After the Great Depression, America’s Congress decided one of the major reasons for the economic collapse was the banking industry. In particular, they argued that banks were engaged in too many lines of business, had potential conflicts of interest, and this caused the system to become unstable. This legislation is what originally split JP Morgan (NYSE: JPM) in two, separating it’s commercial and investment banks. In the US, the Graham Leach Act repealed this years later, bringing with it an onslaught of bank mergers which have created banks as we know them today.
In Britain, banks are now facing a potential Glass Steagall type breakup.Last week George Osborne, the new Chancellor, along with Business Secretary Vince Cable, kicked off a process that could see similar vengeance wreaked on the UK’s banking system. This action would likely split Barclays (NYSE: BCS) from its riskier Barclays Capital division, and Royal Bank of Scotland (NYSE: RBS), similarly splitting the firm to isolate it’s riskier investment business.
Last week, the new Government announced it was forming a cabinet committee, chaired by Mr. Osborne, that will set up an independent commission to consider breaking up the banks. Back in January, Mr. Cable clearly supported a British version of Glass Steagall when he commented: “Now that President Obama has taken on the issue of breaking up the banks on his side of the pond, it is time we do the same in the UK.” Of course, the American banking system is not being broken up – instead, it is just facing significant reform. This reform should return some stability to the system, and hopefully achieve the effects of Glass Steagall type legislation, without the collateral damage and massive structural changes it causes.
Paul Volcker, former Fed Chairman and Economic Advisor to President Obama spoke in London last week, and expressed that banks should not be allowed to dabble in hedge fund or private equity-related activities, either. Mr. Osborne said last week that the Government “wished to reduce systemic risk in the banking system to investigate the complex issue of separating retail and investment banking in a sustainable way.”
Is this political rhetoric or will the British Government actually break up the banks? In the end, parliament’s debate may lead to a set of more diluted rules, similar to the output of finance reform in America. The government has already committed to imposing steep taxes on bank bonuses going forward, which should appease the populist, but could ultimately drive jobs out of high street banks and into less regulated jurisdictions around the globe.
