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Local Banks and Credit Unions

November 11, 2011

In his evidence to the ICB, Richard Werner [Werner 2010] argues there should be more local banking in the UK.

“While in the UK six banks account for about 90% of the banking sector today, in Germany
such large High Street banks account for only 12.5% of the banking sector.
Meanwhile, in Germany about 70% of the banking sector is accounted for by two types of
locally-based, locally-controlled and locally-owned bank: (a) the credit unions (aka as
cooperative banks, Volksbanken in German) and (b) the municipality-owned savings banks
(Sparkassen in German)
(a) The credit unions account for about 27% of the banking market in Germany. They consist
of hundreds of independent, small credit unions, one of which is found to be headquartered in
almost every town (and sometimes even village). As not-for-profit banks (similar in some
ways to UK mutual societies) they extract a lower percentage of profits from their customers.
Further, as they are locally based, this means the banking and seigniorage benefits that banks
enjoy remain within the local communities.
(b) The savings banks account for about 43% of the banking market in Germany. They consist
of hundreds of independent, small banks that are headquartered in many towns, and publicly
owned (by the local municipalities). Like the credit unions, they are not-for-profit banks,
although their recycling of banking profits takes the form of supporting local city and district
councils by supplementing their tax revenues, hence helping to keep local taxes lower than
they would otherwise be.”

Werner lists several advantages from the structure of Germany’s banking sector:
(1) Local decision-making favours small firms
(2) Local decision-making creates and allocates new money locally
(3) Local banks tend to engage in sustainable banking
(4) The ubiquitous availability of 2 types of local banking enhances
competitiveness
(5) Degree of inequality likely affected by shape of banking sector

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