Leading article: Break up the banks properly
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Independent Minds
The great banking break-up begins here. The European Union has approved plans for the dismemberment of Northern Rock. The expectation is that the Royal Bank of Scotland and Lloyds will be next; and quite right too. At the moment British banking is dominated by a small group of institutions that tend to work in their own interests, rather than those of their customers. Greater competition is precisely what this market needs.
But though the destination is right, there is still much necessary debate about the journey. The sale of the nationalised Northern Rock should not be rushed by ministers simply in order to turn a quick profit and generate a favourable headline. Under the proposed "good bank/bad bank" division, taxpayers will be left holding the Rock's questionable assets until maturity. That is, sadly, unavoidable. But it would add insult to injury for taxpayers if the "good" Northern Rock were to be sold off for less than its potential value. Serious consideration should also be given to making the new lender into a building society, rather than a limited company.
The Government must not neglect the bigger picture either. Official attention needs to turn to splitting up retail banks with large investment arms such as Barclays and HSBC. Here the problem is less competition than implicit taxpayer support for inherently risky speculative banking activities. Though the Government is bowing to the inevitable on high-street banking, it is still resisting a separation of retail from investment banking, arguing that it can make these financial behemoths safe through tighter regulation alone. That is doubtful. It also fails to address the fundamental problem that, at present, investment bankers know they will be bailed out by the state if their bets go wrong.
Ensuring greater competition in high-street banking and removing the de facto state subsidy for the "casino" operations of banks pose different challenges for policymakers. But the final goal is the same: to make the banking system safer and to force its institutions to serve the interests of their customers, rather than their employees. We should be pleased that structural reform of the banking sector finally seems to be on the cards. But if it is to be done, it must be done properly.
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Comments
Thus Gordon "an end to boom and bust" Brown can not recognise the need for a Glass-Steagall like separation of investment and retail banking.
It was truly pathetic that he should have sighted the failure of both Northern Rock and Lehman Brothers as justification for not going down the Glass-Steagall route to banking regulation. It was precisely because Lehman Brothers was an investment bank that the Fed could allow it to go broke: AIG, Fannie Mae, Freddie Mac were too big to fail. Systemic risk forced the reluctant hand of of the Fed in rescuing these financial monsters. It may have been "nightmare on Wall street", but at least it wasn't "nightmare on Main St". Northern Rock was run, in Adam Applegarth, by someone even more inept than Gordon Brown. Perhaps Applegarth was too thick to realise something was dangerously awry when 75% of the funding came from the wholesale market. Banks are in the business of borrowing short and lending long: but borrowing on revolving weekly credit at these levels was tantamount to suicide.
Of course a regulator that was not asleep at the helm would have questioned why a regional bank was writing 25% of all UK mortgages. Who do we have to thank for the FSA? Why it is the cretin Gordon Brown.
Splitting banks into retail and investment standalone unit is a necessary condition for better banking regulation, it is not sufficient. Active bank regulation with "stress testing undertaken as a matter of course is essential.
Never underestimate the ability of bankers to lose money every ten years or so: that is what history teaches those prepared to listen.