17th June 2014 by Justin Urquhart Stewart
A Banking Spring?
Only four years ago we all felt the demolition ball crash into much of the UK banking sector as banks collapsed and failed. Then we all saw the tawdry sight of those senior banking executives squirming in front of cameras or investigative committees as they had to try and explain away both the unjustifiable and the undeniable to the drooling media and populist politicians who relished the sight of suffering prey. This frankly had all the style of ravenous hyenas on the savannah. At least there were some senior banking executives, albeit very few, who had the courage to stand up and take the abuse, and even one or two (well one actually) who fully apologised for his organisation and laid out what should be done and what he would be doing about it. Not an easy thing to do when surrounding by such baying creatures.
Sadly though our banking system is still hobbled, but at least our banking regulators are looking far more fit for purpose than the lumbering leviathan that was the FSA. Repair and recovery in the banking world will take a long time and anyone wishing to hark back to the good old days is going to be sadly disappointed. The banking industry has changed forever – not just because of its former sins, but far more from the impact of technology and its subsequent effect on service innovation.
This is not just the effect of online banking and the increased amount of automation – that has been on the cards for years – but the very basis of banking in terms of depositing and lending. There has been a steady growth of peer to peer lending and this is already having an impact in the commercial and personal market, but (in my view) far more importantly will be the growth of the poorly named “crowdfunding”.
The opportunity for such properly organised structures into “private client regional investment” bodies could have a dynamic and potentially dramatic effect on local longer term investing. This in effect could bypass the banks for certain corporate lending and, for the first time in nearly twenty five years, allow local investors to properly invest in local businesses. This is already starting and the proposed launch in September of the Alternative Business Funding Platform in Bristol which will bring together many of the alternatives that businesses might consider from crowdfunding, peer to peer lending and pension led funding.
In effect this will create a mechanism for local investors to invest in local businesses in a variety of ways, via debt or equity, and in many respects almost reinvent the old Bristol stock market. These old markets closed down, with the last one going in Glasgow in 1992, and sadly with their demise local investors lost the connection for investment in local businesses. This disappeared primarily because the dominant London Stock Exchange saw them as local costs to support and their small volume of trading couldn’t justify their costs. That of course was to thus ignore the primary purpose of a stock market which is not to trade shares but rather to act as the most cost efficient method of raising capital for local businesses. Everything else is secondary, including trading.
Because many of these local businesses were smaller companies, as would be very logical, the trading in their shares was hardly going to be frenetic. Also there was a realisation that most private shareholders are not day traders and in fact are the very opposite: most private shares holders tend to be longer term investors and holding periods of five to seven years were much more likely to be the norm. In fact these were far more reliable investors than certain shorter term private equity of venture capital funds.
Maybe this Bristol initiative could be the start of further regional developments in attracting local money into local enterprises. With roughly 6,000 new businesses starting in that area last year, that is quite a level of entrepreneurialism, so you need a far more radical common sense answer for such changes.
Just think what a region could fund with, say 1,000 investors each willing to invest £10,000 – that’s £10 million. Not bad for retaining local investment in the area and if successful would likely encourage further external monies as well. I know a similar concept is being considered around Greater Sheffield, so perhaps we are truly seeing the start of a radical change – some more radical common sense.