Splitting Retail Banking From Investment Banking

[Traktion]

There has been discussion about splitting retail banking (ie. mortgages, savings, personal/business accounts) for the investment banking (ie. speculating) and would like to know the downside and the benefits.

My analysis concludes that it would be a good idea. It would stop money earned by speculation contributing to excessive lending in the retail banking sector. This would keep a lid on house prices and slow the flood of money into risky businesses. Having the two separate would allow bad gambles in investment banking to cause the bank to fail, without taking out the "real economy" with it.

The above seems pretty clear to me and I can understand it, but what are the downsides? I can imagine the bankers wouldn't want it to happen, as they would rather speculate to get the mega bucks, but when/if it goes wrong, they get the money back from the tax payer - great for them, but terrible for us.

I suppose you could argue that some of the flood of cash from investment banking may have benefited some successful, but risky businesses, but isn't that traditionally the role of venture capitalists and business angels?

It seems to me that retail banking should be boring. Mortgages, savings and personal accounts are not complicated things and I would argue could easily be nationalised even. Doing so could even give way to radical reform in the way we view lending for housing (ie. could be interest free, but strictly rationed based on salary, deposit size etc with no ability to MEW this for cash) which would stop all our money going to inflating prices and lining bankers' pockets.

Business banking probably should always have its place in the private sector as risks need to be made, that perhaps better suits the private sector agenda. Private loans should be (mostly) the preserve of the private sector too - lending for consumption is not good for the long term economy anyway (several years money spent in one go + interest = less money to spend if spread out). I think high/full reserve requirements should be moved towards too, to encourage stability and low, but more sustainable growth (rather than the big boom/bust cycle we encourage now with lax lending).

Shouldn't these sort of reforms be being investigated thoroughly? It seems to me, the government is still tinkering around the edges at a time when we have an opportunity to create a much better system, having learned from the mistakes of recent decades.

What are peoples thoughts?

[thecrashingisles]

What is the upside? If the investment banks still create systemic risk then you don't ultimately gain any benefit for ordinary people by segregating retail banking.

[Guest tbatst2000]

What are peoples thoughts?

It's the way to go. The US had this, more or less, for 70 odd years after the 30s depression courtesy of the Glass Steagall act and it seemed to work pretty well. It may just be a coincidence of course, but the start of the credit boom ties in quite closely with the 1999 repeal of the legislation.

[Guest tbatst2000]

What is the upside? If the investment banks still create systemic risk then you don't ultimately gain any benefit for ordinary people by segregating retail banking.

The upside is that you can, at least, cleanly protect retail depositors knowing that what you're insuring is a relatively transparent business with quantifiable risks. Don't forget that such a split, carefully arranged, would also preclude retail banks from getting involved with securitisations to the same extent, participating in the commercial paper markets as major issuers, holding complex derivatives etc.

[thecrashingisles]

The upside is that you can, at least, cleanly protect retail depositors knowing that what you're insuring is a relatively transparent business with quantifiable risks. Don't forget that such a split, carefully arranged, would also preclude retail banks from getting involved with securitisations to the same extent, participating in the commercial paper markets as major issuers, holding complex derivatives etc.

That seems to go further than a simple separation of retail banking from investment banking. You would effectively turn all retail banks into building societies?

[Traktion]

What is the upside? If the investment banks still create systemic risk then you don't ultimately gain any benefit for ordinary people by segregating retail banking.

I hear what you are saying and probably more would need to be done to prevent this. However, stopping this money from flooding into a large part of the economy should surely help to restrain the affects on the economy as a whole.

Whether we should allow investment banks to do all the things they do is another question. I admit that I don't know as much about this side of banking, but it could be argued that many inside of the system don't too; if they did, much of this mess would not have occurred.

Maybe restrictions (or a complete overhaul) in the way we allow our investment banking system to operate and the segregation of the two types of banking are the way forward. We need to start questioning the value of why we want these businesses operating in our country if all they bring is tax payer pain and systemic risk (and some rich bankers, of course).

[LuckyOne]

Retail banks throw off a lot of capital. There is really nowhere to put that capital to work in retail banking. In typical fashion, business managers forget that they work for the owners of the company so they have put that excess capital to work by growing their wholesale business rather than returning it to their shareholders and letting them decide where to invest it.

We are in this mess at least partly because of the arrogance of business managers who thought that they knew better than the owners of the business.

[andydtaylor]

The downside is that Retail banking would become more expensive for the consumer. Higher bank charges and fees would be the result.

[Guest tbatst2000]

That seems to go further than a simple separation of retail banking from investment banking.

Not really, apart from the securitisation bit, that's more or less how things worked in the US pre-1999.

You would effectively turn all retail banks into building societies?

Not quite that far - you'd want them to continue with commercial lending as well in the more general case.

[Guest tbatst2000]

The downside is that Retail banking would become more expensive for the consumer. Higher bank charges and fees would be the result.

What makes you say that? I don't, for example, notice that the Co-op bank (no investment banking operations) charges it customers more than, say, Barclays (big investment banking set up with Barcap) - rather the reverse in fact.

[Neil B]

Not all retail banks / investment management businesses have a direct link between their two business arms they are just sometimes owned by the same parent company. Conversely, some retail banks dont have an investment business and some investment management business dont have a retail banking arm.

Investment management banks are not responsible for the credit crunch: It is it the mortgage lenders that caused it.

Edited July 21, 2009 by Neil B

[The Spaniard]

For a modern complex economy the stable provision of a universal means of exchange is a function that is too important to fail. Whoever issues it has society by the throat.

If it is debt-based (lent to society at interest) then this provision is also immensely profitable, though at the same time essentially unproductive.

The enormous power to expand and contract the money supply is exercised currently by a loosely regulated profit-motivated cartel, with obvious disastrous consequences, both to society in general and to the banking system itself.

There are alternatives to this madness, for example:

http://www.housepricecrash.co.uk/forum/ind...c=77410&hl=

[Guest tbatst2000]

Not all retail banks / investment management businesses have a direct link between their two business arms they are just sometimes owned by the same parent company. Conversely, some retail banks dont have an investment business and some investment management business dont have a retail banking arm.

I'm yet to see one where the liabilities of one part are in any way segregated from the other, regardless of organization. If the IB goes down, it will always take the retail with it.

Investment management banks are not responsible for the credit crunch: It is it the mortgage lenders that caused it.

There's no one party caused this mess - mortgage lenders lent too much, IBs helped them sell on their toxic MBSs via all sorts of routes, retail banks lent too much (not just on mortgage debt), crooked sales-weasels sold dodgy products to people who didn't understand what they were buying (throughout the whole system, not just at the retail level), people bought things without understanding - or even trying to understand in many cases - the risk and regulators/governments stood by and watched in all happen.

[The Spaniard]

The downside is that Retail banking would become more expensive for the consumer. Higher bank charges and fees would be the result.

Yes, at the point of use, but overall this would be a small price to pay.

We need a monetary system which does not facilitate and encourage many of our brightest and best to expend their talents in competitive but essentially parasitic, unproductive and speculative number shuffling.

The upside of money reform is systemic and far bigger than most people realize.

[LiveAndLetBuy]

It's the way to go. The US had this, more or less, for 70 odd years after the 30s depression courtesy of the Glass Steagall act and it seemed to work pretty well. It may just be a coincidence of course, but the start of the credit boom ties in quite closely with the 1999 repeal of the legislation.

Yup - there's plenty of emperical evidence to indicate that keeping investment banks as separate entities to retail banks doesn't cause systematic collapse. It's retail banks going bust that provides most of the systematic risk. Investment banks can be what they want as long as they can go bust without taking retail banks down with them.

[fluffy666]

We need a monetary system which does not facilitate and encourage many of our brightest and best to expend their talents in competitive but essentially parasitic, unproductive and speculative number shuffling.

+1 for this. I think that the primacy of the financial sector over the business of actually making new products is a major reason why in many ways we don't have much more than in the late 1970s.

[Traktion]

For a modern complex economy the stable provision of a universal means of exchange is a function that is too important to fail. Whoever issues it has society by the throat.

If it is debt-based (lent to society at interest) then this provision is also immensely profitable, though at the same time essentially unproductive.

The enormous power to expand and contract the money supply is exercised currently by a loosely regulated profit-motivated cartel, with obvious disastrous consequences, both to society in general and to the banking system itself.

There are alternatives to this madness, for example:

http://www.housepricecrash.co.uk/forum/ind...c=77410&hl=

Interesting - I've started a new thread http://www.housepricecrash.co.uk/forum/ind...howtopic=120518 on a bit of a tangent, but on a similar theme.

IMO, people need to start thinking of alternatives. This debt based dead horse has been flogged enough.

However, we probably need to take steps before such radical changes are made. Breaking up the banks is a good first move, I think.

[abharrisson]

There has been discussion about splitting retail banking (ie. mortgages, savings, personal/business accounts) for the investment banking (ie. speculating) and would like to know the downside and the benefits.

My analysis concludes that it would be a good idea. It would stop money earned by speculation contributing to excessive lending in the retail banking sector. This would keep a lid on house prices and slow the flood of money into risky businesses. Having the two separate would allow bad gambles in investment banking to cause the bank to fail, without taking out the "real economy" with it.

The above seems pretty clear to me and I can understand it, but what are the downsides? I can imagine the bankers wouldn't want it to happen, as they would rather speculate to get the mega bucks, but when/if it goes wrong, they get the money back from the tax payer - great for them, but terrible for us.

I suppose you could argue that some of the flood of cash from investment banking may have benefited some successful, but risky businesses, but isn't that traditionally the role of venture capitalists and business angels?

It seems to me that retail banking should be boring. Mortgages, savings and personal accounts are not complicated things and I would argue could easily be nationalised even. Doing so could even give way to radical reform in the way we view lending for housing (ie. could be interest free, but strictly rationed based on salary, deposit size etc with no ability to MEW this for cash) which would stop all our money going to inflating prices and lining bankers' pockets.

Business banking probably should always have its place in the private sector as risks need to be made, that perhaps better suits the private sector agenda. Private loans should be (mostly) the preserve of the private sector too - lending for consumption is not good for the long term economy anyway (several years money spent in one go + interest = less money to spend if spread out). I think high/full reserve requirements should be moved towards too, to encourage stability and low, but more sustainable growth (rather than the big boom/bust cycle we encourage now with lax lending).

Shouldn't these sort of reforms be being investigated thoroughly? It seems to me, the government is still tinkering around the edges at a time when we have an opportunity to create a much better system, having learned from the mistakes of recent decades.

What are peoples thoughts?

I think your assumptions of the upside are wrong... Ltsb didn't have an investment banking arm, nor did halifax, nor did RBS to all intents and purposes and nor did Northern Rock PLUS the issue was not excess profits from investment banking finding their way into mortgage market lending it was the the creation of CDO culture which drove the wholesale side.... so in terms of plugging any gaps shown up by problems we have seen this time around I would say it would do zip all good and in my view is another potential example of the sort of knee jerk regulation that these sorts of events can throw up.... look at Canada for a good example.. but the answer is not to copy their system but to use the good checks and balances parts of it... in fact I think one of the strenghts of the canadian system was that they would not allow banks ot overly expose their balances sheets to certain asset classes or types of products, many of their banks as groups I think are involved in retail and commerical and investment activities to ensure they ahve just the right spread exposure to asset classes and risk.