The financial services industry is as much part of the national infrastructure as the electricity grid or the water supply. And the financial products that individuals and ordinary businesses outside the finance industry use every day – savings accounts, mortgages and credit cards, overdrafts – are provided by this "utility".
The past two decades have seen the emergence of large financial conglomerates. In these, the basic functions of a banking system are combined with institutional gambling for high stakes. Traders take large positions in securities markets and may gain or lose large amounts of money, not just from movements in economic fundamentals, like currencies or interest rates, but from differential movements in the prices of assets. Bonuses, which seem incomprehensibly large to ordinary people, come mostly from sharing the profits from these trades, though also from the chunky fees investment bankers charge corporations for advice.
In 2007-8, most financial conglomerates came unstuck. Problems began with losses on assets based on the securitisation of US mortgages. These created doubts about the financial stability of all institutions that had positions in these markets, which meant the supply of all forms of credit simply dried up. Institutions such as RBS, Citigroup and AIG had to be rescued by taxpayers.
Advocates of reform of the trading system do not propose that the casino should be closed down: only that it should be separated from the utility. Supporters of change don't want to stop trading in complex securities and exotic derivatives – they just want to ensure that the people who do it do it with their own money, or the money of people who have explicitly subscribed for that purpose, and that the cash individuals and businesses deposit at their high street bank is not used to support a gambling habit.
Supporters of change also suspect that the poor service that banks offer has something to do with a basic incompatibility between the service-oriented culture required for customer-oriented retail banking and the buccaneering attitude appropriate to trading. An emphasis on one-off transactions over long-term relationships is the result of the dominance of investment over retail bankers.
The Independent Commission on Banking headed by Sir John Vickers which the coalition Government has established will be told that such a separation between utility and casino can't be done – although it was done in Britain for most of the 20th century. The commission will be told that if banks can't gamble with their customers' money, they won't be able to give competitive rates of interest, or clear cheques for free. The commission will be told that if the City of London can't get its hands on people's savings, it won't be able to compete in global markets. And the commission will be told that problems like the 2007-8 credit crunch will not recur; better risk management and more effective regulatory supervision will keep the pesky traders in check. We'll see if Sir John and his colleagues find these arguments more persuasive than I do.
John Kay is visiting professor of economics at the London School of Economics