From tomorrow's Observer (but on line tonight):
The significant role that British banks are playing in the Greek financial crisis, as documented in the Observer last week, again highlights the crucial need for the Independent Commission on Banking (ICB) to provide recommendations that will ensure future financial stability.
Ring-fencing retail and investment banking through "Chinese walls", as endorsed by the chancellor, George Osborne, will not produce a banking system that is safe. If companies can continue to move capital between retail and investment banking, the latter could still endanger the former. As a first step, full separation of banking functions is needed to insulate the taxpayer against failure. Full separation would provide depositors with institutions they can trust.
Unlike the US, there has been no independent and systematic analysis of why the crash happened. The ICB has been unable to address issues fundamental to the creation of safe and useful banking. The ICB should call for a further process to correct a wide range of flaws in the financial system left untouched by its inquiry.
Adrian Sanders, Liberal Democrat MP,
Lord Smith, Caroline Lucas, Green party leader, Jon Cruddas, Labour MP and 47 others Linda Jack, Liberal Democrat Federal Policy Committee, Naomi Smith, Social Liberal Forum Simon Hebditch, Social Liberal Forum, Cllr Stephen Knight, leader of the Liberal Democrat Group, Richmond upon Thames, Prof Richard Grayson, Charles Middleton, managing director UK, Triodos Bank, Ray Sheath, managing partner, Social Investment International, Nick Isles, MD Corporate Agenda, Richard Murphy, Director, Tax Research LLP, Jonathan Edwards, Plaid Cymru MP, Mark Durkan, SDLP MP, Mike Wood, Labour MP,Lisa Nandy, Labour MP, Yasmin Qureshi, Labour MP, Professor the Baroness (Ruth) Lister of Burtersett, Andrew Simms, New Economics Foundation, Neal Lawson, Compass, Ruth Potts, The Great Transition, John Kay (journalist and author), Jonathan Perraton, senior lecturer in Economics, University of Sheffield, Prof Doreen Massey, Open University, Dr Charles Dannreuther, School of Politics and International Studies University of Leeds, Hugo Radice, Life Fellow, School of Politics and International Studies, University of Leeds, Howard Reed, Director, Landman Economics, Prof Peter Case, Bristol Business School, Mariana Mazzucato, Professor of Economics, Open University, Professor Jonathan Rutherford of Middlesex University, Ian Gough, LSE, Professor Victoria Chick, UCL, Prem Sikka, Director, Association for Accountancy and Business Affairs, Prof. Giuseppe Fontana, Leeds University Business School, Ismail Erturk, senior lecturer in Banking, Manchester Business School, Chris Edwards, consultant and Senior Fellow, University of East Anglia, Professor Gregor Gall, University of Hertfordshire, Alan Hallsworth, Professor Emeritus, Staffordshire University, Professor Christine Cooper, University of Strathclyde, John Weeks, Professor Emeritus, SOAS, Stewart Lansley, Research Fellow, Bristol University, Geoffrey M Hodgson, Research Professor, University of Hertfordshire Business School, Prof Colin Crouch FBA, University of Warwick Business School, Prof George Irvin, University of London (SOAS), Deborah Doane, Director, World Development Movement, Andy Flanagan, Christian Socialist Movement, Clifford Singer, False Economy, Ben Dyson, Positive Money, Greg Ford, Re-Define, Joe Cox, Campaigns Organiser, Compass
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Richard, as you know I have written on this and I fundamentally disagree with the views expressed above. Separating retail and investment banking will not protect retail depositors, for the simple reason that the behaviour that caused the collapse of four UK banks was primarily excessively risky retail and corporate lending. Investment banking is a major source of settlement funding for retail banking, and if these funds are cut off then retail banks wilI be more at risk, not less, in the event of bank runs.
I acknowledge that investment banking and proprietary trading have very serious problems and much needs to change there. And it is true that in the US excessive risk and leverage in these areas was a huge factor in the financial crisis. But the UK’s banking problems have a different cause. Contrary to popular belief, the UK system is systemically “safer” than the US system already, because we do not routinely securitise high volume retail debt such as mortgages and sell it around the world as they do. 70% of the US mortgage market is securitised, whereas in the UK market securitisated debt is a tiny proportion of the total. However, this means that the risks of lending generally remain with the retail lenders rather than being distributed to investment banking. Hence our retail banking is higher risk and our investment banking lower risk than the equivalent structures in the US. Borrowing the US’s Glass-Steagall separation does not address the issues with the UK banking system. We need a UK solution to UK problems.
We are going to have to disagree on this one.
I fear that you are looking at this issue was a banker, and not from an economic perspective.
The risk in retail banking that gave rise to elements of the crash arose entirely because of the commodification of the lending that they made, and the pressure on them to force more of that lending into the marketplace because of the ease which investment banking could sell the resulting commodified debt as a result of its AAA rating by rating agencies
This was an Investment banking push driven model of retail banking, not a demand led one.
Your argument about the degree of securitisation does not hold either: Northern Rock failed and it was heavily securitised. We need to protect the system from such risk recurring. It also brought down HBOS through the use of its Grampian special-purpose vehicle.
So the risk is very real, present, and continuing.
I do not say that splitting is a solution to every problem, because it isn’t, but it sure as heck is essential if we artery solve the problems, and put investment banking back into its box, where it firmly belongs, as a minor, and peripheral activity within the economy
“As a first step, full separation of banking functions is needed to insulate the taxpayer against failure. Full separation would provide depositors with institutions they can trust.”
Failure to achieve this would mean the the coalition would have defective cognitive learning processes. When (if ever) is Cable going to oppose the “Chinese Wall” idea.