Banking can be made honest - but not fail-safe Perhaps you didn't notice, but throughout much of this week the Parliamentary Commission on Banking Standards has been hosting a series of high-powered witnesses - among them the Chancellor, George Osborne, the Governor of the Bank of England, Sir Mervyn King, and his likely successor, the Deputy Governor, Paul Tucker. Much of the discussion was arcane, involving the deeper intricacies of the banking reform agenda. Even for those of us who claim to know about this sort of stuff, it made tedious listening. The temptation to switch channels was at times almost overpowering. Especially when you consider that back in the real world, an extraordinary tale of greed, hubris, and negligent behaviour was unfolding that compares to some of the worst the banking crisis had to offer. If finance has learnt its lesson, it was not apparent from this little escapade. Given what's happened, these are laudable, not to say necessary, goals. But are they realistic, and are governments pursuing them in the right way? At this week's banking standards hearings, there was general agreement that there are no silver bullets, yet that hasn't stopped policymakers attempting to find them. Some of what's being done is relatively uncontentious, even among bankers. Much higher capital requirements for "risky" trading activities, adequate recovery and resolution regimes, bail-in arrangements for senior creditors - no one quarrels too much any longer with these initiatives. Yet most jurisdictions want to go further, by ensuring that trading is legally separated from ordinary banking activities, a recreation in modern form of the old Glass-Steagall arrangements, introduced in the US during the Great Depression, but dismantled in the years leading up to today's banking crisis. Everyone seems to have their own version of this ring-fenced, structural reform. Britain has Vickers, America has the Volcker rule, Brussels has the Liikanen proposals. Not to be outdone, France has its own peculiarly ill-thought-out variant, whereby banks would be banned from proprietary trading but allowed to do market making. There's to be no single market here, it would seem. Unfortunately, lack of unanimity is the least we have to worry about in this rush to separation. Nor is it even that ring-fencing won't in fact bring us any closer to the twin goals of making banks safe to fail and preventing the use of insured deposits for reckless, bonus-inspired gambling. The much bigger concern is that if you effectively ban banks from taking part in capital markets, or at least make it much more difficult and costly to do so, you are depriving industry of a huge potential, and vitally necessary, source of finance. Nowhere is this more apparent than in Europe, where traditional bank finance is shrinking fast because of the financial crisis. To fill this gap, and to provide the credit to fund growth, there needs to be a rapid expansion of capital market activity. The only organisations in a position to provide deep and liquid markets of this sort are, er, banks, or bank-like vehicles. The bottom line is that it is virtually impossible to legislate for completely safe banking. Nor would you really want to. For all the undoubted traumas of the credit cycle, fractional reserve banking has delivered phenomenal economic progress over the past 200 years. To have decent levels of growth, it may be necessary to let finance do roughly what it wants. Make banking more robust by all means, but in the end the sort of relationship banking we all want to see - honest, responsible and with the customers" interests firmly back in the saddle - will come not from lawmakers, but from banks themselves. To judge by the scandal of Autonomy, there's a long way to go.