Breaking up banks is not hard to do

By Alex Brummer for the Daily Mail
Updated: 03:41 EDT, 16 June 2011

With his knighthood in his pocket and now more than halfway through his second term as governor, Sir Mervyn King no longer has to look over his shoulder politically.

Not that he has ever been shy on expressing his views on a range of issues from the need for tough fiscal policy to the imperative to recapitalise the banks and his radical suggestions for splitting financial groups.

There was an air of pathos about the governor's Mansion House speech.

He remains deeply concerned about the squeeze on living standards imposed by the recession and inflation and invoked the biblical image from the story of Joseph of seven lean years ahead.

Equally telling, however, is his view of the future shape of the banking system.

He starts from a useful first principle. The banking system may be important to the City and the UK economy but it remains too large for the taxpayer to support it in the future.

That is why the authorities need to find a way around the 'too big to fail problem'. Critics of the Chancellor's 'ring-fencing' proposals, also outlined at the Mansion House, repeatedly have argued this is not the answer because Northern Rock - the first of the UK banks to fail - was a retail bank and Lehman an investment bank.

This is arrant nonsense. Northern Rock failed because it was a retail bank which adopted an investment banking model - securitising almost every mortgage it ever granted - and relying almost exclusively on borrowing short on the wholesale markets.

This was a 'casino' banking model grafted onto a retail operation under the eyes of an all but useless supervisor.

Lehman was an investment bank and its demise spread out from the casino arms to the high street because there was no ring-fencing.

This paper has made no secret of the fact that in the light of the banks' appalling behaviour we would like to see a much more radical shake-up of the banks.

In the best of all worlds the ringfencing of retail and casino banking arms would be a prelude to a full break-up.

That is clearly not happening as yet. But if the creation of separate subsidiaries is going to be as burdensome as the banks claim, then the directors ought to consider floating off the retail arms and releasing value for shareholders and giving focus to managers.

King makes other useful points. He is concerned that Europe, in the midst of its own deepening single currency crisis, might try to back away from the Basel requirements for more capital and liquidity.

Individual countries ought to be permitted, in his view, to impose higher standards to meet domestic conditions which vary greatly, say from Greece to Germany.

The governor concludes that the real tragedy in the run-up to the credit crisis was that policymakers and regulators could not see the wood from the trees.

So focused were they on box-ticking that no one (this includes the Bank incidentally) noticed that the balance sheets of the system trebled over five years.

King's critics might conclude that his comments are made with the benefit of hindsight. Perhaps. But keeping an eye on the big picture may have saved the citizens of Britain years of pain.

Jobs joy

One of George Osborne's public refrains is that the media has been too slow to recognise the jobs growth going on in the economy.

Certainly, for those who believe that the Labour Force Survey (which is the measure used by the IMF) provides the most accurate data, recent months have been surprisingly upbeat.

In the three months to April the jobless rate tumbled by 88,000, the largest drop since 2000. Not a bad result when Labour shadow Chancellor Ed Balls claimed the economy is 'flat-lining'.

Moreover, job creation among businesses is way ahead of job losses in the disgruntled public sector.

Nevertheless, there is a small cloud on the horizon. The claimant count, based on the numbers of unemployed calling at job centres, is rising. Historical charts show that over time the two lines tend to converge. Ouch.

King two

The role of challenger suits J Sainsbury at present and Justin King is managing to keep sales growth rising in difficult conditions.

Same store sales managed a 1.9% rise in the last 12 weeks and overall spending through the grocer's cash registers, including fuel, is up 7.3%.

Nevertheless, the normally cheery King acknowledges that in his 28 years behind the bacon counter it was the toughest he could remember for consumers.

Wasn't that what his namesake was saying at the Mansion House?