Breaking up the Banks

Each day we hear of another bank deep in a hole of its own making. The billions and eventually trillions of tax payer's money pitched into banks is taking some time to take effect and get the business moving again. Today it's unclear how much is enough and what the long term ramifications will be. The UK and USA governments are the main protagonists of this strategy probably because between them they have most of the largest banking institutions in their domains but the governments of the EU states are bound to follow suit in time, although perhaps with a more considered approach. The stakes are certainly higher in the UK than most of Europe which can be seen in the run on sterling. 

With a number of banks now partly nationalised the question has to be how to get them back into investor's hands but with a healthy profit for the tax payer?

One way might be to begin the break up of various banking businesses between wholesale and retail, putting the market structure back to pre ‘big bang' days. If this was done in conjunction with new laws and regulations segregating banking and customers assets we would in a moment have put in a preventative measure restricting banks from risking client assets.

In the USA this would be a return to the Glass-Steagall Act repealed a few short years ago and in the eyes of some, the creation of the business environment which led to the current financial crisis.

What would be the effect on financial markets, their structure and business?

Well the investment banking industry would become less inventive and probably boring when measured against today. But it would be safer and easier to regulate.

The structure of the market would change with many more retail firms bringing greater competition. If the wholesale banks were split by product type there would be smaller banks and more competition. The term too big to fail would be history!

The business would revert back to an age where clients could understand what their agents were undertaking without the fear of conflicting interests. Regulations would have more clarity and the costs of compliance would likely fall. The downside is that costs and commissions may rise but never to the levels of the 1980's and the 90's.

By splitting up the banks the government could undertake a phased retreat from banks and create new opportunities for private ownership of the new financial services firms. A fanciful notion maybe but who is to say it won't happen?