We are entitled to ask for decisions to be made in the public interest which means a better banking system could be forged

We are entitled to ask for decisions to be made in the public interest

Now that the government is a major shareholder in our high street banks, taxpayers have every right to challenge how they are run. Sir Philip Hampton and John Kingman, the chairman and chief executive of the body which manages our investments, UK Financial Investments, insist that their mandate is purely commercial and that they will ensure the banks act in the interests of all the shareholders.

This has not stopped the government pressuring the main lenders to reduce mortgage rates by the full amount of the Bank of England's interest-rate cuts. Nor from stepping in to underwrite a £1bn scheme with mortgage lenders to protect homeowners.

But a hands-off stance would be neither sustainable nor appropriate. After all, "commercial decision-taking" by the banks is why we got into this mess in the first place. The banks have destroyed value for shareholders. But then, shareholders are expected to take risks. Taxpayers are not. They will certainly expect a reasonable financial return from their multibillion-pound investment. However, as citizens and customers, they will want much more.

First, the banking system as a whole has to be stabilised, so that we never again find ourselves in a situation where the ordinary process of customers making payments comes as close to collapse as it did this autumn. But the crisis has given us an opportunity to take a longer perspective. The recently announced government plan to fine banks that treat customers unfairly is a start, but not enough. It will be hard to enforce and do little to change how the banks operate. Banks must be willing to make less money from some groups of customers during the recession, including borrowers struggling to stay in their homes, and small businesses.

For the foreseeable future we are entitled to ask banks to take decisions in the interests of the public as well as those of shareholders.

The right kind of regulation can impose some change, but external regulators will never understand a business as well as its managers. What the executives of the more or less nationalised banks need is a framework that gives them incentives to operate in the wider public interest. Forcing specific decisions, such as how much to cut mortgage rates, will not work. Sensible decision-taking needs to be insulated from political pressure.

One way to combine taxpayer interest with banking independence could be through the public-value decision-taking framework used in other public organisations, from arts bodies and the BBC to police forces.

Such frameworks are designed for situations in which managers have to deliver on several objectives that are not always easy to measure. For example, an arts group might have to balance audience numbers, including particular groups, with customer satisfaction, involvement with schools, or training programmes, and all subject to a value-for-money threshold.

UK Financial Investments needs its own public policy aims: for example, financial stability and consistent customer service, subject to a minimum return over a longer period (say, three years) than the usual quarterly assessment made by stock-market investors.

The banks now owned by you and me might, for example, include among their policy aims, particularly in the light of government ambitions, minimising home repossessions or business overdraft withdrawals in favour of payment renegotiations; measuring loans to target groups such as small businesses; customer satisfaction; and a system-wide assessment of risk (such as risks arising from sales commissions to staff, from large executive pay deals and from non-repayment of loans).

All would be subject to a hurdle of viability over a longer time frame than we have grown used to from our notoriously short-termist system.

Placing a requirement on our banks to make such assessments would reassure members of the public that their interests have been taken into account: it is part of the accountability we need from our banks.

We should then ask whether all banks and building societies in the UK should be required to consider the wider public interest in this way, as part of a new regulatory regime. After all, the responsibility for the near-collapse of the banking system is widely shared among banks, and occurred despite an extremely detailed and hands-on system of regulation. Forcing all banks, including foreign ones, to operate to a framework that considers society as well as shareholders might be the best way to prevent a future crisis.

This crisis, and this moment in the crisis right after the bailout by taxpayers, gives Britain an opportunity to shape a banking system that, for the first time in decades, serves the long-term interests of the nation.

The author runs the consultancy Enlightenment Economics

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