ECONOMIES of scale are an important way of getting the most out of industry, but in banking they have the opposite effect.

The bigger our banks, the more harmful to the economy. Instead, we need to move to a banking sector that consists of hundreds of autonomous, locally headquartered banks.

For example, if Lloyds Bank, with a balance sheet of £2 trillion, wants to grow 10% a year, it needs to increase lending by up to £200 billion every year, but it is not going to do it by going down the labour-intensive route of lending £20,000 to 10 million small firms. By reducing the average scale of banks, we would be reducing the minimum scale of deals that the banks are interested in.

A more diverse banking sector would also alleviate the boom-bust cycle, which is due to banks creating credit and lending the money to speculators. This boosts asset prices and creates the booms, which inevitably result in non-performing loans and/or banking crises. Local banks are not able to lend large sums to speculators and are less interested in doing so.

Britain has five banks that account for 90% of banking. Germany has hundreds of local banks and credit unions accounting for 70% of banking. Britain has a long record of boom-bust cycles, Germany doesn't. The connection should dawn even on politicians enjoying funding from the City.

Of course, it may take a while to establish a decentralised banking system. You could do it by breaking up the big banks into smaller units. Equally and perhaps more attractively, though, we should be offering incentives for people to create local co-operative banks and using recent changes in local government legislation that give councils the power to set up banks as well.

Until then, the Government should get the Bank of England to impose credit controls restricting bank credit for transactions that do not contribute to GDP, such as financial speculation, and also those that are not environmentally friendly or unsustainable. This measure would yield positive results fairly quickly.

Professor Richard Werner is director of the Centre for Banking, Finance and Sustainable Development at the University of Southampton. He is a keynote speaker at the Just Banking Conference in Edinburgh on April 19-20.