Seperating retail banking from investment banking.
Discussion
Sounds, to a non banking person, like a wise move. But no doubt there is more to this than the initial headline. So what is the downside of it all?
BBCNews said:
Chancellor George Osborne is to force banks to ring-fence their retail operations from investment banking.
In a speech on Wednesday he will say banks must be set up so that their branches and public savings and loans would not be damaged if their trading arms ran into trouble.
The legal separation of the functions of big banks was recommended by the Independent Commission on Banking.
He will also announce the privatisation of Northern Rock.
The former mutual was nationalised in 2008, in the early stages of the financial crisis.
Mr Osborne will also say that banks will have to hold more capital to protect themselves against future losses than the new international minimum of 7%.
LinkIn a speech on Wednesday he will say banks must be set up so that their branches and public savings and loans would not be damaged if their trading arms ran into trouble.
The legal separation of the functions of big banks was recommended by the Independent Commission on Banking.
He will also announce the privatisation of Northern Rock.
The former mutual was nationalised in 2008, in the early stages of the financial crisis.
Mr Osborne will also say that banks will have to hold more capital to protect themselves against future losses than the new international minimum of 7%.
I agree.
The main downside that people will shout about is that banks will put a service charge on normal current accounts.
Frankly, I think that is a small price to pay.....and quite a fair one if you think about it. Especially when we're talking about a fee that will most likely be less than a £10 a year.
Banking is a service provided by companies.......and not a right bestowed upon humans (though Im sure if you give the EU enough time it will become a 'right').
Therefore, as a service, I am quite happy to pay for having my money 'secure ' in a vault rather than lying around my house. Remember, if you don't like banks, and their managers, then you can take you money and look after it yourself. No one is forcing you to keep it all in a bank. But keeping it in a bank makes things a hell of a lot easier for me...and so like most other 'services' in life, I'd be happy to pay for it......especially if it means the people I'm entrusting it to can't gamble with it.
The other downside I can see is that on normal accounts they may decide to not pay interest on money held in the bank, but frankly it is such a small amount anyway I can quite safely say I won't miss it.
The main downside that people will shout about is that banks will put a service charge on normal current accounts.
Frankly, I think that is a small price to pay.....and quite a fair one if you think about it. Especially when we're talking about a fee that will most likely be less than a £10 a year.
Banking is a service provided by companies.......and not a right bestowed upon humans (though Im sure if you give the EU enough time it will become a 'right').
Therefore, as a service, I am quite happy to pay for having my money 'secure ' in a vault rather than lying around my house. Remember, if you don't like banks, and their managers, then you can take you money and look after it yourself. No one is forcing you to keep it all in a bank. But keeping it in a bank makes things a hell of a lot easier for me...and so like most other 'services' in life, I'd be happy to pay for it......especially if it means the people I'm entrusting it to can't gamble with it.
The other downside I can see is that on normal accounts they may decide to not pay interest on money held in the bank, but frankly it is such a small amount anyway I can quite safely say I won't miss it.
In the US it was called The Glass-Steagall Act.
Good idea, bankers hate it because all that safe money washing around from domestic banking can be used to leverage risk and make them a fortune. Or lose someone else's fortune. It's a win/not-lose situation for them.
That's why they made the idiot politicians get rid of it.
Good idea, bankers hate it because all that safe money washing around from domestic banking can be used to leverage risk and make them a fortune. Or lose someone else's fortune. It's a win/not-lose situation for them.
That's why they made the idiot politicians get rid of it.
Victor McDade said:
So, any shareholders, which bit would they own?Retail, investment or, as it appears, both?
How would shareholders be able to judge the risk in investing in any Bank with this in force?
Separate completely and a considered judgement could be made.
"Safe" retail, more "risky" investment, hopefully for better rewards.
The investors' decision.
What difference is this supposed to make? Proprietary trading, let alone Investment Banking, didn't bring any of the banks down here.
HBOS collapsed because of bad lending to commercial property. Northern Rock, Bradford and Bingley and the Dunfermline didn't own investment banks.
RBS collapsed because of many stupid lending decisions, the over-priced takeover of ABN Amro and a dodgy balance sheet. If anything, it's Global Banking and Markets division is what is keeping the company in existence.
Politicians like to bang on about casino banking yet the biggest risks are in property lending - which they consider "utility" banking. Proprietary trading has a lower systemic risk than lending on housing bubbles.
If anything splitting retail and investment operations makes things worse for retail depositers and borrowers of the latter. Common perception is that retail deposits fund the "casino" operations - they don't. The only bank were UK retail deposits fully cover UK retail liabilities is HSBC - all the others rely on their other operations to provide around £150 billion to cover the gap between retail assets and liabilities. Prevent them from doing that and they'll need to reduce liabilities (i.e. stop lending when everyone wants them to lend more), increase deposits (unlikely) or use covered bonds (bonds secured against mortgages).
The trouble is depositors won't be able to claim on the mortgages secured by the bonds and in the new ring fenced retail bank, those mortgages will form a higher proportion of the assets (compared to the existing group-wide balance sheet): in short, lower protection for depositers.
HBOS collapsed because of bad lending to commercial property. Northern Rock, Bradford and Bingley and the Dunfermline didn't own investment banks.
RBS collapsed because of many stupid lending decisions, the over-priced takeover of ABN Amro and a dodgy balance sheet. If anything, it's Global Banking and Markets division is what is keeping the company in existence.
Politicians like to bang on about casino banking yet the biggest risks are in property lending - which they consider "utility" banking. Proprietary trading has a lower systemic risk than lending on housing bubbles.
If anything splitting retail and investment operations makes things worse for retail depositers and borrowers of the latter. Common perception is that retail deposits fund the "casino" operations - they don't. The only bank were UK retail deposits fully cover UK retail liabilities is HSBC - all the others rely on their other operations to provide around £150 billion to cover the gap between retail assets and liabilities. Prevent them from doing that and they'll need to reduce liabilities (i.e. stop lending when everyone wants them to lend more), increase deposits (unlikely) or use covered bonds (bonds secured against mortgages).
The trouble is depositors won't be able to claim on the mortgages secured by the bonds and in the new ring fenced retail bank, those mortgages will form a higher proportion of the assets (compared to the existing group-wide balance sheet): in short, lower protection for depositers.
WhoseGeneration said:
Fittster said:
Just bring back giro bank and say if you want a safe option here it is.
Pardon?People can choose to bank with the state bank or got to a commercial bank (which according to PH will be far better than a public sector organisation in every way) which would offer greater returns but being a commercial organisation obviously has a small risk of failure.
In the event a commercial bank(s) fails the government can say to the people caught up in it "You had you're bed you lie in it".
http://en.wikipedia.org/wiki/Girobank
Fittster said:
If it's backed by the government it's not going to go bust.
That's the job of the BoE - the lender of last resort. A state-owned bank in name or by share ownership won't change a thing. Reason we got into this mess is because of lax regulation - the French avoided this mess because they require large deposits for property purchases. It's not the system that needs changing it's the whole mindset of the L'Oréal generation.http://www.thedailymash.co.uk/politics/politics-he...
Edited by fido on Wednesday 15th June 10:38
Globs said:
In the US it was called The Glass-Steagall Act.
Good idea, bankers hate it because all that safe money washing around from domestic banking can be used to leverage risk and make them a fortune. Or lose someone else's fortune. It's a win/not-lose situation for them.
That's why they made the idiot politicians get rid of it.
incorrect. Glass-Steagall (among other things) ensured that retail and investment banks were completely separate firms. This is just ringfencing *within* a company.Good idea, bankers hate it because all that safe money washing around from domestic banking can be used to leverage risk and make them a fortune. Or lose someone else's fortune. It's a win/not-lose situation for them.
That's why they made the idiot politicians get rid of it.
And all bankers don't hate it, by the way. I'm in favour.
Seems fair enough, it'll unshackle us, and we genuinely don't want to need an implicit guarantee to do well.
The retail banks tend to make little money, and should be left to go their own way. We can then concentrate on servicing corporates, supra nationals, and governments.
Won't happen though.
The retail banks tend to make little money, and should be left to go their own way. We can then concentrate on servicing corporates, supra nationals, and governments.
Won't happen though.
The Law of Unintended Consequences in Politics` will make this totally unworkable.
Politicians simply do not have the span of control to achieve this.
Corporate Law and the Companies Act which governs all this makes this kind of cherry picking unworkable in practice.
If the Main Bank fails, as a corporate entity, which they will, undoubtedly, if they carry on gambling as before, the subsidiaries CANNOT be isolated from the ownership of the main holding Bank.
It would be quite umlawful for the subsidiary to be removed from the Bank without full compensation being paid to the Bank, which would mean that the full value of the subsidiary must be paid NO DOUBT ONCE AGAIN BY THE TAXPAYER.
How much BETTER to ISOLATE the Retail Banks from the Investment Banks and then guarantee the Retail Banks security.
Trying to do this within the current structures which are in a complex multinational, multi languaged, intercontinental business whilst separating an element of the business and underwriting only that element is typical of Modern politicians.
Unfortunately Modern Politicians think they can walk on water.
Sadly its the taxpayer once again who will get wet. Very possibly drowned.
This is really an impossible task.
If the government want to secure UK investors deposits SEPARATE the functions.
Politicians simply do not have the span of control to achieve this.
Corporate Law and the Companies Act which governs all this makes this kind of cherry picking unworkable in practice.
If the Main Bank fails, as a corporate entity, which they will, undoubtedly, if they carry on gambling as before, the subsidiaries CANNOT be isolated from the ownership of the main holding Bank.
It would be quite umlawful for the subsidiary to be removed from the Bank without full compensation being paid to the Bank, which would mean that the full value of the subsidiary must be paid NO DOUBT ONCE AGAIN BY THE TAXPAYER.
How much BETTER to ISOLATE the Retail Banks from the Investment Banks and then guarantee the Retail Banks security.
Trying to do this within the current structures which are in a complex multinational, multi languaged, intercontinental business whilst separating an element of the business and underwriting only that element is typical of Modern politicians.
Unfortunately Modern Politicians think they can walk on water.
Sadly its the taxpayer once again who will get wet. Very possibly drowned.
This is really an impossible task.
If the government want to secure UK investors deposits SEPARATE the functions.
Spiritual_Beggar said:
Remember, if you don't like banks, and their managers, then you can take you money and look after it yourself. No one is forcing you to keep it all in a bank.
Not true. The money laundering regulations make it for practical purposes impossible to operate in cash these days.And if you want a job, just try to find any employer who's going to pay you in cash.
And then there's the monopoly abuses. No VISA card, no Olympics tickets.
Steffan said:
If the Main Bank fails, as a corporate entity, which they will, undoubtedly, if they carry on gambling as before, the subsidiaries CANNOT be isolated from the ownership of the main holding Bank.
But thety aren't gamblinmg as before. They've been forced to beef up their tier 1 capital. The OTC derivatives markets have pretty much dried up, and we now have more central clearing houses to manage settlement and margin calls.So, as usual, you are talking s
te.So now it appears that the ICB's ring-fence proposals will destroy the business models of many banks (ermmm isn't that the whole point?) thus force them out of Britain so the government is looking to water down the proposals.
http://www.telegraph.co.uk/finance/newsbysector/ba...
http://www.telegraph.co.uk/finance/newsbysector/ba...
Spiritual_Beggar said:
I agree.
The main downside that people will shout about is that banks will put a service charge on normal current accounts.
Frankly, I think that is a small price to pay.....and quite a fair one if you think about it. Especially when we're talking about a fee that will most likely be less than a £10 a year.
Banking is a service provided by companies.......and not a right bestowed upon humans (though Im sure if you give the EU enough time it will become a 'right')
So what about the "mandatory" bank account that I have to open in order to have my wages paid? How is it fair that I pay a fee for an account that I'm forced to have?The main downside that people will shout about is that banks will put a service charge on normal current accounts.
Frankly, I think that is a small price to pay.....and quite a fair one if you think about it. Especially when we're talking about a fee that will most likely be less than a £10 a year.
Banking is a service provided by companies.......and not a right bestowed upon humans (though Im sure if you give the EU enough time it will become a 'right')
Jasandjules said:
In my old bank the investment side made all the money, the retail side did not. We propped up the retail business...................
I see it like this.Retail banking is a utility much in the same way as water, power etc. We have been constantly told that the world could not continue to exist if we lost our banks so this must be the case.
I have to pay for water, power etc, yet we seem to have a major problem paying for our retail banking - or at least being charged in an upfront and transparent way - and this has partially led to some of the more dubious retail banking practices of the past years - mis-selling of extortionate PPI's etc.
So lets grow up about this. I want Retail and Investment banking split. It seems the logical way of protecting retail from the excess of risk available to Investment and maintaining the utility of banking that we need. Investment would be free to gamble as they see fit, with the explicit condition that if you f
k up you fail - no transfer of funds between businesses and no taxpayer backstop.In return, Retail needs to operate as a genuine business and therefore be capable of generating a return for it's owners and shareholders. So, charge us an annual fee to hold and operate a current account. In an ideal world, I would like to see a well run and regulated retail banking sector that was a pretty much risk free investment that delivers similar return levels to 10-30yr gilts and could be viewed as a very good place to deposit long money. This sort of stability would surely be attractive to personal and institutional investors alike - more so because investors will know that the value of their assets and capital cannot be used as a tool to leverage Investment bank gambles elsewhere and could not be diminished or devalued if Investment had a bad day at the races.
I am amazed, given the state of the current finance industry, that no potential new start bank has entered the market on this principal. I think there are a large number of people (especially the "grey pound" market) that would be willing to exchange maybe a couple of hundred pounds a year in account and card fees for the stability that a new debt free sensibly run bank would offer them. Imagine the marketing campaigns you could run - honesty, integrity, transparency - bank with us 'cos we ain't bust type of thing - oh the fun you could have poking the others with a stick for the next decade or two as you slowly dismantled their empires.
Like any other product, if it is offered for nothing, it is instantly perceived as having no value. The banking industry, rather than selling the case for why we should value their services decided to go the bait and switch route - current account and cards free but £38 each time you go a penny overdrawn, PPI on loans that were 3 or 4 times the market rate etc etc and this is one of the prime reasons that an industry that was generally held in such high regard 30 or 40 years ago is now universally derided.
With the government seemingly doing little to challenge the status quo for obvious reasons of self interest, it falls to the industry itself to drive the changes needed. Sadly, as with 99% of corporate behavior these days, it is still all about this weeks results, this months figures, this quarters performance. We need leaders within the industry to look further over the horizon and build businesses that will sustain for decades - much like the people that built the institutions in the first place.
It's a nice dream.
Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff