Another Strong Voice for Glass-Steagall in Britain
July 23, 2012 • 7:53AM

Margareta Pagano, business editor of the Sunday Independent and a City of London journalist and editor for over two decades, argues strongly for Glass-Steagall in her column, "The Square Mile" today, under the punning title, "Why It Makes Sense for Banks to do the Splits," subtitled, "There is a growing recognition that a break-up of banks such as Barclays between retail and investment banking is the way to make things safer."

"At last," she writes, "more of the world's most senior policymakers and top financial analysts are starting to acknowledge the obvious: that a complete break-up of banks such as Barclays between their retail and investment banking operations is by far the best way to make our banking system safer and fairer to the taxpayer. It could also be the quickest and most effective way to get lending to the real economy going again.

"One convert to splitting Barclays in two is Neil Shah, the head of global research at Edison Investment Research, one of the few global independent research houses, so he has no axes to grind. Mr Shah says that so long as Barclays has retail and investment banking, the government will never let it go bust which means the bank will always leverage up, taking more and more risky bets. And that, he says, is inherently wrong for the taxpayer....

"It's interesting that Mr Shah and Mr King are making such a powerful economic case for splitting the banks as well as the broader public-interest grounds. But it seems that the sheer scale of the Libor scandal is making many people think the unthinkable again. Their analysis also blows a hole through the arguments put by the Vickers report, and backed by so many politicians and regulators, who agreed that ring-fencing would be enough. Mr King also believes fears that splitting the banks would cost billions has been exaggerated.

"My view has always been that ring-fencing isn't sufficient and that a Glass-Steagall-type split is the simplest and safest means to get the banking system working again; if the retail banks were released from their tough capital ratios they probably wouldn't need to be coaxed into lending with fancy gimmicks such as the latest Funding for Lending schemes. Vickers was always a bad compromise, one only reached because the wealthy banking lobby, led by men such as Bob Diamond at Barclays, persuaded the politicians that it was not in the public interest despite the views of heavyweights such as Sir Mervyn King, the Bank of England governor, Vince Cable, the business secretary, John Kay, the highly-respected economist and Lord Lawson to name a few. It's time they turned up the heat and widened the debate to look again at reform, including proposals such as those from the US economist, Professor Laurence Kotlikoff, for limited purpose banking....

"It's time to ignore the investment bankers who say a return to Glass-Steagall is a red herring; that Lehman was only an investment bank but it collapsed or that many of the problems were on the retail side, like at Northern Rock. Both examples are true but it's a disingenuous claim since Lehman only became a risk because the entire banking system was clogged up with leverage and bad loans, while Northern Rock pretended it was an investment bank.

"If the coalition is serious about changing the banking culture then it should have the political courage to look again at the Vickers reforms."