John Ball argues that we need to develop greater financial literacy to underpin our business culture

February 28th, 2014

Business Minister Edwina Hart has put the idea of a Welsh development bank back on the agenda. But sadly, an investment bank is not the answer. Hart’s recent announcement – coming as it does hard on the heels of a critical report on Finance Wales – reflects a desperation to be seen to be doing something about financing Welsh businesses rather than an original and innovative initiative.

The sorrowful state of the Welsh economy is well known and I certainly do not intend to revisit its many problems. However, any debate about the Welsh economy invariably involves the question of business finance – its relevance, availability, type and, by implication, its potential role in stimulating the economy.

The idea of an investment bank has been around since time immemorial. Its most recent manifestation was just a few years ago with the then Minister’s (unfulfilled) vision of a “people’s bank to bridge the funding gap”. Other initiatives have been attempted with only partial success. They include Julian Hodge’s Bank of Wales and the largely unsuccessful and questionable investment activities of the former WDA. Its latest manifestation is Finance Wales.

The case for an investment bank is fatally flawed for a number of reasons. Whatever its type or purpose a ‘bank’ will be constrained by the requirements of due diligence, the reality of security, and the limitations and duties of the Banking and Finance Acts. Above all there is the need to make a profit to re-invest in future loans. Lending increases business debt and therefore its cost structure through the need to service interest and capital repayments.

By definition banks require bankers. These are creatures not noted for their risk taking or business acumen. In any event, what is the point of working through the minefield of documentation that would be required in seeking assistance from a public sector bank constrained by the same paper mountain and safety culture as Finance Wales, when the existing clearing banks can provide an answer quickly?

There is also the reality of politics. Whatever the promises a publicly run and funded investment bank will be subject to political interference. In my days with the WDA, it was all too often the case that a refusal to provide financial assistance, even though that refusal made excellent business sense and had been thoroughly assessed, resulted in a councillor or MP demanding to know why. Countless, wasted hours were spent on responding to such matters.

In addition and strangely enough in defence of Finance Wales and its hapless predecessors, the chances are that success would be measured in terms of job creation. This is seen as a major failing of Finance Wales which has, apparently, achieved just 20 per cent of its job creation target. Yet such a measure clearly flies in the face of realty. Investments encourage business growth and often greater productivity through new machinery for example, which often result in no new jobs or even job losses. But the business remains successful.

What is required is a fundamental re-think of the role of finance. One real area of concern and opportunity is the necessity for new and small businesses to access small amounts of money. Research has consistently demonstrated that many start-ups lack security and use very small amounts of finance. A major drawback to early growth is not access to loans per se but short-term overdrafts. There is unquestionably the need for some sort of ‘slush fund’ that recognises such a use and the risks involved. Unfortunately such a fund is unlikely to see the light of day very soon.

The debate on the role of an investment bank and the general wider concerns on finance actually hide a far deeper economic problem, of which access to finance is simply one aspect. The truth is that Wales lacks a business culture and a major cornerstone of such a culture – financial literacy.

Putting aside the limitations of an investment bank, a more sophisticated means of building a sound, indigenous financial sector would be the establishment of a Wales Stock Exchange. The idea of a Wales based stock exchange is not new. The Coal Exchange in Cardiff (where the very first million pound deal was struck) was one of the busiest in the world for many years, as was the Metals Exchange in Swansea. In the 19th Century there were over 20 stock exchanges in the UK.

The idea of developing such an institution has been the subject of research, articles, debate and discussion in Wales over the past decade or so, and I make no apologies for raising the idea yet again. The advantages and support given to an economy through an active stock exchange are well rehearsed and I do not repeat them here. So far as Wales is concerned, articles published in newspapers, by the IWA and excellent research by Professor Rob Huggins at Cardiff (which identified a number of Welsh firms that would consider listing) are well worth reading.

However, I should draw attention to a seminal work published by Atje and Jovanovic in 1993. They looked at the link between financial development (notably stock markets) and the growth rate of economic activity. In the forty countries they examined they found a strong link between stock markets and economic development. Interestingly, they failed to find a similar link between bank lending and economic development – supporters of this recent investment bank initiative, please note.

The question invariably is whether there is enough business to warrant a stock exchange. According to the Finance Wales website, it has made 60 equity investments amounting to some £64 million. The website does not provide any further detailed breakdown, but what this does illustrate is the potential number of businesses and the need for relatively small equity investments, which would be the foremost activity of a stock exchange.

In addition to potential already recognised by Huggins, a combination of recent events has served to suggest unique and interesting opportunities. The purchase of Cardiff airport would have been an excellent opportunity for the people of Wales to invest in their ‘own’ airport. The travails at Cardiff City notwithstanding, supporters might prefer to invest in their club in preference to the owner’s consideration of the Malaysia stock exchange. The green energy lobby – notably the most recent scheme based on Swansea Bay – and other organisations driving green energy would have an opportunity both to achieve investment. More importantly, this would be a real test of the market, and the viability of schemes.

A few years ago a Cardiff based consultancy organised a work shop to discuss the potential of a stock exchange. Among the invited guests was a representative of the Dublin Stock Exchange who was unequivocal in his contribution. He said his exchange would provide the skills, trading platform and low fees to allow a Wales-based exchange to begin trading, thus removing at a stroke the major barrier to entry the trading platform.

All it needs is the political will. Over to you, Minister.

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John Ball is a former lecturer in economics at Swansea University and is now a freelance writer, lecturer and business consultant.

5 Responses to:“Wales needs a stock exchange not a bank”

  1. Peter Hugh Charles Davies says:

    John Ball ends his article with the words,” All it needs is the will . Over to you minister”
    Despite the fact that most Cardiff stockbrokers have amalgamated with London Brokers and Stock Exchanges have closed in many cities throughout Britain due to lack of substantial local business , Your Correspondent fails to write the real truth.
    “All it needs is the money. Over to you minster”
    To which any sensible minister would reply. ” Get Lost!”

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  2. Rhobat Bryn Jones says:

    I assume that the mergers with London stockbrokers have occurred for commercial reasons. If I read him right, John Ball’s point is that a Cardiff Stock Exchange is only likely to succeed if it has political support in addition to the necessary commercial viability. Cardiff does now need to consider developing its own financial sector as the first port of call for the Welsh economy. As the article states, there have been several academic articles down the years arguing the case for this and we do now have Admiral Insurance soon to occupy its own building. But there would have to be a long-term political commitment from the Assembly, preferably cross-party, to develop this new role for the capital city and long-term support from the Government of whichever colour to ensure its long-term success. You only have to look at the extent to which both George Osbourne and David Cameron argue for the interests of the City of London in Europe to see how necessary political support is, even in such a well-established financial centre as London.

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  3. John R Walker says:

    This article fails to make any case to explain why businesses in Wales should not simply continue to use the various markets on the London Stock Exchange. So it falls at the first hurdle!

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  4. Rhobat Bryn Jones says:

    @ John R Walker

    They would have the choice of course. But a Stock Exchange based in Cardiff would be in a position to understand its customers better and offer them a more tailored service as well as carving out a niche for itself in the global market. The idea of an Alternative Investment Market based in Cardiff has also been discussed before.

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  5. Dr John Ball says:

    John Ball responds:

    I had rather hoped for a more enlightened and indeed wider response to the article, especially from those like me who are concerned at the continued decline – for decline it is – of the Welsh economy. Rather naively, I had hoped for a response from the Welsh government or the army of advisers and study groups (how many are there now?) currently examining the minutiae of the economy.
    I am not suggesting for one minute that the establishment of a stock exchange is the miracle cure; what I am suggesting is the need for far higher strategic themes aimed at reversing the decline of the economy and one such strategic initiative would be the stock exchange.
    I think two comments need a response; other than did you actually read and understand the article content? Local stockbrokers deal with many exchanges, they deal with London partly because it’s the nearest and there is simply no reason why they would not deal with an even more local exchange here in Wales. The exchanges that existed throughout the UK did not fail through simply lack of business; the local economies that sustained them changed fundamentally whilst other forms of funding such as the multiplicity of the (then) banks and the London Stock Exchange moved aggressively to take away business from the exchanges.
    There is insufficient space to develop a detailed response to John Walker, if he’s really interested there are mountains of research on the very positive link between capital markets and economic growth, one of which I refer to in the article. He might find the excellent report (produced ironically for the Welsh government) by Rob Huggins – to which I also make reference in the article – to be enlightening.
    Amongst other things, capital markets provide sources both of investment and income for business and individuals, develop skills in financial literacy, the law, economics, marketing, business and management; all skills needed in an advanced economy.
    There are just under 200 stock exchanges in the world, many of which are small; the exchange in Malta (a country with the size and population of Cardiff) for example trades 21 equities and a number of capital bonds; the Helsinki exchange in Finland (a country like Wales with a population of about 3 million and very much on the fringes of Europe) trades over 200. A Wales stock exchange would allow listing at a reasonable cost, any business listing in London faces very high fees and charges.
    Fundamentally, the offer by the Dublin exchange is exciting and a unique, unrepeatable opportunity that should be grasped. I am NOT asking for money, simply the political support to move the initiative forward; sadly I suspect it will not be forthcoming.

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