SEVERAL YEARS AGO I organised a big international technical conference on behalf of an American professional institution. Their New York HQ instructed me that I should not keep more than $100,000 in any one bank, that being the amount insured by the US Federal Government. I explained that regulations and insurance levels were different in the UK, but that since Bank of Scotland had been around since 1695 it was unlikely to go bust anytime soon. Or so I thought.
As we all now know, in October 2008 Bank of Scotland and its main rival the Royal Bank of Scotland were only a few hours away from unplugging their ATMs. By this time Royal Bank had grown to become the single largest company in the world as measured by asset value; if there was a definition of 'too big to fail' then this was it. And, along the way, they had switched away from so much of what we might think of as normal banking. They much preferred to do high-risk high-return international speculative investing - which is what big international banks do.
The UK Government has since had to put up a staggering £850bn to prop them up. As Scotland's annual GDP is just over £100bn, if an independent Scotland had been required to bail them out we would surely have gone bust.
What a sorry state of affairs we have got ourselves into. After all, here in Scotland we were responsible for key innovations in banking as the modern world developed and we needed them for the normal security of saving and lending of money.
Both Bank of Scotland and the Royal Bank were established around 300 years ago as the modern economy began. Henry Duncan set up the first savings bank in Dumfries in 1810 and this was followed throughout the UK in the 1830s and 1840s by the establishment of the permanent building societies. Scottish innovations in banking include the overdraft, the first retail bank network, ATMs and online banking. We really ought to understand banking. Instead, we have managed to completely lose our banking sector.
So what went wrong? The mutuals stopped concentrating on their members' interests and became fully commercial when they floated in the 1990s and the TSB was taken over by Lloyds. The small banks and former building societies have since been swallowed up by multinationals. The Airdrie Savings Bank seems to be the only institution that hasn't been interested in taking on the world. It has just provided trusted, reliable, banking services to the people of Lanarkshire.
There are some signs of a return to normal banking as the big banks try to reinvent their business model. Two companies I am involved with - one big and one small - are now talking sensibly to their bank about normal commercial lending facilities in a way that we haven't seen for some time.
But do we need to re-invent the banks? Probably.
Martin Wolf of the Financial Times said at a lecture at the David Hume Institute in November: "in recent times the major banks have done a very poor job of providing finance to business - they are not interested in doing it and don't do it very well". He favours the establishment of new banks.
The forced sale of parts of the Lloyds and RBS networks, and the desire of people such as Richard Branson's Virgin group, to enter the banking market should provide the opportunity for new players. The competition will be very welcome.