Thursday, November 10, 2011

Do we need to separate investment banking from banking?

Is the era of the financial conglomerate coming to an end? In the US, the Volcker Rule will go into law soon. Under the rule, commercial banks cannot indulge in proprietary trading or hedge funds. In the UK, the Vickers Commission proposes a ring-fence around the core banking activities. The intention is to separate out the casino part of the bank from the essential banking activities.

Some recent events provide an impetus to such moves, the collapse of MF Global and, earlier, the $2 bn that UBS lost on account of a rogue trader. But there are significant costs to reducing the scope of banks- the Vickers Commission has tried to quantify these for the UK. I am not sure whether reducing banks to utilities is the right answer. We saw in the recent crisis that highly focused banks also went under- Northern Rock, for example. Banks have significant externalities on account of size. Between reducing the scope and reducing the size, I would plump for the latter.

More in my ET column, When banks turn casinos.


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