Why it makes sense for banks to do the splits

The Square Mile: There is a growing recognition that a break-up of banks such as Barclays between retail and investment banking is the way to make things safer

At last, more of the world's most senior policymakers and top financial analysts are starting to acknowledge the obvious; that a complete break-up of banks such as Barclays between their retail and investment banking operations is by far the best way to make our banking system safer and fairer to the taxpayer. It could also be the quickest and most effective way to get lending to the real economy going again.

One convert to splitting Barclays in two is Neil Shah, the head of global research at Edison Investment Research, one of the few global independent research houses, so he has no axes to grind. Mr Shah says that so long as Barclays has retail and investment banking, the government will never let it go bust which means the bank will always leverage up, taking more and more risky bets. And that, he says, is inherently wrong for the taxpayer.

But there's a bigger prize, which is that by splitting banks like Barclays, the retail part would be able to reduce its capital buffers as it will be perceived as less risky. So, in turn, the retail bank would be able to lend more to customers and it will also be easier for new banks to compete as they will not need so much capital as the current regulations require.

Mr Shah's colleague, Martyn King, has looked at what Barclays might be worth split in two and predicts that the parts would be worth more than the whole, plus "the consumer, the borrower, shareholders and the economy would all be better off".

Ring-fencing is flawed because both parts of the bank would still need high capital ratios, he says, giving us the worst of both worlds. But when you take the risk away from the retail side, the capital goes down, the multiplier goes up and so does lending; just as it used to when retail and commercial banks were separated from investment banking and securities before Big Bang here in the UK, and the abolition of Glass-Steagall in the US.

It's interesting that Mr Shah and Mr King are making such a powerful economic case for splitting the banks as well as the broader public-interest grounds. But it seems that the sheer scale of the Libor scandal is making many people think the unthinkable again. Their analysis also blows a hole through the arguments put by the Vickers report, and backed by so many politicians and regulators, who agreed that ring-fencing would be enough. Mr King also believes fears that splitting the banks would cost billions has been exaggerated.

My view has always been that ring-fencing isn't sufficient and that a Glass-Steagall-type split is the simplest and safest means to get the banking system working again; if the retail banks were released from their tough capital ratios they probably wouldn't need to be coaxed into lending with fancy gimmicks such as the latest Funding for Lending schemes. Vickers was always a bad compromise, one only reached because the wealthy banking lobby, led by men such as Bob Diamond at Barclays, persuaded the politicians that it was not in the public interest despite the views of heavyweights such as Sir Mervyn King, the Bank of England governor, Vince Cable, the business secretary, John Kay, the highly-respected economist and Lord Lawson to name a few. It's time they turned up the heat and widened the debate to look again at reform, including proposals such as those from the US economist, Professor Laurence Kotlikoff, for limited purpose banking.

There's also a change of mood towards banking reform across the Atlantic being led by bright sparks such as Sheila Bair, one of the US's top law enforcers, who stepped down from chairing the Federal Deposit Insurance Corporation. Ms Bair was one of the first to warn the US Treasury about the subprime crisis before the crash, and one of the most trenchant critics of Wall Street's decision to bail out the banks, which she describes as flagrant "crony capitalism".

She puts the problems well: "I think we lost our way in the mid-2000s between free markets and free-for-all markets. We forgot you need some basic rules and standards to regulate financial markets. We deferred too much to bank judgement. Libor is one example where we left it to banks to set important benchmarks."

Politicians didn't listen to her then. But they should listen now. She has just launched the Systemic Risk Council, a private watchdog group whose aim is to speed up the post-crash reforms that have become bogged down in legalities and inertia. She's got some toughies alongside her – the ex-Federal Reserve chairman, Paul Volcker as a senior adviser as well as the ex-Commodity Futures Trading Commission chairman, Brooksley Born, and former Citibank chairman, John Reed, who is also a splitter.

If you have the chance, watch a TV interview Ms Bair did with US journalist, Bill Moyers, to hear what she says about how politicians and regulators lack the will to punish the bankers because they are too cosy with them, and how she understands the public's lack of interest because no one trusts the politicians or the bankers. (Moyers didn't ask whether she has political ambitions but if the Republicans are smart they should be after her.)

As Ms Bair says, derivatives and securities trading, investment banking and all such activities should be done outside banks with deposits: "At least make people who want to do those types of high-risk activities go to the market, convince private investors to fund it. Don't use insured deposits that are government-backed as there's no market discipline whatsoever in that. Don't use those government-backed funds to take these kinds of risk." She's so right; let them put up their own capital and not depend on the taxpayer to bail them out.

It's time to ignore the investment bankers who say a return to Glass-Steagall is a red herring; that Lehman was only an investment bank but it collapsed or that many of the problems were on the retail side, like at Northern Rock. Both examples are true but it's a disingenuous claim since Lehman only became a risk because the entire banking system was clogged up with leverage and bad loans, while Northern Rock pretended it was an investment bank.

If the coalition is serious about changing the banking culture then it should have the political courage to look again at the Vickers reforms.

Start your day with The Independent, sign up for daily news emails
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

Aren’t you glad you didn’t say that?

The worst wince-and-look-away quotes of the year
Hollande's vanity project is on a high-speed track to the middle of nowhere

Vanity project on a high-speed track to nowhere

France’s TGV network has become mired in controversy
Sports Quiz of the Year

Sports Quiz of the Year

So, how closely were you paying attention during 2014?
Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

From Armstrong and Miller to Pointless
Sanchez helps Gunners hold on after Giroud's moment of madness

Sanchez helps Gunners hold on

Olivier Giroud's moment of madness nearly costs them
A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect