October 25, 2012 6:50 pm

Banking’s ‘golden age’ is a myth

The reality was in those days you were lucky to have a bank account at all, writes David Lascelles

In times of crisis, there is a well-known tendency to seek solutions in the past because things seemed to be better then.

This is now happening in banking. People talk of the need to make banking boring, to simplify bank structures, to rebuild professional standards, to restore the personal contact that once bound bankers and their customers. This is not just hankering after a “golden age”; it is the driving force behind a whole raft of plans for regulatory reform and professional discipline.

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But hold on a minute: what golden age are we talking about? Is it one where waistcoated bank managers welcomed you into their mahogany-lined offices for a friendly chat about your overdraft? If so, forget it.

You were lucky in those days to have a bank account at all, let alone an overdraft. And if you could not get to your manager by 3pm, he had shut for the day. Or maybe it is a golden age when the understanding manager held off calling in your vital business loan because he knew that better times lay just around the corner? Very unlikely. In those upright days, the manager was rated by head office for his success in getting the bank’s money back, not for keeping businesses going. Even then, British bankers were attacked for being less helpful than their German counterparts.

Perhaps it is one where the bank manager dealt openly and fairly with his customers. If so, how to account for the fact that he personally pocketed any commissions on products that he sold you, such as insurance (without telling you) and sat down once a quarter to help himself to fees from your account, again, without telling you, let alone displaying a clear tariff of charges?

True, there were professional standards: a banking institute ran exams without which no aspiring banker could make it up the career ladder. But while the institute did keep an eye on professional ethics, it was self-serving and inward-looking. Eventually it went the way of many such institutions: it foundered on its own self-importance and had to be reconstructed as a provider of professional qualifications.

I could go on. However, the point is that even if banking in the old days was impressively stable, it was only because it played to rules that would be unacceptable in our modern world. The sector’s highly protected status encouraged a culture of complacency in which the interests of the customer ranked some way below those of the banks themselves. In the early 1970s, the pendulum was swinging in the opposite direction from today: in favour of deregulating the banks because they were judged to be just a bit too boring for the country’s good.

The question is whether it is possible to extract what was good about this earlier period and inject it into the environment we have today. This seems to be the aim of the reforms that Sir David Walker is now embarking on at Barclays. It would certainly be good to have more personal contact between banks and their customers. But the figures speak for themselves. In 1970, there were about 20,000 bank and building society branches for 10m customers. Today, there are half that number for five times as many customers. It is impossible for genuine personal contact to play any role in the delivery of bank services.

It would also be good if the bankers who deliver services were free from pressure to meet profit targets. But the only reason why the bank manager of old was free from this pressure is that bank profits were kept secret, so did not matter. Since a return to that state of bliss is also out of the question, I conclude that sales pressure cannot be eliminated either, though I grant that it could be better managed.

And third, it might help to restore trust in banking if the profession had a clear and enforceable code of conduct. This may be do-able, though I fear for its effectiveness for other reasons.

If the Vickers proposals to fence off “boring” banking go through, we shall end up with half a dozen large banks, all well-protected, moderately profitable and secure in the knowledge that they cannot be allowed to fail. Will this lead to better banking, as the Vickers report asserts, or will it merely bring back the arrogance of the old days? I fear it will be the second of these two, which is why we should forget the past and address today’s commercial realities.

The writer is author of ‘Other People’s Money’, a history of the banking profession

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