Editor's comment: Breaking up the banks - who will pay?
The politicians need to think carefully before "breaking up the banks". If they have their way the face of banking will be unrecognisable and it is the consumers of financial services and companies that are not cash rich that will ultimately pay.All this talk of ring fencing different activities within universal banks or even "breaking up the banks" Glass-Steagall-like may sound good on paper to politicians looking to appease a disillusioned electorate that wants to make banks pay, but is it really going to prevent the panic that caused a run on the banks by depositors and investors back in 2008?
More importantly perhaps, it suggests that a line can be easily drawn down the middle; a bit like cutting a cake; between the different activities (deposit taking, securities activities) within a bank without any negative repercussions for other parts of the bank.
Separating retail banking from so-called risky investment banking sounds like a good idea, but if investment banks are going to be more strictly regulated anyway and prop trading desks closed down, is there really any need to "ring fence" the retail banking activity of "systemically-important" institutions?
More importantly, who are these SIFIs (systemically important financial institutions) as before 2008 few would have argued successfully that Northern Rock in the UK was a SIFI and it did not even have an investment banking division yet it made bad lending decisions.
What interests me is where does transaction banking sit within all this? It is neither retail nor investment banking, yet it does cross-over with investment banking in terms of debt and capital markets products and investments. Increasingly we are seeing more collaboration between the Global Banking and Markets and GTS (Global Transaction Services) divisions within banks.
Despite seeing their investment banking colleagues take a huge hit during the 2008 financial crisis, most of the global transaction banks continued to perform well throughout the crisis. The main impact the crisis had on transaction banks was that it saw margins for traditional products like Letters of Credit and credit lines increase substantially, and in a number of cases it reduced credit capacity or appetite. But this was more a direct result of the general panic that gripped the markets, which resulted in interbank lending grinding to a halt, rather than their investment banking divisions selling some dodgy CDOs.
If the politicians have their way there is no question that banks will be unrecognisable in terms of how they operate and behave, but who is going to pay for all of this? Ultimately it will be the end customer; the consumer and companies that are not cash rich and rely on bank financing.
Illustration supplied by Salvatore Vuono.
Date Posted:25th January 2011