Monday, September 12, 2011

Britain's 21st Century Glass Steagall Act

There is some irony here. Britain's banking industry was touted as a model for the brave new world of finance in the 1990s. This model served as the impetus for passing the Gramm-Leach-Bliley Act. The argument for passing the act focused on keeping America competitive with overseas markets. The markets have obviously changed since the financial meltdown of recent years. The meltdown required huge sums of public money to stabilize banks that set themselves on fire with mechanisms that sprang from reckless financial innovation.

Britain's government has learned a few lessons from these mistakes.

Bloomberg reports that Britain's government will impose new partitions between different banking services. Consumer and investment enterprises will now be required to have firewalls between them with the overarching goal of avoiding another crisis that erupted in 2008.

The fenced-off assets are at the core of traditional consumer financial products and services. From the Bloomberg article:

Once the recommendations are implemented, the so-called ring-fenced units will include all checking accounts, mortgages, credit cards and lending to small- and medium-sized companies, the report said. As much as a third of U.K. bank assets, or about 2.3 trillion pounds, will be included, the document said. Trading and investment banking activities will be excluded from the ring-fence.

As for the casino side of the banking industry, they are on their own. A crash in this sector would be insulated from the traditional credit markets and provide a barrier to a Minsky Moment that brought many western banks to the point of insolvency.

Of course, as you can see in this interview, British banks are not happy with these new regulations.

Mr. Mentel argues that more regulatory assertiveness is what's needed under the old business and regulatory structure. He also opines that a 1930s approach is not applicable considering the complexities of today's markets. I argue that Mr. Mentel is missing the point: Complexity of the interrelated banking entities is the issue that new regulations are designed to fix. Additional regulatory oversight with regard to Mr. Mentel's position would be moot because the current business model is too complex and fraught with conflicting interests.
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