Our banking system is still so flawed
Four years have passed since the money markets froze over on August 9 2007, causing a credit crisis and the failure of Northern Rock. And it has been three years since the failure of Lehman.
Since then successive governments have funnelled £1 trillion into the banking system in one way or another. Yet despite what the Governor of the Bank of England, Mervyn King, describes as the worst financial crisis since the late 19th century, there has been no thorough-going inquiry into the causes of this massive financial failure.
The Financial Services Authority (soon to be replaced) produced an internal auditors report into the collapse of Northern Rock. But bigger reports, by outside accountants, into the mismanagement of Royal Bank of Scotland, HBOS (before its merger with Lloyds TSB) and Bradford & Bingley have still to be released.
The Coalition government has set up a judicial inquiry into the media following the recent Murdoch hacking scandal, under the stewardship of Lord Justice Leveson. But there has been no such tribunal to look at the responsibility for the banking collapse. Contrast this with the United States, where there has been a full scale Congressional Commission (which subpoenaed hundreds of pages of documents) and a Senate investigation into finance. This led to charges and settlements with bankers Goldman Sachs and J P Morgan and further inquiries into the roles of the credit rating agencies.
So far, the only major player to argue that such a tribunal is necessary is the former Chancellor, Alistair Darling, in a soon-to-be published book. As the person at the helm during much of the financial crisis, Darling has more reason that most to want a non-partisan inquiry which can be trusted.
One of the oddest aspects of these events is the willingness of the authorities to place the cart before the horse. The normal process in government is to have an inquiry and then propose reforms.
In the case of banking, the shake-up of the regulatory systems, giving the Bank of England prudential responsibility for the banks, is a done deal fulfilling a Tory manifesto commitment. The Independent Commission on Banking, headed by Sir John Vickers (the result of an initiative by Business Secretary Vince Cable) has been seen by many as a political device designed to head off more radical reforms at the pass.
The central recommendation of the Vickers interim report was that the retail arms of the banks be 'ring fenced' from the investment activities. The goal is to ensure that if the 'casino' or investment arm of the bank makes a wrong call in financial markets, ordinary depositors and small businesses should not be affected. It is intended that this be partly achieved through 'living wills', which could allow the collapse of one arm of the bank without destroying the rest.
Opponents argue that this would make no difference. Northern Rock was a consumer bank which collapsed and Lehman, a complex investment bank.
What is forgotten is that Northern Rock was run like an investment bank. Its mortgage loan book was securitised and, like the casino banks, it was almost wholly dependent on the wholesale markets, where banks lend to each other, for its funding.
The real reason for separating retail banks from casino banks is far more practical. As part of a universal bank like Barclays, the retail arm will always be the poor relation. The big profits are made in the exotic world of casino banking, from foreign exchange trading to fund raising and mergers. The result is that the best people are always attracted to the investment bank where the rewards are far higher.
This leaves the retail banks as the poor relation. The focus on the needs of consumers is poor and small and medium-sized enterprises (SMEs) are too often treated badly. Despite lending targets agreed between the government and the banks as part of the 'Merlin' agreement earlier this year, SME groups still report that banks are unresponsive to their needs.
Since the financial collapse, the banks have demanded 'bells and whistles' in terms of security - including charges over the entrepreneurs' homes - as the price of credit. Moreover, despite historically low official bank rates the commercial banks have increased the interest rate margins.
The Vickers reforms should make a difference. Lloyds Banking Group will be required to shed more than 600 branches or more and this should help to improve competition.
But as the report by the New Economic Foundation (NEF) "Good Banking: Why we need a bigger public debate on financial reform" makes clear, the reforms are simply not adequate.
Many of the banks, including state-owned RBS, are still engaged in unnecessary risk taking because this is a faster way of making profits than offering good services to customers.
This is perhaps not surprising. Almost all our high street banks are now run by former investment bankers including Stephen Hester of Credit Suisse at RBS and Bob Diamond at Barclays.
We need a different mix in financial provision. Among the ideas being floated are better access to banks in the regions, the development of American-style monitoring of community lending and development of a Post Bank. It is sheer madness that Post Office banking is provided by the Dublin-controlled Bank of Ireland when the country needs a network of corner shop and rural banks offering basic and sound services.
The priority of this government should be to innovate rather than accept the current flawed architecture.
Alex Brummer is City Editor of the Daily Mail