German banks, British lessons

Britain's sprawling giants aren't the best way to run a banking system

Since the financial crisis in 2009, a blame-game has raged between Britain’s large banks on the one side, and British politicians and businesses on the other. Last year, the Government launched "Project Merlin", warning the banks that a failure to meet lending targets would be met with reprisals. When it later transpired that the banks had missed the target for lending to SMEs, the Federation of Small Businesses said that the project had "failed". The banks replied that "the business demand for credit remains weak" and the Government sat on the fence protesting that "it's going to take some time before the banking sector is back to normal".

Businesses argue that the banks aren’t lending; the banks retort that businesses don’t want to borrow. The problem with the entire debate is that it ignores the real issue: why does Britain have to rely on banks that were crippled by the crisis?

That banks aren’t lending is not disputed: Bank of England figures show that total lending to businesses, not including property lending or to financial firms, fell by 11 per cent between 2008 and 2010 and the evidence since then suggests it has continued to fall. While some of this can be attributed to falling demand, more important is the fact that Britain’s large banks are rebuilding their tattered balance sheets by cutting credit. In a more competitive market, rivals would step in and capitalise on the weakness of the embattled institutions; unfortunately for the UK’s businesses, Britain’s banking market is far from competitive.

If only they were based in Stuttgart rather than Stockport. German businesses do not face the same hurdles in accessing credit as their British counterparts because they are served by a far more diverse and competitive banking system. In Germany, commercial banks, such as Deutsche Bank and Commerzbank, compete with a large cooperative banking sector and, more importantly, a large local savings bank sector. In 2011, total loans by the savings banks or Sparkassen stood at €322 billion whereas the total loan stock of Germany’s large commercial banks was only €177 billion. Like Britain’s large banks, Germany’s large commercial banks cut credit during the financial crisis; lending fell by 10 per cent between 2006 and the middle of 2011. In contrast, the Sparkassen increased lending by 17 per cent and continue to do so; when their competitors were flagging they cleaned up.

If it were not seriously hampering the British economy it would be amusing to reflect upon the irony that Germany and its social market possessed a far more efficient and competitive banking system than Britain, birthplace of laissez-faire capitalism. It is also interesting that the Sparkassen, who currently have the edge, were once derided as uncompetitive and inefficient. The Sparkassen are governed by Federal and state law in Germany. According to the Banking Act of the Federal Republic of Germany they must restrict their activities to their local area. Furthermore, profit is not the main purpose of their business; rather their success is tied to that of their local economy. These restrictions were once viewed as anachronistic and antithetical to an efficient market economy and for years the Sparkassen were forced to fend off attacks from the European Commission and Germany’s commercial banks.

Representatives of the banks often muse that the financial crisis saved them: their local focus and commitment to local businesses re-emphasized the contribution they make to the stability and prosperity of the German economy.

British businesses and consumers perhaps hope that the crisis will produce a similar epiphany amongst British policy-makers. The Government needs to remove the significant regulatory barriers that hamper new entrants, encourage entrepreneurial local authorities that wish to institute local banks in their communities, and support credit unions as they look to use their new powers to compete with commercial banks. These are all steps that must be taken if a more competitive and diverse banking sector is to be created, but first we need to take a good look at what’s going on beyond the Rhine.

Credit cards for a Sparkasse. Photograph: Getty Images

Selling Circuits Short: Improving the prospects of the British electronics industry by Stephen L. Clarke and Georgia Plank was released yesterday by Civitas. It is available on PDF and Amazon Kindle

Photo: Getty Images/AFP
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Is Yvette Cooper surging?

The bookmakers and Westminster are in a flurry. Is Yvette Cooper going to win after all? I'm not convinced. 

Is Yvette Cooper surging? The bookmakers have cut her odds, making her the second favourite after Jeremy Corbyn, and Westminster – and Labour more generally – is abuzz with chatter that it will be her, not Corbyn, who becomes leader on September 12. Are they right? A couple of thoughts:

I wouldn’t trust the bookmakers’ odds as far as I could throw them

When Jeremy Corbyn first entered the race his odds were at 100 to 1. When he secured the endorsement of Unite, Britain’s trade union, his odds were tied with Liz Kendall, who nobody – not even her closest allies – now believes will win the Labour leadership. When I first tipped the Islington North MP for the top job, his odds were still at 3 to 1.

Remember bookmakers aren’t trying to predict the future, they’re trying to turn a profit. (As are experienced betters – when Cooper’s odds were long, it was good sense to chuck some money on there, just to secure a win-win scenario. I wouldn’t be surprised if Burnham’s odds improve a bit as some people hedge for a surprise win for the shadow health secretary, too.)

I still don’t think that there is a plausible path to victory for Yvette Cooper

There is a lively debate playing out – much of it in on The Staggers – about which one of Cooper or Burnham is best-placed to stop Corbyn. Team Cooper say that their data shows that their candidate is the one to stop Corbyn. Team Burnham, unsurprisingly, say the reverse. But Team Kendall, the mayoral campaigns, and the Corbyn team also believe that it is Burnham, not Cooper, who can stop Corbyn.

They think that the shadow health secretary is a “bad bank”: full of second preferences for Corbyn. One senior Blairite, who loathes Burnham with a passion, told me that “only Andy can stop Corbyn, it’s as simple as that”.

I haven’t seen a complete breakdown of every CLP nomination – but I have seen around 40, and they support that argument. Luke Akehurst, a cheerleader for Cooper, published figures that support the “bad bank” theory as well.   Both YouGov polls show a larger pool of Corbyn second preferences among Burnham’s votes than Cooper’s.

But it doesn’t matter, because Andy Burnham can’t make the final round anyway

The “bad bank” row, while souring relations between Burnhamettes and Cooperinos even further, is interesting but academic.  Either Jeremy Corbyn will win outright or he will face Cooper in the final round. If Liz Kendall is eliminated, her second preferences will go to Cooper by an overwhelming margin.

Yes, large numbers of Kendall-supporting MPs are throwing their weight behind Burnham. But Kendall’s supporters are overwhelmingly giving their second preferences to Cooper regardless. My estimate, from both looking at CLP nominations and speaking to party members, is that around 80 to 90 per cent of Kendall’s second preferences will go to Cooper. Burnham’s gaffes – his “when it’s time” remark about Labour having a woman leader, that he appears to have a clapometer instead of a moral compass – have discredited him in him the eyes of many. While Burnham has shrunk, Cooper has grown. And for others, who can’t distinguish between Burnham and Cooper, they’d prefer to have “a crap woman rather than another crap man” in the words of one.

This holds even for Kendall backers who believe that Burnham is a bad bank. A repeated refrain from her supporters is that they simply couldn’t bring themselves to give Burnham their 2nd preference over Cooper. One senior insider, who has been telling his friends that they have to opt for Burnham over Cooper, told me that “faced with my own paper, I can’t vote for that man”.

Interventions from past leaders fall on deaf ears

A lot has happened to change the Labour party in recent years, but one often neglected aspect is this: the Labour right has lost two elections on the bounce. Yes, Ed Miliband may have rejected most of New Labour’s legacy and approach, but he was still a protégé of Gordon Brown and included figures like Rachel Reeves, Ed Balls and Jim Murphy in his shadow cabinet.  Yvette Cooper and Andy Burnham were senior figures during both defeats. And the same MPs who are now warning that Corbyn will doom the Labour Party to defeat were, just months ago, saying that Miliband was destined for Downing Street and only five years ago were saying that Gordon Brown was going to stay there.

Labour members don’t trust the press

A sizeable number of Labour party activists believe that the media is against them and will always have it in for them. They are not listening to articles about Jeremy Corbyn’s past associations or reading analyses of why Labour lost. Those big, gamechanging moments in the last month? Didn’t change anything.

100,000 people didn’t join the Labour party on deadline day to vote against Jeremy Corbyn

On the last day of registration, so many people tried to register to vote in the Labour leadership election that they broke the website. They weren’t doing so on the off-chance that the day after, Yvette Cooper would deliver the speech of her life. Yes, some of those sign-ups were duplicates, and 3,000 of them have been “purged”.  That still leaves an overwhelmingly large number of sign-ups who are going to go for Corbyn.

It doesn’t look as if anyone is turning off Corbyn

Yes, Sky News’ self-selecting poll is not representative of anything other than enthusiasm. But, equally, if Yvette Cooper is really going to beat Jeremy Corbyn, surely, surely, she wouldn’t be in third place behind Liz Kendall according to Sky’s post-debate poll. Surely she wouldn’t have been the winner according to just 6.1 per cent of viewers against Corbyn’s 80.7 per cent. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.