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REGIONAL DEVELOPMENT BANKING - for Stability and Growth.
Moralists who bemoan the trend, and socialists who seek to compensate through redistributive taxation should focus rather on the root cause: a serious inadequacy in our financial system.
Our entire financial structure is directed to facilitating the growth of pre-existing wealth. If you have money, or access to money, you can use it to make more. The more money you have, the more you can make. But if you have none to start with you can make only what your talents alone are capable of.
This is because bankers demand existing funds as security before they will lend more. Or as comedian Bob Hope put it, bankers lend money to people who can prove they don't need it.
Our banking system is backward-, not forward-looking. It lends only to those who have produced in the past: it is not equipped to finance future production without the security of products or assets or wealth already in existence.
Economic expansion and job creation will not be maximized through traditional banking facilities which require pre-existing assets as security. Nor should it be financed through deficit-creating grants. An additional banking facility is required, providing investment secured by the project itself, thoroughly researched to ensure investment security.
Project-Secured Development Banking
Although Project-Based Securitization represents a major departure from the traditional Asset-Based Securitization, the concept is not new. Founded some 60 years ago, the now highly successful Mondragon cooperative group in Basque Spain illustrates this ongoing relationship between investment banking and recipient business. The Workers' Bank serves three mutually inter-dependent functions: it provides investment as a local development bank, offers technical and financial advice for business startup, then monitors production, quality, and financial performance in a process of ongoing cooperation and partnership.
The ongoing partnership concept also assumes longterm commitment, ensuring finance for secure long-range planning and productivity investment, as well as research and development into new-generation products and services, ideally in conjunction with apprenticeships and higher education.
In Bangladesh the Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and has created a banking system based on mutual trust, accountability, participation and creativity. GB provides credit to the poorest of the poor in rural Bangladesh, without any collateral, and has succeeded in improving the lot and the prospects of thousands of the very poor.
The concept of loans based on, and secured by the project itself backed by continuing monitoring is basic, and simple. It can create jobs, economic expansion and improve productivity anywhere.
Development Banking and Germany's Postwar "Economic Miracle"
In Germany, the Regional Banks, or Landesbanken have traditionally provided low-interest loans to local firms, both as startup capital and as on-going investment. In fact, the regional, industry-sponsoring character of the Landesbanken goes back to their somewhat extraordinary origins.
In 1818 the Swedish government stunned Europe by offering 160,000 Taler to the German province of Westphalia as reparation for the damages incurred when Swedish and Dutch soldiers marched through the province during the Napoleonic Wars. This money was decreed the property of all Westphalia by its President, Freiherr von Vincke. The funds were made accessible in the form of a Hilfkasse, or "Assistance Bank", to be used to develop the region's economy and pay for public-works projects.
Frederick William IV, king of Prussia, impressed by the advantages which the Hilfskasse offered Westphalia, ordered that a similar bank be created in the Rhineland in 1847.
Both banks became Landesbanken before the end of 19th century, and were instrumental in making the Rhine-Westphalia region one of the biggest and most productive industrial areas in Europe.
In the post-WW2 years, the Landesbanken played a major role in the creation of Germany's “Economic Miracle”, in particular through the provision of on-going credit to the German “Mittelstand” (small and medium-sized companies) in their respective regions, now one of the enduring backbones of the German economy.
Development Banking created Germany's "Economic Miracle". It can do the same again, and again. And again.
Regional Development Banks
The provision of secure, longterm finance for industry's investment needs can be ensured through the creation of specialized Development Banks on a regional basis with the specific purpose of investing in regional business and industry on an ongoing partnership basis, with investment decisions based on a rigorous assessment of project viability and guided by an overall regional investment strategy.
The RDBs would exist to create new business and new wealth where none previously existed, not (in the words of comedian Bob Hope) “to lend money to people who can prove they don't need it”. The availability of investment credit has enormous potential for growth, and the Development Banks should actively be seeking to maximize the productive use of this resource.
The major distinguishing feature of the RDB concept is that a total project, from design through production and management to sales, becomes the loan collateral, rather than the personal assets of individuals.
RDBs would be authorized to create loans based on project collateral, not required to maintain “reserves” in the current banking sense. In the current banking tradition, a bank's reserves are instituted as, and traditionally regarded as an insurance against losses, but in practice insurance is no better than the risks it insures.
Experience in 2008-9 has shown bank assets woefully inadequate to cover bad investments and gambling risks.
The RDBs would rely for their security on thorough research of loan projects in which they are invested, on a close working and constructive partnership with the loan recipient, and a detailed follow-up of results. Careful monitoring will be to the advantage both of the investing bank and the recipient business, as well as to the regional economy: bankruptcy is not contributive to economic stability and prosperity.
The partnership concept also assumes longterm commitment, resulting in the encouragement of secure long-range planning and productivity investment, research, and development of new-generation products and services.
With a guarantee of adequate long-term finance, the recipient business would be properly set up, equipped and maintained, able to maximize quality and productivity. Indeed the provision of finance for any business or project would be conditional upon the rigorous application of all relevant quality standards pertaining to product design and every aspect of the production process.
The RDB could also provide investment finance for regional infrastructure, such loans to be repaid by the relevant local or regional government departments from their own revenues.
Thus the RDB would prove a powerful catalyst at regional level, providing finance and subsequent ongoing supervision for business and industrial development, together with investment capital for regional infrastructure.
Regional Development Banking provides genuine, repayable investment loans, avoiding the need for deficit-increasing grants.
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