Glass-Steagall is dead, Long live Glass-Steagall

I am surprised every time I see a moment of inspiration emanate from our mother country, the United Kingdom.  We fought a war of independence with them precisely because their system was too inflexible for our rapidly expanding society.  After all, they are supposed to be stodgy, unchanging, glued to the past, dyed in the wool, you get the idea.  Whether that is true or not, every so often they display a lesson to be learned that we in the United States can use to improve our own society.  Sure our they gave us our legal system.  But, we turned it into our own version.  For far too many in the United States, our legal system has become a game of "what I can get away with" rather than "what is the right thing to do".  For others, it has become the great American lottery where "trial lawyers" sell tickets in exchange for half of the take.  I digress.

The great inspiration I am talking about is the Vickers report commissioned by Chancellor of the Exchequer George Osborne and Shadow Chancellor Ed Balls. Sir John Vickers and his committee recommend banks internally split themselves into two business units.  The ringfence, as it is called, will place the retail banking operation into a unit that is separate from the investment banking operation.  In the UK it is estimated that between a sixth and a third of the banking sector's capital would wind up in the retail bank.  This separation is to include not only the capital base but the governance arrangements and culture.  The UK government has proclaimed its support to move forward with this plan, or scheme as they call it, to be completed by 20-19.

I wonder how long this separate operations within one banking company arrangement will last.  Before Glass-Steagall was finally killed in the United States by the Gramm-Leach-Bliley Act of the Clinton administration, the difference in culture between those in commercial banks and those in investments was stark.  The cultural repulsion between commercial and investment banks has always been greater than the business attractiveness of synergy.  We'll see how long this new arrangement will work in the UK.

If this plan sounds a lot like Glass-Steagall itself, I think you're right.  That marvelous bit of legislation required a 45 page bill and its reinstatement would solve the too big to fail problem as well as the moral hazard of Federally insuring deposits that banks are now free to use to for merchant banking, investment banking and other businesses. I don't know if members of Congress, regulators at the SEC and Treasury or at the Fed are listening, but this is a idea worth considering again.

As Paul Volcker recently said "Too big to fail is too big".  Are there other ideas out there to create a robust and resilient banking system?  I know one thing, the 2319 page Dodd-Frank bill does not do it.

I am the eternal optimist that we eventually get things right.  Sir Winston Churchill put it best "Americans always try to do the right thing, after they've tried everything else".

What does all this have to do with Risk Management?  It comes down to the need to have a stable financial market rather than simply an efficient one.  Efficient systems work great, until they don't.  More on this idea next time.