'Vanilla' Mortgages Will Save Banks: Ex-Lloyds Chairman

If governments refrain from interfering, and banks' earnings power continues to be significant, "the prospect for the banks over a longer period will be good", former Lloyds TSB chairman Sir Brian Pitman said Tuesday.

The government interference with the workings of the banks will hinder the banks' profitability, Sir Brian told CNBC. Instead, the introduction of 'plain vanilla' securitization needs to be enforced, as people are too scared to take risks.

In order for banks to grow their businesses, Sir Brian sees a few changes in the banking system being made.

"One of the big changes will be the shape of the deposits. (Banks) will have to be able to attract more retail deposits because you won't be able to depend upon the money market as you have in the past," he said. "That should be good for savers over the longer term because the banks will have to compete for savings in a way that they haven't."

"Of course, the level of the savings rates here and in the US is much too low to finance the banks. So some form of securitization, in my view, albeit plain vanilla securitization, will be necessary," he said. "Otherwise the banks will be resting entirely upon the savers' deposits in countries where there's not much saving, and that will mean exceptionally slow growth."

Once the capital and debt markets are back in full swing, banks will be relieved of their obligations to finance companies that would normally raise money through the debt market, according to Sir Brian.

But in order for this to happen, borrowers will have to accept a higher cost of borrowing in the future, and that people have to be willing to invest in these bonds, he warned.

"The question of securitization: it's just been fear. People haven't been wanting to take any sort of risk whatsoever. And in the last few months they've just shut up shop and said 'I'm not going to take any risks at all'," he told CNBC.

"I can see the situation where what I call 'plain vanilla mortgages', with very satisfactory security, will become attractive to investors again. That will help the banks enormously if we can start to get the securitization market going again."

The economy will normalize once property prices have got to a level where first-time buyers are willing to buy, he added.

"We've got a situation in the housing market where there are lots of people who would love to buy a house for the first time, but they won't buy because they think house prices are going to get lower. I agree with them, they will get lower," he said.

"The interference in the market that we see politicians making, is not helping matters. In the end, houses will have to get to a level where first-time buyers are willing to pay money for them. When we get to that point, the mortgage will be available for them to buy their house."