It was once said that England is a nation of shopkeepers. While the industrial revolution has changed that, what is true is that it is small businesses – called SMEs – which are the foundation of the British economy. It is SMEs which create the majority of jobs in the UK and their performance is what will determine how quickly we will recover from the recession.
Despite what some on the right will say, it is not red tape which is the biggest barrier to these companies growing – it is finance and support. Without the access to funding, and the stability that a long term relationship with your financier can provide, businesses will continue to struggle. This has been seen during the recent recession – caused by a financial crisis – where the withdrawal of funding has led to many companies either laying workers off, or even worse going into administration.
Large businesses rarely suffer from such problems. With a larger asset base and often big cash reserves (Tesco is sitting on nearly £3billion), they either have no need to go into debt, or can do so while investing large amounts of their own cash or assets.
The answer to this is actually available across the North Sea. Germany has long had a reputation for successful growth, particularly in manufacturing in the SME sector. There, a series of state-owned and funded banks – called Landesbanks – which operate as wholesale banks dealing with corporate clients in small and medium sized businesses. Their job is to provide guidance to and support the development of, companies within their region. They also provide financial services to those local authorities within their region. This means that they help to keep funds within their regions, ensuring that local money is benefitting the local economy. They also act as clearing banks for the majority of the local savings banks and mutual or volksbanks which provide local retail banking. Although many have expanded operations in recent years, it is this local aspect which is needed most here in the UK.
The banks, which could use funds many local authorities currently invest in the major commercial banks, would be truly local – responding to local needs, and be the responsibility of the local people. The result would be a financial organisation that people would think was really theirs – not based miles away in London, or even overseas. Local councillors would sit on the board, alongside local business leaders to ensure proper scrutiny of the banks functions.
By creating a series of regional development banks – funded partly by the state and partly by attracting outside investment – we can help grow the economy, create jobs and rebalance it away from London and the South East. They can also support the creation of a new wave of regional and local savings banks and mutual. Local building societies and credit unions could utilise the wholesale banking services, providing a backbone for new regional financial institutions to revitalise local economies. They would act to keep money within their local areas, ensuring the profits from providing financial services flow back into the local economy.
A North East England Bank could for instance help grow the private sector in an area of the country which has long suffered from high unemployment and dependence on public sector jobs – it could help support a re-mutualised Northern Rock, too. A West Midlands Bank could provide much needed investment to the manufacturing industries of the Black Country and capitalise on the new high speed rail link to London. Their job and that of the other new British Landesbanks across the country will be to provide finance to an area of the economy which needs it most and to those parts of the country that need it most.