Wednesday, October 21, 2009

Mervyn King Joins Alan Greenspan, Paul Volcker in Call to Break up Big Banks

Well it seems everyone but the politicians and Ben Bernanke are shouting to break up the big banks so we stop "too bigger to fail". Thankfully the only people who matter are our legislators and since they have been cleanly swept into the back pocket of our financial oligarchs, none of these warnings will gain traction. It truly is amazing how powerful a small group of a few thousand Americans are (legislators plus a splinter of financial elite), able to withstand calls from the majority. Our de facto feudal system seems not much different from the 1400s... at least they let us own the land nowadays.

We've touched on the hood ornament that the Obama administration has made of Paul Volcker many times - for the latest example of how he has been stuffed into a closet please see today's Volcker Fails to Sell a Bank Strategy; it's not even worth devoting an entry to it anymore as it's become so systematic.

The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

The latest to make the fruitless call is the central banker of the UK, Mervyn King.

Via Bloomberg:
  • Bank of England Governor Mervyn King stepped up his call for governments to tackle the dangers posed by banks that are “too important to fail,” saying new capital rules won’t shield taxpayers from funding any future bailouts.
  • “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history,” he said in a speech in Edinburgh late yesterday.
  • He indicated that one solution could be to split up banks and separate riskier activities from more stable businesses such as taking deposits.
  • “Capital requirements reduce, but not eliminate, the need for taxpayers to provide catastrophe insurance,” King said. He added it is “hard to see why” proposals such as those of former Federal Reserve Chairman Paul Volcker to separate proprietary trading from retail banking are “impractical.”
  • King said the U.K. banking system is “highly concentrated” and greater competition is needed to reduce the dependency of households and businesses on just four institutions. The government owns 70 percent of Royal Bank of Scotland Group Plc and 43 percent of Lloyds Banking Group Plc. Barclays Plc and HSBC Holdings Plc are the country’s other biggest banks.
Looks like both countries now have their big 4 oligarchs (RBS, Lloyds, Barclays, HSBC - meet Wells, Bank of America, Citi, and JPMorgan). But somehow Canada does not run into these problems with an almost identical concentration of 5 major institutions. Then again Canadian bankers did not threaten for 2 decades to move away to another country if the regulators stifled their financial innovation or pay. I believe it is cultural more than anything - the UK and US are peas in a pod.... we don't see this extreme anywhere else on the globe. There must be a reason.

[Oct 15, 2009: Even Alan Greenspan Thinks the Banks Have Become too Large]

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