Labour should welcome the ICB report and make the case for a British Investment Bank

Does the Independent Commission on Banking’s Final Report pull its punches?  In tackling so incendiary a topic it’s perhaps difficult not to. The ICB says, rightly, that the international banking reform agenda – notably the Basel process and EU initiatives – need to be ‘supported and enhanced by national measures’. Many questioned whether the Report’s conclusions – chief among them the proposal to ringfence bank retail and investment arms – go far enough in doing that. 

As Stephen Beer argued on Progress last week, we should welcome the report not as the endgame, but as the baseline for banking reform in the UK. It is a starting point, but Labour must look beyond it to more radical policy proposals. 

The ICB’s mandate was to consider ‘structural and related non-structural reforms to the UK banking sector to promote financial stability and competition.’  The first part of that brief – ‘structural and related non-structural reforms to the UK banking sector’ – could be interpreted widely. The second part – ‘to promote financial stability and competition’ – narrows the focus.   

The mandate explains why the ICB’s discussion of banking reform was not as expansive as many had hoped. Ed Balls and John Denham, in responding to the report, were perceptive not only about what the Report said, but what it didn’t say. As John Denham put it: 

‘It doesn’t address the wider issue facing the UK economy today – bank lending to small and medium sized enterprises … There are a growing number of voices that are saying we need to think more creatively, ensuring the banking system has a greater understanding of the needs and potential of key sectors of our economy. If the Vickers reforms are not successful in supporting the real economy, we will need to look at radical options to ensure they provide the support businesses need.’ 

This is a perceptive comment. Anyone working with SMEs – who employ 60 per cent of the private sector workforce – can be left in no doubt that they have been poorly served by credit providers both before, and especially after, the onset of the financial crisis. The ICB notes that the big four UK retail banks account for 85 per cent of SME current accounts. It argues that the retail banking ringfence would insulate vital banking services on which SMEs depend from problems elsewhere in the global financial system. It also makes the case for more competition in retail banking. But it also says that, ‘it should not be the role of the state to run banks. In a market economy that is for the private sector disciplined by market forces within a robust regulatory framework.’ 

I would argue that one radical option we should pursue is the creation of a state investment bank to invest in SMEs, the low-carbon economy and UK infrastructure. Last year I made the case for a British investment bank, looking at the legal mandates of state-owned banks with a successful track record like KfW in Germany (established in 1948) and the Nordic Investment Bank, a legacy of the Palme era which this year celebrates its 35^th year of trading. Many others, including Duncan Weldon and George Irvin, have consistently advocated the same idea. 

Calls were growing for a state investment bank long before the publication of the ICB report. Last October, Gerald Holtham put the case in the FT, and Lord Skidelsky weighed in with an authoritative intervention in March, pointing out that in well-regulated financial systems, banks like KfW pay for themselves. This month the TUC’s Brendan Barber argued that, ‘The real challenge is how to raise investment – not just by companies, but in infrastructure and the public works that can provide jobs, restore confidence and kick start growth.’  As he pointed out, ‘the public has big stakes in two major banks. It’s time we put them to work on behalf of the public.’ 

Since the publication of the ICB’s Final Report last week other influential voices have stoked up the debate. Last Tuesday Adam Posen, an External Member of the Bank of England’s Monetary Policy Committee, gave a speech calling on the government set up a ‘public bank or authority lending to small business’, noting, correctly, that EU state aid laws are not an automatic barrier to doing so. Posen put forward a succinct argument about why such an institution is needed to rebalance our economy and promote growth and jobs: 

‘The aggregate data on credit and investment in the UK clearly demonstrates that tighter credit conditions among fewer banks are not leading to better lending decisions. If anything, the availability of credit remains especially low for SMEs and for new firms. The creation of new firms is essential to the recovery of employment and the restructuring of the economy, and they require financing – and it’s just not happening now.’ 

Lord Skidelsky suggested that as a state investment bank would be setting out to prove that banking does not have to be ‘socially useless’, we would be better off starting with a clean slate (And a clean balance sheet). But whether the starting point is an existing bank, or a new entity, a British investment bank would help boost demand, increase investment and signal a new focus on the real economy. Labour should embrace it.

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Richard Stevens is a practising solicitor specialising in high technology SMEs and an Oxfordshire county councillor

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Photo: GetIntoZeChoppa