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October 19, 2012 / politicsbitesize

Is it possible to restore trust in the banking industry?

On Wednesday 17th October, the British Bankers Association (BBA) held a meeting in London on the theme of restoring trust in the banking sector.  On Radio 4’s Today programme Robert Peston looked at how that trust was lost and if it might be possible to regain it. He stated, ‘Restoring trust for banks is about ethics, effectiveness and economics because… the big banks have let us down in every conceivable way over the past few years’.

Robert Peston lists the many deviant devices used by the banks to fatten profits at the expense of their customers.  He tells us of the ‘grotesque examples’ of the mis-selling of PPI to customers who could never use it, interest rate swaps to small businesses, the LIBOR scandal and money laundering. It can be argued that something went very wrong with the culture in our banks, which led to the economic meltdown of 2007-08.

The ethos of selling unnecessary products in order to inflate bankers’ bonuses and the grabbing of profit at the expense of customers and investors was rife within the industry.  One result of this is that people feel the banks aren’t there to help them, but simply to squeeze money out of them.

It is appropriate then that the BBA are considering ways in which to restore the trust that customers have lost in the banks.  But is this actually possible?  Robert Peston reminds us that the taxpayer bailout of the banks, to the tune of £1.2tr, was because the institutions were so large that their collapse would have been disastrous for the economy.  However, over four years later some banks are still so large and complex that it might be hard to trust them not to get into serious difficulties again.

In his welcome speech Anthony Browne, Chief Executive of the BBA, told attendees that he ‘chose the overall theme “Restoring Trust” because it is quite simply the biggest challenge facing the industry’.  He warned that is was easy to say that the banks need to restore trust but that it would be difficult to achieve.  Mr Browne claimed that one good thing that had come from the investigations into the LIBOR scandal was, ‘that there is now a clear determination from the top of the industry that they must do what it takes for banks to win back [their] place in society’.

To a certain degree then, it seems that the banking industry has woken up and realised that it has to take responsibility for its own actions. But, as Anthony Browne highlighted in his speech, words will not be enough.  The banks are under pressure to promote economic growth by lending to small and medium sized businesses.  A culture of lending too much to too many before 2008 has been replaced with the opposite and now the only way out is to start funding small businesses, financing investment and fuelling exports again.

However, if the banks begin lending to start-ups at pre-2008 levels then the UK might well face yet another financial crisis in years to come.  The British public are already sceptical of the industry, with only 28% of people thinking that they can trust the high street banks (YouGov Poll).  So, as Robert Peston and many others have suggested, a new alternative to banking model might be necessary.


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