Guardian UK: This crisis requires a radical solution - an ethical bank

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This crisis requires a radical solution - an ethical bank
A reformed banking industry would treat customers fairly, pay bosses less and shun complicated financing

Deborah Hargreaves
The Guardian, Thursday September 25 2008



One of the longer-term outcomes of the current financial crisis will be yet another blow to consumer confidence in the banking industry and its ability to manage our money and savings safely. And yet this is a development that we, as a society, can ill afford since the security of our retirement and financial wellbeing is tied up in an industry that has broken faith with us.

Consumers are even worried about their bank deposits. Andy Hornby, chief executive of HBOS, admitted in a memo to staff that one of the reasons for merging with Lloyds TSB was that depositors were taking fright at the bank's share price falls and had started to withdraw their money. Before the Northern Rock debacle last September, Britain had not experienced a run on a bank since 1866. But consumers have now become so nervous that some started pulling their money out of Britain's biggest mortgage lender because of short-term volatility in its stock price.

While it may be a rational decision for one person to withdraw their savings from a weak bank, if everyone does it that bank is doomed. A run on a bank also exposes the myth at the heart of the financial system - our money is not there tucked up in an underground vault. Banks are not able to return everyone's money at once and if we do not maintain faith in them, the financial system starts to crumble.

The trouble is, banks and most financial services companies are among the least liked and respected sectors of the economy. The government wants us all to take more responsibility for our own savings and retirement funding, which is a problem if we do not trust the companies providing those facilities.

We are right to be wary. The financial services sector has done little to earn our respect. Successive failures, such as the mis-selling of endowment mortgages, personal pensions and payment protection insurance, as well as the Equitable Life debacle, have eroded goodwill among the public. Even those who leave their money in a deposit account often find that the bank has withdrawn an attractive starter rate of interest once it has their savings.

When trust is rapidly evaporating, it is difficult to know where to turn. One of the less well-publicised developments of last week's seismic events on world markets was US consumers' withdrawal of $197bn of savings from money market funds. These are sold as ultra-safe savings vehicles, where returns are low but investors are reassured that their money is not going to disappear. However, for the first time in years, one of these funds was forced to return less to its investors than they had put in. Some of these funds had been investing in Lehman Brothers' commercial paper, the value of which was reduced to zero when the bank went bust. ......(more)

The complete piece is at: http://www.guardian.co.uk/commentisfree/2008/sep/25/banking.ethicalbusiness