It is increasingly evident that the world needs a new banking system and that it should not bear much resemblance to the one that has failed so spectacularly. Standalone retail banks, which would do business only with people and small businesses, should be at the heart of the new system. Corporate and investment banking, which have brought us billions of pounds in toxic debt and trillions in banking bailouts, should be a separate sector.

The case for the focused retail bank has never been more evident. Trust in banks is at an all-time low and the last thing that consumers want is to hear that their savings are being used for activities such as commercial property lending or high-risk securities trading. These retail banks would protect people’s savings and help consumers to achieve their aspirations by smoothing out the ups and downs of cashflows throughout their lives.

The case for having separate retail banks starts with the fact that consumers and small enterprises have different needs from those of corporations. The standalone retail bank would focus solely on serving customers’ needs. It would be easy to manage and would not give regulators too many headaches.

The International Retail Banking Council is meeting in Brussels in May to discuss how to bring the standalone retail bank to fruition.

In rebuilding banking, we must recognise that banks as we know them are deeply flawed. Their strength lies almost invariably in retail banking, but more often than not this business has been hijacked to further the personal aims of corporate and investment bankers.

Retail banking activities have long accounted for most of the profit of most of the banks, yet retail banking management has generally been taken for granted within the power structures of banks. Rarely have retail bankers become chief executives; banks’ executive boards have long been dominated by wholesale bankers. Despite all this, retail banking is the only mainstream part of banking that seems to have a viable long-term future. Corporate banking profitability seems doubtful and investment banking is more renowned for serving the needs of bankers than shareholders.

Would all this be a banking revolution? No, because today’s unmanageable universal bank is a relatively new phenomenon. It was only in the 1980s that banks in the United States and elsewhere began to organise themselves around broad customer groups, in the process creating retail and corporate business units.

Before this, banks thought of themselves as being in one line of business – banking – whose function was to channel the savings of households and other depositors into industrial companies. The case for separating what used to be called commercial banking from investment banking and insurance was recognised in the US during the Great Depression in the Glass-Steagall Act of 1933, which limited banks to retail activities and making working capital loans to companies.

Broadly, this remained the world order until the late 1990s, with the ill-fated merger of Citibank and the Travelers insurance and investment banking group. Glass-Steagall was repealed soon afterwards. Citigroup, as the merged business was called, has emphasised why Glass-Steagall was necessary in the first place.

So politicians and regulators may come to realise that far too much attention has been given to salvaging the failed universal bank model and not enough to finding a better retail banking model for the future. That model should be the standalone and highly disciplined retail bank. It could be a private company or quoted on the stock market, or it could be based on the building society model or some new form of mutual. By definition, it should not be owned by a bank holding company within a group that includes corporate and investment banks, because in this new system there would be no so-called synergies between different types of banking activity.

— Michael Lafferty is chairman of the International Retail Banking Council and chairman of Lafferty Group, which provides research and advisory services to retail banks.

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