Preston City Council unveiled plans back in February to team up with other local authorities to create a regional community bank for the North West.
The Lancashire Post can reveal that the council is now close to securing the £20m in initial funding which is needed to begin the process of applying for a banking licence.
Two other authorities in the region which expressed an initial interest in the idea – Liverpool City Council and Wirral Council – have now confirmed their involvement. Wirral has signed up to the scheme and cabinet members in Liverpool will consider a report on the details next week, although it is understood that the due diligence being undertaken by the authority is ongoing.
The level of potential investment to be made by each of the councils has not been made public, but Preston City Council indicated at its budget earlier this year that it was intending to commit £1m to the project.
The Community Savings Bank Association (CSBA), which is helping the Preston-led scheme get off the ground, says that it could be “first across the line” out of several similar proposals currently being developed in other parts of the country.
“Three other areas have already applied for their licence from the Bank of England – and, although the North West bank has yet to do that, the speed at which it’s progressing suggests that it could still be the first to launch,” explains the CSBA chair James Moore.
Preston City Council says it sees the development of a community bank as another part of the so-called “Preston model” to generate and retain wealth within the city and the wider Lancashire economy.
“You have to support the place where you live,” says council leader Matthew Brown, commenting on the rapid progression of the project.
“We’re keen to enable the financially excluded – people and businesses who find it difficult to borrow money – to get access to banking services.
“To support people locally, we have got to change the current economic model – and to do that we have to establish alternatives and make them popular with the people who live here,” Coun Brown adds.
The city’s banking blueprint includes plans to open high street branches – some of which will be staffed and some partially automated, using the latest technology. Accounts and loans will be limited to individuals and businesses within the North West.
The Post understands that a meeting will take place next week to finalise a board of directors, which is thought to include banking and business experts, as well as representatives from the councils taking part in the initiative.
Coun Brown hopes that the bank could end up being bigger than initial “cautious” plans have so far ventured.
“We have made an assumption that if two per cent of people move their accounts to the new bank – or open their first accounts with us – then we can lend half a billion pounds to local people.
“But if you could get real grassroots uplift and support for the concept and encourage 10 per cent of people to bank with us, then we could recirculate £4bn locally.”
The Labour leader also claims that the local community which uses the new bank would be “insulated” from the worst effects of any wider financial crises, like the one which engulfed the global economy in 2008.
The CSBA says that evidence from Germany bears that out.
“The small banks carried on with business largely as usual. Analysis by Germany’s central bank showed that the local banks just kept on lending – there wasn’t really a banking crisis as there was in the UK,” James Moore says.
“Here, loans for businesses came close to drying up and the big banks had to be bailed out.”
HOW WILL IT WORK?
The £20m which is close to being secured for the Preston-led bank would be held as security by the Bank of England. It would underpin the regional bank’s activities in the lending market.
“That money will never be lent out – the money for loans will come from deposits made by customers,” Community Saving Bank Association chair James Moore explains.
“Banks are unique in that respect – with other institutions, if you acquired £20m, you could only lend £20m, but a bank can do something different.
“The deposits are money that is just sitting there and hasn’t been spent – what you need is tens of thousands of people’s deposits and then you can recycle that so that it goes round and round within the local economy.”
That model relies on the project proving popular with ordinary investors with small amounts of money to deposit – and James Moore says there is no reason why that should not be the case.
“The level of due diligence and scrutiny which has to be gone through to set up a bank is greater than you would see for any other business. It is a detailed and arduous process over 18 months, so people can be assured that this would be a safe and secure bank – and by going for a full bank licence, people will get exactly the same protection for their deposits as they would anywhere else.
“Under the rules, it could only ever be a regional bank – so there is no prospect of it being bought out by venture capitalists,” James adds.
According to the CSBA, the local nature of the bank is not only a selling point, but a key strength.
“For local banks to thrive, they need local communities to thrive – whereas for the bigger banks, it doesn’t matter to them whether they are investing in Preston or Abu Dhabi.
“Local knowledge has been missing from the UK banking system in recent years. Community banks would have a local branch manager who will know the area and local businesses – someone for those businesses to talk to rather than just a system where ‘computer says no’.
“The bank will have extra benefits, but it has to have an excellent basic offer, so that it is competitive in terms of interest rates for savings and loans,” James says.
Other investors would be welcomed on board in addition to local authorities – and they, like the councils involved in the scheme, would receive dividends. Any investor can sell their stake in the bank in future – including the councils who are intending to establish it – but they could only do so to investors based in the region where the bank operates.
As part of their preparations for the creation of a community bank, Preston’s council leader has been to visit a prototype which has been built in a warehouse in Bicester.
“We created it to ensure that all of the systems work properly – this is not a Captain Mainwaring [Dad’s Army] set-up,” James laughs.
Preston City Council has approached other local authorities across the North West to invite them to lend their support to a North West regional bank – including neighbouring South Ribble and Chorley councils.
The Lancashire Post understands that interest has predominantly been from Labour-run authorities, but that some Conservative councils have also indicated that they may consider getting involved.
“Not long after the local elections, Preston were at our door asking [about us joining a community bank], but they were told that there has to be a rate of return that our residents would see for their money,” South Ribble cabinet member for finance, Matthew Tomlinson, told a meeting of the authority’s scrutiny committee earlier this week.
“However, we’re happy to investigate it and those investigations are happening as we speak.”
Conservative councillor Damian Bretherton said he was worried about the financial risk of the venture.
“If businesses can’t get a loan from a high street bank, but they can come and get one from a community bank, that sounds like quite a high-risk project,” he said.
Interim chief executive Gary Hall said that the regulations to which the bank would be subjected should ensure that the “locally-focused” operation was not unduly risky.
Meanwhile, Chorley Council leader Alistair Bradley said in a statement: “The community bank is a really interesting idea and the aims of creating jobs and supporting businesses and residents fit in with what we are looking to do.
“We support the principal and would need to see the business case before we take it any further and, if it stacks up, we’d look to put it before councillors for their views,” Coun Bradley said.
Preston City Council leader Matthew Brown said he understood that fellow authorities would want to carry out due diligence on the city’s proposal.
“It’s public money that is being invested at the end of the day,” he said.
53 per cent – of UK bank branches closed between 1989 and 2016.
1.71m – people do not have a bank account
40 per cent – of working age people have less than £100 in savings
Source: House of Lords report, “Tackling Financial Exclusion”, 2017