Open Floodgates on Calls for Glass Steagall in Britain
July 6, 2012 • 8:08AM

The scandal of Barclays bank manipulating the LIBOR interest rate is generating more calls for Great Britain to implement a Glass-Steagall separation of retail and investment banking. In a news article following up its July 4 editorial call for "a formal Glass-Steagall," the Financial Times reports, that British Chancellor of the Exchequer George Osborne "is under mounting pressure to force British banks fully to split their investment arms from retail banking operations.... MPs from all sides have lined up to call for such a split, modeled on the U.S. Glass-Steagall Act of the 1930s."

These calls are evidently more numerous than reported in detail in the British press. Many explicitly say that so-called ringfencing between investment and retail banking as proposed in the Independent Banking Commission report, aka the Vickers Commission, does not go far enough.

The new calls come from Members of Parliament, including Andrea Leadsom, a Conservative member of the Commons Treasury Committee and a former banker at Barclays. In a Financial Times commentary, she writes: "The issue of a complete separation of retail and investment banking should also return to the agenda. .... It is right that the government should be the ultimate guarantor of retail deposits. But that guarantee should not extend to high-risk transactions."

Pat McFadden, a Labour member of the committee, which questioned former Barclays CEO Bob Diamond, said: "Through Bob Diamond's actions this [full bank separation] has been brought back on to the agenda. The question is whether the culture in hard riding investment banking sits easily with retail banking, which hopefully should be more boring."

In an interview on July 4, Channel 4 News asked Lord Myners, former Financial Services Secretary in the government of Gordon Brown, whether the Vickers ringfencing was sufficient? He replied, "I think the evidence of the last few weeks [is illustrative], and Diamond himself said that many of the problems that emerged in Barclays were within the ring fence as envisaged. Now the government has already diluted the ring fence that was proposed by Vickers, but the ring fence doesn't go far enough. We need to go to what is known as a Glass-Steagall model, which is a complete separation." Myners is currently on the board of RIT Capital Partners PLC, an investment fund chaired and sponsored by Lord Jacob Rothschild, and is Chairman of the Guardian Media Group, publisher of The Guardian and The Observer newspapers.

Meanwhile Ben Chu, Economics Editor for the Independent, wrote yesterday in his Independent blog "Eagle Eye" under the headline, "Split Up the Banks — and Do It Properly," wrote that the Barclays scandal "makes the case overwhelmingly for a full separation of retail and investment banking, not the half-way house that the government is implementing. ... The ring-fencing system proposed by the Vickers Commission relies on these individuals to respect a division of banking functions laid out by Parliament: Does anyone seriously believe that a system that depends largely on the good faith of investment bankers will be sufficient to protect savers and taxpayers from future banking crises? Does anyone seriously think that it is a good idea to give these individuals any role whatsoever in guarding the savings of the ordinary public?"

He also refers to John Kay's FT commentary on July 4, that "There are two main arguments for splitting the utility of retail banking from the trading casino. One is to stop croupiers gambling with house money; the other is the incompatibility of trading and banking cultures. The Vickers Commission on U.K. banking reform addressed the first. It is time to turn to the second."

Last but not least, Auke Lont, CEO of Norway's electric power network manager Statnett, in a letter published in the July 3 FT writes: "We should, therefore, have no illusions. Chinese walls did not and will never exist in universal banking. The only robust and workable solution is a complete structural separation between commercial and investment banking. Vickers should go back to work."

Chancellor Osborne, just like Treasury Secretary Geithner and Obama in the United States, is reported by the FT as trying hard to force the opposite conclusion, that now the government should "really implement" the Volcker Ru... — sorry, Vickers Commission. Vickers implementation was scheduled for 2019, even later than Volcker; both can be thrown in the trashbin now.