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banks were once seen as the cornerstone of modern British society safe solid and dependable they provided the capital and security needed to ensure that businesses could flourish and the economy would develop but by September 2005 the UK's banks had changed beyond all recognition finance had become so complicated that many people simply didn't understand what they were dealing with it became too complex both for the regulatory framework for the management styles for the management skills and ultimately for the business model of banking bankers were gambling without being fully aware of the risks that they were taking the failure to distinguish risk which we can measure from uncertainty which we can't is the big failure of contemporary economics the quality of products being sold plummeted what we had it was alchemy we started with high quality mortgages and packaging them into high quality bonds in the end what we were packaging was garbage and telling everybody it was gold in the first instance it led to a credit crisis and our banks being pushed to the very brink of collapse we got to a point where there was one evening when banks were no longer lent to each other overnight the government hadn't intervened at that point with fresh capital for the banks and guarantees that the banking system would have gone it was actually that close then within a year a devastating recessionary wave crashed down on the wider UK economy we've not created it everybody out there whose works for a living he's wondering what the hell is going on it became harder to get a mortgage deposits required when buying a house increased and credit got tighter these events have changed the way that banks operate the public's perception of them and the entire landscape of personal finance but how did it happen and what does the future hold for banking and Britain borrowing and lending money are the most basic principles of banking if done through the market there are problems of information as blenders know little about the borrower and problems of incentive as the lenders may base loan decisions on a willingness to pay a high interest rate rather than an actual ability to pay banks therefore solve both of these problems banks and financial institutions perform an intermediary role in the economy that takes people's savings and allows it to be invested across a range of possible investment projects because banks provide long term loans whilst giving savers instant access they suffer an inherent in balance or liquidity risk we all know that banks are in fact a kind of confidence trick we deposit our money and in theory the bank says yes you can have it anytime you like but actually we also know with another part of our brains that in fact we've lent it to somebody and they've lent it on the long term basis whereas we might want it on a short-term basis historically in the UK banks are divided into distinct types with commercial or retail banks providing instant withdraws and loans for businesses commercial banks which are if you like the high street banks that we all know of are making loans and providing financial services to companies and a much wider range of customers on the other side of the equation with the investment banks involved in long-term capital business they invest and trade in the global financial markets these are banks that are engaged in corporate advice big corporate loans securities trading normally they do not accept deposits from the general public in the UK the Bank of England regulated the banking system before this pal was handed to the financial services authority in 1997 by the New Labour government the Bank of England was the regulator and supervisor within the financial system and although there were no legal regulations the same as in other countries the governor's eyebrows were very important that if he raised his eyebrows and saying I don't really like what you're doing that was often enough to induce banks to stop doing that this UK system of regulation was in contrast to the more formal government regulations in the u.s. you had real constraints on what banks could do you had the glass-steagall Act which said that there would be retail banks on the one hand investment banks on the other and never the two should meet and more generally you had a whole system of capital controls you had regulations which prevented banks and institutions from doing certain things things remain the same until the early 1980s when a new political dawn in the US and UK led to further deregulation of the financial markets Ronald Reagan and Margaret Thatcher were political soulmates the former Hollywood actor and the grocer's daughter were now embarked on a true-life political romance we in Britain think you are a wonderful president deregulation was the great ideology of the Thatcher air raid and revolutions the the idea behind it was that markets were perfectly efficient financial markets were very efficient and they could regulate themselves US and European banks descended on London to take advantage of this new free-market earing approach fundamentally reshaping the outlook of the city that whole process changed people's mentality and people were encouraged to believe that getting rich quickly was good for you and removed any sense of guilt and any sense of responsibility that went with it retail banks became ner active in the mortgage market competing directly with building societies during the 1980s particularly as a result of the so-called Big Bang in 1986 banks began to diversify they began to adopt a much more shareholder value ethos of profitability and this distinction between wholesale banking or investment banking and retail banking gradually became eroded building societies also began to change the way they operated we used to have banks on the one hand and building societies on the other building societies did mortgage business and banks did other forms of consumer credit and typically didn't lend on house purchase we then moved into an arrangement whereby building societies were liberated from the constraints that they had worked under before and were able to extend into consumer credit and subsequently into some forms of business credit and the banks also could compete in the mortgage market so we ended up with a situation where the banks and the building societies were essentially competing in the same area building societies were mutually owned entities until the 1980s and then they were allowed to convert themselves into companies which gave them more flexibility in terms of the way they acquired their funding building societies such as Abbey National and Northern Rock were at the forefront of these changes though many Saudi mutualization and the new focus on profit above all else as dangerous precedents for an awful lot of the last hundred and fifty years mutual organizations worked extremely well they delivered what I said on the tin and I think the death of the mutual movement was to be lamented