But of course we want to have regional banks!

One of the demands of those economics conservatives, the British left and assorted progressives, is that we must have regional banks again. Because, you know, well, regional banks YEAH!

The problem with this being Chesterton’s Fence. We used to have regional banks, why don’t we now? Because we had them, the market considered them and then they all merged to become national banks.

But Chesterton’s Fence. Why did they merge?

Because a regional bank can cause terrible, terrible, problems if it gets into trouble:

From a distance, Vicenza does not look like a city engulfed in turmoil. On the elegant Corso Andrea Palladio, named after the Renaissance architect whose work defines this city, a finely dressed woman clutches a Chanel handbag during her evening passeggiata. Locals sit back and enjoy their Campari spritz cocktails in the July heat. A black Maserati rolls slowly down the street.

But this apparent serenity belies an ugly truth. The regions of Veneto, where Vicenza is located, and Tuscany are the epicentres of Italy’s banking crisis, which has cost citizens hundreds of millions of euros.

If there’s that one dominant regional bank then it getting into trouble can bring the whole region to its knees:

Wealthy northern Italian manufacturing strongholds like Vicenza were the financial engine behind Italy’s postwar economic boom, and are critical for the country’s hopes today. About 30% of Vicenza’s 100,000 companies have a direct relationship with BPV, according to Variati, and those companies need lines of credit and support.

“What I hope, as mayor, is that the bank stays as close as it can to the companies. Those 30% cannot be abandoned, they have to be supported if they are healthy. BPV will be able to survive over time if the territory is strong. There will be no future for the bank if the territory is poorer,” Variati said.

The flip side is also true. Imagine a regional economy with a strong specialisation. That major industry (and in Italy it’s likely to be a cluster, hundreds or thousands of firms all working in roughly the same industry. There’s one little area that produces most of the world’s spectacle frames for example) tanks, what happens to the bank?

Quite, that’s why regional isn’t the way to go, you want banks that are geographically diverse so they’re not exposed to that one industry or one geography risk.

Which brings us back to Chesterton’s Fence and why we used to have regional banks and now do not.

Why don’t we have regional banks? Until that question is answered, A Reverse Chesterton’s if you like, we cannot sensibly discuss whether we should have them again.

And of course the moment anyone says we should have local banks with local worthies (usually, local politicians, unions and locally based businesses) running them we have only to point to Spain’s cajas. Absolutely every one of which went bust from memory.

19 thoughts on “But of course we want to have regional banks!”

  1. Tim

    I have to break a lance in favour of my adopted home.

    Almost true re the Cajas in Spain. Most did go spectacularly broke due to amateur and/or corrupt and/or criminal and/or politically manipulated management allied with the euro-induced real estate boom.

    However, here in the Basque Country, our local Cajas, currently merged into a bank which is still trying to find its real identity, did not have that problem. They were always prudently run (even if politics played too important a rôle)

    We like to think that it is because we are a mix of the north and the south. More northern European than the rest of Spain. A longer history of industralisation, serious business people, less corrupt politicians etc. Our unemployment is lower and we never had the real estate boom in the same way as down south. Money was older here too and more established giving the economy, both business and family, a certain level of sustainability.

    Also true is that the tourist industry is radically different here (much smaller, bigger spending and more up-market attracted by the highest concentration of Michelin stars in the world, no Magalufs) and there is no land to build where housing might allow for holiday home speculation.

    Not perfect but OK compared.

  2. Hundreds or even thousands of firms working in the same industry ? Unless you are counting “high end manufacturing across a wide variety of sectors” as one industry then this sounds a little unlikely.

    Sure, an Aberdeen based regional bank lending only to the oil industry would be at risk but is the lack of diversity of the Veneto economy really at fault here. It sounds from reading the anecdotal stories (a waiter being offered €20,000 for a car loan or €800,000 for an agriturismo business reliant on volatile EU subsidies) that it is just plain old-fashioned bad lending practices that are really at fault.

  3. Works on other scales too dunnit? One (or a few) strong national banks can bring a nation to its knees. One (or a few) strong supranational banks can bring several nations to their knees.

    Maybe it is better if only some places get fucked more often than we all get really fucked less often?

  4. Bloke no Longer in Austria

    A good example of regional banking gone bad is the Hypo Alpen Adria in Austria.
    The whole scandal is stupefying in its involvement of corrupt politicians and stupid bankers.
    The bank in various forms had been around since the 1890s, and was/is based in Carinthia in southern Austria. In the 1990’s it expanded into Slowenia and Croatia and then into dodgier parts of the Balkans, but as a group rather than a single company.
    The expansion was down to Jörg Haider ( remember him ?) and the direct owenership of the bank by the state of Carinthia. So Jörg uses the bank for his private slush-funds and the institution itself doles out very iffy loans.
    In 2007 the Bavarian Landesbank buys the HAA without due diligence for 1.6 bill euros and the Carinthian government gets off the hook for all the dubious lending and uses its 800 million to pay off its debts.
    Predictably the bank goes under in 2009 and is nationalised by Austria for 4 euros, costing the Germans another 800-odd million and the state of Carinthia just under 200 mill.

    The scandal is still dragging on. Revelations come out constantly about dodgy liabilities and enrichment of political parties, banks and the state stitching each other up, insider dealing, reputations ruined and so on…

  5. Bloke in North Dorset

    “Tuscany, eh? Let’s hope Polly did pile all her cash there in disgust at British banks”

    FYP.

  6. The problem with these foreign places is they don’t have the pool of expertise that is provided by the omni-competent British public schools. Get some of these guys in,, with support for the language problem, and everything will be raised to the British level of economic competence, with soaring house prices spreading prosperity like wild fire !

  7. The Meissen Bison

    Cheer up Reedy, the omni-competent British public schoolboy is a bit of a whizz at languages, ancient and modern. Oh! – is that a frite on your épaule?

  8. I’d never come across Chesterton’s fence before so I looked it up. What a brilliant metaphor. Thank you for bringing to my attention

  9. It was the British Public Schoolboy who created and ruled the Empire (in conjunction with the British working classes who formed the native slaughtering regiments) so they can’t have been that weak, weedy and stupid. In fact one could trace the decline of the UK to when non public school educated people were allowed to get into positions of power……………….

  10. @ DBC Reed
    The UK banks were NOT created by those who had attended Public Schools who, entered the army or if they were bright enough, the church or the professions.
    The soaring house prices – why is that my fault? Under Gordon Brown’s management of the economy house prices rose more in ten years than in the previous millennium. Kirkcaldy High School is NOT a Public School.

  11. Well, the powers that be seem to be encouraging the banks to lend, lend, lend and then do a bit more lending. The ultra-low, in some cases negative, interest rates are the policy hammer. But lending at lower returns means there is less cash to cover the higher bad debts that accrue from an increased number of bad lending decisions.

    Japan made this mistake for us 20 years ago (and is still doing it) – and also showed that ramping up state debt and QE doesn’t work either.

    At what point do you accept that having an advanced economy with plenty of cutting-edge innovation (basically US, Japan, to a slightly lesser extent Europe) that drives real increases in quality of life isn’t going to get much more efficient? The new stuff simply doesn’t need capital. Much of it is people starting something on their kitchen table with a laptop. No (financial) capital needed. The old stuff is a few M&A and marginal improvements away from being as efficient as it can get.

    Does that condemn us to long-term zero interest rates, because capitalism has already eaten itself, or does someone need to break the cycle and endure the pain, in order not to end up in a world where the government owes 3 generations of tax take to people who haven’t done nearly enough to justify repayment?

  12. “Kirkcaldy High School is NOT a Public School”: in the Scottish sense it is. But I know what you mean.

    Quite a bit of Empire-making was done by Scots, with lots of Irish soldiers under their command.

    I saved in a local bank when I was young: a Savings Bank, as it was known. But they didn’t pay enough interest to satisfy hoi polloi, so they eventually vanished.

  13. Much of it is people starting something on their kitchen table with a laptop.

    True, up to a point, BiG. But to take your bright idea from a laptop and turn it into a global application (like Uber, say) requires tens of millions in funding. It’s more likely to come from VC than a bank loan, though.

  14. Reading this;
    Also true is that the tourist industry is radically different here (much smaller, bigger spending and more up-market attracted by the highest concentration of Michelin stars in the world, no Magalufs) and there is no land to build where housing might allow for holiday home speculation.

    From bilbaoboy made me wonder again about something that’s been bugging me; if MV=PQ is reasonably true and reasonably useful, does average transaction size have an effect? Anyone got any pointers?

  15. @J77 You are at last admitting that soaring house price inflation might be a bit of a problem : the problem is doing something about it, I think you’ll find. Don’t look round here for assistance: TW used to be a staunch land taxer like his idol ,Adam Smith, but he has cut down on such references as they confuse his laissez faire readers (most of them) who believe that you can have unrestricted investment without land and property prices rising uncontrollably and destroying capitalism. Anything to avoid these dear little chaps confronting the simplest economic mechanism.

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