July 1, 2009
Banks must disclose where they lend
A campaign is gathering momentum in the UK to compel banks to be open and transparent about their activity in the marginalised communities. Equivalent Legislation in USA, called the Community Reinvestment Act (CRA), has been responsible for levering trillions of dollars into low and middle income neighbourhoods. This well researched piece lays out the territory
The government’s relationship with the banking sector is depicted as akin to that of an overly-liberal parent to their child. The government and its regulators have opted for a light touch approach, entrusting banks themselves to do the right thing.
But as minds focus on how to rebuild a banking system that is solid, fair and equitable, a chorus of voices from the social enterprise sector is beginning to ask whether it is time for government to adopt a more heavy handed approach to harness the collective power of banks.
According to critics, evidence of the industry’s contribution to tackling under-investment has been piecemeal and anecdotal. This has not satisfied the growing number of campaigners, who believe the UK should look to legislation overseas – particularly the US – which compels banks to be open and transparent about their activity in marginalised communities.
The concern that banks have been engaged in little more than gesture politics to keep the statute book at bay, was succinctly captured by the influential Social Investment Task Force – pre-economic meltdown – in 2001.
Appointed by then Chancellor Gordon Brown and chaired by venture capitalist Sir Ronald Cohen, the task force’s report said: ‘According to the British Bankers’ Association, banks have supported at least 70 local loan funds of various types. These are welcome moves. However, they are mostly inspired by philanthropy, public relations or marketing.’
Indeed, this view is supported by Niall Alexander, the former director of HBOS’s community banking unit, as he recalls his attempts to build on a widely acclaimed project to tackle financial exclusion in Wester Hailes, a deprived suburb of Edinburgh.
He recalls that while he received support from the highest echelons of the bank, including former HBOS CEO Sir James Crosby, who went on to become the deputy chair of the Financial Services Authority (FSA), this ‘never trickled down to middle management’.
Despite the success of the Wester Hailes Community Banking Agreement, Alexander says he was subsequently unable to secure the resources required to duplicate the project elsewhere. ‘Of course, the bank got their kudos early, good PR, a nice story. Once that had been picked up, they were less bothered.’
Faisel Rahman, managing director of east London-based Fair Finance, which offers financial services to local communities bypassed by mainstream banks, says: ‘I completely agree with Cohen’s view that banks are only interested in getting good PR and promoting themselves to government. This is not just about us understanding the willingness of specific banks to develop products and services that are suitable for under-served markets, but would also enable organisations, such as my own, to start filling gaps in the market.’
Before her departure, former communities secretary Hazel Blears raised the spectre of the government introducing new, powerful banking laws based on the decades-old Community Reinvestment Act (CRA) in the US.
At the centre of the CRA is the full publication of lending data, allowing the general public to take banks to task if they do not meet their obligations to lend in the same areas they take deposits.
Speaking at an event for third sector bosses in London in April, Blears said her department was looking at ways to rebuild trust in financial institutions. ‘The US Community [Re]Investment Act, whereby financial institutions must plough some of their profits into compmnities, might serve as an interesting starting point,’ she said.
A flurry of action
With these few words, Blears set in motion a flurry of activity among campaigners, whose calls for such legislation before the banking bail-out had fallen on deaf ears. For many, the fact that a Cabinet minister was ready to champion their arguments said much about how far the balance of power had started to tilt away from the banks.
The DCLG has since commissioned a scoping study to assess the feasibility of legislation based on the CRA, with counterparts in both the Office of the Third Sector and the Treasury adding their thoughts and ideas into behind¬ the-scenes conversations. Despite Blears’ departure, a series of ‘invitation ¬only’ seminars have been taking place across the UK to guage the public’s appetite for CRA-based laws.
While the Treasury’s official line is that there is currently no ‘clear evidence’ of the need for a CRA in the UK, campaigners point out that the banks’ refusal to publish and share figures on lending leave us all in the dark when it comes to understanding the role of the banks in boosting wealth creation in poor neighbourhoods.
For Toby Blume, CEO of the Urban Forum, the part-nationalisation of names like Lloyds and RBS has given campaigners and the wider British public a newfound sense of legitimacy in calling for fundamental changes to the banking system.
Blume says: ‘There is a widespread feeling that the £90bn of public money invested in banks on the brink of collapse has offered little to communities and citizens. Citizens quite rightly want to feel that the money pumped into these ailing banks has been worthwhile.’
Meanwhile, Rahman says: ‘The financial crisis forced the government to make a decision to spend £70bn of taxpayers’ money over the course of one weekend. It seems right that as part of the public’s underwriting of banks, they should be allowed access to simple information about where they lend.’
eRA in the UK
Unsurprisingly, the British Bankers’ Association (BBA) is sticking to its long-held position that its members do not need to be coerced into action through regulation.
Brian Capon, a spokesman for the BBA, says: ‘In the UK, there is a high level of good practice being displayed across the financial inclusion and capability agenda by the leading banks with considerable efforts being made supporting the FSA and government [agendas] … Legislation could curb this.’
The BBA is also closely following the arguments of free marketeer commentators in the US, who have suggested that the CRA played a large role in the economic meltdown itself. ‘In the US, there is still an intensive debate on if and how the CRA has contributed o the sub-prime crisis,’ Capon says. ‘It would be unwise to move ahead with any similar requirements in the UK while this issue is still being examined.’
But this line of argument has surprised John Taylor, president and CEO of the National Community Reinvestment Coalition in the US, who says it has completely failed to attract any political currency.
Indeed, he points to evidence given to a House of Representatives’ consumer credit committee in March this year, when the Federal Reserve’s director of consumer and community affairs, Sandra Braunstein, said: ‘I can state definitively … that the CRA is not one of the causes of the current crisis.
‘We have run data on CRA lending and where loans are located, and we have found that only six per cent of all higher cost loans were made by CRA¬ covered institutions in neighbourhoods targeted. So I can tell you, if that’s where you’re going, that CRA was not the cause of this loan crisis.’
But it is not just the industry itself warning against a wholesale import of the CRA into the UK. Sarah McGeehan, head of social finance at NEST A, believes it is not as simple as importing the CRA into the UK.
However, McGeehan adds: ‘While CRA might not be the complete answer, there is a sensible argument to suggest that if banks benefit from the extremely profitable bits of the market, there should be a responsibility to serve the whole of the market.’
The Community Development Finance Association (CDFA), whose members provide financial service in marginalised communities, has itself fallen short of calling for wholesale legislation.
Bernie Morgan, CEO of the CDFA, says: ‘CRA operates in a very different legal and fiscal framework. While we are warning against wholesale CRA for the UK, we want the CDFI sector to be a permanent and recognised part of the financial services industry. As we are seeing, CDFIs are essential in times of both boom and bust.’
Instead, the CDFA launched a campaign in May calling on banks and its members to adopt a voluntary code or ‘community finance charter’. Under the charter, the FSA would be able to take a bank’s record in serving marginalised communities into account when awarding a banking licence.
But the CDFA – along with Fair Finance, the Social Enterprise Coalition, the Urban Forum, the Association of Chief Executives of Voluntary Organisations and the Development Trusts Association to name a few – are all convinced of the need for quick and tough action to compel banks to come clean on where they lend.
The report says: ‘Some banks have clearly embraced the opportunity to disclose information, develop their understanding of these markets and work in partnership with CDFIs and other agencies. Others have not been proactive. Those who are more reticent must be required to disclose.’
Morgan adds: ‘It is vital to get banks to disclose activity to the same framework and the same regularity. We’re calling for disclosure so we can measure the contribution of one bank against another.’
Rahman agrees. ‘Disclosure will only ever work if each individual bank can be identified,’ he says. ‘It is only after we’re given access to the data, which would allow us to understand the complexities of financial exclusion, that we will be able to understand what further action could help.
‘It could be then that CDFIs work with banks to show them that banking in these areas can be done. If they are unwilling to undertake this work, one option would be to find ways to encourage them to invest in social enterprises who could help fix this market failure.’
Andrew Robinson, former head of Community Development Banking at RBS & NatWest and currently director at investment manager CCLA, says: ‘While people were spending, it was easy to see why the government favoured a carrot and stick approach – without the stick.
‘The prevailing view was that the banking system was working for most, so why attempt to burden it with red tape and bureaucracy and risk undermining the perceived success of the City.