How to…set up a local bank

A new bank backed by a council pension fund is supporting the local economy by lending to small businesses cast aside by big banks. Austin Macauley reports

What do you do when your job is to foster local economic growth and yet your efforts are frustrated because banks refuse to lend to businesses? Answer: set up your own bank.

Cambridge and Counties Bank, launched in June, is now doing its bit to soak up some of the estimated £3bn of business lending that was rejected by banks in the second half of last year. More importantly, its efforts are primarily focused on firms in its sub-region of Cambridgeshire, Leicestershire and Northamptonshire, who saw around £103m of overdraft and loan applications turned down during that period.

The strapline on its website reads ‘growing business together’. Most financial institutions will churn out all manner of marketing guff extolling their uniqueness, but in the case of Cambridge and Counties Bank it’s true. How many banks can you name that are owned by a local authority pension fund and a university college?

Gary Wilkinson, its chief executive, firmly believes Cambridge and Counties offers a blueprint for other council pension funds looking for ways to maximise their returns – and their local economic impact.

But he’s the first to admit that there were unique circumstances that oiled the wheels somewhat.

Cambridgeshire Council, Cambridgeshire Local Government Pension Fund, Trinity Hall (a college of Cambridge University) and a number of other local parties had been discussing their desire to establish a bank to support local small and medium sized enterprises (SMEs).

By happy coincidence, a buyer was being sought for The Pensions Bank, an institution based in Leicester which provided specialist banking services to pension schemes. Wilkinson was its chief executive and after initial talks led by the county council and Trinity Hall, he guided the interested parties as they set about turning it into a bank fit for their purposes. Around 15 months later the bank opened for business, offering banking and loans for SMEs along with pension fund accounts and secured pension lending.

‘There were two key reasons these stakeholders wanted to set up a bank,’ he explains. ‘One was to make a return on investment, the second was that each wanted to help local communities in the Cambridge area and to promote and help businesses at a time when they were struggling to raise credit.

‘Having an existing bank was an advantage, although in the end it became a new bank with a new banking licence rather than being transferred. But it meant there was already infrastructure in place, £70m in deposits, a building, a lease, an IT system and so on.’

Advantages aside, just how straightforward is it to create a new bank?

The Financial Services Authority (FSA) is currently looking at ways to simplify the process and the Treasury is keen to encourage greater competition. But understandably, it’s an industry where regulation has never been under greater scrutiny.

‘There still are barriers to entry,’ says Wilkinson. ‘It costs money, it takes time and it’s not easy.’

Business, capital and liquidity plans had to be drawn up and the FSA had to be satisfied around areas such as governance, procedures and IT systems. Although there have been relatively few new entrants to the market, Cambridge and Counties is not alone. The last three years has seen the launch of Metro Bank – a high street lender – and two other banks, Aldermore and Shawbrook. The latter were both formed from existing institutions and are similarly focused on SMEs.

‘There’s a need for new players in SME lending,’ says Wilkinson. ‘We have a number of decisions in principle waiting to be approved. It’s as we thought – a lot of big banks are pulling out and businesses are coming to us as they’re not happy with the service they get from the big banks.’

A survey by the bank in August found nationally, 47% of businesses believe their relationship with their main business bank is only average or bad. It may not have any high street branches, but Cambridge and Counties believes a return to traditional banking of yesteryear is what local economies need.

‘Banks have a very poor reputation at the minute,’ says Wilkinson. ‘What we are trying to do is bring back more of the traditional relationship banking. We work with our customers.

‘We aren’t huge, we’re relatively small. But we’re not just Cambridge – that would be an inappropriate concentration risk – we cover three counties. The majority of lending is in those areas but we do lend in other areas as well.’

The bank’s owners are, he says, ‘unusual’ but because of their wider role in the local area, that can only be a positive thing.

‘This is a model that’s working and that could be replicated’

‘These guys are here for the long term. That’s very important because it means we are establishing long-term relationships with customers. We’re more like traditional banking as it used to be.’

Business ventures helped so far include restaurants, student accommodation, a take away, retail franchise, general store, bed & breakfast and an office block. Clients are generally split into owner occupiers wanting to secure finance against their properties and landlords who need loans to buy properties.

Although the bank can’t lend to the local authority, it is clearly aligned with the council’s priorities. Nick Clarke, Cambridgeshire Council leader and non-executive director of Cambridge and Counties Bank, echoes Wilkinson in emphasising the need to support SMEs ‘when it’s proving hard to secure funding even for viable business propositions’.

It’s a win-win situation for all involved. ‘This venture will not only produce a good return for the pension fund, but also means that money from public services pensions is being used to support the economy, create jobs and improve the quality of life for our communities,’ he says.

‘The return on investment will reduce the burden on local taxpayers and leave more money available for frontline services. The bank has been properly assessed and is a very good investment. I am really pleased that we are taking a lead here and investing with Trinity Hall in this exciting opportunity.’

Gary Wilkinson has witnessed the differing approaches found across financial institutions having worked for both building societies and banks in the past. He senses that he’s now at the helm of a new breed of bank.

‘This is a model that’s working. It’s early days but we are very encouraged with what’s been achieved so far. It’s a model that could be replicated. You need to go in eyes open, be aware of all the issues you are going to face and the potential length of time involved.

‘It requires tenacity, enthusiasm and time. And it needs the stakeholders and investors to be able to spare that time. With this you are diversifying your risk and that’s what pension funds need to do.’


  • HAVING A PARTNER ISN’T ESSENTIAL BUT IT CAN HELP. Pension funds may be reluctant to go it alone not only because of the complexity involved but also to reduce the risk involved
  • EXPECT A LENGTHY PROCESS. Setting up a bank can take time and it’s essential that all stakeholders are aware of that from the outset
  • GET EXPERT HELP. There are plenty of advisors who specialise in this area
  • BE A LOCAL BANK BUT NOT TOO LOCAL. Pension funds must minimise the risk to their investors and ensure the best possible returns. Spreading the geographical scope of your lending is good for business


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Paul Halfpenny
Paul Halfpenny
11 years ago

This is such a great initiative – and it’s such a no-brainer that local authorities should be looking at how they can invest locally. But it takes real commitment – as these people have shown. I wonder how many more local authorities will be able to follow suit, either through replication or through pooling.

dave watts
dave watts
11 years ago

Past experience back in the 1980s and 1990s by economic development units of local authorities showed that with a decent business development advice team excellent investments that created good jobs could be made that outdid the banks by miles. Let’s do it again!!!

Vladimir Antonov
Vladimir Antonov
11 years ago

The transformation of Pensions Bank is a special case. We should be less optimistic about new banks sprouting up.

Who sold Pensions Bank, and who were its beneficial owners? Not stated. The only reason C&C got its start was because these persons have been under a regulatory cloud for several years.

It is generally agreed that the UK is underserved by its big banks. Too much of the deposit taking, too much of the mortgage and SME lending, is conducted by a few large institutions.

The paths to setting up local and specialty banks are still rockstrewn.

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