England & Wales, Global, Ireland, Scotland Economy and regeneration, Finance

Regional banks: the missing ingredient in levelling up communities?


The UK banking system is missing a vital component in driving better social, environmental and economic outcomes for local economies and that missing ingredient is regional mission-led banks. They play a major role in promoting greater regional economic equality in economic competitors such as Germany, France, Japan and the USA. How might the UK also benefit, and what is the role of local government?

If, like me, you were glued to CNN during the recent US Presidential elections, you’ll now be more familiar with certain US swing states than you were ever expecting to be.  But here’s something you probably didn’t know about the Commonwealth of Pennsylvania, it regulates 200 banks solely dedicated to serving the businesses and citizens of the state.

These community banks are often mutuals – meaning that they are owned by their customers. Take Penn Community Bank as an example. It has a balance sheet of USD 2.4 billion (£1.8 bn) and 24 branches serving Bucks and Montgomery Counties, which have a combined population of around 1.5 million.

To put this into perspective, the equivalent would be a regional mutual bank dedicated entirely to the long-term prosperity of its English namesake, Buckinghamshire plus neighbouring Oxfordshire.  And the citizens of those fine counties would have a choice of several other community banks too.

So what are the benefits of regional mutual banks?

As regional mission-led banks are commonplace from North America through Europe to South East Asia and Japan, there is a wealth of evidence for their social and economic benefits.

They do the heavy lifting on serving smaller businesses, because their local knowledge and relationship banking model give them a competitive advantage. They complement large banks to ensure that all viable businesses get the service they need. In banking, one size most certainly does not fit all.

Community banks also perform better on financial inclusion, ensuring many more citizens have access to banking and fair credit.

They act counter-cyclically, lending proportionally more to households and smaller businesses during recessions than large national and global banks.

Compared with large banks, they devote a greater proportion of lending to real economy businesses rather than financial and property speculation.

Finally, they provide an important mechanism for ‘levelling-up’ by capturing more capital for reinvestment in the region that would otherwise flow to the financial centre.

That the UK is so unusual in lacking such banks is significant.  Including for the purpose of comparison credit unions and community development finance institutions, the combined banking assets in regional mission-led banks in the USA, Germany and France are 3 orders of magnitude larger relative to their population.

We have billions. They have trillions.

So, it is not surprising that regional mission-led banks have emerged as core components of both Inclusive Growth, being recommended by the RSA Inclusive Growth Commission, and of Community Wealth Building, where it forms one of the five core principles.

The new mutual banking movement in the UK

The UK once had many regional banks, of course, and was a pioneer of mutual financial services, with a large building society sector still today, and a growing credit union movement. But building societies do not perform the economic role of regional mission-led banks, and the UK credit union sector is tiny compared with other countries.

Fortunately, two changes by UK Government over recent years have opened the door for the reinvention of regional mutual banking.

First, reforms to the banking licence application process have enabled over 50 new challenger banks to expand competition and choice in the sector.

Second, the Co-operative and Community Benefit Society Act 2014 permitted mutuals to become banks for the first time in recent history (the Cooperative Bank is not, and never was a cooperative).

This has corrected an unnecessary barrier to UK economic competitiveness, because it is not just the US that enjoys mutual banking. The European Association of Co-operative Banks represents 2700 banks across 22 countries.

New mutual banks are emerging to take advantage of the opportunity – South West Mutual, Avon Mutual, Banc Cambria, Greater Manchester Mutual and North West Mutual.

What is the role of local government?

The strengths of mutual banks also constitute a barrier. The lack of venture capitalists pushing for rapid growth and elaborate financial gains allows a mutual bank to pursue its customer-centric and locally rooted long-term mission.

However, it means that patient, mission-aligned capital is required. The two banks most advanced in the process – South West Mutual and Avon Mutual – have attracted initial private investment from within their regions alongside seed investment from local authorities. There is also strong interest from councils and combined authorities in the north west, north east and west of England and from the Welsh Government. The next step is to secure sufficient capital investment to launch the banks.

Local government could play a crucial role in capitalising regional mutuals, and in return receive a double dividend – sensible long-term financial returns in addition to measurable positive social, economic and environmental impacts for their region.

Unlike the search for new incomes streams in recent years through financial investments, this is first and foremost a policy-driven investment in critical economic infrastructure.

It takes around £20 million to capitalise a regional bank serving around 3 million people. But the nature of banking is that the initial capital will multiply within a few years to mobilise £400 million of local savings for reinvestment in driving local prosperity.

Without regional banks, regional economic development can never fire on all cylinders.

John Glen MP, the Economic Secretary to the Treasury and minister for banking, has said that “[I] believe that regional mutual banks could make an important contribution to the diversity of the financial services sector. Your network’s vision for the benefits which mutual banks rooted in local communities could create is compelling, and I welcome your efforts to establish regional mutual banks.”

But, in a sense, Westminster has done its job in opening the door. Will local governments grab the opportunity to walk though it? Or, when it comes to enjoying the benefits of community banking, will the businesses and citizens of Bucks, England, forever be poor relations to their Pennsylvian cousins?


Tony Greenham is Executive Director of South West Mutual, co-Director of Regional Finance Network, a Senior Fellow of the Finance Innovation Lab, and a steering group member of the Banking on a Just Transition project. [email protected]


One thought on “Regional banks: the missing ingredient in levelling up communities?

  1. The UK will benefit when mutuals lead the UK finance sector in using Intellectual Capital Guarantees for business lending.
    The system seems rather entrenched (with a lack of competition); UK financial system tends to be focussed currently on the value extraction lending model of which Personal Guarantees are part of the armoury.
    I believe mutuals can facilitate value creation in the economy where the lender and business owners interests are more aligned – with Intellectual Capital Guarantees.
    Mutuals must lose personal guarantees which destroy business people and their families.

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