Thursday, April 9, 2009

Too late for this crisis but still a good idea

Bank of England Governor Mervyn King weighs case for forcing banks to split their operations

The Bank of England is examining whether Britain's biggest banks should formally separate their investment banking and retail banking operations, The Times has learnt. News that such a move is under discussion at such a high level will send fresh shudders through the UK banking sector, still reeling from the fallout of toxic debt and the credit crunch. George Osborne, the Shadow Chancellor, hinted yesterday that a Conservative Government would break up Britain's nationalised banks and would also consider whether to block other lenders from becoming too big.

Posted by quiet guy @ 02:18 AM (1202 views)
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17 thoughts on “Too late for this crisis but still a good idea

  • Oh for heaven’s sake, this is the Second Glass-Steagall Act of 1933:

    http://en.wikipedia.org/wiki/Glass_steagall

    Merv is quoted as citing the Act in a speech last month, but did these people really have to drive the economy over the cliff again to see this? What seduced the financial authorities here and in the US into ignoring human nature and the lessons of history in general and the Great Depression in particular?

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  • THIS IS A NO BRAINER. It should have been done months, even years ago.

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  • Tenyearstogetmymoneyback says:

    The American did this in 1933.
    http://en.wikipedia.org/wiki/Glass-Steagall_Act

    The act law was only changed in 1999, apparently to allow the American banks to compete with the
    whizz kids in London.

    :- Duncan

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  • Another nail in risky mortgages.

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  • What paul said.

    Stop using my savings to allow someone on half my salary to outbid me on a home please.

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  • Bank of England Governor Mervyn King weighs case for bolting stable door

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  • It’s a start, but the dominant investment banks (+AIG) operating out of London (and Wall Street of course) while the crisis was building up were American ones. The Americans sidelined UK investment banks long ago. In 1997 Brown gave US investment banks operating from London carte blanche to regulate themselves and to institute a shadow banking system here. Anything the US banks couldn’t get away with at home they did abroad (regulatory arbitrage). It was the lack of regulation of US investment banks that was the core of the problem. Behind that was the capture of Washington by Wall Street. Obama isn’t doing anything to change that.

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  • I must pipe up here and contradict the majority of HPCers once again…

    Regulation is a signpost pointing towards a world government – remove regulation, central banking and the state-backed nature of the financial system and just watch the banks break themselves up into units which pose far less systemic risk, breed more competition, and ultimately perform better for their clients.

    Back to Glass-Steagall? It may be better than what we’ve had recently, however specific legislation for any conflict of interest would do better IMO and will be more future-proof. With the introduction of regulation regulatory arbitrage becomes an even greater profit making business and new products, organisations, legal structures, etc *will* evolve to fill the space.

    Make competition do the work that the state cannot possibly hope to achieve.

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  • Make competition do the work that the state cannot possibly hope to achieve.

    Erm. If you want to apply that principle then most if not all of the UK and US investment banks should go bust, taking their retail businesses with them.

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  • paul… I am talking about the system design, not the clean up required now – you are correct that there are probably some insolvent investment banks which cannot be just let loose right now (although I definitely do not agree that all are) – maybe tighter regulation is required in the short term, the problem is that once created it is hard to destroy organically (hence the likelihood of even bigger problems ahead increases… *sigh*).

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  • 6’s – I think we would all like to let market forces do their job in managing all this. The banks knew all along that if it all went t1ts up then the taxpayer would bail them out – thats why they were prepared to take the risks. They can’t have it both ways. I would like to see choice, whereby if I want to stick my savings in a retail bank with an investment arm, then I get a decent rate of return. Or I could go to Co-Op or NS&I, know its safe but get little interest. And if a bank goes bust then it goes bust – but Co-Op or NS&I wouldn’t because of their business models.

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  • Big banks should never again benefit from a free implicit taxpayer-funded guarantee. If they have grown too big to fail, then they should be explicitly labelled as such and pay an annual premium for it, e.g. 1% of total assets. That would give the management a strong incentive to split up their operations. At the moment the incentive is all towards growing as large as possible as quickly as possible, taking as much risk along the way as the regulator allows. If things go disastrously wrong the taxpayer is always there to pick up the tab.

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  • refusetobuy says:

    People need to be educated that if you put money in a bank, you can lose it.

    You aren’t making a deposit, you are selling insurance to the bank. You give them the capital you wish to insure them for and at the end of the period you’ll receive an insurance premium.

    It’s your job to assess what risk you are underwriting.

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  • 5ick – you’re arguing more about the effect of getting rid of central banking and state backing than against regulation. Any banking system needs laws and courts (regulation) to sort out the disagreements that inevitably arise from banking transactions. Long before the US government and Federal Reserve were instituted the colony of New York passed a law to stop ‘predatory lending’. British speculators were making loans to upstate farmers and demanding payment before the harvest was in. The farmers couldn’t pay and were foreclosed. This enabled the speculators to pick up the land cheaply. (The principle of opposing predatory lending is very relevant right now – South Korea is refusing to be the victim of junk derivatives sold to it by foreign banks, claiming that bankers have a fiduciary responsibility to their customers to recommend loans that help them, not strip them of their assets. If indebted countries take a class action against predatory loans and their enforcement by the IMF…….)

    Given the world as it was in the 1990s there was an obvious need for regulation of investment banks. The core function of deregulation was to expand leverage (boosted hugely by the new CDOs and CDSs that regulators failed to deal with) and draw in speculative funds from commercial paper markets, money markets, pension and mutual funds etc. This gave them the scale to create bubbles, expanding and crashing markets worldwide.

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  • Lower, Lower says:

    Spot on, icarus.

    Particularly this: “It was the lack of regulation of US investment banks that was the core of the problem. Behind that was the capture of Washington by Wall Street.”

    And while quite a few corporate media commentators are now, after the event, happy to tell us about the former, very few even now are writing about the latter, which is the final piece of the jigsaw.

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  • timmy t said, “They can’t have it both ways”
    montyo32 said, “Big banks should never again benefit from a free implicit taxpayer-funded guarantee”
    – sure, but the backing is there due to the monopoly of the central banking system and the tie between government and capitalism, lubricated by regulation (and the incentives for regulatory changes that are counter to the supposed aims of regulation).

    icarus – I am arguing for both points. Regulation is different to legislation, I have no problem with legislation. One can even have a working, private judicial system believe it or not. I also agree that there has to be control, but self-regulation should be the first choice and then the only-choice for aspects where it works (which I believe are most aspects of capitalism, real capitalism has no regulation – we have not had true capitalism, only this pseudo form of it).

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  • 5ick – not sure how reg. and leg. are different. If we are talking about the situation of the financial world prior to these damaging bubbles – rather than some ideal system with no central banks and small government – we probably agree that what happened over the last few years could and should have been prevented by regulation (and maybe by bringing fraudsters to book).

    If we are talking outside any specific historical context about the pros and cons of regulation the problem is that it is difficult to prevent governments from being captured by the industries they supposedly regulate – regulators furthering the interests of the industry against the public interest. Bankers have always made this kind of capture – the Medici had enormous power over the governments of renaissance Italy; similar power was exerted by the Fuggers in the Austro-Hungarian empire and the Rothschilds in Europe and the US since the mid-18th century.

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