As the date of the ICB’s final report gets closer, calls for a break up of the banks get louder. There is even an online petition for it now. Some good arguments have been put forward for a 21st Century version of Glass-Steagall but I’m still not convinced.
As the discussions have gone one, both retail and investment banking have become characatured. On one side you have solid dependable Mr Mainwaring, looking after Aunt Edith’s savings and lending money, after prudent assessment of their businesses, to the local butchers, bakers and candlestick makers. On the other side you have nasty, shouty Nick Leeson, taking people’s money and gambling it on all sorts of bewildering financial instruments that no-one, not even Nick himself, understands. If we could only stop Nasty Nick from playing the tables with the funds from Mr Mainwaring’s half of the bank, we’d all be a lot safer. If things go pear-shaped again, we could bail out nice Mr Mainwaring’s bank, thus saving Aunt Edith’s and everyone else’s savings, and let Nasty Nick and his bank go to hell. Or so the argument goes.
It’s all rot, of course. Retail banks are, in their own way, as risky as investment banks. Three of our UK bank failures were retail banks and only one was a combined retail and investment bank. Globally, as the Wall Street Journal noted, only two mixed banks collapsed during the financial crisis – RBS and Citigroup. The rest of the failures were pure retail or pure investment banks.
Splitting up the banks would not protect all our savings either. As Frances Coppola points out, it might save our current and deposit accounts but a collapse of the investment banks would bugger up our pensions, ISAs and endowments. The clue is in the word ‘investment’.
Furthermore, as Andrew Lilco argues in the Telegraph, a banking split would make the implicit guarantee of a bailout for the retail banks even stronger. We would be dividing the sector into banks that we bail out and banks that we leave to fail. This would encourage those on the ‘to be bailed out’ side to take even greater risks:
With even stronger government guarantees, retail banks will respond by taking the greatest risks they can – because the taxpayer bears the downside. That would mean loans to very risky businesses; loans for dodgy mortgages; high personal loans to subprime borrowers; and so on.
And as for the idea that we could make retail banks safe by stopping them from borrowing money, that too belongs to the era of Dad’s Army. As Frances says:
There are strident calls for retail banks to be denied access to external funding sources such as the interbank market and bond issuance: many of these calls arise from a mistaken belief that retail banking deposits fund investment banking, so retail banks can’t be short of cash, can they? Oh yes, they can. Most retail banks require external funding on a daily basis. Liquidity crises are possibly the most serious threat to retail banking.
I said back in January that I didn’t believe a bank breakup would solve anything and I have seen nothing since that has convinced me otherwise. Banking has always been a risky business and it still is. Splitting up the banks won’t change that. There is no such thing as a safe bank. And Mr Mainwaring retired a long time ago.