1. A curse and a blessing
Love them or loathe them, banks are essential to the working of a modern economy. Or are they? Banks enable business and government activities to happen. They employ thousands of people and pay billions of pounds of tax, helping fund essential services such as health and education. So why are they often not seen as a force for good in society?
Basic banking works in a very simple way. Banks borrow and lend, but the rate of interest they receive when they lend is higher than the rate they pay when they borrow. Even this poses some issues, as some think banks should be a service, not a business making money out of money. But there’s more: banks can make a profit in much more risky ways than giving out loans for, say, cars and houses. And because of these risks banks can lose money – sometimes lots of it. That’s where it can become complicated.
2. How did we get here?
In recent times, public confidence towards banks has taken a hit. In 2007 and 2008 the international landscape was hit by a huge financial crisis.
In the UK, the liquidity of banks - the bank’s ability to have enough money coming in to pay out for its short-term cash needs - came under pressure because, in the pursuit of higher profits, they invested in schemes that didn’t work out. This included taking on risky investments in mortgages abroad.
In order to save the banks from collapse, the government ‘bailed out’ many of the best-known UK banks. The problem was that the government was already in serious debt and it took out extra debt to pay for this. This chain of events helped to create the austerity conditions we are experiencing today and it’s why many blame the banks for contributing to the crisis.
Should we have let them fail?
Some argued that the UK government should have not bailed the banks out. This is what happened in Iceland when the country's banking system collapsed in 2008.
The government thought that the failure of large UK banks would have probably meant that tens of thousands of businesses and families reliant on them would have run out of money, and the bailout may have prevented that. But the crash raised some serious questions.
4. A world without banks
Let’s imagine for a moment what a world without banks might look like.
There would be no immediate access to money, for example from an ATM. All kinds of cash-free transactions would become very difficult – making it necessary to carry around big wads of cash.
Keeping it safe
The Financial Services Compensation Scheme protects deposits up to £85k in case a bank goes bust, making keeping money in a bank much safer than keeping it under the mattress.
And as banks are huge employers and pay a lot of tax, if they disappeared and were not replaced the economy would suffer.
Borrowing and lending would also become very difficult. Building societies might be able to help: although they operate in a way that’s similar to a bank, they are different because they are owned by their members (savers and borrowers) and not by shareholders.
But recently, other alternatives to traditional banking have cropped up.
5. Bank-free banking
Other financial institutions are often thought to be more ethical than traditional banking. Click on the labels to find out why.
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Alternatives to traditional banking can also be more controversial, like money lenders and high-interest payday loans. Banks remain the most popular option for most people, so there has been much discussion about how to restore trust in them.
6. Good bankers = good banks?
'Safe' v 'casino'
One idea is to separate banks into two types: the ‘safe’ banks that just take deposits and lend; and the ‘casino’ banks that take risks.
However, even if this separation occurred, vulnerable customers or those drawn to risk-taking activity may fall foul of ‘casino’ practices.
The banks have agreed a set of new conventions to manage their risks, but there are other control activities from UK regulatory authorities and European bodies. Banking regulation involves the banks better understanding and communicating their risks. This doesn’t mean that they know what will happen next, but that they are perhaps more aware of risks than they used to be.
Code of conduct
Another recent initiative is to try to make individual bankers behave better and have their own ethical codes of practice, much like doctors and accountants.
An initiative in the Netherlands proposes that bankers swear to do their “utmost to maintain and promote confidence in the financial-services industry” and then to obey eight principles of good banking. These include, “I know my responsibility towards society.”
A similar initiative was recently also put forward in the UK. The idea is that good people are good bankers, so if you can persuade people to behave well, then banks will be safer.
7. What makes a bank ethical?
So called ‘ethical businesses’ can have many different attributes. What would you like to see your bank do?