The Banks are all having to rethink their purpose. There is an uneasy dilemma unfolding. Retail banking provides the mechanism for the world to trade easily. Anyone living in or around London, will appreciate that retail banking is possibly quite a small element of “Banking”. Indeed if you work in banking, it is more likely that you work within investment banking and this is probably what people assume.

The main problem being understood by Politicians is that retail banking is different and needs separating from investment banking. I tend to agree with this, but would also add that banking is not insuring or “financial planning” which is also offered by retail banks and done very badly (see the FSA complaints register). Add to this the desire of regulators and politicians to monitor and control risk. But hang on, without risk, there is no reward in the capitalist system. This is really where things start to become less “easy”. In the good old days that pundits hark back to, your Bank Manager would make decisions and decide whether to back you or not. This was risk. Sometimes it would be the wrong decision, but often one that was not too onerous to correct or take on the chin. The model was based upon a working local knowledge and understanding of your circumstances.

The main problem with this system was that Bank Managers were sometimes not very helpful, indeed sometimes very unhelpful and arguably had little real knowledge of the bigger world, particularly when something new was being proposed. This gave rise to specialist Bankers, that acquired skills to assess new ideas and risk, but gradually the numbers got larger and larger resulting in the need for more niche and specialism.

We cannot go back to “the good old days”. These you may remember were good for some, but not for all. Certainly they seemed more simple, but actually involved layers of relationships. Today, there is hardly any real relationship between the “bank” and the “customer” an easy space for a half-decent financial planner to fill, let alone a really good one. I would suggest that it is the commoditisation of risk and the death of relationship that has caused the problems for banks today, not the actual risks themselves. However, I also believe that no Bank should be too big to fail, which means that breaking them up once they reach certain “sizes” is probably the better way of containing and avoiding disaster.

 

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