With all this talk of greed and corruption in the City (more on that later too), everyone is demanding a return to basic banking.
I’ve heard this several times in the past week and over the past few years.
Just yesterday, over lunch, my colleague was recalling the days when you needed credit from the bank. This was way back in the 1960s, before credit cards were introduced, and the only way to get credit was to borrow from your family or put on your best suit, tie and clean shoes and stand before the bank manager.
The bank manager would be seated and would eye you up and down very suspiciously .
He was always a he in those days – no equality in society then (or now) – and, after asking for the loan, his first question would not be:
“What do you do for a living?”
“What security can you offer?”
“How will you pay it back?”
“Why do you need this loan?”
But: “What does yoru father do?”
You were not the borrower: your guarantor was.
This meant that no-one over borrowed or over-leveraged.
How different today.
Another friend was talking about how they grew up in Wales, and their father was a bank manager.
He knew all his clients intimately and would know what they did for a living, who their family were, what assets they owned and whether they were good for the money.
He looked after a lot of farmers and would regularly visit their farms, talk to them about the business, shake the hands of their workers and even know the cows by name.
How different today.
The core rot that sink into the banking system was retailing.
Banking is not about selling credit – or it shouldn’t be – it is about managing risk,.
During the 1990s and 2000s, credit became easy and banks became populated by retailers.
This was the era when Andy Hornby took over HBOS, having been a golden boy working at Argos.
The focus of all banks became sales.
Get as much mortgage, loans and credit cards out there as possible.
The economy was booming because the days of the boom-bust era were over, according to then Chancellor Gordon Brown.
This was the greatest consumer-driven boom ever.
It was a credit-driven boom, as we now know.
The reason credit retailing became the norm is that the retail bank could easily gain access to funding through the wholesale markets.
The wholesale markets fuelled the credit markets through credit default swaps and all the other toxic derivatives that are now being paid back big time.
How different today.
Having had the biggest credit driven boom, we now have the greatest austerity driven bust.
So do we return to basic banking?
Do we return to the days of George Bailey in It’s a Wonderful Life:
Or George Banks in Mary Poppins:
If you invest your tuppence
Wisely in the bank
Safe and sound
Soon that tuppence,
Safely invested in the bank,
And you'll achieve that sense of conquest
As your affluence expands
In the hands of the directors
Who invest as propriety demands
You see, Michael, you'll be part of
Railways through Africa
Dams across the Nile
Fleets of ocean greyhounds
Majestic, self-amortizing canals
Plantations of ripening tea
All from tuppence, prudently
Fruitfully, frugally invested
Ah, the good old days of banking.
Going back to a rose-tinted nostalgic past is just blust and thunder.
Britain has staked its economy on financial services and made it the key market sector for our economy and position in global commerce.
As a result, trying to melt it down to some localised trade is just ridiculous.
Instead, we need to recognise that every boom is followed by a bust, but the booms create progress whilst busts create innovation.
When you have expansionism, you don’t care about risk as much as when you have contraction.
When you have contraction, you care far more about stretching investment dollars than you do when you have expansion.
This is why stability is the last thing we want.
We need booms and busts to progress and innovate, and this is just one of those defining moments when the world turns and life moves on.
“In Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.”
Oscar Welles as Harry Lime in the Third Man
So what we need now is a return to banking basics in a modern form.
That means that we continue to take risks, invest with leverage, stretch our assets and resources … we just need to do that with appropriate limits (Basel III), a better sense of risk (derivatives collateralisation) and an improved knowledge of what the hell we are investing in (improved governance).
We're getting there, but the idea of returning to an era of fifty years ago or more, is a bit like asking everyone to return to wearing bowler hats and suits.