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.

David Vinter

Kitty Usher, has given a very rational and thoughtful perspective on a crisis that was building up for several years. The US government for political reasons wanted everone to own houses, regardless of whether they could afford it or not. Then Northern Rock used these US loans as collateral to pay the highest interest rates to investors, but also give housing loans on just crazy terms to UK house buyers. Then given the UK had by far the biggest credit card debt in Europe, we were trying to ride a one wheeled bicycle on a tight rope. It all came crashing down, some of us were lucky, we had paid our mortgages off, and had a naturally mean nature, inherited no doubt from my methodist grandfather. Resist those advertising temptations, buy what you need!

James Jamusch

This is a political and ideological issue: people want to know that their wages and savings aren't being used for reckless financial betting, wholly for the private gain of a few spectacularly wealthy bankers.

mark willis

What are your thoughts on the 'too big to fail' issue? The 'great moderation' (especially after the repeal of Glass Steigal) was a time when corporate takeovers saw the creation of the staggeringly enormous banking groups we have today. This created a highly dangerous risk concentration.

Ultimately the size of a failed bank's balance sheet is more significant to taxpayers than the nature of its business model (retail, investment, or both). Lehman demonstrated just how interconnected global finance has become. When a large bank collapses the affects ripple around the global economy.

Downsizing global banks would not be so difficult. It could easily be included in new regulatory requirements, with larger institutions required to hold more tier one equity capital and have more stringent remuneration restrictions.

Whether we like it or not most failed banks will receive state assistance because the real economy needs a properly functioning financial sector. History suggests that financial 'innovation' will enable banks to bypass a lot of new regulation. They'll likely collapse again and need more taxpayer money. So, lets make the bailout a bit cheaper next time!

George Shaw

Which institutions failed is irrelevant to the argument. NR did not fail because it was engaged in retail banking. It failed because it's business model was dependent on "casino-like" products - securitising it's loans - and because the wholesale market, which it used to obtain finance, seized up due to the impossibility of pricing those securities.

The 'too big to fail' argument is entirely the point. The demise of Barings was inconvenient, but it could be allowed to fail. But if the same scale of losses were to bring down Barclays or Lloyds, that is an unacceptable risk to the government if it is required to support retail customers.


This is well known that cash makes us independent. But what to do if someone has no cash? The only one way is to receive the mortgage loans or term loan.

Andrew Preston

@David Vinter

Rather too much assertion in there, imo, for Usher's post to be particularly rational and thoughtful.

Kitty Usher was Economic Secretary to the Treasury up till about a couple of years ago, and most of what she says appears to indicate zero progression of thinking from that point. Both persoanally, and as reflected in the stated policies of the then government, and now Opposition.

Andrew Preston

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