• First, it will increase the array of resolution options available to the authorities in the event of crisis, creating at least the possibility that we may choose to rescue the ring-fenced entity while allowing non ring-fenced entities to fail. That possibility will in itself reintroduce market discipline into a system characterised by too-big-to-fail assumptions; which in turn will help constrain the unnecessary proliferation of complex structuring and trading activities, reinforcing the impact of higher capital requirements.
• Second, it will give us the option – provided the vast majority of SME lending is conducted within the ring-fence – of applying macro-prudential policy levers at the ring-fenced level instead of or as well at group level. That will create a tighter link between macro-prudential levers and the dynamics of credit supply in the real economy, and increase the likelihood that we could limit the impact of booms and busts in commercial  bank lending.
• Third, but perhaps this will turn out to be most important, it will give banking groups the opportunity to build institutions very explicitly focused on the excellent provision of essential banking services to households and SMEs, institutions which – provided banks grasp the opportunity – could play a major role in rebuilding customer trust.

Better, more intense and more robust conduct supervision and enforcement, but recognising also their limitations:  On the prudential side, more effective rules need to be supported by a new more effective supervisory approach; and the FSA has been putting that in place since 2008. On the conduct side the changes which the FSA has begun to make are equally important... Alongside more intense and better focused supervision, robust after-the-event enforcement action and sanction will have to remain a key regulatory tool. 

Action by the leadership of banks to improve culture and values – a difficult area but a vital one: Banks are only likely to earn the trust of customers and the respect of society at large if from the very top there is a clear message that there are many things which may be profitable, which may be within the legal rules, and which neither the customer nor the supervisor will necessarily ever spot, but which go against firm values and which the bank therefore will not do. There is no value in beating about the bush. Unless management and boards themselves shift the tone from the top in such specific ways, and in addition make effective controls against dishonest behaviour the highest priority throughout the organisation, then we are not going to change the external perception of bankers.

And finally, some recognition by regulators, politicians, consumer groups and the general public of the complexity of the challenge and the constraints which banks face: Much of the responsibility for restoring public trust in banking therefore lies not with the regulators but with the leadership of banks. But the challenge may prove an impossible one unless regulators, politicians, consumer groups and society at large are in turn willing to recognise the many good things that banks already do, recognise the constraints under which banks operate and honestly debate a crucial trade-off.

We need to recognise a central problem in UK retail banking – the impact on competition of free-if-in-credit banking. One reason many people don’t like banks is that in the short term customers are locked in, and in the medium term competitive choice appears muted. So we need to facilitate new market entry into retail banking. But that is continuing to prove difficult. Some say that the FSA’s rules and approval processes are an impediment: I don’t believe that is the case, and we have taken several steps to ensure it is not. But one important barrier to competitive entry into UK personal sector banking is obvious – the fact that the core product, the current account, is usually given away for free, sold at below cost of production. Which means that it may be difficult for a new entrant to make a business plan stack up unless they assume the sale in some future year of high margin ancillary products – products which if we are not careful may be for both the incumbents and the new entrants, the next PPI.

UK personal sector banking has for years achieved reasonable overall profitability on the basis of large cross-subsidies between different customer segments: many who stay in credit get a good deal, subsidised by others who pay though, for instance, unauthorised overdraft charges and PPI insurance premiums. It is not a sound basis for a long-term trust-based relationship between a competitive banking system and its customers. But if the industry is ever to move away from this model onto a sounder base, it will only be able to do so if confident that at least some regulators, politicians and consumer groups will admit the case for doing so, rather than accuse them of profiteering.

The last three weeks have been very bad for the reputation of British banking. Rebuilding trust will be a huge challenge. Some of that challenge falls to regulatory authorities – we made big mistakes before the crisis. Much falls to the leadership of banks themselves. But it is a challenge that must be met, given the vital role which the banking industry plays in our market economy.