Obama announces banking separation - the UK should do the same

It is time for wise reform in the national interest

President Barack Obama today announced that he wants to separate the activities that banks engage in.  These reforms are along the right lines.  The UK should do the same.


The Obama announcement today heralded legislation to limit the scope of bank operations.  Announcing the 'Volcker Rule', after Paul Volcker, a former Federal Reserve chairman who has advocated such measures, President Obama announced that he wanted to 'ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.'  Obama is concerned that banks are relying on government support to take excessive risks.


President Obama also announced that he wanted to put a limit on the size of banks, preventing institutions in future being 'too big to fail'.


This is a significant announcement today.  It echoes the Glass Steagall Act that separated banks after the 1929 Wall Street Crash, until the legislation was reversed in 1999.  Why doesn't the UK do the same?


There have certainly been calls for separation of banking operations.  The Christian Socialist Movement for example has an Early Day Motion (no 531) before Parliament calling for just that.  Yes, it's true that Northern Rock was not an investment bank - but it got involved with toxic assets traded and promoted by investment banks.  And of course, Lehman Brothers was an investment bank and was not involved in retail banking at all - but many retail banks got themselves exposed to the racy assets Lehmans was trading.  Systemic risk occurred because banks went beyond their core functions.  That is why we need a return to more narrow, or utility, banking.


So, what's stopping us?  Up until now, it has been collective political will.  No government could act, it seemed, without international cooperation.  Yet the US has done just that.  There is another reason - the stakes are higher in the UK than the US.  The financial sector is a larger proportion of the UK economy and the risks of reform can appear larger.  It is understandable perhaps that politicians might hesitate - indeed they are wise to think things through.


However, eventually they must act and before it is too late.  It is time for vision.  They must also guard against both a 'Treasury View' which is stuck in the pre crisis mindset (ie let the financial sector alone) and the intensive lobbying and screaming from banks.  The banking sector has demonstrated extremely poor judgement.  It cannot reform itself now and it does not want to do so.  Its bluff should be called because government's responsibility is to the people.  Only clear government (and legislative) action can prevent another crisis.



Stephen Beer, 21/01/2010

 Recent Articles 
The 100 trillion dollar question 
ESG must learn from the tech bubble - returns matter 
What should the Bank of England do about inflation? 
Companies must be discerning when picking causes to support 
The next generation of ESG opportunities - FT Adviser 
 Labour News