by Stephen McPhie, CA
Partner RSD Solutions Inc.
The UK government recently announced proposals to “ring-fence” bank’s retail from their investment banking operations. The underlying idea is that the government would allow investment banks to fail in the event of a future financial crisis and that retail banks would be safer. Presumably investors would believe that retail banks could be bailed out.
Moody’s warned that this is a credit negative event making bank downgrades more likely. And others have warned that it will raise costs for consumers and small businesses.
We actually need to see the mechanics of such a scheme. Many operations are obviously retail or investment banking but there are grey areas, e.g. structured products and the cut off point between small and large corporate business, so where would they be put? Importantly, how would the existing capital be allocated to each operation?
A lot of smart people have been very skilled at peering round Chinese walls and reclassifying one type of asset to look like another. Would the proposed ring-fencing be different this time?
And of course, the major UK bank failures had little to do with investment banking operations and lots to do with retail banking. Furthermore, Lehman Brothers, which started a lot of dominos falling, had no retail banking operations. So what benefit would ring fencing have brought if it had been in place for the last few years?
Is it a well-conceived way to protect peoples’ businesses and the economy? Or is it a political response to an inability to institute effective corporate governance and regulatory oversight?
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