BREAK up the banks!” goes up the rallying cry. It’s not coming from the mob, however, but from various pockets across Parliament. For those wanting to appear tough on banks, it has become almost obligatory: you’ll only be taken seriously if you push for the nuclear option.
With banks as unpopular as they are, this is apparently good politics (though I don’t hear people in the pubs calling for it). But that doesn’t mean it is good policy. In fact, it is quite the opposite. Almost all the arguments used to justify breaking up the banks are readily refutable.
First, it is often said that universal banks – combining wholesale and retail banking arms – are inherently less stable.
But the financial crisis affected banks of all sizes and business models, and there is no evidence to suggest that smaller or monoline banks are intrinsically safer. Indeed, the International Monetary Fund has warned of the risks posed by small institutions in Germany, Spain and the US, as they do not benefit from the diversified revenue streams of banks with a universal business model.
It is secondly argued that, in universal banks, the swashbuckling culture of investment banking infects the retail side, leading to miss-selling to ordinary customers – such as the payment protection insurance and interest rate swaps scandals. There is no excuse for miss-selling, of course. But it is clearly not confined to banks with wholesale arms (or even to banks in general). Pure retail outfits of almost all structures (and almost all sectors) have also been found guilty. Whatever the root cause of miss-selling, it can’t be having a wholesale bank in the group.
What breaking up the banks would do, however, is make it more difficult for the banking sector to serve large complex clients, such as major corporations, therefore making it far more difficult for banks to promote economic growth.
Many governments around the world – from the UK to the US to France have considered forcing their banks to break up. They have all come to the same conclusion: it doesn’t make sense.
The UK’s Vickers Commission, and the EU’s Liikanen group both examined the case for breaking up the banks, and rejected it (preferring ring-fencing instead). The government is now legislating for Vickers ringfencing. But even before that has come into effect, there are calls to go further.
If the UK did go down that route, we would be the only country in the world that responded to the financial crisis by forcing the separation of wholesale and retail banking. That’s an extraordinary step for a country that wants to remain host to the world’s leading financial centre.
Anthony Browne is chief executive of the British Bankers’ Association.