The credit crunch of 2007 led to: the Failure of Northern Rock and other medium size banks; the effective nationalisation of RBS and Lloyds TSB; a crash in the real economy, unemployment and on-going recession.

Banks created a trillion pounds of new money between 2000 and 2007: 40% of this went to property, which pushed up house prices; 37% went into financial markets which eventually imploded during the financial crisis; just 13% of the money went into productive businesses.

97% of all money in the economy is created by banks NOT governments. Money creation was deregulated in the ‘80s and rarely since then has bank lending matched the public interest.

The UK banking sector is dominated by just five banks which account for approximately 90% of banking. Banking reforms in both the UK and the EU have simply forced the merger of banks increasing the number of too big to fail banks and encouraging banks to boost capital and cut lending. Bank bail outs put pressure on government budgets and increase austerity.

All central banks used to issue generally followed guidance to banks over how much they could lend and who they should lend to. Guidance was only abandoned in the Western economies in the ‘80s. It is still used in East Asian economies and is arguably the central mechanism for China’s long stable growth. Its use alongside central bank activity could help align policy objectives and bank lending and prevent “bubbles”.

90% of lending by large banks is damaging the UK because large banks are less likely to lend to SMEs which are the most productive part of the economy. Scottish SMEs experience problems accessing bank finance particularly finance for development and manufacturing and especially if they lack a trading track record.

Smaller banks are more likely to lend to SMEs as they are more willing to visit premises and meet with budding entrepreneurs e.g. Airdrie Savings Bank est. 1835 has 8 branches with independent managers, no shareholders and lends to local businesses. In Germany, Japan and even the US such banks are common as they were here until deregulation. If supported with management training and seed funding, they could flourish and attract customers from commercial banks. Credit Unions which are often community based could have their deposit limits and lending rules revised.

For major projects, direct lending or investment through publicly owned banks is both cheaper and more effective. For political reasons in the UK this is discouraged. The Green Investment Bank will not compete with or undercut other sources of commercial finance. Some other public banks can lend at lower rates but have low lending limits. Few of these organisations have local community links and there is confusion over which organisation to apply to for support.

In Germany 42.9% of the banking sector are publicly owned local banks. Each council in Scotland could establish at least one such bank. Public enterprise companies e.g. local energy companies or housing associations, could receive funding for essential projects to meet national or local plans.

Local bank lending for public investment should be coordinated by a national investment bank with long term loans at around 3.5% e.g. public loan board rates. All profits would be retained by the public purse and goals such as meeting renewable targets and supporting local industry would be achieved at a much lower cost.