The decision by local councils to set up municipal banks to offer mortgages is a sign that the banking system has failed, one expert has said.
Plans by local councils to offer mortgages to residents is a sign of how the UK banking system has failed, one economist has said.
Tony Travers, director of the Greater London Group at the London School of Economics, explained that municipal banks, which are currently being considered by Essex County Council and Birmingham City Council, could pose risks for borrowers and taxpayers.
Local government is facing additional strain as a result of the economic crisis and councils will have to "tread carefully" to ensure the proposals work.
Commenting on the municipal bank plans, Mr Tavers said: "It is a sign of the failure of the banking system, one of many that we see around us.
"If you talk to people in some of the more distressed banks they have very little money for anything and I'm afraid local government is suffering from that problem."
"This kind of involvement could only be justified if it offered a better return for councils than they would get elsewhere and/or they provided resources that otherwise would not go ahead," Mr Tavers added, suggesting that these would be "good reasons" for councils taking on the role of banks.
However, he concluded: "Clearly this is something that authorities need to be very careful about because as we have discovered recently it is a very complicated and potentially difficult task banking."
The New Local Government Network (NLGN) said last week that councils would only provide mortgages to residents who represent a secure investment and will assess applications "as a commercial would".
