UK Takes On ‘Too Big To Fail’ Banks

There is no political will in the United States to do what’s necessary to make sure we don’t see a repeat of the 2008 financial meltdown. The reason might be more complex, but at the root of it is this: money in politics. Our elected officials are beholden to the banks, not the citizens. Across the pond, some are showing the political courage necessary to stabilize the financial system, and make it more amiable to the average person. If successful, banks in the UK will no longer be able to gamble with customer deposits. No longer will banks lean on taxpayer bailouts to hedge against unnecessary risk.

Bank of England - photo by Ofer Deshe

UK prepares new law to break up errant banks:

Reuters — British banks that fail to shield their day-to-day banking from risky investment activities could be broken up, finance minister George Osborne said on Monday, bowing to political pressure to come down harder on reckless lenders.

With Britain’s banks buffeted by scandal and part-nationalized Royal Bank of Scotland (RBS.L) (RBS) set to be fined up to 500 million pounds this week for interest rate rigging, Osborne decided to “electrify” the ring-fence around banks’ core retail activities with the threat of break-up.

“Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system. The anger people feel is very real,” Osborne said in a speech ahead of the publication of the banking reform legislation.

“Let’s turn that anger from a force of destruction into a force for change,” he said, speaking at the offices of U.S. bank JP Morgan (JPM.N) in Bournemouth, southern England.

Look at that first sentence. The UK is actually planning to break up banks to shield risky investments from day-to-day banking, and they refer to it as “bowing to political pressure.” We could use a little of that in the U.S. But could you imagine if something like this was proposed in the United States? If we already have a socialist president — excuse me, Kenyan socialist president — what would Republicans scream next?

Under the new rules, the Bank of England will monitor whether banks’ investment banking arms, which trade complex securities, are endangering their retail operations.

If the central bank finds a breach, the government will decide whether to flick the switch on the electric fence, forcing the bank to sell one of the two arms.

“Banks require discouragement from gaming the rules. They will always try to do so unless strong disincentives are put in place,” said Andrew Tyrie, the chairman of the parliamentary commission that had demanded the break-up threat.

To some of us, this is simply common sense. To others, it’s a secret plot to end freedom as we know it.

photo by Ofer Deshe

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  • Krys

    We already had this in place until Congress repealed the laws separating retail banking from investment banking. I think it was called the Glass Stiegel Act and it worked rather well until it was repealed. Let’s just reinstate it. We don’t even have to come up with something new this go around.

    • http://leftcall.com/ David K. Sutton

      Yeah, as it turns out, they did a few good things post-1929 crash. Who knew? :) And then elected officials in the late 90s thought they knew better. And what’s even worse? They still haven’t learned.