Leading Article: Banks no longer deserve our trust

ANYBODY who wondered where the money would come from to pay for the clearing banks' disastrous mistakes in the past two decades - the bad loans to Third World governments, the backing for Robert Maxwell, the support for property companies, the abortive adventures in stockbroking - now knows the answer. The banks, already fleecing small businesses, are preparing to soak current account holders by reintroducing charges for services. Thus, ordinary people, who run their personal or business affairs sensibly, will have to pay for the follies of property developers and those who lent to them.

This is the perverse morality of modern British banking. The 'good customer' is one who runs an overdraft or takes out loans, thus allowing the banks to charge exorbitant handling fees or to extract high interest payments. The 'bad customer' is one who keeps his or her account in steady credit, forcing the banks to handle cheques, standing orders and cash withdrawals, free of charge, while earning more modest sums of interest in the money markets. The 'wicked customer' is one who deploys modest resources to maximum personal advantage, withdrawing unused funds to high-interest building society accounts and paying off credit card debts in full at the end of the month. Nowadays, there are far too many customers of this sort around for the banks' liking; their problem is that their customers have become too smart for them.

Yet banks used to stand for something more than money-lending and profit. To many people, they seemed remote and unwelcoming, their managers severe and authoritarian. Typically, Captain Mainwaring in Dad's Army was a bank manager. (Some banks are clearly still worried about this image and run advertising campaigns to prove that their employees enjoy cycling or playing football with children, just like anybody else.) In many respects, they provided a limited service, but it was reliable and it was trusted. Captain Mainwaring may have been an irritating old fusspot, but he tried tirelessly to do his duty. If a bank was asked to transfer money to another account, for example, it did it. Customers regarded a bank manager's advice as impartial and, usually, they heeded it.

Now, banks neither provide service nor earn trust. True, they open for longer hours and we do not have to queue quite so long to withdraw money. But the annually rising number of complaints to the Banking Ombudsman suggests that service is deteriorating. Charges are arbitrary and mysterious: banks alone can take people's money away without billing them, yet they frequently refuse to itemise how charges are calculated. Customers pay improbable sums - as much as pounds 20 in some cases - for the privilege of receiving a single letter warning that they have gone into the red. An investigation last year by Sir Gordon Borrie, Director-General of Fair Trading, concluded that banks were often 'insensitive and high-handed' in their relations with small businesses.

Yet the banks talk more than ever about their 'services'. These are not, however, 'services' that customers want but 'services' banks are determined to sell, regardless of whether anybody needs them. Branch managers have become marketing men. They are given head office quotas for selling life insurance policies and making personal loans. Customers are bombarded with postal invitations to join new schemes for borrowing money, even with shrill requests from 'personal banking suites' to attend upon the branch so that the benefits of some new 'service' may be explained to them. No longer do managers offer impartial advice about the best pension plan or insurance scheme; they are required to sell their own, and sell it hard. They are no more likely to offer trustworthy financial advice than the travelling encyclopedia salesman is to offer trustworthy educational advice.

The banks have proved to be ill-equipped, at all levels, to support the diversification of their financial activities. They remain bureaucratic, hierarchical institutions, bastions of traditional English amateurism, bound by rule books and fixed promotion ladders, like the Civil Service. Many top managers are poorly trained in skills such as cash-flow analysis; they learned banking largely 'on the job' and rose on the 'Buggins's turn' principle. Enterprise and flair are rarely rewarded. Equally, incompetence is rarely punished. Several bank chairmen have freely admitted that nobody has been sacked or even demoted for the lending errors of the 1980s. The mistakes, they said, were made collectively, by committee, making it impossible to single out individuals. As Keynes observed, the sound banker is one who, 'when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him'.

A decade or so ago, none of this mattered greatly. The British never enjoyed the most dynamic banks in the world, but at least they were stable and trustworthy. The Thatcherite mania for deregulation, which allowed banks, building societies and the rest to compete as providers of financial services, changed all that. Now we have the worst of all worlds. It is a lesson that governments should heed: shaking up old, hidebound institutions may seem a good thing, but they do not always change for the better.