A Shorter Leash: Ideas for reforming the banking sector

The banking crisis was not universal.

The UK is still going through a severe financial crisis, five years after the failure of its banking sector. However, none of the banking institutions that Lines used suffered serious adverse effects from the 2008 crisis. That is quite unlike the major banks. Why were those banks different? The answers to this question, Lines believes, hold the key to what happened during the crisis, where the banks went wrong and how they can be put on a better course.

Lines has a current account, a mortgage account and a small savings bond with a leading building society; a savings account with a Dutch-owned ethical bank; and a credit card with the Co-operative Bank. Lines put these three institutions’ resilience during the crisis down to three factors:

1. The form of ownership, at least in the case of the building society, which makes it more responsive to the needs of depositors and account-holders and less eager to pursue profits for their own sake. After all, Lines is one of its owners, with a vote at annual general meetings; not merely a customer but a member of the Society.
2. Tighter rules affect building societies than commercial banks, in particular restrictions on access to money-market and interbank funding and consequently a greater reliance on deposits.
3. All three institutions pursue different policies than the biggest commercial banks: they are reluctant to use non-deposit funding and make only limited use of derivatives and securitisation.