Breaking up is hard to do, but that is what will happen to British banks if Vince Cable gets his way

It was in 1933, just a few years after the Great Crash, that Washington's politicians inflicted their retribution on Wall Street's banks for their part in the country's economic downfall.

JP Morgan was split into two – one part commercial, the other the speculative, investment banking arm we know today as Morgan Stanley – under the Glass Steagall Act on bank reform. Others suffered a similar fate.

Last week George Osborne, the new Chancellor, along with his Lib Dem partner, the Business Secretary Vince Cable (right), kicked off a process that could see similar vengeance wreaked on the UK's banking system.

In a year's time, Barclays could be split from its money-making but riskier Barclays Capital arm led by Bob Diamond. Royal Bank of Scotland could be prised into two, with the costly ABN Amro-based investment business, bought three years ago, left to go it alone. Meanwhile, spare a thought for Michael Geoghegan, chief executive of HSBC, which steered a relatively safe passage through the recession, but could also find itself shorn of its investment banking operation.

The spectre of the likes of Barclays shipping large parts of its operation to far-flung, more regulatory friendly juris- dictions around the globe, remains a possibility, according to many in the Square Mile.

Last week, the new Government announced it was forming a cabinet committee, chaired by Mr Osborne, that will set up an independent commission to consider breaking up the banks.

News that the Chancellor rather than his Lib Dem counterpart would be leading the investigation into possible reforms brought an audible sigh of relief from bankers.

"The creation of an independent commission is a smart way to avoid dealing with the issue in the short to medium term," said one. "The City is happy it has been kicked into the longer grass for a bit, whatever the motivation for the decision."

Certainly the creation of the commission gives the Government breathing space for an international consensus to emerge on bank break-up. A lack of agreement on the international scene is mirrored in the coalition's divergent thinking on the matter. It will take time for a consensus to emerge here, too.

Mr Cable has consistently taken a tough stance towards the banks, advocating that wholesale arms should be wrested from the traditional activities such as lending. Such a move would return Britain's City of London to a pre-Big Bang world where merchant and high street banks remained distinct.

Back in January, Mr Cable left the City in no doubt that he supported a British Glass Steagall when he said: "Now that President Obama has taken on the issue of breaking up the banks on his side of the pond, it is time we do the same in the UK."

The man driving through America's reforms, Paul Volcker, President Obama's lieutenant born two years before the 1929 crash, spoke in London last week. He outlined his "Volcker Rule" break-up proposals, which included forcing banks to trade complex derivatives through a regulated and transparent exchange, rather than via the over-the-counter backdoor route favoured by many banks. He said banks should not be allowed to dabble in hedge fund or private equity-related activities, either.

Mr Osborne, while clearly sympathetic to such a view, has taken a less decisive stance on banking break-up than his Lib Dem counterpart. Last year, he said: "Whether any form of separation between retail and investment banking, even within the same financial group, is feasible or desirable, it is clear that size itself is a risk factor."

However, he has consistently fallen short of signing up to a definitive separation edict.

Last week, Mr Osborne stated that the Government "wished to reduce systemic risk in the banking system to investigate the complex issue of separating retail and investment banking in a sustainable way".

How exactly such a separation would work remains to seen. Political realities are likely to dictate a more diluted set of rules. Although differences remain between the Business Secretary and the Chancellor, the pair do agree on the issue of slashing banking bonuses through a so-called banks levy. There is no doubt wealthy bankers will have to pay up in the coming years.

But before the new commission reports next year, controversial Basel capital reforms will be thrashed out, while a raft of other regulatory measures, such as a Financial Stability Contribution, could be introduced too.

According to analysts at the investment bank Credit Suisse, the wave of regulations coming to European banks could wipe as much as€€244bn from the sector in lost earnings and higher capital requirements.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Operations Manager

£30000 - £38000 per annum: Recruitment Genius: They are a financial services c...

Guru Careers: Stockbroker

£Basic (OTE) + Uncapped Commission: Guru Careers: A Stockbroker (qualified / p...

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Day In a Page

Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk
Nepal earthquake: One man's desperate escape from Everest base camp after the disaster

Escape from Everest base camp

Nick Talbot was sitting in his tent when the tsunami of snow and rock hit. He was lucky to live, unlike his climbing partner just feet away...
Adopting high fibre diet could dramatically cut risk of bowel cancer, says study

What happened when 20 Americans swapped diets with 20 Africans?

Innovative study in the US produces remarkable results
Blake Lively and 'The Age of Adaline': Gossip Girl comes
of age

Gossip girl comes of age

Blake Lively is best known for playing an affluent teenager. Her role as a woman who is trapped forever at 29 is a greater challenge
Goat cuisine: Kid meat is coming to Ocado

Goat cuisine

It's loved by chefs, ethical, low in fat and delicious. So, will kid meat give lamb a run for its money?
14 best coat hooks

Hang on: 14 best coat hooks

Set the tone for the rest of your house with a stylish and functional coat rack in the hallway
Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?