Time for a Full Public Bank in Wales? Yes.

With due care, but Yes.

The positive thrust of PPIW’s report to Welsh Government on the benefits and viability of a Public Bank for Wales is to be welcomed.  The report reviews prominent international examples of public banking, and finds evidence to suggest strong reasons why Wales might benefit from the creation of a Public Bank:

• Better access to investment for SMEs and regional economic development
• Reduced dependence on private capital
• Retaining money (and jobs) within Wales
• The ability to “create money”, rather than recycle funds.

The report introduces the “money creation” capability of every fully constituted bank, but the beneficial implications deserve more prominence. Prior to a 2014 Bank of England report on money creation, very few people appreciated that as much as 95% of the money circulating in the UK economy is based on an act of accounting that matches every loan out with an equal deposit in the borrower’s account. As the money is paid back, the deposit is reduced and the money is uncreated. As things stand, in the UK, this creative and profitable capability sits only with private interests. It is surely time to let the public interest have a share.

In terms of access to investment, the report notes that potential borrowers who are close to the City of London do better than those much further away. Therefore, “a public bank…creating money with an explicit regional objective, could boost SME lending and regional economic development”.

This is not just a question of proximity, but of the mind-set of the lender. Too often, lenders look for low risks and quick returns. Wales needs lenders who can use local knowledge and long-term criteria when assessing applicants. As the report says, “Public banks with an explicit community objective could be able to process soft information that could boost SME lending in Wales”. This could also stimulate demand for investment, and encourage indigenous enterprise.

The report questions whether there is demand for investment in Wales. But the wrong lenders reduce demand. Professor Jones-Evans’ 2014 report estimated some £500m in rejected funding applications. With grave uncertainty ahead, there is little to suggest that the City will gear itself up for investment demand in Wales. We need a banking system that is responsive to Welsh needs and aspirations, and less dependent on the private lender.

Locally responsive and long-term-oriented investment is needed not only for SMEs but also social and environmental businesses. Germany’s public banking system has been pivotal to its green energy transformation and 300,000 green construction jobs. As a country seeking to build for the well-being of future generations, we need to have our own hands on some long-term financial levers. A money-creating Public Bank for Wales would be just such a lever, encouraging investment for the good of our people and environment.   

Such investment could also be extended to infrastructure and public services. Currently public bodies underwrite private investments; offer up large profits from the public purse; and carry the can during market crises. A Public Bank could work with local authorities and others on long-term investment strategies that put the public first. This is not wild-eyed Marxism. The highly successful Public Bank of North Dakota serves one of America’s more conservative states.

A key to the success of North Dakota is that its Public Bank has the legal power to create money, just like private banks do everywhere. Rather than simply lending their capital, like development agencies or revolving funds, they can leverage their capital. In a UK context, an initial start-up investment of say £10 million could create up to £100 million for loans. The initial start-up capital only needs to be invested once. Subsequently, the bank not only repays the original investment but generates returns, year after year, for its original investors. In a Public Bank for Wales, these could include Welsh Government, Local Authorities and other interested bodies.

The report clarifies that the new Development Bank for Wales will operate a revolving fund and neither take deposits nor create money. We wish it only well in its important role as a development agency. But it and other Welsh finance institutions would be much strengthened if they had a full Public Bank to work with too: a bank that creates money, in Wales, and for Wales.

Is such a Bank viable? The PPIW report quite rightly calls for further research, and we likewise encourage Welsh Government to move to the next stage of exploration. Wales needs to learn from other’s mistakes, to properly understand our own evolving context, and to be diligent.

But doing nothing also holds risks. Wales has the opportunity to be in the forefront of place-based banking developments in the UK, and is uniquely able to align such developments with the values and principles of its ambitious and over-arching laws. It would be a serious “opportunity cost” if we failed to explore and embrace this potential, and found ourselves stranded on the financial margins in years to come.

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