In the wake of several banking scandals, Great Britain’s Chancellor of the Exchequer (Finance Minister) Osborne entertained the idea of breaking up big integrated financial institutions.
He spoke about a possible new law to facilitate this process at a recent speech in Bournemouth, England.
“Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system. The anger people feel is very real,” Osborne said in a speech at the offices of JP Morgan, according to a Reuters report.
The complete set of regulations is yet to be published, but it is clear that Britain wants to take some more drastic measures. Osborne said the country is planning to include a provision that will make it possible to split off core retail activities from more speculative divisions, such as an investment bank’s proprietary trading operations.
We need to rid the world of the problem of ‘too big to fail.’
—Bank of England Governor Mervin King
“Banks require discouragement from gaming the rules. They will always try to do so unless strong disincentives are put in place,” Andrew Tyrie, the chairman of the parliamentary commission that pushed for the break-up provision, told Reuters. So far, the new rules only stipulate that the Bank of England will watch investment banking activities and ascertain whether they damage retail operations.
In a Dec. 2012 speech given in New York, outgoing Bank of England Governor Mervin King hit similar tones.
“We need to rid the world of the problem of ‘too big to fail’,” King said, noting that the UK banking system represents 500 percent of UK GDP. In the United States it is 100 percent. He also said it should be possible for groups to be dissolved and put out of business, lamenting that currently no such framework exists, “We have absolutely no resolution framework at all, not even for small banks.”
Industry Expert Questions Regulators Resolve
Professor John Alan James, of the Center for Global Governance, Reporting, and Regulation at Pace University’s Lubin School of Business in New York City, thinks that the banks have stretched the patience of the government and the public due to recent scandals.
“The Libor scandal and the huge fines to be paid by the government owned Royal Bank of Scotland appear to have greatly angered the Conservative majority in Parliament. Stronger regulations, stiffer penalties and significant warnings to both senior banking executives and their board of directors’ members are among the new proposed regulations,” he said in a statement.
Ultimately, however, he does not think that regulators will follow through with their threats, whether it is in the UK or the United States.
“There is no way that the United States or the United Kingdom are going to break up any one of the [too big to fail] institutions. Because the day they announce it, the stock markets around the world will panic,” he told The Epoch Times.
He explained that the size of banks’ assets in terms of GDP is so large that any break-up would negatively affect the overall economy, as small community banks depend on their ability to source capital from larger institutions.
“All these banks are tied together. If I am in Dayton [Ohio] and company X comes to me and says, ‘I really would like a loan about x million dollars.’ And the bank says, ‘we want to get you your 100 million dollars, but it is beyond our capacity. But we will work together with the New York City banks and get you your 100 million dollars.’” James says, illustrating the fact that current chains of credit flow could be severely disrupted by new regulation.
He also thinks that given these risks and the lobbying power of the banks, regulators will ultimately refrain from passing tough regulations.
“Is it bark or bite? I will wait to see the parliament pass the regulations for the [British] Financial Services Authority, come up with the guidelines as to ‘when you do this, we will break you up’,” he said.
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