Cyprus: it's hard to imagine a neater way of undermining confidence in the banking sector.

A PR disaster.

I hold my hands up.  I could not have been more wrong if I had tried.

I did not believe that the banking powers-that-be (the European Union, European Central Bank and International Monetary Fund) would be so dumb as to sanction a levy on consumers savings to bail out banks.

It has been a PR disaster. It is hard to imagine a neater way of undermining confidence in the banking sector.

That the leading banks in Cyprus are in a mess is not in dispute. The sector is reckoned to need a bailout of €17 bn; that is probably a conservative estimate. But the proposal to raise €5.8 bn from depositors of Cypriot banks sets a dangerous precedent, in particular the notion that the levy apply to all savers.

There is, or rather there was, an EU-wide guarantee that small savers’ deposit balances up to €100,000 were protected. That assurance has been given to savers in Cyrus as elsewhere in the EU. That promise is now seen to be complete and utter bunkum. It gets worse. The EU and the European Central Bank are not merely allowing the authorities in Cyprus to rip up the €100,000 guarantee; the EU and ECB are the very bodies pressing Cyprus to levy a charge on all depositors.

The latest in this Cypriot pantomime is that the country’s president Nicos Anastasiades is considering a levy on deposits below €100,000 of 3 per cent. That, I suppose, is an improvement on a levy of 6.7 percent proposed over the weekend. The revised act of larceny would witness account holders with balances of between €100,000 and €500,000 forfeiting 10 percent, while deposit balances above €500,000 would be cut by 15 per cent.

It is no wonder that share prices have tumbled at the Eurozone’s largest banks. It can be argued that Cyprus is a special case as regards the size of its banking sector relative to the country’s GDP. It is not however far-fetched to imagine consumers in countries such as Spain, Greece and especially Italy fearing that their savings may be under threat in the future.

Just to add to the gloom, Jeroen Dijsselbloem, the Dutch president of the group of euro area ministers, on Saturday refused to rule out taxes on depositors in countries beyond Cyprus. There remains time for the Cyprus government and the EU authorities to re-work their sums in an attempt to rebuild trust among small depositors. They could, for example, apply a tax-free threshold of €100,000 while raising the threshold on savings above €100,000; it is the least the government ought to do.

A PR disaster for the IMF, ECB, and EU. Photograph: Getty Images

Douglas Blakey is the editor of Retail Banker International

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation