How banking has moved away from the needs of the real economy

By: Information Daily Staff Writer
Published: Wednesday, October 15, 2014 - 10:27 GMT Jump to Comments

People still think that what banks do is lend money to business for capital investment, but this a long way from today’s reality, says economist John Kay in this video.

Today’s high tech businesses don’t need huge amounts of capital for plant and buildings, but what they do need is funds to cover startup losses.

Making this kind of investment requires local knowledge, the ability to make relationships, and risk-taking capability, none of which our current, highly centralised banks actually have.

Europe needs new kinds of institutions to fund businesses, ones that might draw on models in Silicon Valley and in Israel - where government-funded R&D, local business relationships, and public procurement all play a role - and also in Germany, with its locally-based banks.

Post crisis, we remain far away from the public debate that needs to be had about making this transition.

John Kay is a former academic who founded the consultancy firm London Economics. He has also been Director of the Institute of Fiscal Studies, Director of Oxford’s Said Business School, and director of Halifax plc and a number of investment companies. He has had a weekly column in the Financial Times since 1995 and is the author of many books.

The video was recorded at the 2014 European Conference on Banking and the Economy. ECOBATE 2014 took place in Winchester on 8 October and was organised by the Centre for Banking, Finance and Sustainable Development (CBFSD) at Southampton University, led by Professor Richard A. Werner, D.Phil. (Oxon), Chair in International Banking and Director of the CBFSD.

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