Hamish McRae: It's too simplistic to demonise banks – society as a whole shaped their culture

We need safer banks, but it will be harder to get mortgages, or for firms to get loans

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Society gets the banks it wants. For more than a generation, banks have been nudged, encouraged, even bullied by politicians and customers to make borrowing easier. As a result, they took on a larger and larger role in financing a boom that ran with only a couple dips from the early 1980s onwards.

Sometimes the encouragement was explicit. US institutions were pushed by politicians into sub-prime lending, giving home loans to people who would not normally qualify. Sometimes it was implicit. UK mortgage lenders were not checked when they started to offer mortgages of more than the value of the properties, for this was seen as helping first-time buyers – a group that attracted political support.

It continues today. European banks are being pushed into buying the debt of their governments and are being lent ultra-cheap money by the European Central Bank (ECB) to do so. UK banks are being pushed into lending more to small businesses. Yet rationally the sovereign debt of Italy and Spain carry huge default risks and, statistically, British small firms have been among the most risky borrowers.This is not to say these borrowers should not get their money. It is simply to point out that societies expect banks to take risks.

Most of the risks that have gone sour have been in regular commercial banking. The largest single category of losses has been property loans, either directly (as in Ireland and Spain) or indirectly (in the form of sub-prime debt passed on from one lender to another). Of course, banks should have known better but what we now see as their recklessness was supported by central banks supplying easy credit.

Even in Britain, where the Bank of England was arguably more restrained than the US Federal Reserve, money supply was increasing in the mid-2000s at about 14 per cent a year. No wonder there was a housing boom. In the eurozone, the ECB had to set a single interest rate for the whole region. No wonder that rate was too low for some parts of it, such as Spain and Ireland.

And investment banking, or "casino banking" as it is now called? Well, it is true that the failure that triggered the worst of the crisis was Lehman Brothers, and that was an investment bank. Arguably, it would have been much cheaper to rescue it, in the way commercial banks have been rescued, because of the complex interactions of the global banking system. It is also true that the investment banking divisions of commercial banks have seen spectacular trading losses by individual traders. But in general investment banking divisions have been profitable overall, whereas commercial divisions have seen the huge losses.

That is not to say there should not be a split between commercial and investment banking. Actually, there is a good argument for that, in that the skills are very different: one requires caution, the other actually embraces the idea of taking a risk.

Part of the problem may be that the culture of commercial bankers became too infused by investment banking verve. But we should not kid ourselves that one form of banking is safe and the other is dangerous. That does not square with what actually happened. Northern Rock was in home mortgages – historically the bit of banking that has had the lowest default rates of all.

We are heading back to a world of safer banks – and we should be, because what happened was intolerable. But we should be aware what this will mean. It will be a world where it is much harder for people with bad credit ratings to get a credit card. It will be harder to get a mortgage without saving for a deposit first. It will be harder for a company wanting to expand to obtain a bank loan. It will have to raise more equity, real risk money put up by people prepared to lose it, rather than the bank being forced to write off a bad debt.

In short, it will be a world where, instead of being encouraged to be irresponsible about money, we will be forced to become responsible about it. If we are to be more cautious about borrowing, then I expect we will demand that our governments are more cautious, too. That will be the next stage of the story.

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