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October 7, 2009

Time for banks to play their part

In the pre-credit crunch era our banks behaved as if they were untouchable.  There was little or no expectation that they should play any part in helping to regenerate our poorest communities.  A very different situation applies in the States, where the Community Reinvestment Act has been in place since the 1970s and has resulted in billions of dollars being invested in rundown inner-city areas.  Last week, the Chief Secretary to the Treasury, said he felt the time was ripe to consider a UK version

Larry Elliott, The Observer

Plans to force Britain’s banks to pump money into poor communities in exchange for their massive taxpayer bailouts are being drawn up by the Treasury, a senior minister has revealed.

Liam Byrne, chief secretary to the Treasury, said last week that the time was ripe to consider a UK version of America’s Community Reinvestment Act, introduced in the 1970s to prevent banks abandoning deprived areas.

The CRA has resulted in American banks lending billions of dollars in rundown inner-city districts, and, with public anger at the activities of financial institutions running high, Byrne said he was actively considering a similar scheme for Britain.

“It is an interesting idea, which we are exploring earnestly at the Treasury,” he told a fringe meeting at last week’s Labour conference in Brighton.

The chief secretary added that there were two issues that worried him and his Treasury team – the lack of any hard evidence that particular communities were being frozen out by the British banking industry, and concerns that CRA-induced lending to poor households in the US had triggered the sub-prime crisis.

“These are serious questions for us to explore,” Byrne said. “But we wouldn’t be looking at it if we didn’t think it would be a good idea.”

The financial crisis of the past two years had provided the perfect opportunity to force the banks to behave with a greater sense of responsibility, he believed. “If we are not going to do it now, we will never do it,” he said.

The chief secretary travelled to the US late last week to see how the CRA was working on the ground, but believes it could be one answer to the lack of capital hindering urban regeneration.

The CRA was designed to prevent discrimination in loans made to individuals and businesses from different areas. Bill Clinton’s administration brought in an amendment prohibiting mergers or takeovers for institutions not complying with the CRA.

National banks in the US are assessed on their record of helping to meet the credit needs of an entire community, including low- and moderate-income neighbourhoods. That record is considered when the bank applies to open new branches, relocate an existing branch, or engage in mergers and acquisitions activity.

Steve Wyler, director of the Development Trust Association, one of the groups that has been campaigning for a British CRA, said that previous attempts to copy the US model had foundered on the unwillingness of the government to take on the banks. “We are in a different position now. There is big public frustration about the possibility that we might slip back into business as usual.”

Wyler added that a greater degree of social responsibility should be part of a bank’s licence to operate. “There is a strong argument for it when the government has bailed out the banks,” he said.

Responding to Byrne’s concerns, Wyler said there had been an attempt by the Republican right to use the problems faced by sub-prime borrowers to discredit the scheme, but that “all the evidence shows that those financial institutions operating under the CRA were the least responsible for the sub-prime lending.”

Wyler said a lack of disclosure made it hard to say whether banks were discriminating against poor people, but that it was clear struggling parts of Britain lacked banking facilities.