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Like all dream solutions, it turned out to be just that: a daydream. The good old Co-operative Bank, a venerable 130-year old Mancester-based lending institution, owned by its members, was to take over 632 bank branches from Lloyds Banking Group, the hideous conglomerate lender rescued by the British taxpayer four years ago. It was a heaven-sent opportunity for George Osborne, Chancellor of the Exchequer, to boast that new competition was entering the hated banking sector, courtesy of a friendly society with an ethical investment policy. But after a year's negotation, the Co-op has backed out of the deal, adding insult to the government's injury by blaming the worsening state of the economy for its decision to reverse pedal on its expansion plans.
Lloyds now intends to spin off the branches and their 4 million-plus customers in an IPO because the European Commission has demanded that Lloyds shrink as a condition of the government rescue. That may satisfy the letter of competition rules but it is unlikely that an old name stuck over the door (Lloyds intends to revive the TSB brand) will significantly boost lending to businesess and consumers. If we really think that a sprawling Co-op bank will revive the economy, it is because we are not thinking hard enough about what people want from banks.
Meanwhile, there are rumours, notably from the BBC, that the Co-op may be rethinking its own commitment to banking. This was denied today by the Co-op, but the bank today cited increased regulation as an additional reason, alongside the weak economy, for the collapse of the deal. That may be code for mounting concern about the need for a capital boost to ensure the expanded bank had adequate reserves to cope with a tripling in its size.
Perhaps the Co-op has finally realised that, unlike selling corn flakes, banking can be done very effectively and more profitably without an extensive branch network. Even corn flakes can be sold over the internet (and delivered to your door). In West Africa, retail banking by cellphone is a booming business, with the mobile network operating an effective payments system.
What the financial collapse in 2008 is now beginning to reveal is the legacy of antiquated banking practices and tired ideas that dominate inefficient institutions. Instead of looking forward, politicians looked backward and imagined a return to a quaint world of respected local bank managers exercising their personal prudential authority over the financial affairs of their customers.
That world is gone, because it is too expensive and unnecessary – and it would not have prevented the collapse of RBS and Lloyds. Instead of attempting to revive the simplicity of Jimmy Stewart rescuing the Bailey Building and Loan with his savings in It's A Wonderful Life, we need to think about what works. Payment systems, consumer loans and business loans are all different businesses with different required skills, and different costs. There is no reason why the utility business of moving money from one account to another should not be run by utilities; likewise the dispensing of cash from holes in the wall. But lending requires the skill of risk assessment and that means more than a high street branch and and a legacy IT system.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.