IN our last two articles we have focused on banking regulation and made some proposals relating to banking resilience (to prevent bank failure) and bank lending – prioritising lending to the SME sector to support the growth and development of small businesses. This time we will discuss the regulation of banks to ensure the needs of their customers and borrowers are met.

All banks have an over-riding obligation to return customers’ money, which has been deposited with them, when it is demanded. This is why liquidity adequacy rules are a fundamental part of banking regulation. If customers lose trust in a bank they demand their money back and to avoid the risk of a “bank run” the central bank should provide deposit guarantees which ensures customers can always get all of their money back. At present in the UK the deposit guarantee is £85,000.

A deposit guarantee is a “long stop” form of central bank insurance because it should never need to be called upon if other elements of banking regulation are effective.

Banking services are a public utility. Every citizen, regardless of income or wealth or wherever they live, needs easy access to banking services. The demise of local banking is a social and economic disaster. This process must be reversed.

READ MORE: Why we need to talk about banks in an independent Scotland

Bringing back local access to basic banking services can be achieved by restoration of the Post Office Savings Network – this would involve the public capitalisation of a Post Office Bank. Sub-contracting of Post Office Bank services to a private bank (the Bank of Ireland at present) should be terminated. The service should focus on providing basic bank services, accessible to all citizens regardless of where they live, based on a community presence by the Post Office (in small communities PO services are often based in a local shop).

Basic services include making deposits, making and receiving payments, cash withdrawals, and obtaining small short-term loans or overdraft facilities at a low rate of interest. It would be appropriate to limit the amount that can be deposited in a Post Office Bank account, the interest to be paid on deposits and limits on the size, duration and interest rates on loans.

Scotland should restore building societies to function as the primary source of mortgage lending and as important institutions for savings, especially citizens’ longer term savings for house purchases.

The promotion of credit unions will also be important as they too are mutual financial institutions with a local and community-based presence. They can provide additional capacity for savings and loan services over and above more basic services provided by the Post Office Bank network.

Both building societies and credit unions should have the same central bank support as commercial banks in the form of deposit guarantees and the loan guarantees which operate within the “credit guidance” framework proposed in our last article.

The coronavirus pandemic has led to an increase in cashless transactions to avoid viral transmission risk from cash handling, but it has also made it clear that Scotland will need a robust digital payments system free of transaction costs. Small businesses cannot support the disproportionate transaction fees which apply to small value transactions.

Privately owned and operated systems such as Visa make enormous profits from transaction fees – we need a payments system that is free of charge. There should be a powerful Banking Ombudsman Service to deal with complaints about customer service – eg complaints about service charges, treatment of customers in arrears with loan repayments, poor customer service etc.

READ MORE: How an independent Scotland can make its bankers more responsible

Standards of customer service should be prescribed through a Customer Service Charter monitored and enforced by the Banking Ombudsman Service. Issues concerning access to banking services, service charges etc, which are referred to the Ombudsman, may alert regulators to previously unrecognised risks and shortcomings so the Ombudsman Service has an important role to play in ensuring regulations are kept up to date and evolve in response to emerging issues.

The re-introduction of a Post Office Banking network, building societies and growth in credit unions, together with the establishment of a National Investment Bank, will lead to a transformation in Scotland’s banking system.

Greater competition for deposits and loans will create systemic pressures on commercial banks. Profitability for commercial banks will be derived from productive lending and competition for deposits seems likely to lead to a reduction in the size of banks. This will be beneficial as banks would then no longer be “too big to fail”. The failure of a bank or revocation of a bank’s license to operate would no longer present a risk to the banking system as a whole.

A more diverse, competitive, customer and productive lending focused banking system will be a positive asset in a thriving Scottish economy which serves the needs of all our people.