It would be highly desirable if bankers did rein in their excesses, of course. In my view, this is best done by the market mechanisms of punishing failure and ensuring the bankruptcy of failed institutions. Some of the reforms proposed in the wake of the crisis will improve matters in this respect, though I am sceptical about many of the measures being proposed by the ICB.

But what about the more general issue: is banking socially useless and should we be rebalancing our economy?

It is, in fact, difficult to imagine a modern economy without a large financial sector. The chattering classes and intellectuals often seem to think that it would be better
if much more of the British workforce were engaged in manufacturing and we had fewer money-men supervising superfluous transactions that have nothing to do with the real business of creating wealth.

But life would be intolerable without banks. Not only
do banks provide mechanisms to ensure that we can pay each other immediately for the goods and services we consume, they also provide crucial economic functions. These include screening risk, diversifying risk, reducing transaction costs and providing capital for businesses and credit for consumers. The flip side is that they also provide safe returns for savers. Without a modern financial system, retirement from work would be more-or-less impossible.

The costs and risks involved in investing, say, £10,000 without banks would be enormous. The lender would have
to seek out potential borrowers. The lender would then
have to check their credit worthiness and the viability of the projects in which they want to invest. All but the very rich would have little chance of diversifying their risk between different borrowers. And, without the mechanisms that banks use to maintain liquidity, lenders would have to wait years to get their money back. With a developed banking sector I only have to find a reliable bank and it will provide all these services. The bank screens the risk, ensures that risk
is effectively diversified, reduces transaction costs and ensures that I can have my money back more or less when I like. There are corresponding benefits for borrowers, of course, who have cheaper and easier access to finance.

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This article originally appeared in the Autumn 2011 edition of Balance, the magazine of the British Bankers' Association