The financial crisis of 2008, the run up to which is now starring on the big screen in Michael Lewis’s The Big Short, highlighted just how dependent we all are on a functioning financial and banking system. Though our economy seems to be recovering from the longest and deepest downturn since the Great Depression, how confident can we be that the necessary changes have been made to the way banks operate? Have we ensured that, when the good times roll anew and the “this time is different” mantra begins to resurface, it doesn’t happen all over again?

This BBC piece provides a good summary of what has changed in the banking world since the crisis. Firstly, there have been reforms to the way in which bonuses are paid – restrictions on the cash element, less immediate access and claw back policies. The fact remains, however, that many bankers enjoy entrepreneurial-grade rewards without the corresponding risks that entrepreneurs face, namely failure, financial loss or bankruptcy. If you knew that taking a risk might secure a reward in the millions yet, if it didn’t come off, you’d still take home a six-figure base salary, it’s difficult to understand how stretching the payment terms of your bonus is really going to cramp your style. Especially if you’re employed by an operation that’s ‘too big to fail’.

Next, the bank levy idea – a 0.088% charge on balance sheets to ensure that the banks contribute something to the havoc they created. Helpful, but that has no effect on the modus operandi of the banks and therefore does nothing to prevent a future crisis.

The Banking Reform Act of 2013, arising from Sir John Vickers’ Independent Commission on Banking, offers more hope. The key part of the Act calls for the ring-fencing of investment banking and retail banking divisions, creating separate legal entities. Losses in one division would not drag down the other. In theory this answers the criticism at the heart of the ‘too big to fail’ idea, that failure of the risk-taking investment banks was shielded by the need to keep retail operations going. Perhaps. But the fact is that the individuals brought in to lead the failing banks post-crisis were all investment bankers. Here’s Alex Brummer, from his book, Bad Banks:

“For many, the problems with investment bankers went beyond their perceived lack of policy skill. Investment banking involves a very particular mindset. It requires people with a gambling edge, prepared to take high risks for potentially high rewards. This in turn creates an aggressively buccaneering culture. The risk-taking, trading nature of investment banking is very different from the steady skills required in retail banks, which take in deposits from customers and make cautious loans after a careful assessment of the risks. The two can sit uncomfortably side by side.”

So despite a theoretical ring-fence, the culture that permeates the large banks post-crisis is unlikely to be skewed toward the staid, stable world of retail banking. And even if a legal ring-fence exists, a key attribute of a bank – the confidence of its customers – is likely to be severely tested if the investment banking division is shown to be acting irresponsibly. Again. This effect is compounded by the extraordinary complexity and opaqueness of modern banking and its products, to the point where it is questionable whether even senior banking management really understand their full product range and the deep details of the balance sheet.  For that reason, I think a formal separation – into different companies – of investment banking and retail banking businesses is warranted.

Then finally we have the overhaul of the regulatory system and the replacement of the Financial Services Authority with three new regulators, the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority. The problem, as Joris Luyendijk describes below, is that the new regulators are still reliant on information fed from the still highly complex banks they seek to watch over:

“Perhaps the most terrifying interview of all the 200 I recorded was with a senior regulator. Ultimately, he explained, regulators – the government agencies that ensure the financial sector is safe and compliant – rely on self-declaration; what is presented by a bank’s internal management. The trouble, he said with a calm smile, is that a bank’s internal management often doesn’t know what’s going on because banks today are so vast and complex. He did not think he had ever been deliberately lied to, although he acknowledged that, obviously, he couldn’t know for sure. “The real threat is not a bank’s management hiding things from us, it’s the management not knowing themselves what the risks are.” – How the Banks Ignored the Lessons of the Crash by Joris Luyendijk.

Capitalism works. In contrast to the failed experiments of communism, it seems to be, to borrow from Churchill, the worst way to run an economy… except for all the others. But a key part of capitalism is failure and the idea that with great reward comes great risk. Pre-crisis banks were structured in a way that didn’t reflect this basic tenet, both at an individual and institutional level. And though, as I’m sure is abundantly clear, I’m not a banking analyst I don’t get the sense that the reforms to the banking system are robust enough. Not robust enough for a few decades’ time when memories of the 2008 crisis are starting to fade and a new generation of bankers who, only vaguely aware of what happened then, decide that the latest boom means it’s different this time and game the system.

It’s been said that part of the scariness of the financial crisis was that the whole world of the City and Wall Street are just too difficult to comprehend for anyone who can’t devote all their time to it. I’ve spent a LOT of time studying equities but I stay away from the banks for the simple reason that I don’t understand them. I don’t feel bad about this. But I have a lot of sympathy for the idea that the complexity of financial institutions and the terminology used to describe them and their products be simplified to make the City more accessible. There is a sea of books on the financial crisis and its aftermath but if I had to pick just four they’d be Too Big To Fail by Andrew Ross Sorkin, The Big Short by Michael Lewis, Robert Peston’s How Do We Fix This Mess and Bad Banks by Alex Brummer. Joris Luyendijk’s How the Banks Ignored the Lessons of the Crash is an excellent long read. I haven’t seen it yet but I thought the impressive Timothy Geithner had an excellent crisis so his Stress Test is on my reading list. And if you want a relatively easy way to keep a weather eye on US and global business and finance, watch CNBC’s US Squawk Box. It’s very good on US politics too.