The campaigning group Move Your Money (MYM) has welcomed calls by the British Bankers' Association for council support of challenger banks, but says more must be done.
Anthony Browne – CEO of the British Bankers Association has suggested new entrant challenger banks “should be allowed to look after councils' £30 billion cash pile”.
The size of council deposits (£35bn), and extent of local government spending, gives banks providing profitable council banking services a major advantage in terms of achieving scale.
It's an important point, as currently, just five banks provide council banking services, with The Cooperative Bank in the process of surrendering a leading 35% market share, RBS/ Natwest with 30% share, HSBC 12% Barclays 11% and Lloyds with 7% share. On 08 November 2013, The Coop announced a withdrawal from council banking following its takeover by hedge funds.
MYM raised the lack of competition in council banking with the PRA and FCA, and were informed the FCA’s remit to promote competition in banking only extended to individuals, not to public institutions such as councils.
Commenting for Move Your Money, Joel Benjamin, local authorities campaigner said:
“MYM would like to see different types of banks providing council banking and investment services, with the larger building societies such as Nationwide, and challenger banks including Handelsbanken, Metro Bank and Triodos – who fund sustainable developments also in the mix.”
The British Bankers Association, which remained silent during The Coop's council banking retreat last November now appear interested in fostering competition in the sector, as an alternative to Ed Miliband’s proposal to cap the market share of the big banks.
To ensure competition and support challenger banks Anthony Browne BBA suggested:
“Levelling the regulatory playing field between established banks and new entrants will obviate any need for a legal cap on the major lenders' market share… We want to see a concerted effort on the part of the Government and regulators to recognise that regulation is holding back our challenger banks."
Browne’s statement tells half the story. Closer examination of the market suggests that it is not as simple as 'regulation' holding back council support for challenger banks. Questions need to be asked about the role of the advice of ‘Treasury Management Advisors’ Sector and Arlingclose that favors ‘too big to fail banks’, and adoption of this advice in council ‘Treasury Management Strategies’ which set out where and how council invests public funds.
The Chartered Institute for Public Finance and Accountancy (CIPFA) set local authority investment priorities.
CIPFA policy, coupled with the advice of Sector and Arlingclose, and council risk aversion following the Iceland crisis have seen council deposits in building societies decrease from £10.4bn in 2008 to just £1.8bn in 2012, with money instead flowing into money market funds and ‘too big to fail’ banks which fail to hit lending targets to SME’s.
Challenger banks such as Metro Bank and Triodos do not have a formal credit risk rating, and Sector and Arlingclose currently refuse to place them on approved lists to receive council deposits. Move Your Money believes this needs to change.
Details of the BBA’s proposal withstanding, forcing big banks to share credit risk information with smaller banks may begin to address these barriers, allowing challenger banks and alternative models, such as public banks and mutuals to win market share from the big five. Thus leading a transition to a more diverse and sustainable banking landscape.
