TSB provides competition in banking. But we need more than that


This article was first published on the Guardian on 9 September 2013. 

This is because Lloyds was ordered to sell those branches by the European commission as a condition of the Labour government's bailout of the bank, now 39% owned by the taxpayer.

The next big milestone for Lloyds will be the bank's privatisation. When that happens the chancellor, George Osborne – who said when it was bailed out in 2009 there was "no guarantee that this will get lending flowing in the real economy, help real businesses to stay afloat or keep people in work" – will seek to take the credit. But any future privatisation – likely to be at a profit – will be a vindication of the action taken by his predecessor Alistair Darling and the then prime minister, Gordon Brown to save the banking system from itself. They deserve credit for that.

As the Independent Commission on Banking, set up by Osborne and my opposite number, Vince Cable, said: without the intervention of the last Labour government – along with those of other governments around the world – "the consequences of the 2008/9 global financial crisis would have been immeasurably worse". No amount of rewriting of history by Messrs Osborne and Cable can obscure this rather salient fact.

From the middle of next year, once the new TSB is floated by Lloyds – as is planned – it will become a properly independent bank. This is hugely welcome. Why? Because we know our country's small businesses and entrepreneurs have been getting a raw deal for far too long from the banks, with lending down £538m in the second quarter of this year and small firms missold interest rate swap products by the banks and now being made to wait an inordinate amount of time for compensation.

If we are to turn this around and improve the service our businesses get, there must be more competition in the retail banking sector – particularly business banking where lending to almost five million businesses is concentrated in the hands of just high five street banks.

Nationwide, the UK's biggest building society, had planned to start lending to small firms from this year but has had to put on hold its plans until 2016 due to regulatory issues – Nationwide's move should have been worrying the existing players given the building society's customer satisfaction levels are far higher than theirs. So it is timely that, with TSB's re-emergence, we will see a much needed new entrant into the business banking market this year, before Nationwide joins the party.

However, more competition "in" banking is not enough – we need more competition "to" banking as well if we are to ensure our businesses get access to the finance they need. We want to see more sources of alternative finance, from innovations in factoring such as MarketInvoice or in peer-to-peer lending such as Funding Circle which Labour local authorities are now using to support and invest in local businesses.

Reform cannot stop there. We are the only country in the G20 without state-backed investment institutions to help get credit to businesses who want to start up and grow. The government talks about its Business Bank but this won't be up and running until 2014 at the earliest and it not a proper independent bank as we know it but a fund run by civil servants behind desks in the business department.

This won't do. That's why Labour would set up a proper British Investment Bank, providing funding which is not reliant only on the existing banking network but flowing through a new network of geographically mandated regional banks. If we are to ensure our economy is fit for the future, piecemeal change of the type Cable famously complained about in his leaked letter to the prime minister and deputy prime minister last year is not enough – we need to radically transform support for our entrepreneurs and wealth creators.