Decentralised Reciprocity

by Colin Mayer


The objective behind this programme of research was to understand the role that local and decentralized financial systems should play in promoting enterprise and economic development in developed economies. The significance of this has taken on greater relevance globally in relation to the coronavirus pandemic and the need to build back failing small and medium sized enterprises (SMEs), in particular in the UK where the government has attached considerable significance to the “levelling up” agenda of reducing regional disparities as part of the economic recovery programme.


The research involved an extensive analysis of existing literatures on decentralization of banking systems and the differences that exist across countries in Europe and North America. In addition, it looked at the way in which different financial institutions performed in promoting SME growth.


The programme fed into several policy debates that are in process in the UK on the role of the financial system in recovery from the pandemic and the significance of decentralized banking to levelling up. It produced a substantial report that summarized the evidence accumulated, a paper that was written for a special issue of the Oxford Review of Economic Policy on Regions, and a paper that was written for another issue of the Oxford Review of Economic Policy on the Economics of the COVID-19 Pandemic.[3] Articles appeared in the Financial Times and the Spectator based on the work of the COVID pandemic paper.


The main insight of the research is on the importance of a decentralized local banking system in promoting the growth and development of a thriving small and medium enterprise system, in particular in the context of local and regional growth and the resolution of regional inequality. The research identifies precisely what is meant by a decentralized banking system, its core features and characteristics, and what is required to promote decentralized banking.


The research develops the concept of tacit knowledge that is specific to particular contexts, locations, activities and firms, and codified knowledge that can be packaged and marketed in a form that is readily accessible to a wide body of individuals and investors. The former requires local relationship financing in which institutions have a deep-rooted understanding of the specific context in which finance is being provided. The latter requires the standardization of information in such a way that it can be used as the basis for accessing large pools of capital both nationally and internationally.


A core part of a financial system is to transform tacit into codified information and vice versa thereby exploiting the benefits of both context specific and expert generic knowledge. That is what successful decentralized banking systems in Germany, the US and Nordic countries have succeeded in doing and where the UK has been deficient following the collapse of its local banking system in the 19th century.


At one stage, the UK established a very successful institution – the Industrial and Financial Corporation – that did exactly what was required in terms of promoting the funding and scaling up of SMEs. What distinguished it was: its ownership - a consortium of the UK clearing banks and the Bank of England; its operations on a decentralized local basis; the knowledge of its personnel about business as well as finance; and the long-term, close relationships that it built with businesses. It was highly successful and profitable becoming the largest venture capital business in Europe in the 1980s, 3i, before it was sold off. It has important lessons for current policies to develop financial institutions such as the British Business Bank, the challenger banks and new organizations to respond to COVID-19.


The research has in addition revealed the importance of not only transforming tacit into codified knowledge through the banking system but also of combining private and public finance. The levelling-up agenda has revealed the need for coordinating private and public sector activities through public-private partnerships at both the local/ regional and the national level. This is required to establish clearly defined common purposes by the public sector, and promote experimentation, innovation and learning by the private sector.


The significance of a decentralized banking system is particularly great in the context of the UK’s levelling-up agenda and need to rebuild its post-COVID SME sector.

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