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Split the Split the Banks - A New Glass-Steagall Act Is Needed — Not Just in the U.S.
12 July 2013
THE FOLLOWING IS THE LEAD EDITORIAL FROM LONDON’S FINANCIAL TIMES July 12, 2013: An unlikely couple of U.S. senators, John McCain and Elizabeth Warren, have tabled legislation that would bring back a version of the 1930s Glass-Steagall Act. It is improbable that their proposal will see the light of day, such is the opposition in Congress. But the instinct of the two legislators that retail banking ought to be separated from riskier activities is sound and should be heeded. As the financial crisis made abundantly clear, the main beneficiaries of the universal banking model have been the banks themselves. They have been able to fund themselves cheaply, since investors know governments will come to the rescue to save depositors. This implicit subsidy encourages the type of reckless behavior taxpayers around the world are still counting the cost of. U.S. legislators have sought to limit the problem by banning banks from gambling with their own capital via the so-called "Volcker rule." In the U.K., retail services and capital market activities are being split into separately capitalized subsidiaries. EU legislators are taking a similar view, following a report by the Erkki Liikanen, Finland’s central bank governor. In principle, these measures should make banks safer. But there are concerns over their applicability. The implementation of the Volcker rule has been severely delayed by haggling over what constitutes proprietary trading. Meanwhile, the U.K. and European ringfences have shown themselves permeable to some derivatives and hedges. Full-scale separation could be easier to enforce — the original Glass-Steagall Act was a mere 37 pages long. It would also eradicate the testosterone-charged culture of investment banking from retail activities, which require patient stewardship. As the Libor scandal has shown, when the two cultures conflate it is the traders who typically have the upper hand. Without deposits, investment banks would find it harder to fund themselves, which would cap their size. This could inject competition into a sector dominated by a few players. The crumbling of the giants would spare politicians from their mighty lobbying influence. Retail banks would still have to be carefully monitored and properly capitalized. Many crises have originated from old-fashioned mortgage books. Regulators should also ensure that when they have to save a retail bank, the impact on taxpayers is minimized via provisions to wipe out equity and "bail in" bondholders. But even if the public purse is used, it should not subsidize casinos. When popular discontent with the banks is so high, this powerful argument cannot be ignored. |