. Economic Policies for an Incoming Labour Government (Part 7 of 9) | London Progressive Journal
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Economic Policies for an Incoming Labour Government (Part 7 of 9)

Thu 12th Mar 2015

As previously remarked, the continuation of the existing banking arrangements, in which the merchant bank gambling function is integrated with the rest of the banking business, is not a safe way for the British economy, as Mervyn King has regularly warned us all. A major re-structuring of the British Banking sector is required, into retail banks, mortgage and consumer credit banks, merchant banks and local community investment credit banks (as previously described).

Retail banks will collect local savings and provide a banking service to local people and industry, providing the money-handling service which enables wages and salaries to be paid and all other transactions between buyer and seller to be carried out. Retail banks will be encouraged, if they wish, to develop close relationships with local industry (as is the norm in Germany) and to develop an informed view of the prospects of their local enterprises. Retail banks with many local branches will be invited to consider becoming local SME investment credit loan banks as they wish. Local authorities will be invited to consider setting up Local Authority Banks to help support their economic development. Government guarantees will be available for the savings and credit deposits in retail banks of up to £200,000 per individual, but it is very unlikely such guarantees would ever be required.

Investment credit banks will have the primary purpose of extending long -term loans at an interest rate of 4% pa over terms of between ten and twenty years to British-based SMEs. These banks will have the ability to re-discount their business loans up to the official re-discount limits set under the “window guidance” at the Bank of England. Such banks will be completely backed by government. SMEs and other companies taking out loans and the personnel employed by these companies will be expected to change their bank so that the loans granted, the wealth created in company accounts and the wages paid will all initially, and perhaps ultimately, be in the loan-providing bank. Savings kept in investment credit banks will have a structured rate of interest so that short-term one-year savings will have an interest rate of 1% and savings over five years will be offered an interest rate of inflation plus 1% and thus effectively would be better than inflation-proofed.

Mortgage and consumer credit banks would have the major function of providing mortgages or consumer credit at relatively low rates of interest. The mortgage section and consumer credit section of any bank should be legally operated as a distinct entity within any bank which provides any other functions. Government guarantees will be available for the savings and credit deposits in mortgage and retail banks of up to £100,000 per individual, but again it is very unlikely such guarantees would ever be required.

Merchant banks will exist as entirely separate free-standing institutions not associated with any other bank and may attract such savings as may be commensurate with their level of risk. The risks of complete loss of savings must be clearly explained to merchant bank savers, and no government guarantee for any savings placed in a merchant bank will be available. Merchant banks will be obliged to keep reserves, probably in the range of 10%-20% of total bank assets, commensurate with the gambling risks they undertake, as determined by the Financial Services Authority.

These measures would go a long way towards constructing a banking system that provided proper security and guarantees to savers, that truly served the public interest and that in particular provided much-needed investment finance to Small and Medium-Sized Enterprises.

© Bryan Gould and George Tait Edwards 2015

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