Monday, 17 April 2017

The Issue of Bank Branch Closures: Should the Continuation of Bank Branches Be Enforced?

Today’s post is concerned with the issue of banks closing their physical branches up and down the U.K., which has recently led the Shadow Chancellor John McDonnell and other politicians to call for an end to what is being described as an ‘epidemic’ of bank branch closures – McDonnell has pledged that Labour will tackle the issue by only permitting branches to be closed only after extensive consultation and the gaining of permission from the Financial Conduct Authority, should they win the next General Election. However, this post will examine the issue from the obvious point of the need to keep branches open, but also from the point of view of whether it is right, or indeed appropriate to force private companies to operate in a manner which benefits the public but not their own profit margins.

Firstly, it is important to note the current state of bank branch closures in the U.K., because the rate is rapidly increasing. According to a House of Commons briefing paper, there were 20,583 bank branches in 1988 in the U.K., but only 8,837 in 2012. The Financial Times reported how more than 1,000 bank branches have been closed between 2014 and 2016, whilst the Guardian reports that there are 486 more closures scheduled for 2017 alone. This has led McDonnell to state that bank branch closures have ‘blighted our town centres, hurting particularly elderly and more vulnerable customers, and local small businesses whilst making profit for themselves’, whilst politicians in Scotland have stated that pressure needs to be put on the banks so that they ‘understand the needs of local communities’. The House of Commons paper explains how ‘the traditional role of banks within the community, and the effects of branch closures on customers, banking staff and the community itself, mean that closures, especially in rural areas, are often controversial’, but the question is why is it controversial?

The obvious issue is in relation to the availability of banking services, and crucially of financial advice, to people who are deemed to be ‘vulnerable’ i.e. the elderly or the financially uninformed. This takes us back to an important post in Financial Regulation Matters were we discussed how the Government are apparently embarking upon a push to increase the amount of financial education within society, as demonstrated by the establishment of the ‘Financial Exclusion Committee’. In line with the ethos of the Financial Exclusion Committee, the ‘Campaign for Community Banking Services’ has noted that the issues of access to financial services, sustainability of communities, and environmental damage (through increased travel to branches further afield) are all knock-on effects of the increased rate of branch closures. In essence, we have a governmental push to increase financial literacy and support at the same time that the most visible source of that support is being withdrawn, which is the main source of criticism from onlookers. However, what of the arguments of the banks in radically changing the culture of the country and its communities?

A report cited in the House of Commons report states that ‘there is a clear and consistent demand for branches declared by the British public, but also that this preference is also [borne] out by people’s actual behaviour too’, and that the closures are not a response to demand conditions but as a result of a ‘business calculation’. However, the banks argue differently, with RBS declaring that ‘simple’ branch transactions across its chain of branches (in conjunction with its NatWest branches) have fallen by 43% since 2010, whilst online and mobile-based transactions have increased by an extraordinary 400%; HSBC similarly declared that the footfall in its branches had reduced by over 40% in the last five years. Statistically, the banks have a point, but as is usually the case, the statistics paint a different picture. Whilst it is right that there has been a reduction in footfall, and that only 11% of the population use branches, that 11% consists of the elderly and poorer customers. Therefore, there is a burning question that needs to be raised when such figures are cited – what do we expect from the banks? Do we expect them to behave like the companies they are i.e. prioritise their own growth and protection above all else? Or do we expect them to play some societal role and take into account the needs of society? The answer to that question has been debated for a very long time.

The issue of what is expected of the banks can be neatly categorised by the economic and regulatory studies of so-called ‘public goods’. ‘Public Goods’, in the economic sense, are ‘things’ that are provided for the public, and contain certain characteristics. Essentially, a ‘pure’ public good has both ‘nonrival’ and ‘nonexludable’ properties, meaning that the good can be consumed by one person without reducing the availability of potential consumption by another (nonrival) and that the good is free to all (nonexcludable). The study of this phenomenon can be found in the field usually termed as ‘Public Choice’, but for our purposes an interesting discussion can be found in this interesting blog post by June Sekera. However, the term is often (and in this author’s opinion misguidedly) used interchangeably, alluding to a provision of a service as contributing positively to society (a better term could be used for this). Banking, on both sides of the Atlantic, is often perceived to be a ‘public good’, and this can be demonstrated by the consistent references to providing for a community. Yet, what we expect of a private, or indeed public company, is often alluded to, and herein lies the issue. Banks, particularly under Right-wing governments, are considered to be purely private institutions whose affairs the state cannot interfere, unless some illegal transgression has been committed. McDonnell, in representing the Left-wing, confirms that the Labour Government would actively interfere in the organisational procedures of private institutions, which is not particularly surprising knowing what we know about the main political parties. However, there has been little discussion as to why the state should interfere, or not, it has just been assumed that one’s political outlook will decide one’s views. There is, however, another way of assessing the situation.

In the early 2000s, the leading banks took conscious efforts to defraud investors, engage in a systemic degeneration of ethics and standards, and ultimately put society at great risk, all because of one widely-held understanding – they were too-big-to-fail. Companies such as RBS in the U.K., and Bank of America in the U.S., understood that whatever happened, the state could not let them all fail. We know now that this was understood, and ‘too-big-to-fail’ has made it into common parlance as a result. Therefore, rather than the societally-dangerous reasons underpinning the Right-wing viewpoint of leaving business alone, absolutely, and the Left-wing approach of interfering in private business, it is better to understand it in these simple terms: relying on the public as a parachute intrinsically makes that company liable to consider the public more than companies that do not. The work of the Financial Exclusion Committee has confirmed that there is a desperate need to increase financial education and face-to-face support, and as such the leading banks, particularly those that have directly benefited from the public fisc, must take an active role in meeting this required demand. Whether that means reducing the rate of branch closures can be debated, but there must be an effort to meet that demand – it is not enough, like RBS have done (a major beneficiary of public bail outs) to simply claim statistics as the reason for increased closures. Banks do not fulfil the requirements of the ‘public good’ designation on a number of accounts, but like the Financial Crisis seemingly changed the parameters in favour of the banks, it can now be brought back around to favour the most vulnerable in society. It is important that political bias does not interfere with this alteration, but that we simply adhere to the notion that everything has a price that must be paid – interest payments on bailouts are not enough for irrevocably changing the parameters of society.

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