Democratic Finance: An Expansive Public Banking Sector
While the cause of public ownership has been advanced with a degree of success in a number of sectors, including public transport, household utilities and steel, the case for a public banking sector has generally received less attention. In some cases, comparable proposals such as the reintroduction of the United Kingdom’s green investment bank (which is not in fact a bank) have shared surface-level similarities, while differing significantly from public banks on substance. Yet the case for public banking is central role to achieving structural change in the economy.
Britain’s volatile and extractive financial system led to what was, until this year’s pandemic, the biggest economic crisis in more than 70 years. The crisis, in turn, led to one of the slowest ever economic recoveries and the worst period for wage growth for centuries. While the scale and impact of this financial failure have raised the need for financial reform, most proposed solutions have been piecemeal or have relied on changes to regulation alone. Questions surrounding ownership have received much less attention.
By any useful social metric, the United Kingdom’s economy has failed to provide for the needs of most median and lower-income people. The country has substantial levels of poverty, 42% of children lack a ‘minimum’ standard of living, regional inequality is the widest of any comparably rich country, precarious work is rife and financial insecurity is the social norm.
The stark lack of support for society returning to the old ‘normal’ and the strong appetite for ‘fundamental reform’ of the economy (in one YouGov poll for the Institute for Public Policy Research, only 2% favoured preserving the status quo in how the economy is run), illustrate the degree to which these inequalities and injustices have fed discontent. With regard to finance in particular, it is clear that the role of the financial sector in the state of the economy is at least partly understood — with 66% of respondents in one poll agreeing that the banks have not been working in the best interests of wider society.
That’s why it is absolutely necessary for a large-scale overhaul of the financial system, including in terms of ownership. An expansive public banking sector would allow for the rewiring of the wider economy. This would include a shift toward social priorities and economic democracy and away from speculation, opacity and top-down control.
The blooming of a substantial-sized public banking sector, one which does not just operate alongside existing private banks but takes on a major role in the sector, would allow for democratic oversight over investment. This would leading to fundamental changes in economic decisions, which could be made in the interests of society as a whole rather than shareholders (or for that matter stakeholders). Crucial to this would be a model of public banking which involves substantial democratic involvement over the priorities and the decisions of financial institutions, democratic public ownership. Further, public banks would be particularly well-placed to take on a number of other different roles including ‘‘a countercyclical role, a capital development role, a venture capitalist role and a mission oriented role”. (Marois, Thomas, State-Owned Banks and Development: Dispelling Mainstream Myths, School of Oriental and African Studies (2014), p. 3.)
The first would involve the activities of public banks being used to dampen the effects of recession by providing investment in a downturn. The final two, could allow for considerable financial support for social ownership and for social priorities to be reflected in investment decisions, respectively. This too, could lead to deep and far-reaching change in how the United Kingdom’s economy operates. While public ownership of areas like the railways, bus services and water is essential for gaining public control of key infrastructure and providing more affordable services, this will not necessarily bring about far-reaching change in how the wider economy works. Public banking has that potential.
The current banking sector is plagued by a host of issues, from links to tax avoidance, mis-selling of products, money laundering and a culture of exorbitant bonuses. Further, the sector has engaged in speculation at a scale that has, among other things, drastically inflated the price of land and housing, leading to enormous rental costs, widespread insecurity and stark inequalities.
The United Kingdom already has a number of small National Development Banks, the British Business Bank (established in 2014) and the Development Bank of Wales (launched in 2017). The Scottish National Investment Bank was due to be launched in December 2020, with the Scottish Investment Bank — which is the investment arm of public body Scottish Enterprise — due to be incorporated into it. However, these institutions are small in size and primarily not oriented toward structural change. It is also worth noting that the Scottish National Investment Bank has already come under fire for the narrow composition of its board.
Historically, the United Kingdom has had the Girobank (privatised under Margaret Thatcher’s government). The Bank of Ireland has also provided current accounts at the UK’s publicly owned Post Office as part of the scheme Post Office Money. These accounts were discontinued after six years in 2019.
Nonetheless, the United Kingdom has historically had a predominantly privately-run sector, with public ownership in the financial sector effectively avoided by the post-war Labour government. The United Kingdom remains a notable outlier among both the rich countries and emerging markets for its lack of a National Investment Bank.
Public ownership of the larger banks is in fact already formal TUC policy. This was based on the proposals set out in a 2012 pamphlet for the Fire Brigades Union, entitled ‘Time to Take Over the Banks’.
In numerous other countries in 2010, public banks constituted significant portions of the total banking sector, such as in Brazil (43.5%), Argentina (43.6%), Indonesia (38.4%) and Germany (31.5%). In 2004, Micco et al concluded that many of the best-run banks were held in public hands. (op. cit., p. 3).
In Germany, the sector operates under what is described as a ‘three pillar system’, which involves a set of private banks, a set of cooperative banks and a set of public sector banks. According to Marcel Thum and Harold Hau, the public sector banks account for 46% of the overall sector (the OECD puts the figure at 40%). Best known of these is Kreditanstalt für Wiederaufbau (KfW), the German National Investment Bank, which has assets totalling over €500 billion. Alongside this, Germany has a host of publicly-owned saving banks (‘Sparkassen’). And Postbank was in the public sector as part of the German Post Office before it was de-merged and sold off, eventually ending up a subsidiary of Deutsche Bank.
Costa Rica has also been the home of a substantial public banking sector. As detailed by Thomas Marois “in the mid-1990s more than 80 per cent of banking assets were state-owned”(op. cit., p. 2), dropping to around 63% in 2001. The country continues to have an impressive and effective public banking sector even while its dominance has eroded.
Other notable examples including Brazil, where more than 40 percent of the sector is in public hands — with major banks including Banco do Brasil, Banestes and Banrisul in public ownership; South Korea, where public banks have arguably played a pivotal role in the country’s modern economic development; and Argentina where a large portion of the sector consists of public banks.
It is worth touching upon touching upon some of the obvious alternatives to public banking, such as mutuals, breaking up the big banks and ‘challenger banks’. The latter, an idea promoted by the Conservatives in the UK, has been a clear failure. This has involved promoting new banks to compete with the big five banks and to promote better practices via increased competition. This strategy has floundered.
Further, there are some key indications that the challenger bank strategy is exacerbating financial instability. The idea of breaking up the big banks has also had a large amount of currency on the centre-left. This would see the major banks split into retail banks and investment banks in an attempt to separate these activities and promote stability. It is a reasonable demand but does not address many of the problems set out above or achieve the same set of objectives as public banking.
Finally, mutualisation is sometimes mooted as a more reforming alternative to the approaches set out above. Such an approach has understandably been favoured by figures in the Co-op Party. This would involve turning existing banks into building societies, mutually owned by account members. Theoretically, this would reverse the demutualisation which occurred in the 1980s, enabled by reforms under the Thatcher government.
More mutuals would not be a bad thing. But such measures would not broaden ownership as widely as would be the case with public banks (leaving ownership in the hand of members, but not society as a whole), while economic democracy would not expand beyond the level of the bank itself. Mary Robertson has argued convincingly that mutualisation (more generally) ‘will widen ownership without meaningfully increasing democracy’. In my view, public banks would more easily fit within a wider economic strategy by working in concert with other public institutions to pursue social objectives. This would also avert the pitfalls of reforms confined to the level of a single company, allowing for sweeping democratisation of the economy.
Public ownership of the larger banks is in fact already formal TUC policy. This was based on the proposals set out in a 2012 pamphlet for the Fire Brigades Union, entitled ‘Time to Take Over the Banks’. The pamphlet arguably marked the beginning of a rich recent history in which public banking has influenced thinking in the labour movement and the Labour Party.
In 2019, a report published by the Labour Party by Laurie Macfarlane and Christine Berry recommended among others things that a Post Bank should be established as part of the Post Office and that this would form part of an ‘ecosystem’ of public banks. The report makes a large number of desirable recommendations, including incentives for banks that are closing local high street branches to hand the premises over to the Post Bank, that a National Investment Bank should promote structural change, decarbonisation and economic democracy and that the majority of RBS should remain in public hands. Labour’s acceptance of the report’s findings marked a step-change in its approach to banking, both by shifting its approach on a National Investment Bank and by envisioning an ‘ecosystem’ of public banks.
I would argue that a government ought to go a step further by purchasing the remaining shares in Royal Bank of Scotland (the public currently own 62% of the company, a similar argument is also made by Grace Blakeley in Stolen). The current government has been going in the opposite direction, with plans for privatisation to be completed by 2024 — though they are currently delayed. Lloyds Bank which was brought into public ownership in response to the Global Financial Crisis should also be returned to the public sector and democratised, after having been privatised as part of a process which ended in 2017. This would be a victory for popular control of the economy.
When it comes to the prospect of a National Investment Bank there is now relatively broad support in mainstream politics. The introduction of such a bank would be an important and worthwhile endeavour, especially if such a bank had a remit to promote social ownership and economic democracy and to promote a social mission, including by promoting regional equity among other key aims. Financing a National Investment Bank at the level set out in Labour’s 2017 and 2019 manifestos would make sense.
It would also make a great deal of sense to introduce a Post Bank operating inside the Post Office and providing accounts for ordinary consumers, similar to that described in the 2019 report. Such a proposal did appear in the 2019 manifesto and has been supported by the current leader of the party, suggesting its inclusion in the 2024 platform is possible, though perhaps unlikely. A Post Bank should be aiming to be in a position to rival the larger high street banks in terms of size. Finally, bringing more of the big five banks into the public sector would be ambitious — but it would be worthwhile.
As Thomas Marois argues “democratized state-owned banks offer the most viable alternative” (op. cit. p. 18) to the status quo of privately-dominated banking sectors. As the nerve centres of economic activity, banks in public hands would be a vital asset.
An earlier version of this piece was published at Labour Hub, where I am a member of the Editorial Group. The arguments in this article owe much to the work of Thomas Marois, the argument set out by Mary Robertson in ‘Left Economics from Below?’ and the arguments set out by Christine Berry and Laurie Macfarlane in their 2019 report ‘A New Public Banking Ecosystem’. I would recommend taking a look at all of their work.