German Style Banking System Way Forward for the UK

Kaveh Pourvand, 14 March 2013

Labour leader Ed Miliband is due to announce today a new policy to build a network of regional banks modelled on Germany’s system of local savings banks – the ‘Sparkassen’ (See FT and BBC news reports). In a speech to the British Chambers of Commerce, Miliband will say that the banks, like in Germany, would have a mission to serve only their local region. This is a key factor behind the success of the German Sparkassen system, where high levels of local knowledge allow bank managers to make informed lending decisions. In February Civitas released an in-depth commentary of the Sparkassen by Christopher Simpson, The German Sparkassen: A Commentary and Case study and in May 2012 a review of local banking systems across Europe, including Germany, by Stephen Clarke, Street Cred: Local Banks and Strong Local Economies.

Shadow business secretary Chuka Umunna has also tweeted this morning about the German state Investment bank, KfW: ‘In the same way they have KfW and the Sparkassen in Germany, we want to establish a British Investment Bank and a regional banking network’. This is more welcome news and was also advocated by David Merlin Jones in the Civitas publication Extending Lending: The Case for a State-backed Investment Bank. It is now widely recognised that the failure of the British banking system to support the wider economy has been a key factor behind Britain’s faltering economic performance.

In Germany too, the big German commercial banks cut lending to businesses after the crisis in 2008. However, the Sparkassen actually increased their lending during this turbulent period, from €59.2 billion in 2008 to €66.7 billion in 2011. Moreover, David Merlin Jones points out that KfW provides crucial financing for infrastructure, housing and SME promotion in Germany. It provided loans amounting to €161.5 billion to East Germany following reunification, which contributed significantly to the reconstruction of region. The creation of similar institutions in the UK will allow promising businesses to circumvent the unreliable big banks and gain access to the finance they need if Britain is going to return to the path of prosperity.