The TSB spin-off alone won’t create a viable local banking system
Kaveh Pourvand, 11 September 2013
One of the key policy recommendations of the Wealth of Nations project here at Civitas has been to create a local-banking network based on the German Sparkassen model or the Swiss cantonal banks. So it was interesting to hear the Lloyds TSB chief executive, Antonio Horta-Osorio, announce to the media last weekend that TSB is going to be spun-off as a separate entity. The new bank will consist of 631 branches and deposits of £25bn. TSB, Mr Horta-Osorio announced, will focus on localised banking with named branch managers and each branch will strive to place deposits in its local area. As we at Civitas have argued elsewhere, localised finance is a key reason why countries like Switzerland have a more balanced and stronger economy than we do.
The problem with big, commercial banks is the ‘tick-box’ approach to lending. Viable local businesses that don’t meet the criteria for lending set by the centre of the bank are refused finance. Empowering local bank managers with localised knowledge is the antidote to this. The creation of TSB as a separate, locally-focused bank is therefore to be welcomed. There is also a symbolic significance here. TSB, which stands for Trustee Savings Banks, was originally a series of local savings banks. The UK was actually the first country to legally recognise localised savings banks in the Act of 1817. However, ill-thought through financial deregulation in 1984 spelled their extinction as they merged to form one bank, TSB, in 1986 which eventually merged with Lloyds in 1995.
The problem was that in Britain, unlike Germany and Switzerland, the role of local savings banks was never institutionalised and formalised. And that problem will not be resolved today by relying on private sector initiatives like that of Lloyds. One reason why German and Swiss local banks do well is that they are legally required to invest their deposits in the local area. TSB will face no such restriction. The danger is that this may just turn out to be a short-term move with TSB’s lending policy liable to being changed in the future. So while the spin-off is very welcome, it should not detract from the role of government in creating the right institutional structure for localised banking. If free-market, small government Switzerland can create a local banking system, there is no reason why the Coalition can’t.