But, as disappointing as this might sound to some of you, in building a new financial system I think there are limits to what can be achieved through a “heads on sticks” strategy. For me at least, the financial crisis was in the main not a story of individual fallibility, greed or hubris. There are 400,000 people employed in banking in the UK. The vast majority of those, perhaps even 99%, were not driven by individual greed and were not professionally negligent. Nor, even in the go-go years, were they trousering skyscraper salaries. It is unfair, as well as inaccurate, to heap the blame on them. For me, the crisis was instead the story of a system with in-built incentives for self-harm: in its structure, its leverage, its governance, the level and form of its remuneration, its (lack of) competition. Avoiding those self-destructive tendencies means changing the incentives and culture of finance, root and branch. This requires a systematic approach, a structural approach, a financial reformation. A financial reformation I want to argue that we are in the early throes of such a financial reformation. And that this will help to deliver a more socially useful banking system. Let me mention some of the more important of these reform strands. These fall into five categories – the five “c”s: culture; capital; compensation; credit; and competition. It is easier to will the ends on these issues than it is to divine the means. How exactly do we change banking culture?
With returns sky-high, there was then a great sucking sound as both people and monies were drawn into banking, in particular the high-risk/high return, sharp-suited parts such as investment banking. A generation of scientists’ and mathematicians’ heads were turned towards finance. Funds flowed into the bank money machine, with balance sheets rising fivefold in less than 20 years, much of it to support short-term trading activities rather than long-term investment. Yet even while it was still inflating, this bubble was already having silent costs – costs to the economy and indeed costs to other parts of banking. Many of the best people and the best financial resources were drawn away from other sectors, including the retail banking sector. Industries outside of finance were starved of sunlight. The costs of this great sucking sound are only now being properly understood. Recent research by the Bank for International Settlements suggests that, once bank assets exceed annual GDP in size, they begin to act as a drag on growth.3  1  Philippon and Reshef (2009). 2  Haldane (2011). 3  Cecchetti and Kharroubi (2012). 2  BIS central bankers’ speeches  Why? Because human and financial resources are drained from elsewhere in the economy. The sectors hardest-hit by this financial vacuum-cleaner effect are R&D-intensive businesses (who might otherwise have attracted the scarce, skilled labour that flowed into finance) and businesses reliant on external funds (whose financial cake was instead being eaten by the banking system). These are the very businesses that today we are seeking to re-nurture.