The Paul Flowers affair has been nothing less than a terrible disaster for responsible banking. In light of the financial crisis, many customers (including my parents) switched to The Co-op as an ethical alternative to the other banks in the disgraced financial sector. Now, however, The Co-op is no better. With losses in the region of £700m the bank, has been taken over by US hedge funds to give the bank enough capital to survive.
It is very easy to – as the government have – point the finger at the last Labour government for overseeing the appointment of the Reverend Flowers as chairman of the bank with little to no banking experience. It may have been the result of the appointment of Mr Flowers as chairman of the bank that caused the problems within The Co-op but this is not really the relevant issue here. These are very exceptional circumstances but they could have occurred at any bank. However, because they have occurred at the Co-op there is now a greater issue that we face – that of choice for the consumer in the banking sector.
We are often told by economists from their ‘bible of economic truths’ that the ‘market’ can always be relied on to give consumers choice – but what choice do we have in the banking sector? If I wish to bank with an organisation that launders dictators’ money, rigs interest rates or partakes in investment banking then where can we turn? The Co-op was the only real alternative in this country and now, with its hand over to US hedge funds, we no longer have any option but to bank with institutions that have ethical records that would make some mass murderers blush.
The market has failed to produce sufficient competition in this sector. We need to have a banking industry that actually performs the functions which it was created for – lending and storing capital. It is a fallacy that the banking sector needs any form of investment banking as Will Hutton mentioned in a discussion at the Guardian’s open weekend. He recalled a conversation he once had with a banker, that having looked at the business model of investment banking he realised that it was produced entirely as a means of producing enormous personal wealth for those who work in investment banking – it has no wider public good at all.
Really we have all become deeply confused. It should be the public dictating what kind of financial system we wish to have to serve the public – not the financial sector dictating to us what services it is willing to supply, then expecting us to bail it out once the system collapses .The deregulation of the banking sector has gone hand in hand with the lowest rates of lending. If we continue to let it become its own entity to pursue its own ends then eventually it will cease to perform the job it was set up to perform.
It seems to me that we are in need a many reforms in this sector, but I think it is not a simple matter of the banks continuing to provide a service exactly as they do now and only their practices changing. We must also change our expectations. Yes, in recent years banks have offered very attractive interest rates and mortgage deals: but at what cost? If we wish to have a banking sector that is not just about creating personal fortunes for a small number of people then I think we also need to reconsider what we should expect from it.
If the cost of brilliant saving rates and current account interest rates is a sector over run with self-serving investment banking branches to prop up these deals then I think we need to forget about them. I would rather pay a fee and store my money at 0% interest with a bank that practices ethically than fund these ends.
These are illusions of good deals. These things still came at a cost; we just did not see it. However, we have ended up paying for all these things through other means; taxes to bail out the banks, austerity, and wage freezes. We need a banking sector that serves the public, but we also need to leave these illusions behind – if we wish to have ethical banking then perhaps we need to forget these ideals of ‘banking bargains’.
Whether or not the Co-op survives is up in the air, but I believe it really is time now that we collectively decided as customers to opt for less glamorous banks that serve the public and not themselves. As the economist Jayati Ghosh once said: finance should be boring. If only we could reinvent a more tedious banking sector than I believe we could once again have banks that serve the public good and not just themselves.