A Resolution Foundation report from 2010 pointed out that despite the so-called boom period from 1997-2007, “incomes of the bottom three-fifths of the UK population failed to keep rise with rising prosperity”. So how were we able to eat? Easy: the dramatic rise of mainstream consumer credit.
Credit cards and friendly banking institutions filled in where wages dropped. But then after the recession mainstream banking institutions became slightly risk averse. Credit wasn't so free-flowing, and wages still weren't rising. In fact real wages fell on average by 7 per cent in the two years from the end of 2009 (according to Stewart Lansley in a chapter of a new book called The Socialist Way).
Soon the technical recession would be over, meaning the UK would enjoy positive growth, but the practical recession, where households under-served by banks were tightening their own budgets and feeling the full force of what the economic collapse had to offer, was just getting started.
Now, Chief Secretary to the Treasury Danny Alexander will try to reverse this by announcing that banks, by January 2014, will have to reveal their lending data across 10,000 postcode areas. The Treasury has said that this move will encourage competition by helping smaller lenders to identify unmet need. It will also show which communities mainstream banking is neglecting.
Disclosure of lending trends is to be celebrated, but it's only a first step. When we start to find patterns of unmet need only then can we make banking better by reminding those financial institutions of their obligations towards wider society, and this will address the lingering problem of the un- and under-banked.
Fortunately we don't have to reinvent the wheel.The Community Reinvestment Act (CRA), was enacted by United States Congress in 1977 with the intention of encouraging depository institutions to help meet the credit needs of the communities in which they operated.
It was noted that though banking institutions were and are privately capitalised, they had and have an obligation to serve their local communities. What started as a way of disclosing lending details, much in the way that Danny Alexander wants to, it ended up being a way to highlight where banks were not meeting the credit needs of low and moderate income communities and permitted regulators to penalise lenders with weak records.
By 1984 three large lending institutions, First National Bank of Chicago, Harris Trust and Savings Bank, and the Northern Trust Company had all committed $153bn to reinvestment purposes, focusing on single family and multi-family housing and small business loans. Other larger institutions such as the Bank of America set aside $12bn annually to ensure consumer loans were being lent to lower income families. It took time, but the act proved highly successful.
It was not without its problems, however, which the UK can learn from. At the outset community groups who oversaw the enforcement of the CRA found fault with the way in which the regulators supervised banks. It was supposed that they were not rigorous enough and that they were not properly enforcing the new requirements effectively.
That's why in 1989 Congress amended the act to require regulators to show their CRA evaluations. After this, from 1990-1992, only 939 banks (9.8 per cent) were deemed in need of improvement and 87 (0.9 per cent) substantially non-compliant out of 9,520 banks that were covered.
The important message about the CRA, pointed out by Allen J Fishbein in his fifteen year evaluation of it, is the following:
“Despite the perception by many bankers that lending in low and moderate income areas is too risky and unprofitable, the experience over the last fifteen years has debunked these myths. Numerous examples of successful community reinvestment partnerships that have come into being since the CRA's enactment demonstrate that lending to the residents of older urban neighborhoods is both prudent and profitable for banking institutions.”
So what Danny Alexander should see to before his new measure is enacted next year is:
- Make sure lending data disclosure rules are properly enacted;
- Oblige regulators to publish their reports;
- Call for a reinvestment action council, made up of people in local communities, that can publicly testify on banking institutions lending records (or better still, grassroots groups can set these councils up themselves); and
- Set penalties for banks who do not invest sufficiently in local communities and use that money to sponsor local credit unions.
Moves towards disclosure are positive, so lets keep the momentum and make banks benefit communities, too.