The Financial Times Wants "Formal Glass-Steagall-Style" Restructuring
July 5, 2012 • 8:14AM

In an editorial today entitled "Restoring trust after Diamond," the Financial Times says that measures for restoring trust include separating the investment and retail parts of universal banks, and, for the first time to our knowledge, argues for a Glass-Steagall-style approach, as opposed to the Vickers ring-fencing approach. What this means for action remains to be seen. We quote the relevant sections:

"The clash between retail and investment banking has always been evident. What is now clear, however, is that the hard-charging, revenue-seeking investment banking culture predominates when they are pushed together. The more herbivorous retail banking ethos — with its emphasis on patient stewardship — is marginalised. This seems to lead ineluctably to the proliferation of socially questionable trading activities and abuses such as the Libor scandal.

"The government accepted the principle of separation last year when it endorsed the conclusions of the banking commission presided over by Sir John Vickers. This argued for an internal split rather than a total separation on the basis that the diversity of assets within a universal bank could be a source of strength at times of financial stress.

"While the FT supported those conclusions, we are now ready to go further. For all the diversification benefits, the cultural tensions between investment and retail banking can only be resolved by totally separating the two, on formal Glass-Steagall-style lines.

"Other changes may also be required. The government must find ways to unblock the supply of credit to the economy. In the world of Basel III and higher capital ratios, plus tighter regulation, this may be difficult. But then other ways will have to be found. Mr Diamond's forced departure marks a pivotal moment. The politicians must respond responsibly."