I really want to believe all this stuff about the benefits of splitting up retail and investment banks. I’d love it to be that simple. Split the sober stable retail banks from the crazy greed-driven investment banks and our economy and our savings will be safe. The Captain Mainwarings should be allowed to get on with taking deposits and lending money while the Nick Leesons are left to go to hell in handcarts of their own making.
It’s not that simple though, is it? The objections are well rehearsed. Not being an investment bank didn’t stop Northern Rock from playing the money markets. Not being attached to a retail bank didn’t stop Lehman Brothers from dragging all and sundry down in its wake. Two of the UK’s biggest combined retail and investment banks, HSBC and Barclays, have emerged from the financial crisis in better shape than many others.
There is an argument that splitting up the banks will make sure that they are no longer too big to fail. However, it will also mean that they are no longer too big to be taken over. Unless other countries split their banks up too, we run the risk of making our banks targets for takeovers by foreign banks. What’s the point of splitting UK retail banks from UK investment banks if they then become part of foreign investment banks instead?
The transfer of regulatory power from the FSA to the Bank of England is a lot of fuss about nothing too. The same people will be doing the job; they will just be TUPEd across. There is little evidence that things would have been any different in 2008 if the Bank had been in charge. Whoever is responsible for regulation needs clear powers to intervene and guaranteed political backing, something the FSA never had under Labour.
I fear there are no simple answers to bank regulation. Splitting up banks and moving regulatory powers around might make good headlines but that’s about all.
That’s no excuse for not getting to grips with regulation though. There is some evidence that financial institutions are sliding back to pre-2008 practices. The financial bonanza of the 2000s is often compared to a wild party which, though everyone knew it would have to end sometime, no-one wanted to leave early for fear of missing the fun. Will George Osborne act quickly enough to break up the next party before it gets out of hand again?