Community reinvestment

Banking that helps? The framework of regulation and incentives that promote equal opportunities in finance in the USA has long stood out as a model for success.

The Home Mortgage Disclosure Act in the 1970s was a response to allegations of race discrimination in lending by banks. The Act required them to publish their lending data. This was followed by the Community Reinvestment Act, that widened the disclosure and added an obligation on banks to serve all the community in which they were licensed to operate.

I looked at the Community Reinvestment Act in research in the late 1990s with colleagues, that was published as “Small is Bankable” by the Joseph Rowntree Foundation. Following the report, and with the momentum of the Social Investment Task Force and many, many allies, every one of our recommendations came to fruition. It led to a Community Investment Tax Relief, the emergence of the Community Development Finance Association and a time-limited support fund for non-bank enterprise lenders.

The one thing that did not happen was disclosure on lending by neighbourhoods. Until today.

An initiative launched today by the Treasury will see the disclosure of data on lending by the main banks. It will be on a voluntary basis and without direct sanctions for failure or incentives for success. But potentially it could lead to a world in which it was entirely normal for banks to be held to account for their daily activities, rather than their periodic misdemeanours.

An open set of questions

We had an open and constructive session recently at our annual Co-operative Congress on the current context around the Co-operative Bank. The strong sense from the wider co-operative sector is one of support for the practical action now underway to restructure the capital base of the Co-operative Bank, in partnership with those affected, in order to safeguard its operations, in line with co-operative values and principles.
Over time, we will also need to look at the deeper learning for us as a wider co-operative movement. This will take time, but the lessons need to be embedded precisely because if they are not, then over time, the circumstances may be repeated. The Co-operative Group has said that it will commission an independent enquiry, which is a welcome sign of openness.
What needs to be considered? I personally would set aside the issues that the media has tended to focus on, over political factors (who supports which political party) and whether bondholders want a better deal. Others of course may disagree, but as I see it, the first is probably froth – more important is whether those in power pressed for the merger of the Co-operative Bank and Britannia. The second is about legal rights and, to a degree, commercial negotiation.
In terms, then, of deeper learning, we could put these perhaps in the form of ten questions that merit exploring:
1. Was the coming together of the Co-operative Bank and Britannia Building Society, whether you call it a merger or a take-over, appropriately handled?
2. Were the true risks of losses identified? Following the merger, in the context of wider economic stress, should the potential losses that have now come to light been recognised at an earlier stage?
3. Were there weaknesses in governance or management capability or reporting that led to an avoidance of action to address the underlying issues?
4. Given the swift transition from challenger bank, with the proposed Lloyds TSB deal, to casualty bank, were there weaknesses in terms of organisational culture, post merger, at a governance or management level that took eyes off the ball, led to hubris or undervalued caution in strategic planning?
5. Has the model of membership for the Co-operative Bank as an indirect one through the wider Group been sufficient to ensure prudential customer ownership and control?
6. Have the interests of the different groups of members, savers, borrowers, investors, pension-holders and staff had due consideration?
7. Are there instruments for rebuilding member financial ownership over time of the Co-operative Bank?
8. Have the models for financing mergers and business expansion at the level of the Co-operative Group proved to be effective as a commercial strategy?
9. How far is the proposed ‘bail-in’ the consequence not just of past losses but also the demands of a regulator keen to raise capital ratios across banking, including mutuals that were neither recipients of taxpayer support nor structured to raise additional equity capital in conventional ways?
10. What was the role of the ratings agency in this story – positive or negative – and how far does the ratings industry understand co-operative and mutual models?
Looking forward, there are also some relevant points of learning, such as insights from overseas around customer-owned banks and how to operate as a co-operative with a minority external set of investors. But for now, the immediate and overriding priority remains the call of implementation. Anything else may simply get in the way. But when that is done, the reflection must start and considering the right questions is one way to prepare for when this moves forward.

Enough to count

The model of public services that are delivered by mutual enterprises with a strong staff has moved from idea into practice over recent years.

I met with Anthony Collins Solicitors this week, hearing about their work with partners on co-operative models in probation.

According to new statistics from the Cabinet Office, reporting in a one-year progress check after the end of the Mutuals Task Force (which I participated in):

· 32 leading public service mutuals have recorded annual revenues of around £650 million, and this is projected to rise to more than £700 million next year. Given that the Cabinet Office is tracking over 70 live mutuals, the total revenue of all is likely to be over £1 billion.

· Those mutuals that have spun out since 2010 have increased the number of contracts they hold (by just under a third), a good sign of business skills.

· The mutuals that have launched since 2010 report that they have also made over £21 million of savings.

· When staff feel more engaged, they are likely to stay longer with the organisation and miss fewer days of work. This is reflected in the latest survey data showing lower churn and absenteeism, which, say the Cabinet Office, has fallen on average by 16% and 20% respectively.

With public service policy a hot topic, all this is now enough to count.