The development of more localized banking can come from regional banking. Klagge and Martin (2005) put a case for regional banking in terms of three advantages. “First, the presence of a local critical mass of financial institutions and agents—that is of a regionally identifiable, coherent and functioning market—enables local institutions, SMEs, and local investors to exploit the benefits of being in close spatial proximity. ... Second, the existence of regional capital markets specialising in local firms may help to keep capital within the regions, as local investors direct their funds into local companies—and hence into local economic development—rather than investing on the central market. . Third, in a nationally integrated financial system, the case can be made for a regionally decentralized structure on the grounds that it increases the efficiency of allocation of investment between the centre and the regions” (p. 414). However, they acknowledged limitations. Regional financial institutions may largely raise their funds locally as well as providing funds and credit to local firms, and their ability to raise funds dependent on the economic prosperity and development of the region.
Minsky (1993) advocated the establishment and support for Community Development Banks (CDBs), which had characteristics of providing ‘narrow banking’. The characteristics of CDBs would be to operate of payments system, to provide a secure depository for savings, to provide commercial banking services, to fund housing and consumer debt, and to provide investment banking services and asset management services and advice.
The local aspects are stressed by Sikka (2014) when he writes that “banks should be part of local communities. They should not be permitted to up sticks and leave local communities in the lurch. Maintaining a socially desirable network of branches should be a necessary quid pro quo for a deposit-taking licence and the state’s deposit protection guarantee. Each branch closure must be sanctioned by the regulator, and banks must be required to demonstrate that after closure, the local community’s access to banking services will not suffer” (p. 24).