Airdrie Savings Bank - Reflections
3 February 2017
Suffice to say that I was very sad to learn of the impending closure of Airdrie Savings Bank. I feel most especially sorry for the Trustees, staff and customers for whom the Bank was very much a cherished local institution; it is also regrettable that it has not proved possible to sustain a small bank which had such a focus on providing a simple personal service to all parts of its local community. I offer the following personal observations but they need to be viewed with some caution as I have been retired for 4 years and no doubt much has changed in recent years.
If one goes back to the time just prior to the start of the banking crisis around 2008, ASB had the following principal revenue streams -
- Interest earnings on money market call and term deposits with other banks
- Earnings from investments in dated UK Gilts and highly-rated corporate and other bonds (no "derivatives" or other "hybrid" instruments)
- Interest margin and fee earnings from lending to personal and small/medium business customers, including a healthy stream of fee and interest income from bridging loans for house purchases
- Bank account service charges
Until 2008 that combination was more than sufficient to cover costs and provide annual boosts to the reserves, bearing in mind ASB has no shareholders and all profits net of tax were retained in the business. Balance sheet balances relating to items 1 and 2 were approximately twice those of item 3, reflecting the Bank's high level of liquidity. However, as the full impact of the banking crisis took effect, revenues were very quickly reduced, primarily through the dramatic fall in the level of interest rates. Changes in the housing market and increasing regulation of mortgages had an adverse effect on bridging loan activity thereby reducing revenues from that source as well.
At the same time, costs were rising, not least as the regulatory authorities introduced more and more measures to address issues relating both to the crisis as well as a number of consumer related aspects of the banking industry's historic treatment of customers. The increasing volume and complexity of these regulatory measures necessitated the engagement of external specialists at high cost. The other costs of simply doing business remained considerable including the costs associated with the Bank's customers’ usage of other banks ATMs to withdraw cash.
As with any business, and while the Bank had never been known for being profligate spenders, steps were taken to cut costs where possible. There was scope for some increase in revenue from customer lending activities but this would prove to be limited given economic conditions and the need to avoid the considerable risks associated with lending purely to enhance short term revenues without taking account of the potential for bad debts and increasing capital requirements. At the same time, changes in the banking marketplace, including not least the rapid digitalisation of banking services and the widespread closure of branches by all the major banks would in time demand high levels of spending on IT infrastructure and services to keep pace with evolving customer requirements.
Prior to 2008 the Bank had been contemplating a gentle re-organisation and expansion of its branch network with a view to continuing the progressive and prudent growth of the business. While one branch was closed, plans for any new ones were put on hold when the crisis struck. Eventually one new branch was opened, restoring the complement to 8 branches, and while the new branch proved to be relatively successful in its own right, persistent low interest rate levels demanded caution regarding any further plans. In this, and many other ways, the fact that interest rates have been so low for so long has been a hugely material factor - in short, the Bank has been affected in the same way as any other savers.
Taking all of this together, it is ultimately not so surprising that the Bank has had to come to the decision to close. If there is one positive aspect, it is at least reassuring that this is being undertaken in an orderly and controlled manner which is entirely typical of the way the Bank has been run for 182 years since it was formed in 1835.