– Hugo Dixon is a Reuters Breakingviews columnist. The opinions expressed are his own –
Breaking up the banks is no silver bullet. Politicians on both sides of the Atlantic — including two of the party leaders fighting the UK election — want to separate so-called casino investment banks from utility lenders. But such simple rules would create arbitrage opportunities and rigidities without curbing excess risk-taking.
In the last of the UK’s election debates, the Liberal Democrat and Conservative leaders vied with one another to see who could be tougher on banks. As a soundbite, the notion that nasty, risky investment banking should be split from nice, safe retail banking may well be a winner. Gordon Brown, the Labour leader who has a more nuanced position, was left looking like a defender of big banks.
The politics are similar in the United States, where the Obama administration has proposed the so-called Volcker rule, which would prevent banks from engaging in proprietary trading. Some version of this rule may yet emerge in the financial regulation bill now going through Congress.
But these initiatives ignore the fact that excess risk-taking was a feature of all types of financial institutions during the credit bubble. Utility lenders — such as the UK’s Northern Rock or Washington Mutual of the United States — bit the dust. So did casinos like Lehman Brothers.