Monday, 11 April 2011

Vickers report....

There are still calls for banks to be broken up along the lines of "casino" and "utility" lines.

This just doesn't make any sense.

Firstly is lending a utility activity? well if it is then there will be an enormous amount of risk in the "utility" bank, after all there was no investment banking involved in blowing up bradford and bingley, northern rock, hbos, or even rbs. It wasn't prop trading, or underwriting, commissions from equity trading, m&a advice that sank these banks, but having too many bad loans against too little capital.

Lets pretend that we can then put loan making into the risky "casino" bank, or perhaps suggest we seperate banks along three lines, deposit taking, lending, and investment banking. The businesses that are lending institutions will still require capital to lend, they are not going to be financed out of equity. In which case they will have to borrow money from.... dum dum dum... the utility banks, in which case deposits will still be at risk, unless the government is going to just guarantee those loans, in which case you've just double the business for accountants, auditors and regulators and not changed a thing.

The fundamental problem is that depositors make a loan, but they don't believe they are taking any credit risk, so take little to no care about the credit they extend, expecting the government to bail them out. The government has to charge for this, and the people to charge are depositors. However thats a real vote loser because the general public would much rather believe they were faultless innocent victums, rather than the greedy speculators they so love to castigate.

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