Why should we be concerned?
Small and alternative banks offer a great improvement in financial stability over the giants that currently dominate the financial system. For a start, their failure doesn’t threaten the system as a whole. Small, local, deposit-funded banks also tend to reduce economic swings. Partly because they are embedded in local economies; they build long-term relations and; they are less likely to succumb to market pressure to cut lending in a downturn. Small and alternative banks also offer more democratic banking and finance because stakeholders typically have more of a say.
Yet, the odds are stacked against them succeeding, not least because of the lobby machine of large finance, and rules that suit the largest firms. While small and alternative banks remain such a small part of the system, their ability to help us with a just social, environmental and economic transition is limited.
Big banks tend to push for rules that favour big banks, but these rules also tend to disproportionately punish smaller banks. A typical example is that capital requirements are lower for banks that use internal models, but in reality this is only possible for the largest banks. Even the bureaucracy of everyday banking is disproportionately heavy for small banks, such as applying for a licence and reporting to regulators.
By any measure, ethical, alternative or just plain small banks make up a tiny percentage of total banking assets. According to the European Central Bank’s consolidated banking statistics, small banks make up less than 3% of total European consolidated bank assets. What’s more, their share has not grown noticeably in over 10 years.
Ethical banks likely make up an even smaller share. For example, the combined assets of the European members of the Global Alliance for Banking On Values (GABV) make up less than 0.2% of the total consolidated banking assets of the EU.
What should we change?
In addition to putting an end to too-big-to-fail banks, the whole regulatory apparatus should be revisited to ensure that the burden for small, local and alternative banks is proportionate. This shouldn’t mean less, or lax, regulation for everyone – state regulation can serve banks by building confidence amongst the public that they are properly run and that they have access to state support. But it should mean recognising that imposing similar requirements on small banks and too-big-too-fail (TBTF) banks does not make a level playing field – it will faller harder on small banks than on TBTF banks with huge budgets and thousands of employees. The capital and regulatory burden on TBTF must be increased because of the dangers they pose, and to give space to small and medium sized banks and the advantages they can bring.