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About this programme by Peter Day
Banks were local when they started. The goldsmiths in mediaeval Italian cities discovered they could make more money issuing receipts for gold that other people could cash in … effectively inventing the cheque.
In Lombard Street they brought their “banking” skills to London.
Prosperous family businesses creating the industrial revolution in Europe in the 18th and 19th centuries sloughed off cash that they lent out in the industrial towns they were creating.
Local banks were family owned, or partnerships. They knew their customers.
The banking parlour was the common-room where all the partners worked at their desks together. The post was opened in front of everyone, making double dealing difficult.
Money was always a temptation, but trust and reputation were at the heart of the local world of money for a long time. Trust, reputation, probity … and local knowledge.
The improbable magic of banking is that skilled bankers know how to lend out much more money than their depositors have paid in, and people trust in that magic.
Depositors seldom arrive all at once to ask for their money. But when they do, there’s a run on the bank and that can be nasty. Especially in a small town.
But despite the centuries-old suspicion of credit and the magic that made it possible, governments were eventually persuaded that banks might be permitted to be owned by corporations, rather than private individuals personally liable for the debts.
Joint stock companies had existed for centuries, but the authorities were wary of banks owned by shareholders with their liabilities limited to the issued capital; in the 18th century joint stock banks were expressly illegal in England. (Scotland had its own laws.)
But a developing, urbanising industrial civilisation needed more money, more lending, more transactions.
Private banks did not have enough capital to meet the new financial demands of the 19th century.
Provincial joint stock banks with many shareholders were legalised in 1826. They prospered in an industrialising Victorian Britain.
They built imposing branches in the towns they served.
Confidence is why bankers used to dwell in marble halls: they had to run an institution that looked worthy of trust.
These days the implicit trust is backed by insurance on deposits up to a certain size, but banks are so big that the details of the insurance system barely matter.
Governments (and bankers) are scared by the implications of systematic bank failures. Banks have become too big to fail.
How did that happen? Well, the joint stock banks were naturally expansion minded.
In particularly, they created branches, all over the country, a seemingly elementary step now but fraught with problems when you are doing something so dependent on trust so far from home.
In the 1850s, the joint stock banks gained entry to the clearing house system, a move which boosted the significance of cheque transactions all over the country.
The pace of change quickened. Joint had been kept out of the capital, but they started to take over London banks as well as each other, mergers which intensified after the First World War.
By 1936, says the British Banking History Society, 11 big banks had emerged from the dozens, no hundreds, of 19th century banks … and the five biggest had 87 percent of the business. Sounds familiar.
Branch banking was the way most people with a bank account experienced banking (and until the coming of the credit card in the 1960s, many people lived in a cash world and rarely encountered banks at all.)
They may have been branches but business was still done in a pretty personal way.
As I have written before, when I was young we lived behind the bank and my bank manager father would bring home every evening all the cleared cheques, just to keep an eye on what his customers were doing. Personal service. These days the jargon is “relationship banking”.
When banks first computerised in the late 1960s, they replicated the branch structure in their computer systems, even though they were installing machines that might have started to do away with the old marble halls.
But eventually, two decades later, computer networks changed the structure of banking.
The branches began to dwindle in managerial importance. Decisions based on credit scoring, for example, could be taken far away.
Bank branches became retail outlets, or did not survive. Closed bank branches (still instantly recognisable because banks took their architecture seriously) became other things, often betting shops.
And many banks got into bad habits they are now paying for, shelling out almost £2billion last year for the miss-selling of personal protection insurance to millions of their customers.
Trust used to be at the centre of a banking relationship.
But now the banks seem to have got too big for their boots, and certainly too big to fail.
During the credit crunch crisis, the government took emergency measures to take significant stakes in two of the current big five banks, fearful that the demise of the RBS Group or Lloyds would have imperilled the whole financial system and the whole economy.
Too Big to Fail is a very unhealthy situation, not for the banks themselves but for the taxpayer who has to bail them out and the system as a whole.
That’s why the Independent Banking Commission under Sir John Vickers last year recommended big reforms in the way banks go about their business, and said they should face a monopolies commission inquiry in 2015 unless competition increased.
And that is why some brave newcomers think it is time to challenge the big players with new banks; this programme hears from a handful of them.
There’s the local branch-with-power-to-decide approach. There’s the branch that’s open (almost) all hours approach.
There’s a bank aimed entirely at small and medium sized businesses, the ones who are complaining bitterly about the way their established bank has been treating them in recession.
And there’s peer-to-peer lending which cuts out banks altogether by enabling lenders to lend directly to borrowers, with loans chopped up into £10 slices to spread the risk.
It’s an idea that recently got approval from no less a person than Andy Haldane, executive director for financial stability at the Bank of England.
Opposed to this flurry of small scale but eye-catching competition is the apparent sheer inertia of most bank customers, snagged into opening a bank account in their teenage years and seemingly reluctant to change.
We need banks, and the banks know we do. They know the economic system needs them too.
Whether we need the banks as we know them now is quite another question.
Contributors to this programme:
Chairman and co-founder, Metro Bank
Clifton branch manager, Handelsbanken
Founder and chief executive, Aldermore Bank
Chief executive, British Bankers Association
Chief executive, Virgin Money
Chief executive, Zopa
Banking analyst, SRN Consulting
Insights into the business world with Peter Day - featuring content from his Radio 4 In Business…