The public are struggling to make sense of the recent financial crises and are asking: ‘What is a rational view to hold of banks?’

Background: The official start of the credit crisis is in dispute, possibly as far back as August 2007, but the defining moment was the collapse of Lehman Brothers (Sept 15 2008). To stop banks such as Northern Rock (Feb 22 2008) falling like dominoes in the Western World governments nationalised many banks, notably RBS and HBOS in the UK (Oct 14 2008, at a cost of £37bn).

European EC members had to be rescued (currently Greece and Ireland plus non-EU member Iceland). Money was pumped into the banking and debt systems (Quantitative Easing) in the west and especially the USA to stop a 1930s-style slump.

A recession has resulted in most western nations with a general increase in the ‘misery index’ - unemployment rate plus inflation rate - and an unprecedented level of debt (UK public sector debt of £900bn, rising, if banks are included, to £2.3 Trillion or 155% of GDP as of Feb 2011). New UK borrowing for 2010/11 is expected to be £149bn - 12.6% of GDP.

Consequently, the public is angry especially when they see bankers again earning huge bonuses when it is tax payers’ money that has rescued the day. For most people, taxes are rising, wages are static, inflation is rising, living standards are falling and government expenditure is being cut dramatically.

The banking crisis of the last two and a half years has been the result of a gathering 60-year credit explosion plus a toxic combination of unrestrained greed, globalisation and loose government regulation. The basic biblical principle of ‘spending less than you earn’ has been ignored on a massive scale.

Both sides of banking are to blame - too much lending on the ordinary Deposit/Lending side of banking, largely financed by wholesale borrowing from other banks - but much more so by the proprietary trading and more aggressive activities of investment bankers (especially credit derivatives).

ACFA is concerned at the apparent failure of ‘Project Merlin’ to satisfactorily align the long-term investment needs of the nation with the avaricious short term ‘enrichment’ needs of investment bankers.

Banks are lobbying hard to avoid the separation of the two sides of banking, a topic which is currently being investigated by Sir John Vickers (Independent Commission on Banking). London and the UK benefit from the location of world banks here but we are concerned at unrestrained investment banking activities causing even bigger crises in the future... back to the 'bad old days'?!

ACFA strongly encourages Mervyn King, the Governor of the Bank of England, to stand up to the banks, especially in the Bank of England's new forthcoming role as Head of Prudential Supervision.

ACFA is further concerned by the diminishing political will to properly reshape the two majority taxpayer-owned failed banks, RBS and HBOS. ACFA suggests the Government should force the banks to further their role to develop lending to Small and Medium sized Enterprises (SMEs) and be held in the ‘Troubled Assets Programme’ for as long as possible.

A rapid reduction in their commercial loan books is to be avoided, particularly when that involves the unreasonable demands of their debt restructuring / debt collection departments. One of the positives has been the relatively few repossessions from residential mortgage borrowers.

More radically, ACFA suggests that the Government consider breaking up these two monolithic organisations to encourage more competition for high street and commercial banking services. In many instances the wide gap between paltry bank savings rates, high commercial lending rates, plus large arrangement fees is unjustifiable and borders on exploitation.

The UK-based banks such as Barclays or HSBC, which have not had UK Government support, have nonetheless benefited from an implicit government guarantee.

Unquestionably, they are shrewd world-class businesses, worthy of being included in the top FTSE 100 and are very welcome stalwarts of the City. Nonetheless they should contribute fairly in terms of corporation tax receipts, remain accountable and hold adequate reserves. Although they can apparently domicile themselves anywhere in the world, we do want them to stay and prosper.

The withdrawal of many bank-based financial advisers, notably Barclays, should give a greater opportunity for Independent Financial Advisers to provide the advice that is so desperately needed.

Banks, a necessary part of the City of London's wish to maintain itself as a Financial Capital of the world, are still a 'work in progress'. Their aims should be to benefit our long-term prosperity as well as that of their customers. Short-termism and the 'inflated bonus culture' should be seen as what they are -greedy and counter productive.

ACFA member, Arwyn Bailey, has just written a lively and incisive book: ‘Ouch, that hurts’ on the causes of the credit crunch, taking past and present examples of ‘asset bubbles’, ponzi schemes and downright fraud.

Whilst few in the nation are blameless, we are all borrowers in one way or another, it is time to ‘live within our means’ and effectively save for all our futures. Failure to do this will mean that ultimately the bugbear of inflation will steal all our livelihoods away and the inexorable drift of economic power eastwards will gather pace.

Fundamentally, the bond of trust between the public and banks needs to be restored.



Aidan Vaughan is Chairman of the Association of Christian Financial Advisers