The British government has announced plans to force banks to separate their high street and investment banking arms which it says will protect ordinary customers and make sure bailouts are never required again.
The theory is that by ringfencing high street banking operations, the investment banking arms of those banks can’t gamble with (and lose) the money that ordinary customers put in their accounts and if the investment banking arm collapses, the high street bank can continue operating as normal.
Nice theory but completely and utterly bonkers.
It costs money to administer a bank account, to run a branch, pay for cashpoints, process cheque and card payments, etc. Unless you’ve chosen a bank account with extra benefits that attracts a monthly fee, you don’t pay for any of that yourself. I have a bank account that has a monthly fee attached to it and the value of the benefits I use (which is probably 1/10th of what’s available) far exceeds the fee I pay – it’s subsidised by the bank. So where does the money come from to subsidise the cost of administering your bank account?
It costs money to pay out interest on your savings. Even if your bank is only paying a nominal 0.1% interest, it’s still costing them money. So where does the money come from to pay interest on your savings?
The money comes from the profits the banks make on investments and which bit of a bank makes the investments? There’s a clue in the name. Sure, the high street part of the banks make money from interest on loans and mortgages that it gives out but it just doesn’t compare to the billions of pounds the investment bankers are playing with daily.
When Northern Rock collapsed it was because of a run on the bank caused by the Bank of England being forced by the EU Monetary Abuse Directive (aptly shortened to “MAD”) to disclose that it had offered (not given, just offered) an emergency credit facility to the bank. Robert Peston, who at the time hadn’t been elevated to sainthood by the BBC and was only useful for talking about exchange rates and zero balance credit card deals, got wind of this, made it seem like Northern Rock was about to collapse (it wasn’t) and caused mass hysteria amongst the general public. The rest is history, I’m sure we all remember the news footage of Northern Rock customers queueing up to withdraw their money and deprive the bank of all its capital.
Had Northern Rock not over-extended itself with high risk mortgages with low deposits, they probably would have survived because they’d have had cash from mortgage deposits and the collateral for inter-bank loans but as it happens, at the time of the run they were basically a poorly-funded, badly-secured high street banking operation. This is what will happen to all our banks when their investment arms are separated from their high street operations, particularly if their mortgage lending operations are lumped in with their investment banking operations.
Separating retail banking operations from investment banking will cost the banks billions. You might say “good, they deserve it”, especially if you read the Guardian or listen to the BBC but those costs will be passed on to consumers. Free bank accounts will be a thing of the past, interest rates on loans (and mortgages if they’re kept as part of retail banking) will go up, interest payments on saving will go down, branches will close, free transactions will end. Look at the table of charges for a business bank account – that’s what we can expect when the retail banking operations of our banks are starved of the cash their investment banking arms feed into them.
Back to the official reason the British government are giving for the separation. The theory is that it will protect the retail banking operations so taxpayers won’t have to bail out banks and customers’ money isn’t being gambled with and lost. The implication there is that the investment arm of a bank will be allowed to fail if it gets into trouble. If you listen to the Guardian or the BBC (or most politicians in fact) then that’s no great loss but we’re talking about the companies that are investing your pension fund and provide hundreds of thousands of jobs. The city accounts for about 10% of the entire UK economy, can we really afford for investors to lose confidence in our financial sector?
Allowing the investment banking arm of a major bank to fail would devastate the city and lead to the collapse of our entire financial sector. Hundreds of thousands of jobs would be lost, billions would be wiped off the value of pensions and investments. The knock on effects would be catastrophic – the big companies like supermarkets and manufacturing companies that invest money in and through banks to boost their balance books and pension funds will lose billions and their share prices will fall through the floor resulting in more job cuts and companies failing. There won’t be enough money in the economy to financially support all those people who’ve lost their jobs so the Bank of England will have to print more which will lead to a further devaluation of the pound which means it’ll cost even more to import the things we need (we are far from being self-sufficient).
The pound is worth less than an Albanian Lek and you’ve lost your job and home but at least those bankers got what was coming to them, eh?