The financial crisis has imposed economic and fiscal costs upon the British economy and public finances that rival those of a world war. This brutal fact must inform the response. It is why it has to be radical. Business as usual will not do because that could lead to national ruin. No industry can be allowed to operate in such a way. As Sir Mervyn King, outgoing Bank of England governor, noted this week: “It is not in our national interest to have banks that are too big to fail, too big to jail, or simply too big.”
It is quite likely that the crisis will cost the UK a sixth of gross domestic product, in perpetuity. How is this disaster possible? The answer is that we have entrusted a private industry with the provision of three public or near public goods: the supply of money; the payments system; and the supply of credit. But credit is risky, while money and payment have to be safe. For this reason governments have provided ever stronger safety nets. Profit-seeking bankers have responded by making their institutions increasingly fragile: the desire to make banks safer allows bankers to take more risk.
It is only against this background that we can assess the proposals of the report by the Parliamentary Commission on Banking Standards, out this week. It is a depressing, but impressively radical, document. It lays bare the malfeasance and incompetence that characterised UK banking before the crisis.