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Page last updated at 08:45 GMT, Wednesday, 7 September 2011 09:45 UK

Banks 'must have public trust'

The Vickers Report on bank regulation is about to be published, and the chancellor is facing pressure from the City to put some of its proposals on hold amid fears that they would inhibit progress towards recovery.

But what does the City think is the best way to encourage growth, and turn the gloomy tide?

Conservative MP Matthew Hancock, George Osborne's former chief of staff, is the co-author, with Nadhim Zahawi MP, of a book called "Masters of Nothing". It argues for radical city reform and says that the financial crisis was brought on by "greed, recklessness and irrationality".

He told Today programme presenter James Naughtie that although he considers himself "a friend of capitalism", he believes the City needs to change tack.

"Economic behaviour is underpinned by human behaviour, and often that isn't rational", he explained. "We've run the economy on the assumption that everyone's rational all of the time. They're not."

Moving on to the way the City is governed, Mr Hancock asserted that "the system needs to be more commanding on the big picture, but also needs to remove a lot of the detailed rules".

Citing the example of RBS, "the biggest banking failure in the world ever", he continued: "It followed all of the rules to the letter, but it entirely failed to follow the spirit of sustainable and reasonable banking and therefore it grew far too large."

Lord Levene, the outgoing chairman of Lloyd's Insurance, emphasised his track record at the company.

"We put into effect something called a franchise system, which was a type of self-regulation, by the market, not by the government... Eventually we got into a position where the market was in very good shape."

Agreeing with Matthew Hancock, he admitted: "There is an issue about behaviour, you've got to get away from greed and recklessness."

Returning to his experience at Lloyds, Lord Levene described it as "the RBS of the day... it had lost people a huge amount of money, there were others who had walked away with a huge amount of money. It was wrong."

"The only way to get around that was to tackle it head on, and to come up with a system which would stop that happening again."

Asked whether the banks had got this message, he replied: "I'm not suggesting that they have... the jury's still out."

Lord Levene concluded that "the banks are a very important part of the economy, and if they don't have the trust of the public it's not going to work".

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