How did a largely respectable industry go so wrong so quickly?

It’s usually foolish to look back into the past in the hope of finding some sort of mythical, halcyon “good old days”. They usually weren’t.

But it is true that something appears to have gone badly awry in banking over the past two or three decades.

The old Halifax, when it was a building society, lent money to homebuyers out and took money in from savers. It wasn’t free of warts, but when it sinned its sins were usually as a result of the complacency that comes from being the big kid on the block and having a rather large and stuffy bureaucracy. Meanwhile Bank of Scotland was a highly respected, regional bank that sometimes seemed like something of a commercial offshoot of the Bank of England north of the border. It minted money after all.

These two ingredients combined became HBOS and it nearly broke the country (that’s no exaggeration) before some arguably dubious political and commercial machinations fixed up a rescue from Lloyds.

Barclays was always a little bit more dynamic. A bit more aggressive. Sometimes a little bit fly? But it was still fundamentally respectable. Not any more.

Then there’s the Royal Bank of Scotland, and we all know what became of that.

How did what was once a largely respectable industry go so badly wrong so quickly (it says it all that large parts of it don’t even see that it has gone wrong)?

That’s a challenging question to answer and Andrew Tyrie’s Parliamentary inquiry isn’t blessed with a lot of time. If he and his members succeed, and manage to find some workable solutions for moving forward, they’ll have done a great service, not just to the country but to the industry.

Who knows, they may even help restore the reputation of another institution that has taken something of a kicking recently: that of Parliament.

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• swishtrish

  It will take far more than getting the banking system back on track for the reputation of “Parliament ” to be ” restored “. And much longer too – about the time hell freezes over, i would say.

• Susan G.

  Hmm.., I think Tony Blair could answer your question about the corruption in our banks, but of course he won’t.
  I think Tony Blair could answer your implied question about the corruption in our parliament, but of course he won’t. He shreds as much as evidence as possible that could be used against him and his cabal…

  Still, I would politely suggest that he is the personification of the psychopathy; hubris; megalomania and entitlement that infects the 1% of imbeciles and malfeasants around the globe. From the bankers to the brutal dictators for whom he shills, Tony has the answer, but he’s not going to tell you, is he?

• jamesdar

  I think this enquiry needs to be wide ranging and examine the history of banking, particularly over the last 30-40 years. An outline of my own analysis of the position is set out below. I strongly suspect the enquiry won’t go anywhere near this.
  My own view is that the key event is Big Bang in (I think) 1987. Previous to that, the banks were essentially high street lending institutions (bit stuffy, but solid), with some City based operations (mostly around currency and interest rate hedging). Separately, you had the stockbrokers and merchant banks (essentially what we now refer to as the casino operations). Many of these were partnerships, and essentially risked their own money (this is the key point: if they did something stupid, they lost their houses and went bankrupt) to try to become rich. A kind of “heads I win (big); tails I lose (big)”. Obviously, with those kinds of stakes, people did try to rig the market in their favour, but (subject to that), this is a reasonable busniess model.
  Big Bang allowed the banks to buy up the brokers and merchant banks in the name of “international competitiveness”, and “reducing the cost of access to capital”. What this means is that the casinos’ borrowing costs were reduced because they had an implicit guarantee from the state (the “too big to fail” guarantee). No longer were the casino operators gambling with their own money: they had an implicit State guarantee of last resort. If the merchant bankers got it right, they won big (as before), if they got it wrong, we (the rest of the country) would be there to bail them out. So now it’s “Heads I win (big); tails YOU (the rest of the country) lose (big)”.
  Naturally, given the implicit “no lose gamble”, the merchant bankers began to take increasingly large risks, guided only by what “everyone else was doing” (ie taking increasingly large risks) (the City has in my experience a tendency to behave like Lemmings). The issues were exacerbated by Labour tax policy (taxing capital gains at far lower rates than income, and allowing unfettered deductions for interest) in the early 2000’s, all of which encouraged people to strip money out of companies in the name of “efficiency”.
  This house of cards finally collapsed in 2008, and we are now left to pick up the pieces.

• quizbook

  Spot on !

• Guest

  A lesser contribution was the de-facto abolition of the mutual-savings model, by allowing it to be hijacked by relatively small pressure groups, so that the banks had greatly extended access to the mortgage market. The mutual building societies were always prudent about their lending because (a) that was the basis on which they did business and (b) they had no real option, in any case. The banks abandoned this model rapidly and completely.

• jamesdar

  Point taken and agreed. That had an effect on mortgage lending not dissimilar to the points I made above on corporate lending. This was then bundled up and sold on, allowing stupid lending in a few countries (mainly the US) to poison the world system.

• http://www.facebook.com/Rbm6699 Robert Mackintosh

  I agree (somewhat! because I think that the modern banking industry – bank mangers, brokers – has always been on the look for profits – personal profits! – long before 1987) bank should be a service for the society it serves not the bankers. They should not be serving the investors (remember that Execs are not investors) of the banks but the savers who invest their saving in the banks.