UK takes right step on too-big banks

November 3, 2009

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

So it can be done after all.

Britain is poised to take tough steps to break up the large banks it rescued, setting it in stark contrast to the United States, which seems set on a policy of shoring up the unfair advantages it grants its too-big-to-fail banks while regulating around the edges.

It is quite a change for Britain, which has a sorry history of self-serving self-regulation in financial services combined with limp and outgunned official control.

Chancellor of the Exchequer Alistair Darling on Sunday told the BBC that Lloyds, RBS and Northern Rock would be partly broken up and assets sold to new entrants into the banking market. Large existing competitors such as HSBC are expected to be blocked from making bids for the assets.

Britain took over Northern Rock after a run on the bank and its rescue of Lloyds and RBS left it with stakes of 43 and 70 percent, respectively.

It is worth noting that if anything Britain is more dependent on its financial services sector than the United States.

Could it be that Britain has determined that a level playing field, strong competition and a lower risk of a crisis might actually make it more competitive internationally? I certainly think so.

It will without doubt improve the situation for the small businesses and individuals that can’t access international capital markets and depend on the banks for access to credit and other financial services.

Before we get all excited and expect the United States to follow suit with Citibank and Bank of America, it is important to recall that Britain’s Labour government is more or less on its death bed and faces an election in 2010 which the bookies and almost everyone else think it is highly unlikely to win.

There is also the matter of the European Union, which has a say over subsidies such as the ones Britain has showered on the banks. RBS said on Monday that it may be forced by the EU to sell more assets than it had planned. Lloyds is also seen likely to raise additional new capital to allow it to stay outside of an asset insurance scheme Britain is running for the banks and which would involve the government taking yet more equity in the participants.

OH WHAT A CONTRAST

The fact remains that Britain and the EU are saying that more competition is needed and taking steps to ensure that the banks which ended up needing state care are broken up. This must have an impact on how other big banks are ultimately treated, even if they did not receive the same level of direct state aid.

The equity buffer that is being required is also remarkable; the banks should end up with core tier one equity of about 10 percent, four times what they were expected to hold before the crisis.

Contrast all of this with the hopefully named Financial Stability Improvement Act of 2009, now wending its way through Congress. As Harvard Business School professor David Moss points out, as currently drafted this bill won’t even allow the systemically important banks it is designed to control be named, a real Monty Python-esque touch.

Think about it: we won’t even be allowed to know the identities of the firms we are potentially on the hook for. Moss points out that this neatly side-steps the idea of taxing too-whatever-to-fail status as a means of encouraging the behemoths to sell up and avoid the costs. The costs remain with the taxpayer, or potentially with a group of big firms after the fact.

The argument the U.S. administration is making, more or less, is that our complex global economy somehow demands that we have complex huge banks. If we don’t allow huge banks to persist, we’ll choke off growth. If we think we can go back to mom and pop banking, we are simply kidding ourselves. And anyway, if the U.S. doesn’t allow it, foreign banks will just scoop up the cream. With Britain and the European Union taking strong steps, that argument is losing traction. And as for complexity, well I’d have to say that the record of complexity in banking is mixed, to be kind, as far as the deal it gives to taxpayers and consumers of banking services. It would be one thing to argue for huge economies of scale for plain vanilla banking processes like clearing, but it is hard to see why that needs to be combined with derivatives and trading.

It would be nice to think the winds are blowing west across the Atlantic, but this is not usually the case.

(Editing by James Dalgleish)

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

8 comments

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Isn’t this the guy who last year wrote, “banks nationalized by Autumn: Bank on it”?

If there is no accountability for banks, there certainly doesn’t seem to be any accountability for columnists.

Posted by Bob | Report as abusive

James, this is another extraordinary complex debate you propose here, and I doubt that anyone has a definitive stand to partake. I see it more like an experiment, and Britain has a long history of failed economic experiments. Nevertheless, for observers, it would really become a bonanza of information. Philosophically, I would just point that the size of an enterprise in a competitive market should accommodate a certain granular structure of its clients. It is interesting to see how tuning one side would affect the other.
I cannot abstain from remarking that the political complex you just have described may play a larger role than just to respond to an angry constituent base. It might well be the case that this is the last attempt to save most of the banking system from nationalization. I do not think that any government in the developed world would have the appetite to micromanage its banks. Problem is, it may well become an inevitable pragmatic (i.e. not ideological) solution in not so a distant future, like healthcare, education, power grid and so on.

Posted by M | Report as abusive

I cannot add to the British bank breakup debate. But I can on the US situation.

US will never breakup its major banks; indeed the bigger the better. Which has already happened because the majors are now hugely bigger after absorbing a few of the Old 5 investment banks.

They are now beyond TBTF, they’re Too Big To Control. Indeed, Too Big To Touch. Why?

Because these banks are more than banks. They are instrument of US imperial power. They finance the trillion-dollar military to project power globally; they finance the unlimited spending appetite of Congress; they finance the agenda of every president’s claim to transform the world to America’s image and liking. And they finance the wars – which come regularly every few years.

But there is one more big reason no politician dared to touch the major banks who run their political lives. The US dollar is threatened and they need to banks’ power to fix it.

In other words, the politicians need money, trillions upon trillions, and only the banks can create the kind of unlimited money they are addicted to. They might as well hand the US Constitution over Goldman Sachs CEO and let him rewrite it. And put the SEC back into a box while at it.

Posted by The Real Deal | Report as abusive

Surely the break up of the “biggest banks” is a total contradiction to what the UK government and the FSA have been doing for the last 12 months.

We’ve had 12 months of merging the smaller institutions that had financial difficulties into more stable (apparently) larger institutions.

Now, less than 12 months on, these (much) larger institutions are deemed too big to fail so the proposal is to break them up into smaller institutions.

Welcome to the merry-go-round of UK financial policy!

Posted by Ian J | Report as abusive

Interesting article.

The approach of the US doesn’t surprise me. The old adage that they have “the best government that money can buy” appears to be as true as ever. The big corporations effectively run the country (US) for their own benefit. Seems to be true for banking, healthcare/pharmaceuticals, farming, oil & probably most of the rest of their industries.

What baffles me is why the Conservative party would want a closer relationship with the US!

Posted by Daniel | Report as abusive

Everybody knew that breaking up the tbtf monster banks would of course have been the right thing to do. Instead the Bush administration bailed them out, killed off their competition, and made them even bigger and their stranglehold on the U.S. economy and government even stronger.

Congress can’t or won’t do anything about it now, because the banks own Congress and most of the politicians and bureaucrats in our government.

This problem certainly focuses attention on one important difference between the U.S. Congress and the U.K. Parliament. Our Congress is controlled and operated by the lobbyists who are employed by the wealthy corporations (and a few other wealthy entities such as labor unions). The majority of the members of Congress do the lobbyists’ bidding, since that’s who is paying them the most.

The U.K. Parliament is not controlled by the influence of lobbyists, so are able to thrash out their honest differences of opinion and work out a solution instead of just making it worse the way the U.S. does.

Posted by Chuck S. | Report as abusive

There is no real value in what is being “produced” today. If there were, then there would be no need to drive debt the way we have. We were encouraged by corporate America and also by government (because of business sector lobbying), to spend money we didn’t have, to buy things we didn’t need. We were given the blessing by the powers that be to support our country’s economic growth by way of consumption.

But when this experiment failed, as it was bound to, those who are supposed to represent OUR (the citizen’s) interests, instead jumped to the aid of the business/banking sector (the too big to fail crap), by giving them money to stay in business.

It was money that should have gone to help citizens stay afloat while the business sector was shaped by the “survival of the fittest” philosophy they touted so loudly in the 80’s and 90’s.

Instead they convinced (by way of money) our elected representatives that making sure THEY stayed in business was the only way for us poor folks to be properly served. As soon as they realized that we were focusing on paying down our own debts, we stopped getting any more “stimulus” checks.

By the logic displayed in the actions of our country over the past few years, it’s easy to see that our system REQUIRES that a percentage of the population go homeless, hungry,uneducated, and sick. Otherwise there is no opportunity for profit.

Even though the citizenry is too IMPORTANT to fail, our “representatives” did not serve our interests. They served their own interests and the interests of those who bring money their way.

Only one president ago we spent money hand over fist to kill people in other countries because we SUSPECTED they intended to do us harm. We fought so hard for this that even when we realized the truth we still went ahead and spent that money up, and spilled the blood of our children, at the expense of our own people here at home.

But now we have issues of health care, education, and housing. Now all of a sudden cost is a factor. How absurd is this? If we were willing to spend money we didn’t have in order to kill, then surely we can make some economic adjustments in order to ensure access to health care and quality of life.

This is not a technical issue (who’s going to pay, how are we going to do it etc..).

It’s simply an ethical one. We’ve already made the choice to spend money we didn’t have in order to kill.

So, should we make the effort to ensure a better quality of life for our citizens here at home or not?

Benny:- ‘to spend money we didn’t have, to buy things we didn’t need’ and ‘our system REQUIRES that a percentage of the population go homeless, hungry, uneducated, and sick’.

Is that not a contradiction in terms ?

Also, will the break-up of troubled banks create economies of scale ?

Posted by Casper | Report as abusive