The latest report from the Public Policy Institute for Wales brings together evidence on the effectiveness and viability of a full public bank in Wales. Debates surrounding this issue have been taking place between political parties in Wales for some time. The report examines what is meant by the term ‘public bank’, how such banks can be financed, whether they can stimulate small business lending and/or local economic development, and the potential role the Welsh Government could play in establishing them.
One of the difficulties with debates surrounding public development banking is that it is often not entirely clear what supporters or opponents actually mean by the term. Our report proposes three different – but not mutually exclusive – understandings of the form a public bank in Wales might take:
1. Greater state intervention in the economy
The Development Bank for Wales, which is due to start operations later this year, is an example of this. It will provide £171m of funding to SMEs in Wales, particularly to help meet the objectives of the Well-being of Future Generations (Wales) Act 2016. But it will not provide many of the services that are typically associated with a ‘bank’. It is a fund.
2. A state-owned national bank that funds credit to businesses and projects
Such a bank would be based on an initial investment by the Welsh Government, which would be used to generate (or leverage) further capital to provide public and/or private loans. It would probably not take customer deposits, but instead generate funding from international capital markets. An example of this is the German KfW bank.
3. Regional/local community banking
This could be a single bank dedicated to a locality or a network of banks serving communities across the country. In either case, the bank would have a board of individuals drawn from the local area, be geographically limited in its operation, and be a stimulus for local development. The bank would create money itself through making loans. When a bank makes a loan, it simultaneously creates a deposit in the borrower’s bank account. The loan creates the deposit. In essence, such a bank would create money out of nothing. It is this process of money creation that would distinguish a public development bank from current SME lending programmes in Wales.
Whichever form it might take, there are two key questions to answer before making the case for a public bank. First, is credit currently being allocated in Wales in a way that maximises economic prosperity and social outcomes? Second, if it is not, could a public bank do any better?
The report argues that there are problems in the Welsh banking sector and wider economy that a public development bank could help to alleviate. There appears to be a lending problem, and the nature of the current banking system exacerbates this. Lending decisions made away from local areas are less likely to favour SMEs. A public bank or network of community banks with an explicit regional objective could help boost SME lending and regional economic development.
A public bank could also contribute to socially desirable outcomes. For example, a significant proportion of the German KfW’s lending goes to projects with environmental objectives. Borrowers also receive financial reward if they reduce emissions. This has helped the German government in its aims to insulate homes and meet its climate change targets. The KfW advised the UK Coalition Government 2010-2015 on its Green Investment Bank, however the two have always been very different. The Green Investment Bank is not a bank but a fund, and it was recently announced that it will be privatised. A full public development bank could make investing in socially desirable outcomes a focal part of its lending strategy, as well as investing profits from its business into socially desirable projects.
However, setting up a public development bank, in any form, is not easy. The report highlights evidence from around the world of differing experiences of public banking. Good governance is crucial to prevent overreach and excessive political interference, and to stop them from being bought or sold. In some cases where these arrangements have not been established or maintained, the consequences have been disastrous.
Developing an effective and sustainable banking model in Wales would be a significant undertaking. The Welsh Government could follow and learn from the progress of ongoing public banking projects in the UK. It could also carry out due diligence on each potential public development bank model, considering their transferability to Wales, their commercial viability, and their contribution to the public good.
About the author: Craig Johnson is a Research Officer at the Public Policy Institute for Wales.