Banks are scrabbling to find some trust. Robert Mochrie explains how they might look to the distant past.

The nature of banking transactions demonstrates the need for trust between the participants as well as faith in the system.  Our bank notes still “promise to pay the bearer,” even though the linkage of bank notes to gold ended in the currency crisis of 1931. When people deposit money, they believe that the bank will be able to repay them in full at any time in the future.  At an institutional level, trust is also essential. In the run-up to the financial crisis, markets gradually lost trust in the banks which failed. They steadily lost access to sources of finance, first the bond markets, then primary equity markets, and ultimately the overnight inter-bank market.

It would be very easy to add to the screeds written about the origins and the nature of the crisis.  Instead, I’m going to write about developments in retail banking since the financial crisis.  I claim that trust, in banks as organisations, and in the institution of banking, often emerge from ongoing relationships. And I argue that the practice of virtue, and the development of a stronger ethical basis among financial institutions, will foster the emergence of that trust.

“Our bank notes still ‘promise to pay the bearer,’ even though the linkage of bank notes to gold ended in the currency crisis of 1931.”

It is almost a truism that businesses owe their success to meeting the needs of their customers.  And customers want to trust banks because of the nature of financial relationships.  These are powerful reasons for expecting banks to act in ways which engender trust. And in traditional models, banks provide financial intermediation – collecting deposits and lending them out to finance profitable projects – and earn trust by acting efficiently and in customers’ interests.

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