Why it matters: More regional banking

As Labour starts to shape its manifesto for the 2015 election, we know that ideas for economic growth will have to be at the heart of it. If a ‘one nation’ economy is the vision, then it has to be growth that will benefit the whole country, rather than further increase current geographical disparity. Too many regions are still struggling to create jobs and get their economies moving, and the idea that growth is recovering now will be laughable in many parts of the country. Since the crash of 2008, trust in the banking sector has been at an all-time low and there has been a crisis in lending. Moreover, the major banks have for too long been overly concentrated on investing and supporting growth in the south – particularly London and the south east.

So a movement has been gathering momentum recently, with support from all political parties, but particular interest from Ed Miliband, to establish a new generation of local banks. Local banks that are more responsible and accessible, more reactive to local economies, and more willing to take a lead in supporting small and medium sized enterprises (SMEs). They could play a crucial role in helping the north east, for example, take control of its own economic revival.

As IPPR North’s Northern Economic Futures Commission showed, the single biggest barrier for business growth is access to finance, particularly for SMEs. Growth in lending over the last three years has been negative.

Yet we know SMEs play an important role in driving economic growth, particularly through creating employment. They create the bulk of the opportunity for those who are currently shut out of the labour market, accounting for 92 per cent of all movement from unemployment into private sector employment. In the UK, new firms create one third of all new jobs, and small firms create another third. In Germany and France, the economic contribution of medium size businesses is approximately twice as much as the UK. Local banks could provide the necessary support for local businesses and SME’s to create jobs in areas like the north east and fulfil our potential to be one of the most powerful economies in northern Europe.

Historically the north has had a lower level of SME activity compared with the rest of the UK. In 2007, businesses in the greater south east attracted 41 per cent of all investment, despite making up only 32 per cent of the total number of businesses in the country; in contrast, the whole of the north received just 23 per cent.

Other barriers to business growth identified by our research included low levels of confidence and ambition, an absence of growth strategies on the part of businesses, and a reluctance to take on risk. Local banks could play a key role in supporting businesses to overcome these limitations. They can build relationships in a way that is more flexible and responsive than the ‘big six’, who currently have over 75 per cent of the UK market. They can drive greater competition and encourage a more personal and flexible relationship with local SMEs to help drive business confidence.

There are many issues to be explored, not least the regulatory and governance models, any potential role for the state in capitalising them and links with proposals for a national bank, whether they could fund infrastructure projects as well as small business lending, and what scale ‘local’ could mean.

We know investment in the local economy by both businesses and government is a key driver for productivity and growth. It can help compensate for current underinvestment in SMEs and help build confidence, giving northern businesses the power and the finance they need to thrive. A new generation of regional banks will give the north the chance to drive its own economic revival. If we want to make a one nation economy a reality, here is one powerful way to help do it.  

Why it matters: What Labour can achieve after 2015

Despite a fitful economic recovery, we know that the next government will continue to face tight constraints in what it is able to achieve. But tough times can be liberating too: unable to simply throw money at problems, political parties are being forced to think differently about how they can realise their goals in office.

As part of the Fabian Society’s 2013 conference programme, Labour MPs outline one policy idea that can make a real difference to voters in tough times.