Banking StandardsWritten evidence from Robert Pringle

Robert Pringle is chairman and founder of Central Banking Publications and author of “The Money Trap: Escaping from the Grip of Global Finance”, a recent book on the global financial crisis. He has been deputy director of the Committee on Invisible Exports (a predecessor of TheCityUK), editor of The Banker, chief executive of the Group of 30, and a senior fellow of the World Institute for Economic Development of the United Nations University (WIDER). He has served as a consultant to private sector and official agencies in the UK and internationally on a wide variety of topics, including policies to support SMEs.

The paper reflects the personal views of the author.

Summary of the Paper

Response to Question 1 on standards and culture

Recent history shows that the culture of UK banking has become one of “what you can get away with” rather than “what is right” for the client or the bank. Banks are widely perceived to operate mainly for the benefit of management.

The moral code that should support and complement the legal and regulatory codes is largely missing. Regulation cannot fill the moral deficit.

UK banking culture has been heavily influenced by the seeming success of the business model of US investment banks. That model failed in the financial crisis.

The existing approach to regulation failed comprehensively.

Response to Question 2 on consequences for consumers and the economy

The scandals that have blotted the City’s reputation are not victimless crimes. Showing how customers are defrauded is often complex, and needs to be undertaken case by case.

The lack of trust on the part of professional market participants is if anything more damaging than the collapse of public trust.

The most serious consequence is that banks can no longer act as trusted intermediaries.

Response to Question 3 on trust in banking

The effect has been severely damaging to the City of London’s domestic and international reputation.

Response to Question 4 on causes of the problem

The main underlying conditions that gave rise to these problems have been policy-induced: pro-cyclical regulatory and monetary policies. However, this does not excuse the boards, shareholders and management of financial institutions from accountability for the failures of judgment that occurred in institutions during their watch.

Response to Question 5 on remedial action

Further action is needed to change the structure of remuneration and in particular curb the bonus culture, at least in future ring-fenced banks.

Recent events suggest that structural reforms should go further than the government proposes following the recommendations of the Independent Commission on Banking, and that there should be a full separation of investment from deposit banking.

Response to Question 6 on further remedial action

If banking is to be restored as a form of intermediation, regulation should be guided by a new set of principles: banks should be instructed to follow a few big, bold rules that the general public can understand and which bankers should interpret themselves. All other financial activities would be conducted by firms adopting a partnership form.

This approach can be successful only if buttressed by higher moral standards and integrity as well as tough external sanctions.

Question 7 on Other Matters

The keynote of the new moral code should be the traditional one—put the interests of clients/customers/consumers first at all times, in wholesale as well as retail markets.

The Bank, FCA and PRA should ensure that “heads roll” when a bank misbehaves or asks for public assistance. The City understands immediate, punitive action, and the authorities need to have discretion to take such action when appropriate even if they cannot prove the individual concerned was personally responsible.

RESPONSES TO CALL FOR EVIDENCE

Introduction

The terms of reference of the Commission are to consider and report on:

(a)professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process;

(b)lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy; and to make recommendations for legislative and other action.

May I offer three introductory comments:

Firstly, in my view, the most important initiatives that could be taken by the government to restore standards and a healthy financial system in the UK would be to support a broader reform of international money and finance. The financial crisis that erupted in August 2007 and that shows no signs of ending is above all an international crisis and the remedies also need to be international.1 Discontent with the behaviour of financial institutions is widespread. Many are now linking it with the lack of a proper international framework for money and banking. This interest is evident in different ways both in the US, where reform og the monetary system has become part of the Republican Party’s platform for the presidential election in November, and in the eurozone, where a radical restructuring of the banking system is recognised to be unavoidable. This is not to say that nothing worthwhile can be done at the national level. This submission offers observations in response to some of the specific questions raised by the Commission and indicates the direction in which, in my view, policy should move. Yet, if the underlying assumption of the Commission’s terms of reference is that raising standards in UK banking is important as a means to support growth and employment, rather than an end in itself, then what is needed above all is an international effort to develop stronger international rules for money and banking.

Secondly, the terms of reference of the Commission are broad, and it is in the nature of my critique that my comments also range broadly—perhaps more broadly than most of the evidence that will be submitted. Given this, it has not been possible to go into as much detail as would be necessary to offer a full analysis of any of the questions.

Thirdly, the central topic of inquiry—UK banking standards and culture—can be addressed and analysed at many levels. These include, for example, the following:

How people did or did not meet appropriate standards—what was the bad behaviour.

The structure of organisations in which bad behaviour took place.

The services that were being offered that were the context for poor behaviour.

The buyers of the services that were being offered, that were the context for poor behaviour (retail depositors, wholesale counterparties, corporate clients, other participants).

The period of time that is being reviewed.

How standards and culture in the period under review compares with those in previous periods.

The Commission may find it helpful to distinguish carefully between these levels and time periods. The differing needs and perspectives of investors and capital markets, counterparties and end-users of financial products should also be born in mind.

Answers to initial questions

(The Commission’s questions are in italics; the responses follow its numbering)

1. To what extent are professional standards in UK banking absent or defective?

The evidence that has come to light in the course of recent scandals shows that the culture has become one of “what you can get away with” rather than “what is right” for the client or the bank: or, “if it is not actually illegal it is OK”. The moral code that should support and complement the legal code is largely missing—possibly reflecting changing attitudes in society at large. Moreover, the more scandals come to light the more the suspicion grows that these are the tip of the iceberg. Hence the pressure to try to fill ethical gaps by ever more detailed regulations.

Banks are widely perceived to operate mainly for the benefit of senior management—something that would have been so shocking as to be unbelievable to previous generations of bankers. This having been said, one could enter caveats. For example, professional standards as regards trading practices in specific market sectors may be, and so far as I know, are generally of a high level and well enforced (for instance the standards for good practice to promote orderly markets of the International Capital Markets Association). The bankers who initiated these markets—such as the international bond markets in the 1970s—and established trading standards, including ethical standards, were outstanding innovators. Such markets continue to provide key services to the UK and world economies. (This is only one example of the need to distinguish between the levels of analysis mentioned in my third introductory remark.)

It is the use that top management of financial institutions have made of these markets where the loss of standards has been evident. This embraces lowering of standards in terms of due diligence, the conflicts of interest in large diversified groups, speculative proprietary trading, using customer deposits backed by public guarantee to leverage balance sheets and rates of return, as well as the bending of regulations, and willingness to take on massive speculative “bets”.

There is one common strand: a failure fully to recognise—or, if recognised, to implement—the need for the interests of the client/user/customer to be treated as paramount at all times. This is both a moral failure and a failure of corporate leadership, as it is the only sound foundation on which to build a successful business enterprise.

How does this compare to other leading markets?

It is sometimes said that this culture was imported from the US by the big investment banks, and while this may be an over-simplification certainly they exercised and have continued to exercise a great influence on it. They are still the financial firms most sought after by young graduates wishing to enter finance. From the early 1980s onwards, their increasingly dominant position was accompanied by a growth in the contribution of trading activities relative to fee-based services to profitability. Derivatives, properly used, were believed to offer new ways to manage risk; mathematical models seemed to offer a fool-proof way of measuring risk, with the great US investment banks leading the way.

The investment banks’ business model and ethic seemed ideally suited to the emerging global financial market that followed the abolition of exchange controls in the UK and other developed countries. The difference between the remuneration they could offer and that available from other institutions rose rapidly, striking awe into the rising generation of financiers, and their pay practices were soon imitated. Some observers attribute this to the oligopolistic structure of the industry.

In the US, their “Machiavellian” approach to business was traditionally balanced by harsh external discipline, where transgressors were regularly hauled before the courts, convicted and sent to jail. But such muscular discipline was not imported to Europe, which then became a playground.

The seeming success of the investment bank model was imitated around the world, and shareholders began to expect and pressure bank managements to pursue much higher rates of return than had ever been achieved by commercial banks in the past. One element in a return to sanity must be shareholders’ acceptance in a deflationary environment that any positive stable return is a worthwhile investment.

The spread of the investment bank ethic and business model was accompanied by a damaging decline in the diversity of forms of financial institutions. Almost all financial institutions looked the same, played the same games, took the same risks, because they almost all used the same risk model, ie VaR. The ideas of loyalty and long-term service to one’s employer and its culture were discarded. Teams of specialists were bought and sold like slaves or football stars.

In London, the Bank of England lost its power to shock and awe the market, as large financial institutions acquired a global reach. Regulation increased, but these firms countered it by stepping up investment in lobbying and legal advice. Their alumni were soon to be found holding key policy-making roles throughout the world. Regulation suited the big firms.

Regrettably, London has quite recently come to be seen as a polluter of world finance. This perception has developed largely since the outbreak of the crisis. This is partly because of US and euro area anti-City propaganda. But there is also an uncomfortable grain of truth in the accusation.

Defences that institutions and centres with other traditions, such as the merchant banks in the City and the universal banks in continental Europe, had historically used to combat the inherent tendency of banking to crises were tested and either collapsed or were found wanting. These included both internal (moral) standards, and external discipline.

The hollowness of the investment banks’ business model has been exposed in the financial crisis. It failed because of an absence of team work. Companies that enshrine bonus greed as their driving force are (as John Kay observes in his book “Obliquity”) unable to protect themselves from their own employees: individuals make fortunes (Bear Stearns, Lehmans) while the institutions collapse. Indeed, this species of institution has been saved from extinction only by a controversial extension of the central bank “umbrella” to the remaining two specimens, Goldman Sachs and Morgan Stanley, by the US Treasury in 2008.

There was also a comprehensive failure of financial regulation. This points to the need for a rethink of the prevailing regulatory philosophy (see Response to Question 6 below).

Other professions

The aggressive, bonus-seeking culture of the trading room spread to other parts of the financial sector, then to the private sector more generally as well as recently the UK public sector. I cannot cite research on this, but one’s impression is that top professionals in many areas of national life expect outsize bonuses and excessive pay, while being protected from, or insuring themselves against, business risks, failure, or the costs of being sued. While not the only factor involved, this seems likely to have contributed to an upward spiral of rewards and growing social inequality.

The historic experience of the UK and its place in global markets

London was traditionally the freest and most diverse of all financial centres, and it had used that freedom to good effect in such innovations as the creation of the eurodollar and euro bond markets in the 1960s and 1970s, even while the UK maintained exchange controls. This relative freedom put a premium on internal, ethical, norms of self-discipline and regulation. So London was perhaps particularly vulnerable to any weakening of such internal standards. There seems to be widespread agreement that in many respects standards declined from the 1970s—the contrast is sometimes drawn between the business style of merchant bankers (eg Sigmund Warburg) and stock brokers of the 1960s with that of the generation of bankers and their supine boards who came to run UK banks more recently. But here again it is important to distinguish between different levels of analysis and time periods.

2. What have been the consequences of the above for (a) consumers, both retail and wholesale?

The scandals that have blotted the City’s reputation are not victimless crimes. Showing how customers are defrauded is often difficult and complex, and needs to be undertaken case by case.

That should be a priority of the Financial Conduct Authority.

(b) the economy as a whole?

The economy has suffered in multiple ways: through the fall in the reputation of the City, a major sector and exporter, through mis-selling of financial products, through the way that excessive financial rewards have swollen the share of the nation’s skilled resources taken by the finance sector, through the costs of bank rescue operations and the recession and above all through the collapse of trust on the part of the public and market participants (including other banks). This has caused a drying up of liquidity and has crippled the banks’ ability to function normally.

3. What have been the consequences of any problems identified in question 1 for public trust and in, and expectations of, the banking sector?

Severely damaging to the City of London’s domestic and international reputation, leading to a general mistrust of finance. It is, however, worth reflecting that there is a general lack of trust in all authority. It is also worth remembering that the City has historically harboured many unsavoury characters and witnessed many shameful episodes—and recovered from them. Moreover, distrust of finance is a global phenomenon. This does not make the economic effects any less damaging.

4. What caused any problems in banking standards identified in question 1?

The problems in UK banking standards should be viewed broadly in the context of the evolution of UK monetary and economic policies in a globalised world economy. In particular, UK monetary policy has become caught up in a business cycle where, every few years, pressure mounts on the central bank to pursue excessively expansionary policies. These surges of officially-supplied liquidity leave “money on the table”—to use bankers’ language, ie easy pickings for the private sector, and a perennial source of temptation to lenders and borrowers to build up excessive leverage. Thus, in my judgment, the main underlying causes of these problems have been the weakness of regulatory policy (reflecting the fact that finance is globally integrated, while policy remains essentially national), and the permissiveness of monetary policy.

However, this does not excuse the boards, shareholders and management of financial institutions from the failures of judgment that occurred in institutions under their watch. One big problem was their narrow pursuit of maximising shareholder value—a pursuit that came close to destroying many companies.

Some things can be done at the national level to improve the reputation of UK banking.

The Commission requests that respondents consider (a) the following general themes:

The culture of banking, including the incentivisation of risk-taking

The structure of remuneration reflects and accentuates the lowering of standards, lack of discipline and readiness to take excessive risks. Events have shown that this structure is built on, and can survive only on the foundation of, the support of the public sector. This is an intolerable situation. Payment of bonuses has become an ingrained part of this dysfunctional culture and radical action is required (as discussed further in responses to Question 5).

The impact of globalisation on standards and culture;global regulatory arbitrage

Regulatory arbitrage is viewed as part of normal business practice. Under the existing culture, a bank management would be regarded by shareholders and boards as culpable if it did not take advantage of discrepancies between the regulatory rules, or in the strictness with which they are interpreted in different jurisdictions; this seems unavoidable. However, when it is used to threaten governments of specific jurisdictions that do not join in the race to the regulatory bottom it becomes a form of blackmail that a democracy must face down.

The impact of financial innovation on standards and culture

The influence is pervasive, and it could be argued is a necessary accompaniment of innovation. But if it occurs in the wrong environment (with too-big-to-fail institutions, ultra-low interest rates, and pro-cyclical monetary policies as well as a lowering of fiduciary standards of top management) then of course standards and morality will suffer.

The impact of technological developments on standards and culture;

Corporate structure, including the relationship between retail and investment banking

The ability of financial groups to undertake both kinds of banking under the same roof has resulted in investment banking culture becoming dominant in finance generally.

The level and effectiveness of competition in both retail and wholesale markets, domestically and internationally, and its effects

This topic was well discussed in the Vickers report.

Taxation, including the differences in treatment of debt and equit

Equity finance should play a much larger role in financial intermediation. Risk-bearing and reward should be whenever possible tied together at the level of the individual, thus re-introducing a culture in which employees at all levels of a financial organisations are imbued with an awareness of risk. Policies that discriminate in favour of debt and against equity finance, such as the tax deductibility of interest, contributed to the build-up of excessive leverage and should be phased out, as the IMF has recommended.

(b) weaknesses in the following somewhat more specific areas: (eg the role of shareholders, and particularly institutional shareholders)

General comment: calling on boards of directors to exercise closer surveillance over management—demands for improvements in corporate governance of financial institutions generally—are common themes of inquiries of this type.2 But the executive can generally outwit the most dedicated of shareholders. I am not aware of evidence that calls for “more effective governance”, however numerous, have ever had any impact on behaviour.

This applies, even more strongly, to “ethical” codes that routinely form part of an institution’s human relations and public relations. These can lead to ludicrous overkill—I understand that one institution’s “Code of Ethics” on personal trading, for example (just one of a multitude of policies employees are meant to follow) runs to 43 pages of tightly written legal language the sum effect of which is completely incomprehensible to the average employee. The whole lot could be replaced by the single sentence “Don’t take advantage of your position, don’t do anything you could not defend if it became public knowledge, always put our clients’ interests first and use your common sense”.

5. What can and should be done to address any weaknesses identified? To what extent are such weaknesses subject to remedial corporate, regulatory or legislative action, domestically or internationally

General comment:

If banking is to be restored as a useful, indeed leading, form of financial intermediation, bankers need to re-discover and extol the social purposes they fulfil, and keep the individualistic or profit-making objectives in their proper place. This means not only adopting the principle of putting the interests of the client/customer first but working out in detail the implications in everyday financial judgments and management styles. Some suggestions for what might be considered within the Commission’s terms of reference are mentioned in the answers to the following question. Structural changes also can help to promote a fresh vision of banking and its place in society. But the main point is that for most people it would be more interesting to work for a company that is visibly performing a valuable role for society, and has a passion for serving its customers and creatively meeting their needs, than one driven by individual or collective greed.

Specific remedial action—remuneration structure

Among specific steps that could be taken, as indicated in my answers to Question 4, I submit that further action is needed to change the structure of remuneration. Some measures have been taken at the EU and national level but these do not go far enough. Among steps that the Commission could consider recommending would be to bar banks that pay bonuses from eligibility for emergency lender of last resort assistance from the Bank of England.

The pay structure is defended on the grounds that it allows overall costs to vary; an industry that has such volatile revenues needs to be able to respond to revenue downturns, it is said, by cutting its main expense, which are staff costs. If all banker pay were entirely fixed with no bonuses, the only other recourse would be redundancies, which, it may be argued, could be more damaging to the long term well-being and continuity of the industry. It might also make horizons even more short term. It could also be maintained that cutting off access to central bank liquidity provision would be misguided, on the grounds that it would not restrain bankers in the good times—no bank ever thinks it is going to need to call on the Bank of England or runs its business on these lines—and may unnecessarily constrain the authorities if a bank does need to be rescued.

On the other hand, there is a strong moral case for such action. First, individuals should not be able to buy private benefits at the cost of burdening the public with further, open-ended contingent liabilities. Secondly, nothing is more calculated to sow distrust between client and bank than the fact—whether or not the customer is aware of it at the time—that an employee stands to gain a bonus for selling a service or product to him or her. Thirdly, it is intolerable that one cohort of senior bankers should be allowed to privatise and pocket all the gains from the credit that previous generations of prudent bankers have built up for their bank, especially as their behaviour destroys the bank’s reputation and thus its capacity to fulfil its key intermediary functions in society. Fourth, bonuses encourage risk-taking and discourage cost containment as they are paid out of revenues rather than profits.

Nothing has infuriated the public more or contributed more to the low esteem of finance than the bonus culture. This is often portrayed as “populist bank bashing”, and of course one should avoid a witch hunt, but in my view the public’s instinct is justified. The bonus culture is so ingrained that only public policy can effect a real change.

6. Are the changes already proposed by (a) the Government, (b) regulators and (c) the industry sufficient? Respondents may wish to refer to the Financial Services Bill and the Government’s proposals for the Banking Reform Bill. They may also wish to refer to proposals by the Bank of England and the Financial Services Authority on how the Financial Policy Committee, Prudential Regulation Authority and Financial Conduct Authority will operate in practice

These questions clearly raise far-reaching, complex issues and in the following I limit myself to making a few general observations, mainly on financial regulation.

Specific remedial action—structural separation

As is evident from a submission I made with a colleague to the Independent Commission on Banking in 2010 proposing a form of ring-fencing, I have supported the recommendations of the Vickers Commission.3 However, I have come to the view that there is a growing case for a more fundamental restructuring, with a full legal separation of investment from commercial banking in the UK. This would assist bankers to rediscover and return with pride to serving their key functions in society. Yet even this would not be a panacea.

The implications of the decline in trust

The fundamental issue may be put very simply. All deposit banks require trust that the management of banks has the highest ethical standards. This is because of the “opacity” of banking—customers do not know what banks do with their money.

It follows that if it proves impossible, given prevailing social attitudes, to re-introduce high ethical standards and social purpose into banking, as discussed above, then the focus should switch towards encouraging forms of non-bank finance that minimise the input of “trust” needed. For this reason, proposals for an equity-based financial system, where banks are replaced by unit trusts, made by Professor Laurence Kotlikoff, deserve fuller consideration that was given them by the Independent Commission on Banking.4

The international response has been to attempt to cover up this moral hole by extending regulation. Yet virtue cannot be legislated.

Not only are measures to reform the institutional structure of regulation and its rules unable to bridge that moral gap. They do not in my view even mark an improvement on the pre-crisis regime. They are likely to contribute to the build-up of another crisis—as the former regulatory system is now seen to have done (despite the massive intellectual input that went into that earlier system). There are several reasons for this.

The reforms are likely further to encourage homogenous, herd-like behaviour. Firms will adapt in similar ways to the regulations, thus raising the risks of a systemic crises if the regulators “bet” in the wrong way. Regulators will find it difficult to avoid becoming more and more involved in the effective management of the financial system and of individual institutions—eg expressing “guidance” or giving “direction” on desirable trends in lending, investment, capital, liquidity, and remuneration. Thus the regime represents another step in tightening official control over finance. Indeed, if it does not represent such a step, it will be seen as a toothless tiger.

This may be an unavoidable and indeed logical implication of the effective assumption of intermediation risk by the State. With the banking system still “nursed” by central bank liquidity, taxpayer support and implicit guarantees, and with the key inter-bank market functioning poorly, the State is perhaps bound to have a greater influence on management decisions. But nobody should pretend this represents a return to normality.

For example, the Interim Financial Policy Committee has already expressed sentiments to the effect that banks should raise capital ratios, set up a “temporary” capital “cushion”, restrain dividends and compensation, tackle risks promptly, while increasing lending to the real economy. Of course all these objectives should be achieved in way that avoids adding to financial fragility (see the record of the Interim Financial Policy Committee meeting held on 22 June 2012). How, bankers may ask, are we supposed to provide all these good things—why don’t the members of the FPC show us? How far, indeed, will the FPC go in enforcing its wishes—for example over bank pay?

Every extension of the role of the state over the financial system diminishes the responsibility and autonomy of bank management. Yet the lesson of history seems to be that autonomy leads to reckless irresponsibility if it is not constrained by a moral code and credible external sanctions.

Given the current direction of policy, the next financial crisis is likely to be blamed on the central bank and its associated organs—justly so, as they will have assumed responsibility for giving guidance/direction on all the main parameters that contribute to the build up of risk. This carries the risks not only of having adverse effects on its ability to conduct a stable monetary policy—one of the original reasons for separating the two functions—but also of substituting the judgment of officials for that of bankers over a wide range of the nation’s financial activity.

The current trend in regulatory policy will reduce rather than foster diversity in the financial system. To the extent that regulators in other financial centres harmonise their approaches, diversity will be reduced globally, and the fragility of the global system further enhanced.

The more complex the regulatory apparatus, the more it encourages size in banking, as only a large institution can cope with the flood of regulations, influence the interpretation of those regulations to its advantage and threaten regulatory agencies with unlimited spending on legal fees if a case should go to court.

As a sector, banking is almost unique in modern capitalist societies in having high barriers to both entry and exit.

It is tempting to believe that “judgment-based” regulation can fill the gap. Yet such an approach would further enhance the risks of an excessively cosy relationship developing between the shepherds and their flocks—regulators are already very close to the banks they oversee.

Remedial actions—reform of regulation

If banking is to be restored as a form of intermediation, regulation should be guided by a different set of principles: the search for ever-greater extension of the responsibilities of supervisors, and what is in my view likely to prove a vain search for effective counter-cyclical macro-prudential regulation, should be replaced by requiring banks to follow a few big, bold rules that the general public can understand and which bankers should interpret themselves. These would include limits on activities and a high, simple ratio of capital to deposits, buttressed by an aggressive competition policy to keep banks small so that failures can be more easily managed (and the threat of failure made credible). All other financial activities would be conducted by non-banks, firms adopting a partnership form. Transgression would be followed by swift retribution.

7. What other matters should the Commission take into account? HMG should…

Extend areas of financial offences where criminal prosecutions could be brought.

Step up prosecutions for insider trading with custodial sentences.

Ensure that “heads roll” when a bank misbehaves or asks for public assistance; the widely-held and powerful City myth is that when a bank goes to the Bank of England for emergency lending, the Governor responds by saying “Thank you, Mr Chairman, we shall discuss that with your successor; goodbye”. That is the kind of action that the City understands and was sorely missed in the crisis—for example, when RBS failed (I doubt if many people took any notice of the results of the FSA’s laborious inquiry—a 352-page report released three years later).

Give the appropriate authorities discretion to take such action when appropriate even if they cannot prove the individual(s) was/were personally responsible.

Make their expressed determination to end “too big to fail” credible in the markets, as the single most important step in restoring professional standards—and above all, the needed culture of risk-consciousness—at all levels of an institution.

Encourage the Financial Conduct Authority to have as its central focus an insistence that financial institutions put the interests of clients/customers/consumers first at all times.

Call for the head of the FCA to work closely with the Governor of the Bank to establish a new moral tone to UK banking.

Consider the possibility of conflicts between the objectives of different oversight bodies. Official allegations of law-breaking can destabilise confidence in a bank, and thus its funding—but this risk should not be allowed to hinder or postpone the need for disciplinary action including where appropriate prosecutions.

Affirm the public interest case in upholding the moral and legal codes and that this should trump the case for protecting any individual institution.

The latter risk underlines the need for the resolution authority to stand ready at all times to manage the failure of a bank without disrupting business or causing a more general panic.

Encourage the further development of forms of financial intermediation that could in the longer term offer substitutes for traditional deposit banking.

Concluding Remark

Lack of trust, low standards and the legacy of the financial crisis are preventing UK banks from fulfilling their key functions in society. They are in a state of torpor. New life can be breathed into them, however, if top management can effect a change of culture. Employees should follow an ethical code placing customers’ interests first. Given such a change, regulation could be radically simplified.

3 September 2012