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MSE News: ICB report urges banks to separate retail and investment arms

edited 30 November -1 at 1:00AM in Budgeting & Bank Accounts
9 replies 1.7K views
Former_MSE_HelenFormer_MSE_Helen
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edited 30 November -1 at 1:00AM in Budgeting & Bank Accounts
This is the discussion thread for the following MSE News Story:

"The report states UK institutions should ring-fence money deposited by the public from 'casino' operations ..."

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  • edited 12 September 2011 at 11:21AM
    Old_WrinklyOld_Wrinkly Forumite
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    edited 12 September 2011 at 11:21AM
    Does MSE have any views on the ICB's wish to get the Government to interfere with the Lloyds divestment of branches/accounts?
    (This would seem to be the earliest thing to happen in their timescales ...)
  • So would this have stopped Northern Rock and Bradford and Bingley failing?

    Would HBOS have survived with these rules in place?

    Would the Government own 83% of RBS if this had been legislated for a decade ago?

    (I know the answer for the first 3 - not sure about RBS)

    It reeks of taking action without considering what you're trying to stop happening. That invariablty brings in extra cost, discourages competition in the market and doesn't deliver anything of value.
  • jamesdjamesd Forumite
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    opinions4u wrote: »
    So would this have stopped Northern Rock and Bradford and Bingley failing?
    Yes, seems likely for both. Look at where the use of deposit money falls between the parts of the banks. Both of those two also relied very heavily on short term market borrowing and failed when those markets froze due to a failure of trust between banks. Measurse to make banks more trustworthy should help to prevent a repeat of that freeze, though much of the action on this needs to be international if it's to work well. The increased capital requirements would increase the duration of a freeze that could be survived before failure.

    Market freezes are not guaranteed not to happen again, Just observe the way many US-based institutions are reducing their holdings in Europe at the moment due to concerns about the Euro and sovereign credit risk.
    opinions4u wrote: »
    Would HBOS have survived with these rules in place?
    The retail banking part of it, seems to have a significant chance, yes.
    opinions4u wrote: »
    Would the Government own 83% of RBS if this had been legislated for a decade ago?
    Unlikely. Possibly of the retail part, if the capital requirements were insufficient to protect that part. The non-retail part would have failed, or at least, the idea is that it should be possible for that to happen.
    opinions4u wrote: »
    It reeks of taking action without considering what you're trying to stop happening. That invariablty brings in extra cost, discourages competition in the market and doesn't deliver anything of value.
    It seems like a tolerably costly move that might well improve stability. Glass-Steagall certainly had some useful effects and it's perhaps interesting that the recent events happened only after it was abolished in 1999 and then some time for the adverse effects of its removal to arrive.
  • JimmyTheWigJimmyTheWig Forumite
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    Presumably this means that interest rates on savings will stay at rock bottom forever, doesn't it? If the banks can't invest the money we save with them then they can't give us a very good return.
  • jamesd wrote: »
    Yes, seems likely for both. Look at where the use of deposit money falls between the parts of the banks. Both of those two also relied very heavily on short term market borrowing and failed when those markets froze due to a failure of trust between banks. Measurse to make banks more trustworthy should help to prevent a repeat of that freeze, though much of the action on this needs to be international if it's to work well. The increased capital requirements would increase the duration of a freeze that could be survived before failure.

    Market freezes are not guaranteed not to happen again, Just observe the way many US-based institutions are reducing their holdings in Europe at the moment due to concerns about the Euro and sovereign credit risk.

    The retail banking part of it, seems to have a significant chance, yes.

    Unlikely. Possibly of the retail part, if the capital requirements were insufficient to protect that part. The non-retail part would have failed, or at least, the idea is that it should be possible for that to happen.

    It seems like a tolerably costly move that might well improve stability. Glass-Steagall certainly had some useful effects and it's perhaps interesting that the recent events happened only after it was abolished in 1999 and then some time for the adverse effects of its removal to arrive.
    Your understanding of "Investment Banking" is different to mine on this.

    I'll toddle off and do some bedtime reading on the proposals tonight.
  • Alpine_StarAlpine_Star Forumite
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    Does MSE have any views on the ICB's wish to get the Government to interfere with the Lloyds divestment of branches/accounts?

    I would imagine that MSE's view is the same as mine ie it was Government's interference in allowing Lloyds to amass too many branches in the first place.
  • jamesdjamesd Forumite
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    The reading may be a little frustrating because the dividing line is apparently deliberately flexible.

    One interesting item from the press conference was a prohibition on using retail deposits for investment banking and the effects it was intended to have on increasing safety and decreasing funding costs of retail banking. At the expense of investment banking, which would lose that funding source.
  • ReaperReaper Forumite
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    jamesd wrote: »
    One interesting item from the press conference was a prohibition on using retail deposits for investment banking and the effects it was intended to have on increasing safety and decreasing funding costs of retail banking. At the expense of investment banking, which would lose that funding source.
    I think this is key and the main reason for the opposition from the banks, though they won't come out and say it publicly. At the moment their investments arms can borrow cheaply using either savers money or from borrowing on the markets. They can borrow cheaply because markets know the government has no choice but to bail out the bank if it all goes pear shaped.

    Any seperation of retail and investment means suddenly the investment arm struggles to fund high risk ventures because they can't use savers money and the markets are less willing to lend to them fearing the government will only rescue the retail arm.

    That is how it should be as paying market rates for borrowing acts as a brake on risky behaviour. The taxpayer should not have to underwrite any risks bankers choose to take in pursuit of a juicey bonus.
  • jamesdjamesd Forumite
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    Agreed. No reason for tax-backed guarantees for investment banking borrowing.
This discussion has been closed.

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