“We need a plan for change. A plan to reform the banks, invest in the industries of the future and support the small businesses and entrepreneurs who can be the lifeblood of our economy.”

With these words from our new leader yesterday still fresh in our minds, we need to get on and develop a plan to reform the banks.

Labour’s approach towards the banking sector will define the nature of our whole economic policy. We can repeat as many radical mantras as we like, but they will sound hollow if we remain conservative in our approach towards banks.

It might help to know where I’m coming from on this. When I go back to the office on Friday, my computer screens will as usual be showing well over a hundred share prices flickering away, as well as the current market interest rates on bonds and various commodity prices. I am a fund manager. A rare breed in the Labour Party. I manage money for the Methodist Church; an even rarer breed. You will not be surprised therefore to hear that I am generally in favour of financial markets – but I am also highly sceptical about what I hear from banks. And I want to say too that being radical is not the same thing as being wacky.

There are first of all two points to bear in mind when discussing economic policy. The first is the reason why we are discussing it at all. Most of us didn’t come into politics to debate the finer details of bank tier one ratios; or the marginal efficiency of capital curve – essential or even to some enjoyable though these subjects may be. We are in politics driven by our Labour values. That starts with the principle that each person is of equal worth; and they must have equal opportunities. It continues with a concern for social justice and a ‘bias to the poor’.

That leads to the second point to bear in mind – power. Governments do not have a monopoly of power. Power is to be found elsewhere too. For example, the prevailing ‘conventional wisdom’ traps us in prisons of our own making unable to think afresh. Or the power of bond market investors- able to bring down governments on a whim.

Or the power of banks. The power that means they can demand the biggest industry bailout in history. The power that means they can prevent governments from bailing out anyone else and can refuse to reform themselves.

Three years ago, Northern Rock had to be bailed out. Two years’ ago, we faced financial meltdown: Lehman Brothers went under in the US and for a scary time it looked as if the whole banking system might collapse. That would have meant even our debit cards would not have worked. Labour took the right decisions, we bailed out some more banks – Lloyds, HBOS, Royal Bank of Scotland – and led international action to stabilise the system. World banking, and with it the world economy, was saved from collapse.

However, there was still an enormous drop in confidence across the economy and a deep recession. A million extra people are out of work in this country as a result. Moreover, we now have growing net public debt which at some point must be dealt with. The Coalition government plans historically severe austerity measures, which are dovetailing with their smaller state ideology. So we have not only large scale unemployment, but we have cuts in benefits, cuts in spending in schools, cuts in defence – risking our global standing – , and cuts across the board.

All because – when it comes down to it, amidst all the contributory factors – a few hundred, or at most a few thousand people in the world took excessive risks with other peoples money. Investment banking arms traded off the security given to retail deposits by taxpayers, allowing them to take excessive risks. At the same time, retail banks got carried away and began exposing their balance sheets to financial securities and risks they did not understand.

The banks didn’t go under. Indeed they have been directly and indirectly supported by government. They are now making large profits again – borrowing short at low rates and lending long at higher interest rates. They can do this because the Bank of England has driven down its interest rate so providing a steep yield curve that makes it easy for banks to be profitable. Banks have gone back to business as usual. High – excessive – salaries are again the norm in the investment arms of our high street banks.

Of course substantial efforts have been made to improve bank regulation. After a relatively short period of time, new rules, called the Basel III proposals, were announced earlier this month. Bank share prices rose 7% on the day the news was announced – a clear indication that these new rules are hardly changing the game. The greatest progress has been made in the States. President Obama signed into law a bill which implements the Volcker rule, separating some of the activities of investment banks.

Strong regulation – which we do not have – is necessary but it is not enough. Over time, over the years, we become complacent; we believe we know what the risks are. A new conventional wisdom takes hold and captures regulators so they believe in new models and relax their guard. Basically, every few years we allow banks and others in the financial sector to find new ways to borrow more (and ultimately lose more). No one wants to stop the party and besides by the time doubts are expressed the financial sector has too much power. Finally, the borrowing gets too much and down we go – again.

In the Christian Socialist Movement, as our name might suggest, we are particularly concerned with repentance. That is, not just saying sorry but a turning away from the old ways of doing things and doing things differently. The banking sector has said sorry, to some extent, but has yet to exhibit genuine repentance by changing the way it works.

Banks have shown they cannot reform themselves so we must do it for them. So says not only the Christian Socialist Movement, concerned as we are for the poor around the world who suffer most from bank failure, but Mervyn King, governor of the Bank of England; and respected economists from a range of different perspectives such as the FT’s Martin Wolf and John Kay. Bank of England director Andrew Haldane remarked earlier this year that “...during a crisis big banks have if anything been found to be less stable than their smaller counterparts, requiring on average larger scale support.” That is, you and I have to stump up more money. In its Lex column earlier this month, the Financial Times noted “Perhaps a superhero could run a too-big-to-fail bank in the interests of shareholders, regulators, customers, employees and the common good. But a mere mortal is likely to fail.” I would argue that the investment banking interests would always ultimately prevail.

Friends, we should bite the bullet and commit to separating retail or narrow banking (as John Kay terms it) for consumers and small businesses from larger scale investment, or casino, banking. This will help institutionalise some honesty into banking. Combined with strong regulation, it will prevent another financial crisis such as the one we have just experienced. All other reforms are about what do to after a crisis, not how to stop one happening.

Two voices against reform have been prominent. The banks themselves – and the Labour Party.

It’s not surprising banks are against being broken up or restricted. They have even threatened to leave the UK – a similar line used by some businesses worried about the minimum wage I recall. Yet measures to separate banking need not harm the UK financial sector. Indeed, they might encourage much needed competition.

What has been surprising – shocking – was the way that, after the bold action we took in the crisis, Labour ministers somehow appeared as apologists for the banking sector. Reform would be distracting; we needed a bit more regulation; it was all too difficult. You name the proposal – bank separation, financial transactions tax, a bank levy, a bonus tax – the initial reaction was, well, not dissimilar to that of the British Banking Association, though with perhaps a bit more hand wringing.

No wonder voters, angry at what the banks had done, found nowhere to go!

If the progressive party had no progressive policies on the fundamental issue of the day, was it really being progressive?

Now we are at risk of being upstaged by this Conservative-led government as its banking commission leads the debate. We need to hear a strong Labour voice, rooted in our vision for Britain in the years to come.

Here, before I close, are two key reasons against reform that I hear. Northern Rock was a retail bank which went under – it wasn’t an investment bank. True. But banks will always fail from time to time – CSM proposes that the retail banks have deposit guarantees for people’s savings but the point is not to save an individual bank but to stop a bank collapsing the system. The second objection is that Lehman Brothers was an investment bank with no retail banking arm, but it still went under and helped worsen the crisis. True. But retail banks had got themselves into trading in the same securities far away from their core competence (or any competence). True separation of banking would have meant Lehmans could have gone down and lost its shareholders a lot of money but without threatening the payments system or your savings – or your future tax bill.

Let’s pause, let’s go back – this new generation – let’s go back and recall why we are in politics. Not to promote excessive risk taking by a few for high rewards and little penalty, but to govern for the many. To protect the vulnerable from the excesses of others. To promote the Good Society, working together for the Common Good.

That’s what we are about and that’s why Labour should commit to – radical and in fact sensible – reform of the banks.

This speech was made at a Christian Socialist Movement fringe event (Gambling with someone else's money) at the Labour Party annual conference on Wednesday 29 September 2010.