Keeping it together
by Kitty Ussher
A newly elected MP remarked to me the other day that talking about separating the casino banking from the high street banks in response to the financial crisis ‘worked very well on the doorstep’. That, however, doesn’t mean it is the right thing to do. In fact, there is no evidence that one of the contributory factors of the financial crisis was the existence of banks with both retail and investment arms. This can be seen in the list of which institutions found themselves in severe difficulty and those which did not.
The ones that did not survive included Lehmans (investment banking), Northern Rock (retail), HBOS (mainly retail) and RBS (both) and some smaller building societies such as Bradford and Bingley and Dunfermline (retail only). The ones that did survive include Goldmans, Deutsche Bank and Standard Chartered (all mainly investment), Barclays (retail and investment), Nationwide Building Society (retail only) and HSBC (retail and investment). This naturally leads one to question why breaking up the retail and investment arms of the remaining financial institutions would be a rational, or relevant, solution. What we should do instead is focus on the underlying causes of the crisis.
The first port of call would be America. The deliberate deregulation of the housing market and the banking sector created an environment where bad loans could be made, and then securitised around the world. The IMF estimates that of the total stock of toxic debt in the banking system, around $3.1 trillion originates in the US, compared to $900 billion in Europe and Asia combined. And of course we were particularly vulnerable in the UK because of our low savings ratio. But, the problem was then compounded by management failure in some of the banks, who did not understand the nature of the risks they had on their balance books.
Six months ago, President Obama announced he would seek to break up the American banks, but that does not offer a solution that relates to the problems in the financial sector. Instead of following him, we should seek to gain a competitive advantage over America by focusing on the need to increase the resilience of our retail and investment banks and making them more able to withstand future shocks.
Putting more checks and balances into the corporate governance of large financial institutions would be a far more rational response to the crisis than breaking them up. And that’s what we should look to defend on the doorstep.