As everyone knows, a number of Western banks have either collapsed, been wholly or partly nationalised, or are still in intensive care. The pumping of trillions of dollars by governments into the ailing #banking system was an attempt to stem the bleeding. But even this mega sum will not be enough to keep the patient healthy in the long term.

Even as I write, there will be politicians, financial experts and business people meeting to discuss this vastly complex subject affecting all of us. However, the bottom line is this: love them or hate them, banks are the beating heart of every economy and cannot be allowed to fail again.

While I sympathise with those on ‘Main Street’ who object to their tax monies going to institutions that they believe triggered the #crisis, there was no alternative. If the #banking system goes down, no-one is immune. Moreover, critics who argue that government intervention contravenes the sacrosanct principles of capitalism are misguided. In an emergency, who stops to think whether or not they should save the occupants of a blazing house?

In my view, the US government should not have stood by as Lehman Brothers went into receivership and Britain should have acted more swiftly to save Northern Rock, which might have staved off ensuing panic.

For some time, I have been mulling over with friends, advisors and colleagues what must be done to restore confidence in banks so that they are once again respected as trustworthy guardians of our wealth. My considered advice follows.

Back to Basics

According to the Cambridge Dictionary, a bank is, “an organisation where people and businesses can invest or borrow money, change it to foreign money, etc. ”Admittedly, that description still covers the core business of many banks, but over the decades banks have become less and less conservative in their dealings. Until recently, they were aggressively marketing loans and credit cards to people who could ill afford repayments as well as using customer’s money to play for high risk stakes.

Some banks have even diversified their scope of business interests to the extent they can hardly be termed ‘banks’ anymore. Perhaps it is time they streamlined their operations and returned to more traditional roles.

Bearing in mind that this turmoil was caused by the sub-prime #crisis, ‘back to basics’ means banks should stick to their former rules of lending whereby loans were issued only to creditworthy customers with appropriate collateral or solid business plans.

Maintaining Liquidity and Capital

Banks must maintain an effective level of liquidity to counter a situation such as the one we are in now where banks are refusing to lend to one another. It would help if governments made their bailouts contingent on normalcy of inter-bank lending.

They should also ensure that they have adequate capital so that they can withstand unforeseen losses without having to take hasty decisions to shore up their capital. To this end, #global #banking regulators should agree on what constitutes, ’Tier 1 Capital’ - a bank’s ability to sustain future losses based on the ratio of its equity capital to its risk-weighted assets.

Resumption of Lending

Banks must not only lend to one another, but also to creditworthy individuals and companies. Economies can only flourish when cash is once again circulating through their veins. For instance, the US auto industry is said to be in trouble because people cannot get loans to buy cars.

Further, banks must ensure that lowered interest rates are trickled down to customers so that they can buy homes and refinance existing mortgages. This is a prerequisite for the return of a healthy housing market.

Oversight and regulation

In every profession there are inefficiencies and a small percentage of rogues. Banking and related fields are no exception. If necessary, laws need to be passed to hold #banking heads accountable for malpractice or dereliction of duty.

Managers of banks requiring government rescue should be replaced as a condition of those bailouts. Bank executives, who succumbed to pressure to outperform their rivals by indulging in risky ventures, should be questioned about their involvement in toxic assets. If they are found guilty of wrongdoing, they must be punished as a deterrent to others.

Regulatory authorities need to be more stringent and should devise clear-cut rules limiting the level of leverage an institution can achieve in relation to its capital. Auditors must be scrupulous, while rating agencies should pay a price for assigning misleadingly high ratings to suspect investments.

My old friend, former US Congressman Paul Findley, believes there has been “a criminal lack of bank regulation” to date, and I fully agree.

Goodbye to the ‘Gravy Train’

Banking bosses and executives have had it too good for too long. They have a right to be justly rewarded for their services to their shareholders and customers, but not to the tune of annual million dollar bonuses and, in some cases, multi-million dollar ‘golden parachutes’.

The sight of CEOs of bankrupt banks walking into the sunset with whopping cash ‘rewards’ is surely obscene when their customers have to struggle just to regain their hard-earned savings.

Other crucial factors

Economic recovery, however, is not entirely in the hands of bankers. Wealthy investors and the managers of sovereign wealth funds, as well as other cash-heavy funds, need to take a deep breath and resume their investment activities. Once smaller investors notice sophisticated investors are back in the game, market confidence will be restored.

Lastly, the media must refrain from its constant drip-drip of financial bad news that is so dangerous it can reverse the fortunes of banks, companies and corporations that are essentially hale and hearty. Most of us support a free media but at a time when #global economies are in dire straits, newspapers and television are morally, if not legally, bound to cooperate with those striving to return them to a stable footing.

There may also be an argument for government reining-in of the media. Alternatively, they should be fined for any unsubstantiated rumours it publishes or broadcasts that have an adverse effect on financial houses or corporations.

Without wishing to be overly dramatic, the prevailing climate is akin to wartime. Lives and livelihoods are at stake. People’s entire futures and fortunes are in the balance. The status quo cannot continue. Change must be effected now. The alternative is a grim legacy of debt and uncertainty for our children and grandchildren. If we do not act wisely, will they ever forgive us? Will we ever forgive ourselves?