We need strong banks with good balance sheets By borrowing more we brought forward demand, raised asset prices and felt wealthier. In 1980, UK clearing banks had financial assets totalling around 100pc of Britain's GDP at the time. By the end of 2007, this figure represented more than 500pc of GDP. The banking system was a house of cards. Over the past five years, there's been so much talk about sorting out the banks - and so much hardship arising from the crisis - that it would be natural to assume that the problems have been resolved and couldn't happen again. There's certainly been progress on several fronts, but the underlying causes have not really been addressed. Looking across the actions taken, there's no doubt that banking regulation has been tightened up and supervision improved. Much of the regulators" emphasis has been on making individual senior bankers more accountable for their actions. This theme runs through the third report from the Parliamentary Commission on Banking Standards (PCBS), published in June, entitled Changing Banking for Good. Given that banks lend more than they have, trust is an essential ingredient of a healthy banking sector. Restoring that trust is proving difficult given the series of revelations of past misdemeanours - Libor fixing, PPI mis-selling and most recently the hiding of losses in the "London Whale" scandal. Punishing for the sins of the past is important, but it does not in itself ensure a more positive future. Trust still needs to be earned - and only the bankers themselves can achieve that. To date, the industry hasn't set out a radical vision for itself that includes a redefined, even a noble purpose in society and a radical re-think of the balance it strikes between risk and reward. Instead, there's a tendency to defend the business model of the past and to react to regulatory demands rather than be proactive. It would be great to see a key industry figure set out an ambitious and compelling vision of the future that could help attract into banking top young talent motivated to do good as well as make money. A summer intern asked me on his first day at Newton whether I thought it was possible to be moral and work in the City - a shocking but genuine question. The regulators have also been demanding that the banks raise more equity to improve their leverage ratios. Leverage ratios are a blunt measure: they do not indicate the riskiness of the banks" loans, but they do give an indication of relative leverage and changes in leverage over time. In June, the Prudential Regulatory Authority - part of the Bank of England - set a leverage ratio of 3pc for UK banks, limiting their financial asset exposure to 33 times equity. US regulators have gone further by setting minimum leverage ratios of 5pc. The 3pc requirement here is an improvement on the pre-crisis situation, but is still extreme relative both to longer term history and any other industry. Even hedge funds, often considered risky, are on average just 2.5 times levered. The hedge fund manager Sir Michael Hintze suggests that "if they're mad, [they're leveraged] five times, if they're insane, 10 times." The PCBS's June report expresses disquiet about the 33 times level set for banks. The commission "considers that the 3pc minimum leverage ratio is too low" and notes "that the Chancellor's explanation regarding the Government's rejection of a higher leverage ratio relied on allegedly 'compelling" representations to the Treasury that a higher ratio would cause unintended damage; the commission is not persuaded." Banks insist that they need to operate with relatively high leverage to keep the stream of credit to the economy. In fact, of course, there is no reason why a bank with much more equity couldn't provide just as many loans as a highly geared one - it's just that bankers are judged and remunerated on their return on that equity, which would then be lower. The myth, perpetuated by the bankers, that high leverage is good for the economy has not been sufficiently challenged by the Government. The PCBS's earlier recommendation of an "electric fence" between retail banking and more risky investment banking was similarly weakened to the point that Andrew Tyrie, the chairman of the commission, told the House of Commons that "the Government's amendments render the specific power of electrification virtually useless." These are telling signs that the banking lobby is standing in the way of real reform. A more radical reset of equity levels - say to the point where banks have financial assets of no more than eight to 10 times their own funds (a level that would have probably prevented or at least withstood the stresses of 2008) - would certainly present practical challenges. Banks would need to raise hundreds of billions of pounds of equity or dramatically reduce the size of their balance sheets - both daunting, quite possibly unrealistic immediate prospects. At the moment, however, the objective to improve is not nearly sufficient. At the very least, these organisations should not pay out dividends until their balance sheets are much, much stronger. The past five years have demonstrated that too much risk in banking can have dire consequences for all of us. We need strong banks with good cultures and a business model that is safe. Small steps in the right direction to date mean we are a long way from that state. More ambitious reform is needed before it is too late. Helena Morrissey is chief executive of Newton Investment Management