Duncan’s Economic Blog

Banking Reform

Posted in Uncategorized by duncanseconomicblog on January 27, 2011

The public responses to the Vickers Commission on banking are online and worth a look.

I especially recommend taking a moment to read Sir George Mathewson’s views. This former CEO of RBS, and the man responsible for the takeover of NatWest in 2001, recommends that both RBS and Lloyds should be broken up.

FT Alphaville has some excerpts and suggestions as to where to start reading. (Like them I am most amused by Nigel Lawson’s suggestion that the Commission read a couple of chapters of his memoirs!).

We are seeing a clear divide open up, many outside experts and former bankers are calling for radical reforms – the banks to be broken up, retail and investment banking to be separated, etc. The big banks themselves are digging in and defending their business model.

I would, again, recommend that those interested in this debate that a look at Mark Blyth’s recent piece on how the old model may well be broken and at some of the issues raised in my own recent post on banking.

I suspect the final report from Vickers et al will make for interesting reading. But with Vince Cable emasculated, will George Osborne be prepared to do anything that damages the resale value of our stakes in RBS and Lloyds?

I rather suspect his desire for a pre-election war-chest to fund tax cuts will trump reform.   

PS – For what it’s worth I’d favour some from of separation between retail and investment banking to make protecting deposits more straight forward (and I’d settle for separately capitalised structures within the same group), the remutualisation of Northern Rock (I did a quick post on why this makes sense back in 2009), the break up of the “too big fail to banks”, the introduction of more competition, the establishment of a state investment bank and green investment bank, and a focus on new regional banks.

7 Responses

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  1. gastro george said, on January 27, 2011 at 12:12 pm

    I like your last point. I forget where I read it recently, but somebody was explaining how the problem with the big banks lending to SMEs was as much cultural and structural as anything to do with bank policy. Essentially big banks are structured to deal with multinational companies – dealing with SMEs is more costly and time-consuming.

    It’s notable that a number of European countries have preserved their regional banks that provide good support for SMEs (OK, some are a bit shaky financially in the current crisis, but that doesn’t detract from this aspect). Is the problem that, because they are not as profitable as the big banks, and with our very open takeover rules and their managers having an eye on their wallets, they have been lost in the name of “efficiency”? If so, then they would need to be protected in some way.

    • duncanseconomicblog said, on January 27, 2011 at 12:16 pm

      I agree there is a cultural problem with the bigger banks interacting with SMEs, local managers have little discretion in lending to businesses they might know very well.

      It’s a bit of both – easy takeoers, plus reduced costs from running larger organisations.

      I’d actually favour a reduced corporation tax on banks with smaller balance sheets, that were regionally focussed and deposit funded.

      • Alex said, on January 27, 2011 at 1:08 pm

        But when it comes down to it, it’s the stick rule – no matter how much gold you have, the guy with the stick eventually makes the rules.

        That is to say, state power must be asserted to stop them going ape. The examples I have in mind are the German Landesbanken, which were once very good at channelling capital into the mittelstand but unfortunately caught the smell of money drifting downwind from London (remember WestLB? 6,000 pubs? Jumpers for goalposts?). Also some others like Hypo Alpe-Adria, Northern Rock, IKB Deutsche Industriebank etc.

  2. Luis Enrique said, on January 27, 2011 at 12:51 pm

    alphaville has Kotlikoff’s response too. I’m rooting for LPB!

  3. NM said, on January 27, 2011 at 2:15 pm

    For me, its Mathewson’s last point that is the most interesting one here. “The separation of borrower from the debt owner through securitisation” is a key issue. If banks had kept even a decent percentage of mortgage / credit risk on their books, how much more prudent would they have had to be?

  4. Cian said, on January 27, 2011 at 9:16 pm

    As far as I’ve ever been able to work out larger banks are more inefficient than smaller banks. Obviously it makes sense to expand if you’re the managers (bigger salaries/bonuses), less so if you’re the shareholders. So it might actually make more sense both for UK PLC and HMGov to split them up.


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