Bonus-chasing bankers and the failure of the supervisory system are to blame for the meltdown of the financial system, the Treasury Select Committee has said.
The committee, chaired by MP John McFall, has concluded that a combination of a risk-taking culture, low interest rates, extremely poor supervision and a lack of understanding of the complex products switching hands for large sums of money led to “an astonishing mess of the financial system”.
It also claims that UK banks - including HBOS and Royal Bank of Scotland - have been "the principal authors of their own demise". In RBS’ case, the ill-fated acquisition of ABN Amro proved “how reckless RBS's growth had become and how it had overreached itself.”
HBOS’ problems, the committee says, stemmed from liquidity issues and a lack of discipline over capital resulting from the management of the bank rather than the deteriorating economic conditions.
"Rather more emphasis was placed in HBOS's evidence to us on the catastrophic global context of recent events than on a genuine recognition that responsibility for the company's plight lay with the board and the board alone," the committee's report states.
McFall adds: “We have experienced a comprehensive failure of the banking system at all levels.
"The banks have failed to govern themselves effectively; senior managers failed to understand the investments being made in their name; risk management and due diligence were seemingly ignored; and the non-executive directors, often eminent and hugely experienced individuals, failed in the proper scrutiny of the banks' activities.”
However, government and politicians, as well as central banks, also came into the firing line for "sustaining the illusion that banking growth and profitability would continue".
Since the start of the financial crisis, the downfall of Northern Rock and Bradford & Bingley has left many shareholders heavily out of pocket and produced widespread panic among account holders.
Royal Bank of Scotland and Lloyds have swallowed billions of taxpayer money since last October as the credit market froze over, confidence crumbled and investors bailed.
In its second report into the banking crisis, the cross-party committee supported the government’s decision to take stakes in some of the struggling banks, claiming more banks would have failed without state help.
However, it warns that “the unavoidable speed of implementation meant that the implications for both banks and government were neither fully understood nor worked out.”
It also raises concerns over the government’s Asset Protection Scheme; as well as the potential cost to the taxpayer, it remains concerned about the haziness surrounding its actual purpose as a precursor or as an alternative to a bad bank. Lloyds and RBS have already signed up to the scheme to insure £500 billion worth of toxic assets.
In a series of recommendations, the committee calls for more regulation to protect depositors including separate banking licenses for each of the brand names a bank owns, and more debate on proposals backed by Bank of England governor Mervyn King to separate retail banking from riskier investment banking.
UKFI, the body set up to monitor the government’s stakes in the banks, also came in for heavy criticism for being “enigmatic” with questions also raised about its ties to the Treasury.
“Given the importance of the task entrusted to it and the vast sums of public money involved, we need reassuring, not only of its independence, but also that there are adequate mechanisms in place to make it properly accountable to Parliament and the public," McFall says.
The effects of the crisis will leave a deep mark for years to come, with public confidence in the banking system shattered by the greed and mismanagement exposed by the crisis, the report concludes.
"The repercussions of this banking crisis are being felt, and will continue to be felt, by ordinary people for many generations," McFall says. "Looking to the future, the rebuilding of consumer trust is key.
However, the report has come under criticism from both the Liberal Democrats and the banking industry.
Vince Cable, spokesman for the Liberal Democrat party, says: "This is a disappointingly weak report. It fails to meet the previous standards of tough criticism advanced by the select committee when interrogating the bankers."
And Angela Knight, chief executive of the British Bankers' Association, adds: "If we simply continue to blame the industry for all of the problems of the economy in the UK it will do little to help us out of the recession and will further damage the UK as an international financial centre."