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'How do we fix this mess?' Archbishop Justin on restoring trust and confidence after the crash

Archbishop Justin in Westminster last night. Photograph: Clare Kendall/Bible Society

Tuesday 23rd April 2013

Britain is not in a recession but in "some kind of depression" which will require "something very, very major to get us out of," the Archbishop of Canterbury said last night

Culture change in financial services will not be achieved by "light touch" or "heavy touch" regulation, Archbishop Justin said at a Westminster discussion organised by the Bible Society. 

Instead the banking sector must adopt "an aim of service to society and not mere rent-seeking, and a culture of virtue based in the realities of daily life and not a fantasy nirvana," he said.

Describing what this change of culture might look like, the Archbishop said it would require "a ruthless honesty and a deep willingness to be made very uncomfortable indeed through listening to things one does not want to hear".

"The creation of virtue is community based. We correct each other but good culture and virtuous cultures only develop in communities of trust," he added.

Regional banks

The Archbishop warned that the breakdown in confidence caused by the financial crisis may take a generation to rebuild.

"Economic crises are a major problem when they are severe. When they are accompanied by a financial crisis and a breakdown in confidence then they become a generational problem," he said.

He continued: "Historically, the great failures in banking have led to very, very long periods of recession at best. I would argue that what we are in at the moment is not a recession but essentially some kind of depression. It therefore takes something very, very major to get us out of it in the same way as it took something very major to get us into it."

Problems were created when banks became distant from the communities they served, the Archbishop said. "At least part of the banking system should be local".
 He added that the simplest solution to recreate a local banking system was "recapitalising at least one of our major banks and breaking it up into regional banks".

Speaking later during a panel discussion which included BBC business editor Robert Peston, Lord Myners and Virgin Money chief executive Jayne-Anne Gadhia, the Archbishop praised credit unions and their role in deprived areas, but said banks should do more to support these communities.

"The big problem we've got is that in the end the banks will not make money in some of the more deprived areas," he said.

"Either they have to be compelled to go there or they should be warmly and compellingly encouraged to help other people bank those areas, because efficient banking in those areas is the only way in which those areas have a chance of regeneration."

Listen to the full speech here


Read an edited transcript of the speech below:


'How do we fix this mess? Longterm solutions to the financial crisis'

The Archbishop of Canterbury, Justin Welby
Westminster, Monday 21 April 2013


I want to make the normal two caveats. One is that what I’m essentially doing is a think piece. It may not even be my final thinking. I’m not sure if I represent anyone this evening – even myself. I certainly am not giving the official position of the Church of England or the Banking Standards Commission. I just want to be clear about that.

The question I was given is: ‘How do we fix this mess? Long term solutions to the financial crisis’. That implies that there’s a ‘We’ somewhere, who can fix the mess.  I don’t believe that’s the case for starters. I think it’s a very much more complicated process than that. If there was someone who knew how to fix it, they certainly wouldn’t be in this room. They’d be on their yacht or island, and at the top of the Rich List.

The mess I want to suggest is essentially one of confidence, much more than of the mechanics of the markets. The symptoms in the markets have been those of a failure of confidence.  

Historically, as probably most of you know better than I do, economic crises are a major problem when they’re severe. When they are accompanied by a financial crisis and a breakdown in confidence, then they become a generational problem. Historically the great failures in banking have led to very, very long periods of recession at best.

I would argue that what we’re in at the moment is not a recession but essentially some kind of depression. It therefore takes something very, very major to get us out of it – in the same way as it took something very major to get us into it.

Building confidence is essentially – I’m also going to argue – an ethically-based activity, and I want to pick three aspects of it.  

The first of them is going to be qualities – the qualities of banking. Experience of the last, almost a year now, on the Parliamentary Banking Standards Commission, which I’ll just call the Commission, ruins many of one’s illusions. One of the key points of disappointment is that bankers aren’t nearly as bad as one hoped they would be. They don’t come in with horns and a tail, burning £50 notes to light large cigars, and involved in casino banking in arcane and complex structured projects – so much as coming in and having to admit or showing that what they’d done was the slightly unsophisticated error.  

I’m not talking about all of the banks – I say to the Chairman of HSBC who’s sitting a few feet from me – but what they did, essentially in many cases, was to borrow short and lend long.  One classic error.  And secondly, they lent very, very large amounts of money to people who couldn’t pay them back.

Those two errors are quite sufficient to bankrupt any bank. They are not sophisticated errors; they are the reality. The largest bankruptcy of a bank in the UK, or it was rescued in the end, was HBOS, which lost more than 10% of its total loan portfolio and more than 30% of its portfolio in Australia. That simply is going to bring anyone down. You can’t help it. It will destroy you.

Banking is highly complex in management terms. Thus, the first thing that needs to happen to restore confidence is to begin a move that will take a generation or more to complete, towards professional standards in banking. We cannot go on with banking being essentially something that people drift into in the way that I drifted into being a group treasurer.  

I was one of the very few innumerate group treasurers in the top 100 companies in the UK. In fact I was the only one I ever met. It created employment: there was an accountant especially assigned to check every number I ever spouted – and he was needed. He was also my successor.  

The creation of a profession means the establishment of sets of standards and disciplines covering the different aspects of banking. There are 37 royal colleges in the medical world, and so the fact that there are loads of different banking disciplines doesn’t mean you can’t do it. It just means it will take a long time to establish in the way it does in the medical world.  And in the way that it changes.

The point of a professional body is that it changes expectations and encourages not only high standards of professional knowledge, but also carries within it a sense of virtue, of what it is to be good at what you’re doing – both in practice and in character.  

I spent some years at one point as chairman or a director of an NHS general hospital trust. One of the fascinating things about medicine is not merely that it’s to some degree self-regulating – although there is a very heavy degree of external oversight. It’s the fact that the vast majority of doctors correct each other and talk to each other about how to improve what they do. There is a culture which helps improvement of standards.

In addition, in the qualities that we need to require of a banking system that inspires confidence is the obvious and ancient virtue of transparency. The Governor of the Bank of England, in his evidence to the Commission, commented that “a high proportion of bad loans in some of our major banks have not yet been recognised”.  We’ve all heard of the problem of zombie companies, and there is a significant suspicion that we have some essentially zombie banks.

It took Japan 10 years to work out that if they were going to begin to get confidence back, they had to recapitalise the banking system. Balance sheets that are not transparent, that do not acknowledge the full level of potential loan losses, are not only bad in themselves – but create a sense of fear and overhang in the market.  

At the moment, British companies are holding more cash, both in absolute terms and as a proportion of GDP, than they have ever done in history. That fact simply points to a lack of confidence. It has an ethical and social impact of a profound level – in the sense that the budget last year, if you read the Red Book, essentially looked forward for recovery to exports and investment. If companies are hoarding cash at an extraordinary rate, exports and investment are going to be restrained, to put it mildly.  

Transparency means knowledge, and knowledge brings confidence. I would suggest as a practical measure that we need to start moving towards the establishment – as other countries have done – of a ‘bad bank, good bank’ system, in order to enable recapitalisation and clarity of value. I might add that as far as one can see, this is a European scale problem, particularly affecting some of the provincial banks in other countries in Europe. The threat to confidence coming from Eurozone banking will need much more drastic action than we’ve seen to date.

To step up a gear from the qualities of the banks, the second area I want to refer to is a revolution in aims of the banks. Banks exist to serve the society they are in, like all other companies. From an ethical point of view, a company is a group of people who come together in order to be profitable.  But in being profitable, to promote the flourishing of the society in which they exist, they are not self-regarding things to maximise the returns only for their shareholders – unless you take stakeholder in an absurdly wide sense. They exist for the benefit of the whole of society. You’ll find that point argued in Centesimus Annus, one of John Paul II’s remarkable encyclicals.  

The distance from where a bank is based, to where it is lending and operating, lends ignorance to credit scoring and is repaid with economic lethargy. One of the great dangers in the present mess is that we retain an extraordinarily, even now more concentrated banking industry. Which remains incapable of localisation.  

We need flexible regulation for new entrants such as Virgin Money; vigorous competition; clear specialisation geographically, as well as by product; and regulation that differentiates between a North East bank funding SMEs and local trade, and a large multinational full service bank. There is a danger that we end up with the most cautious view of all of them.  

I am concerned that our new regulatory system might, in reaction to what happened in the last decade, become so risk averse that new banks cannot grow and local needs cannot be met. In one of his bits of evidence to the Commission, Andy Haldane at the Bank of England showed that once banks get above about £100bn of balance sheet, there are few, if any, further economies of scale.  

The other thing that seems fairly obvious from the evidence that we heard, and this isn’t a Commission view it’s my own,  is that basically as a bank you can be big and simple, or small and complicated, and do well. But if you get big and complicated, you become unmanageable.  

The aim of banking must be human flourishing; profitability and good working are a means to that end. Distance makes focus on communities come down to giving money or time (social responsibility), rather than a broad sense of promoting the wellbeing of a region of which one is an integral part. That is one of the tragedies of the failure of Northern Rock.  

So both the issues of efficiency and of responsibility lead to the conclusion for me that at least part of the banking system should be local, not London-based, and have its root in its own community at a size where it has efficiencies of scale but is manageable.  

In simple terms, we need to recreate the local. And the easiest way to do that, as well as bringing new entrants in, is to kill two birds with one stone by recapitalising at least one of our major banks and breaking it up into regional banks. This would also have a major impact on remuneration – an area which is essential but which I do not have time to look at this evening.  

The third area I want to mention – after the quality of the bank and the aims of banking – is the most difficult: that is cultures and standards or virtues. Basically, it’s a longstanding premise of Christian belief that rules don’t work. They don’t make things work well and, if the system is shot, they don’t stop things going wrong.

This present mess is one where diagnosis of our disease is frequent and appears easy. Everyone says to us: “The culture’s not very good, you know.” And we nod knowledgably and write it down. But the cure is seldom proposed and even more rarely successful. It is also the area where hypocrisy, including my own, flourishes. It is easy to listen to evidence or read stories on a BBC blog and mutter “disgraceful” in a pompous manner. But my own experience is that culture is easily degraded and far less easily taught to be good.

I keep looking and listening. As I’ve listened to hours and hours, weeks and weeks of evidence over the last 10 months, I’ve asked myself if I would have been any different. What that says to me is that culture is not something that we can look at from outside and say: “We can easily beat that” or “There is a simple answer”. It requires a deep change in the overall environment in which good culture is being created.  

I also look at my own institution and ask myself what I am not seeing – in the way that many of those who gave evidence said that they had not seen problems in their own institutions and we tut-tutted reprovingly.  

Good culture requires a ruthless honesty and a deep willingness to be made very uncomfortable indeed, through listening to things one does not want to hear. The creation of virtue is community based. We correct each other. But good culture and virtuous cultures only develop in communities of trust.  

One of the two most enjoyable times of my working life was when I was at Enterprise Oil as group treasurer. One of the reasons for that is there was an extremely good team that was rigorous in correcting each other. The result was that we were willing to challenge and, as a result of that, we grew a better culture. We managed to replicate that a few years ago when I was working in Liverpool at Liverpool Cathedral. Again, there was a team, a very diverse team, that was rigorous in correction, not bound by hierarchy. Fortunately, of course, I work for an organisation now that has no sense of hierarchy.

In Christian history, where we go back to the monasteries as those great models at their best of virtuous communities, we find something similar.  

Benedict in the early 6th Century, at the time of the fall of the Western empire, when every good thing in the world seemed to be vanishing – a far harder situation than today – knew that through people knowing the love of Christ and finding it in daily experience, and sharing that love with one another, communities of love and security could be created. The ones he created saved civilisation and changed Europe.

What does that mean in a world of business and competition?  It means that companies should be communities of common interest which serve the common good. For that to happen there needs to be a store of value in them: a sense of what is right that is independent of our individual achievement; compassionate in its acceptance of us; empowering in its interaction with us; and all knowing in its assessment of us.

My own experience over the years in religious and non-religious institutions is to affirm my deep sense of belief, despite ups and downs – my own particularly –  that we find that only in the person of Jesus Christ and in knowing and loving him. In the same way as a true Christian community is recognisable on sight, even to many nonbelievers, so trust and confidence can be sensed and recreated. They have been lost and there needs to be drastic action that may to some extent be symbolic to get them back.  

We will not do it either by relying on light touch regulation or heavy touch regulation, but by competence. By an aim of service to society and not mere rent-seeking, and a culture of virtue based in the realities of daily life and not a fantasy nirvana of perfection.  

Thank you very much.


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