Financial mathematics.

In the beginning, there was the Bank of Scotland, the Halifax Building Society, Lloyds Bank and the Trustee Savings Bank (wikipedia links). In 1994 Lloyds took over the TSB, and in 2001 the Bank of Scotland took over the Halifax. Now, all four are one megabank.

Both these original mergers saw high street banks take over organisations which had begun as very different beasts, operating on less purely commercial lines.

155 years ago, the Halifax began as an extremely prudent building society, operating "for the mutual benefit of local working people". In the mid-90s the lure of unsustainable profits proved too much for the Halifax, and £19bn of wisely-saved assets were just given away during the demutualisation.

This was the beginning of the end of Halifax, and just four years after it was floated on the stock exchange, it was swallowed up by the Bank of Scotland. I know it's unfashionable in Scotland to care about what happens south of the border, but at the time it was clear that the town of Halifax had lost a substantial asset, as had the working people who were the original intended beneficiaries.

The TSB, for its part, was an aggregation of small savings banks, run by trustees along "democratic and philanthropic guidelines". By 1970 there were 75 such banks, holding the then substantial sum of £2.8bn in assets. In 1984 they were united by legislation, and the TSB became virtually indistinguishable from the other high street banks.

It took just eleven more years for this new more commercial entity to be swallowed by Lloyds Bank, although in this case a small element of the philanthropic guidelines were retained, as 1% of pre-tax profits still go to charity.

In both these cases, creative and prudent Victorian financial structures were gradually stripped of their purpose and their capital. Private and secure institutions floated on the stock market as the short-term gains from speculation, massively leveraged loans and exotic derivatives grew more appealing.

The depositor was essentially forgotten, and these banks competed to throw more and more money they didn't have at the mortgage sector, before trading these worthless debts as if they were actual assets.

Looking at the latest merger, it's dependence on exactly this money-go-round which caused the collapse of HBOS. Lloyds was a suitable buyer precisely because it had retained far more prudent approach to the secondary markets.

Personally, I am convinced that there are clear models we should pursue if we want to see a sustainable future for financial services. First, there are still building societies. The Nationwide in England may be the largest UK-wide, with £159bn of assets, but we have our own mutual stars like the Dunfermline Building Society. There's definitely room for more.

Second, there are banks we will surely never see a run on, prudent organisations which invest in society and which rely on deposits, not inter-bank lending. The Cooperative Bank and Triodos are the two most obvious examples. The Royal Bank of Scotland would be well advised to get on board with this more sustainable model as quickly as possible (and, while we're on the subject, to reject schemes like Sakhalin 2), although I know it'd take a massive amount of work to do so.

Thirdly, we are seeing a small rise in the role of credit unions, which operate in line with many of the original social objectives of the building society movement.

In the longer term, if we have institutions which are based on this limited element of Victorian values, we will be able to weather these storms. They're traditional Scottish principles, too, as Patrick pointed out at First Minister's Questions today. Thrift, self-reliance, sustainability, and even prudence. We'll be lost without them.

Update: here's what that ??? should look like.

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