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From The Times
October 27, 2008
The banks must rediscover Victorian values
A mutual trust between client and bank was once the foundation of our financial system - we need to get it back
William Rees-Mogg
div#related-article-links p a, div#related-article-links p a:visited {color:#06c;}The British are - or were - particularly good at banking. British banking financed the Empire and the Industrial Revolution. These achievements owed a great deal to the stability of the gold standard, which lasted from Isaac Newton's recoinage of gold in 1717 until Ramsay MacDonald's abandonment of it in 1931. More than two centuries of exchange-rate stability gave the British banking system a stability of its own and, associated with that, a high standard of trust.
I can remember, when I first opened a bank account in the 1940s, the stable atmosphere of British banking. My father started the account for me to buy books; I was introduced to the Westminster Bank at its old Corn Street Branch in Bristol, where my father had his own account. I met the bank manager, an avuncular figure, whom I was encouraged to treat as a trusted adviser. This was relationship banking, and it still survives in the far corners of the British banking world. It was the right way to do business.
The bank manager then occupied a similar position to the family solicitor or the family doctor. He hoped to maintain a long-term relationship with each client and he hoped that this relationship would survive for generations. He would offer general financial advice, and was concerned to keep the interest of the client and the bank in alignment.
He did not lend the bank's money to people he thought might be unable to repay it. That would plainly be against the interests of the client as well as of the bank. He would, however, try to find a way of meeting the needs of vulnerable groups, including students - which I then was - widows and businesses under trading pressures. The customer who failed was seen as a failure for the bank, because it would be regarded as a lack of banking competence. The customer who built up a successful business would also be a good advertisement for the bank.
Banks were there to help their clients and to keep them out of trouble. Of course these bank managers liked to have some formal security, but they were more concerned about the character of the borrower. There is the famous story of the Clydesdale Bank and the first Mr McAlpine. When asked for security for a loan to develop his building company, Mr McAlpine turned up at the bank with a group of his sons. The bank lent on the security of the character and potential of those young men. This turned out to be very good business for the bank and made possible the success of the McAlpine business.
After the Second World War, relationship banking went into decline. The banks were attracted by the impersonal profits to be made in transactional banking. They did not look for character as essential to their security. They invested in one-off transactions and increasingly in derivatives. They also relied on credit card and other unsecured forms of lending that could largely be administered by automated processes.
It became hard for a client even to see a branch manager, and many managers were retired early. I remember bright young managers who went from being high-flyers to redundancy in only a few years. This took the heart out of many British banks and left a gap in experience between ambitious juniors and board members who had not mastered the derivatives in which their bank was dealing. Bankers under 30 lacked the experience of banking; bankers over 45 did not understand derivatives that had not existed when they were being trained. Nor did the 45-year-olds feel at ease with the impersonal internet.
At the same time, global banking became infected by the more adventurous American attitude to risk. US banks, going back to their 19th-century origins, had always been more speculative than the British tradition. They were more willing to take a big risk for a big profit. In the period of the internet bubble of the 1990s and the housing bubble of more recent years, too many British and European banks made the mistake of accepting American levels of risk in the pursuit of maximum profits.
Huge sums were lent to clients who might not be able to repay. The systems of bonuses gave bankers strong incentives to gamble with the bank's money. They could not be supervised adequately by senior staff who did not grasp the details of the new securities in which their banks were speculating.
Where relationship banking still survives, there have been relatively few problems of bad debts. The problems have arisen in transactional and unsecured credit card banking with one-off or completely unknown customers. Of course the customers have often behaved badly; if a bank does not know its customers, who are only blips on a computer screen, some of them will behave badly. The bank only has itself to blame.
The Sunday Times yesterday had a blazing example of the evils that can result. Banks issuing credit cards have found a legal way of turning unsecured debt into debt secured on house property. That means that credit card debt, which banks have been ladling out to all comers, can lead to the repossession of the family home. Which bank is notorious for the harsh use of this loophole of which credit card customers were given no prior warning? Apparently it is Northern Rock, which was “rescued” by being nationalised. So the grotesque situation has arisen in which the Government is repossessing the houses of credit card customers - to their considerable dismay - as part of the rescue of an incompetently run bank.
The decline of moral responsibility has damaged British banks; it is the real flaw behind the credit crisis. There will be new regulation of the world's banking system after the crisis. Governments cannot risk another catastrophe on this scale. The banks need to change their behaviour. They need to re-establish relations with their clients and value experience in their staff. They need to beware of American-style, high-risk, high-return, policies. British banking was based on protecting the client's interest as well as the bank's. Bankers should not be ashamed of their Victorian heritage.
From The Times
October 27, 2008
The banks must rediscover Victorian values
A mutual trust between client and bank was once the foundation of our financial system - we need to get it back
William Rees-Mogg
div#related-article-links p a, div#related-article-links p a:visited {color:#06c;}The British are - or were - particularly good at banking. British banking financed the Empire and the Industrial Revolution. These achievements owed a great deal to the stability of the gold standard, which lasted from Isaac Newton's recoinage of gold in 1717 until Ramsay MacDonald's abandonment of it in 1931. More than two centuries of exchange-rate stability gave the British banking system a stability of its own and, associated with that, a high standard of trust.
I can remember, when I first opened a bank account in the 1940s, the stable atmosphere of British banking. My father started the account for me to buy books; I was introduced to the Westminster Bank at its old Corn Street Branch in Bristol, where my father had his own account. I met the bank manager, an avuncular figure, whom I was encouraged to treat as a trusted adviser. This was relationship banking, and it still survives in the far corners of the British banking world. It was the right way to do business.
The bank manager then occupied a similar position to the family solicitor or the family doctor. He hoped to maintain a long-term relationship with each client and he hoped that this relationship would survive for generations. He would offer general financial advice, and was concerned to keep the interest of the client and the bank in alignment.
He did not lend the bank's money to people he thought might be unable to repay it. That would plainly be against the interests of the client as well as of the bank. He would, however, try to find a way of meeting the needs of vulnerable groups, including students - which I then was - widows and businesses under trading pressures. The customer who failed was seen as a failure for the bank, because it would be regarded as a lack of banking competence. The customer who built up a successful business would also be a good advertisement for the bank.
Banks were there to help their clients and to keep them out of trouble. Of course these bank managers liked to have some formal security, but they were more concerned about the character of the borrower. There is the famous story of the Clydesdale Bank and the first Mr McAlpine. When asked for security for a loan to develop his building company, Mr McAlpine turned up at the bank with a group of his sons. The bank lent on the security of the character and potential of those young men. This turned out to be very good business for the bank and made possible the success of the McAlpine business.
After the Second World War, relationship banking went into decline. The banks were attracted by the impersonal profits to be made in transactional banking. They did not look for character as essential to their security. They invested in one-off transactions and increasingly in derivatives. They also relied on credit card and other unsecured forms of lending that could largely be administered by automated processes.
It became hard for a client even to see a branch manager, and many managers were retired early. I remember bright young managers who went from being high-flyers to redundancy in only a few years. This took the heart out of many British banks and left a gap in experience between ambitious juniors and board members who had not mastered the derivatives in which their bank was dealing. Bankers under 30 lacked the experience of banking; bankers over 45 did not understand derivatives that had not existed when they were being trained. Nor did the 45-year-olds feel at ease with the impersonal internet.
At the same time, global banking became infected by the more adventurous American attitude to risk. US banks, going back to their 19th-century origins, had always been more speculative than the British tradition. They were more willing to take a big risk for a big profit. In the period of the internet bubble of the 1990s and the housing bubble of more recent years, too many British and European banks made the mistake of accepting American levels of risk in the pursuit of maximum profits.
Huge sums were lent to clients who might not be able to repay. The systems of bonuses gave bankers strong incentives to gamble with the bank's money. They could not be supervised adequately by senior staff who did not grasp the details of the new securities in which their banks were speculating.
Where relationship banking still survives, there have been relatively few problems of bad debts. The problems have arisen in transactional and unsecured credit card banking with one-off or completely unknown customers. Of course the customers have often behaved badly; if a bank does not know its customers, who are only blips on a computer screen, some of them will behave badly. The bank only has itself to blame.
The Sunday Times yesterday had a blazing example of the evils that can result. Banks issuing credit cards have found a legal way of turning unsecured debt into debt secured on house property. That means that credit card debt, which banks have been ladling out to all comers, can lead to the repossession of the family home. Which bank is notorious for the harsh use of this loophole of which credit card customers were given no prior warning? Apparently it is Northern Rock, which was “rescued” by being nationalised. So the grotesque situation has arisen in which the Government is repossessing the houses of credit card customers - to their considerable dismay - as part of the rescue of an incompetently run bank.
The decline of moral responsibility has damaged British banks; it is the real flaw behind the credit crisis. There will be new regulation of the world's banking system after the crisis. Governments cannot risk another catastrophe on this scale. The banks need to change their behaviour. They need to re-establish relations with their clients and value experience in their staff. They need to beware of American-style, high-risk, high-return, policies. British banking was based on protecting the client's interest as well as the bank's. Bankers should not be ashamed of their Victorian heritage.
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