In September the Independent Banking Commission appointed by the Cameron government published an issues paper and we have responded by bringing to their attention the regional pattern to the UK banking collapse of 2008. This has crucial implications for the bank reforms that are needed in the UK. But the regional dimension of 2008 has hardly been mentioned in public policy discourse – including in the Commission’s issues paper.

In short –

Although we explain our concerns in detail on a more extensive webpage, in short, we have concerns about the UK banking system that no-one else is addressing. The UK banks that needed the injection of public money as shareholdings in 2008 were mainly those banks which had developed out of regional banks and building societies over the course of the last generation.

The outline map below shows the principal banking groups that were part of this story.

By the end of 2008 only 2 of these banking groups were not under some serious degree of control by the government company United Kingdom Financial Investments.

Lloyds TSB had become closely involved with already tottering institutions in the final months of 2008. However, HSBC and Barclays, the more archetypal London (city) banks, did not collapse in any comparable way. Nothing of this is referred to in the issues paper published by the banking commission. Box I on page 14 would have been where we might have expected to see some reference to the dynamics of the banking collapse.

This collapse resulted from the provincial financial bodies apparently taking ‘globalisation’ to mean that they could borrow huge sums of money in New York and then lend it excessively in a way that bid up property prices in the Celtic territories of the UK, and even more so in provincial England.  The importance of ‘regional’ ambitions can also be seen in the crisis in both Spain and Germany.

The Regional Crisis in Germany

In Germany it was  the regional banks that got into the sort of difficulty where they needed some sort of rescue. Hypo in Munich and the Saxon Bank were the first to have difficulties. But unlike the UK where the regional great champions could no longer borrow from the New York markets, here it was a case of the German Banks having loaned money to the New York markets and there was now a question mark over how much of it they would get back. The first 2 banks to have to admit they were in serious trouble, Hypo and Sachsen, had been seriously lending money on the New York market through subsidiaries in Dublin, Ireland.

It was in the weekends following  the UK banks being taken over by government that other regional German banks had to admit that they were in difficulties, and these are referred to in the outline map below.

Although it was regional banks in both countries that got into difficulty, we must not over look the important difference. Our UK banks were relying on the US money/secondary mortgage markets to fund their lending and even their cash flow.  Unlike the German banks that ended up in need of state help, none of the UK banks collapsed because of any gambling of their savers’ money on any more esoteric market than their standard lending – based on the UK residential property values as collateral.

Path to reform

As these UK banks are re-organised and sold off by the state, we want to see the future banks that emerge from this mess reporting to the authorities on a region-by-region basis. This would be the basis of the future structural separability of the parts of larger banks we would like to see. Whether or not they become more regionally owned any time soon, we want their financial health evident and policed on a region-by-region basis.

This would allow banks to be taken in and out of any necessary public custody on a more limited and manageable basis: manageable in both managerial and affordability terms. This would limit the risks to the government’s fiscal position. The banks ‘living wills’, in which the commission are interested, should be written in such a way as to facilitate them being dismantled on a regional basis. Our website also includes pages outlining other ideas on the regionalisation of central banking.

Over time, regionalised separability would foster the development of a more decentralised and less monopolised financial sector. Structure related surcharges on the most centralised banks would probably need to have a role in this process. This regional separability would be a solution more relevant to our national banking crisis than the more discussed issue of a supposed need for ‘casino banking’ to be separated from savings banking.

We hope our regionalisation proposals could be of use to the commission in finding a politically acceptable way forward. The Commission was set up because the Conservatives would not agree to the Lib-Dems’ idea of how the banks should be broken up. On the face of it, it does not seem likely that they should now come round to this concern over ‘casino banking’ through any further examination; but neither do we see any logical reason why the Lib-Dems should now rally to the Conservative – or even a conservative – approach.

Our distinct take

We recognise that our proposals are competing for attention against very wealthy and established interests: interests themselves funded hugely by – amongst other sources – the taxpayer.  We will follow the Commission’s deliberations as far as resources permit and will look to make further contributions to those considerations when we know more about the direction taken by their thinking.

Andrew Lydon