The President’s wish to split off hedge funds, proprietary trading and venture capital from utility banking on the High Street could be done. If he just tries to do it in one country, even a large and powerful country like the USA, the mega banks will simply shift their ownership of these areas elsewhere in the world. If the US claims extraterritorial jurisdiction, then the mega banks based in the US could switch their HQs to another overseas territory. If he still pursues them, they could split their capital structures.
If all the main banking jurisdictions of the world agree some new Basel accord on the subject it is likely the big banks would get the message. They could sell off their private equity, trading and hedge fund arms as separate companies, or they could split themselves into investment banks containing the “naughty” business as defined by the President, and utility banks.
All this implies two things that I do not agree with. The first is, it implies the three specified areas were the ones that caused the problems, whereas in many cases this is not true. Secondly it implies that future bail outs of utility banks is acceptable. Surely we ought to be seeking a world where bail outs are not needed? Why does the taxpayer have to face more pain for banking incompetence and Central bank idiocy?
What we ought to be discussing is how to regulate cash and capital by banks in a way which makes failure less likely. We need to discuss why the main Central Banks got it so wrong, why they kept interest rates too low for too long to create the bubble, then held them too high for too long to create the slump. We need to understand they ran a boom and bust policy, and both phases were wrong. We need to find people to run the Central Banks who don’t drive by looking in the rear view mirror, but who can think ahead.
If we stick with the regulation of commercial banks, the Regulator could make it clear their guarantees only extended to the utility bank subsidiary in their jurisdiction, and that such businesses could be separately accounted so in the event of a crisis that could remain solvent and independent if the rest of the Group went down. Alternatively, we could just strengthen deposit insurance so all who we wish to protect in a crash have the reassurance that their money is safe and there is no need for a run on the bank to add to its other troubles.
In the UK we need to split up RBS and Lloyds whilst they still have large public stakes. If the minority shareholders do not like it then they must arrange for buyers to take all the government’s shares at a profit for the taxpayer to allow them to call the shots. We need to strengthen our competition policy, by explaining to our Competition authority that the aim of policy is to get much more competition into High Street banking in the UK, supporting the policy of splitting RBS and Lloyds.
Which leaves us with the need to regulate cash and capital. I still favour this, though there is no evidence from the recent past that the Regulators knew how to do it. We should try again. All banks and financial businesses taking positions on their balance sheets and offering to pay people their money back at some point in the future should be expected to keep minimum levels of cash and capital. These levels should normally be higher than they were in 2007. In the short term they should be lower, as we need to generate more loans and financial activity to help the recovery.
Soemtime we need to come off quantitative easing and very low official interest rates. This is just a money go round to let the government spend too much, and to allow the banks to earn easy money. It does not help the rest of the economy, still struggling with too little credit at too high a price as a result.