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By David g. Green 1: 23 GMT 21 December 2010

George Osborne and Vince Cable convened leadership at Whitehall this week to admonish unjustifiable premiums and their inability to lend to small businesses. But instead of the current mix of special taxes, behavioral rules and public exhortation, the coalition must sharpen the competitive pressures in the banking sector. It may do so by creating a legal framework for a new type of local bank, modelled on the long and very successful savings banks in Germany, which is now about one-third of all German bank assets collectively more big names in the German bank.

Nick Clegg has recently warned banks which the would Government "stand not unnecessarily" if they do not restrain bonuses and David Cameron has called for personal and threatened with higher tax liability. Instead, they should examine closely how prosperous banks in economics it have been successful. Major banks the Germany made the same mistakes as ours, but their local municipal banks did not. They have no culture of bonus, and while large commercial banks were lending companies, savings banks increased their.

Banking German being more pluralistic, large international banks do not have the same systemic control as to the United Kingdom. German commercial banks hold approximately 29% of all assets of Bank, which means that they are not "too big failure". Co‐op banks have approximately 12% and 34% savings banks.

The success of operations banking pluralism in Germany provides an index of large coalition. Banks are the indispensable role of intermediation between savers and borrowers, and is more effective to encourage more responsible for executing operating pressure fresh but relentless competition from rivals. In time, is much more efficient than any amount of behavioural regulation by agencies of State armed to the teeth with powers of intervention, with or without regular public warning by political leaders.

The Germany is not alone in having a system of local banks. Swiss cantonal banks are proportionately smaller, but also play a central role in the respective cantons. Two main characteristics are the German and Swiss banks potentially interesting to the United Kingdom. First of all, they are legally restricted to operating in a well-defined geographical area and, second, they must function as commercially sound business while he was also the interests of the community - particularly by providing accounts for all and loans and other financial services available to local businesses. This combination of to be a commercially viable but step to maximize profit and, on the other hand, social goals is often called the "double bottom line".

German savings banks are institutions in the public sector with the structure typical German double Board: a (in this case composed of two-thirds designated by the local Council and one third by employees) Supervisory Board and an Executive Board that runs to the Bank. They are governed by the laws of same as all other banks, but are also subject to additional legal obligations. Trade surplus must be reinvested in the company, and they are not allowed to make investments risky derivatives or one of the other scarce financial instruments which have contributed to the recent financial crisis. Local focus means that the Bank employees are familiar with local businesses and even more effectively assess the reliability of loan applicants.

Funds, as they have for loans are primarily customers deposits must be preserved. Therefore, German local banks are part of a national network that spreads risk in a system of regional and national institutions. The Germany also has credit guarantee banks that lend to each federal region. They are non-profit lenders who historically bonds worth 80% of the value of the loan associations. Each bank guarantee would take on up to 35% of the risk, while the Federal Government has 40% and the regional Government of 25 per cent. The borrower pays a fee of 1 to 1.5 per cent of the loan and an annual commission of 1 to 1.5% on the amount outstanding each year. Historically the borrowers were at risk for 20% of the value of the loan, but as a result of the recent financial crisis that has promoted the German Government guarantee banks cover 90 per cent of the risk and take up 50 per cent to themselves.

By creating a new legal framework for the coalition could make possible the emergence of similar to the United Kingdom banks. The Government should not implemented the project "save and enterprise" banks, but it should create the possibility that they could be implemented where they are wanted. Or they need to be public sector organizations. Regionalism Bill provides a framework that would take this form, but a variety of existing legal structures may also be appropriate, including mutual, co-operatives, private companies limited Community interest companies and trusts. The presence of a Supervisory Board keep an eye on the Executive Board is a useful constraint but it should not be composed of a mixture of the candidates and the local authority employees. It could include clients as a cooperative of consumers; or its members could be trustees, who are charged with safeguarding the social objectives of the Bank but prohibited benefit personally.

The creation of a new framework to register it and business banks could define coward a vast pool of untapped energy potentially holds the key to restore our economic fortune. In addition, the existing banks would fight the hardest to keep their customers. Things are going that some banks may move overseas escape overregulation. This reaction may be understandable, but if they leave because they are competing for customers rather unpleasant and then, we're better without them.

David Green is Director of Civitas.

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