Quelle Surprise! Partitioning Bank Retail and Wholesale Operations Won’t Cost Much

One of the most annoying aspects of Life After the Crisis is the utter refusal of banks to take responsibility for the costs they have imposed on the rest of us. This is directly related to their efforts to fight any and all interference with their God-given right to loot.

In the UK, for instance, the Bank of England and the FSA both recommended to the Independent Banking Commission that banks be forced to break up along retail-small business v. pretty much everything else lines was successfully beaten back. The ICB in its preliminary report did come out in favor of ring-fencing, which primarily serves to limit the way banks can use their cheap deposits to fund the riskier wholesale side of the house.

Banks have predictably screamed that any such change would wreck the economy. Since advanced economies grew faster when banking was more heavily regulated, simple-minded comparisons seem to disprove the banks’ stance, putting the burden of proof on them (well, in fairness, they employ enough think tank types that they can usually gin up something that bears a passing resemblance to an analysis to bolster their argument).

The Financial Times reports that a newly released study casts doubt on the banks’ claims:

The report, from the Ernst & Young Item Club group of economic forecasters, shows that the likely effect of the ringfence proposal, which is to be aired in full on September 12, may lead to a rise in costs for the nation’s biggest borrowers of up to 1.5 percentage points. The effect on output is likely to be no more than 0.3 per cent of gross domestic product.

But that does not mean this change would have no impact. The FT quotes Lloyd Barton, economist at Ernst & Young,

“Of course, it may have an effect on bank profitability,” he added.

I leave it to readers to judge what is really driving the banks’ vociferous protests: their concern for the state of the economy, or their own pay packages.

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  1. F. Beard

    This is directly related to their efforts to fight any and all interference with their God-given right to loot. Yves Smith

    Not God-given since theft by dilution (so-called fractional reserves) and usury between fellow countrymen is forbidden in the Bible (Old Testament). In fact, the ability of the banks to loot is dependent on government privileges such as a lender of last resort and legal tender laws which give banks an effective monopoly on private money creation.

    The solution is also from the Bible – separate government and private money supplies per Matthew 22:16-22 (“Render to Caesar …”).

    Let’s be real. The government certainly does not need a banking system since it can create and spend its own fiat. As for the private sector, why should corporations and other “credit-worthies” be allowed to steal purchasing power from the US population?

    1. Heron

      While the biblical mandates against usury are indeed, as you say, clear and unequivocal, they haven’t exactly posed a great difficulty for modern Christianity and it’s wealth apologia. Regardless of what the actual book says on the matter, modern Evangelicals and Calvinists have both thrown their lot in with the wealthy, and will defend their right to thieve, misrepresent, and defraud to the hilt.

      1. F. Beard

        Regardless of what the actual book says on the matter, … Heron

        Many (most?) Christians are woefully ignorant of the Old Testament. However:

        All Scripture is inspired by God and profitable for teaching, for reproof, for correction, for training in righteousness; so that the man of God may be adequate, equipped for every good work. 2 Timothy 3:16-17 New American Standard Bible (NASB) [bold added]

        1. Birch

          Beard, I think Yves was refering to the Consumerist god, not the Christian one. Very different deities, though the consumerist profits (bad pun) would like us to forget that they are not the same.

    1. doom

      Good article. Except there’s nothing wrong with GOP extremists tearing down this state. It’s terminally diseased. The question is what supplants it. The Dems will have no role in that choice because they’re equally opposed to establishing a state worth having. Dems are all tangled up in the kleptocratic worm bolus too. Poison them and sht them out.

      There’s a perfectly good, proven template for reconstructing failing states like ours, and there isn’t time to re-invent that wheel if you don’t like it. So either we get with the civilized world or we grovel to the triumphant snake-handlers.


      Four-fifths of the world subscribes to that. It’s the rules. If my would-be representatives can’t go to bat for those principles, they can go fck themselves. I don’t care, I can cash in on corrupt states, on totalitarian states, on warring states, on collapsing states. Done it before, I’ll happily do it again. I do not give a sht if it’s the USA this time.

  2. appointmetotheboard

    To (kinda) be fair, even a 0.3% blow to GDP would send the UK perilously close to recession.

    That said, I still think that TBTF banks still present the biggest danger around at the moment – with Europe lurching from crisis to crisis, the next financial meltdown could be just around the corner, and the UK taxpayer is in no condition to bailout the banks again. That would probably have a bigger impact on the economy…

    The other issue is whether the banks will leave the UK. Probably more of a political consideration, as this won’t add up to massive job losses. Again, I could live with that – Barclays paid just £113m in tax for 2009 (or 2.4% of its annual profits) so if thats all we get in return for backstopping the banks, well, New York are welcome to have them. But you pays your money, you takes your choice…

    1. Yves Smith Post author

      The minimum estimate for the output loss due to the GFC is 50% of global GDP (that’s using CBO estimates that show us getting back to trend by 2015. If you believe that, I have a bridge I’d like to sell you). Andrew Haldane of the Bank of England has estimated the minimum output loss at 1x global GDP.

      A tax of 1% of GDP to prevent a 1 in 20 year recurrence is cheap. And I bet you any amount of money the recurrence will come well before 20 years from fall 2008.

      1. Susan the other

        When the banks say they cannot be deprived of their cheap depositor base and still make a viable profit, are they also saying that there can be no limits on the amount of taxpayer money required bail them out for any future problem? How can the banks hope to live in a world of other forms of ring-fencing and pretend they do not need to be? I really don’t want the Swiss, French, German and British banks emigrating the US for the tax base. Does anyone? How ironic that people are flocking to buy up Swiss Francs when Switzerland will have to print all that currency up fast. And isn’t Switzerland just about the fartiest little country on the planet? Right. The Swiss have a great tax base.

  3. Element

    Beloved Yves,

    If/when bank x says harm to me = end of world,

    Then display bar graph of bank failures from 1925 to 1940 with superimposed GDP line plot for same period.

    Next point out that when banks snuffed in great numbers, GDP and the REAL ECONOMY EXPLODED into real growth and real production.

    Like has not been seen before or since.

    One might easy conclude from this that the massive BK and closure of needless financial scum suckering criminal controlled banks is in fact a very good and extremely high yeilding investment.

  4. Mark T

    All depeends what you want to do really. The economic crisis was NOT caused by the investment bank arms of any UK banks, so forcing them to spin off won’t prevent a repeat of anything. Northern Rock etc failed because they were dependant on wholesale funding which dried up thanks (as Mr Darling pointed out) to the fact that the academics had taken over the Bank of England and did not understand the system they were supposed to be running. The bad lending was concentrated in Scottish and Irish bankers with impeccable political connections lending to property developers (as is the case in most bad credit cycles) while the establishment looked on. To be fair to Gordon Brown (not often I or anyone says that) but the rapid deleveraging in 2007/8 had at its root the blatant govt “encouragement” over the previous 15 years for US banks to lend to sub-prime borrowers. Wall St was hardly blameless is developing different ways to create products on the back of this and we know how that ultimately ended up in a big pile. But forcing HSBC et al to seperate their wholesale and retail operations will achieve nothing more than stupendous amounts of bureacracy (writing to and re asssigning millions of bank accounts)and a higher cost of capital for the very SME lending politicians are claiming isn’t happening. As it is the stable door approach of requiring vast amounts of capital for any lending except (surprise) to govts is crowding out private sector lending. The markets reaction in recent weeks is effectively to say “everyone thinks bank shareholders are there simply to bail out everyone from politicans to opportunistic credit traders and that they should not (as eeevil capitalist shareholders) expect any return for this” They are voting with their feet. The Banks have been little more than the agents of a series of political screw-ups and if you swallow the line that the politicians are the good guys and that Bankers are “evil, and stupid and must pay” then you have simply let the politicans off the hook. Again.

    1. bob

      This is complete xenophobic horseshit.

      “The economic crisis was NOT caused by the investment bank arms of any UK banks”

      Sure, I have a bridge I would like to sell you too. Where are these banks located? The center of the financial universe is the City, and all of the major out of bounds playing took place there. Lehman? AIGFP?

      But, the longstanding BOE line that “if they regulate them, they might be responsible for them” is the key point to your argument, and complete BS.

      Without the City and the BOE setting up a financial “free for all” zone, none of those “Scottish and Irish bankers with impeccable political connections” would have had anywhere to go to get in such trouble up.

      And to your last comment, which seems to round out your tour de force of tory thinking- Let’s ask one simple question, who has the money now? I don’t see too many Irish and Scottish pols globetrotting in private jets. Bankers? Yes, they made out very well.

    2. Linus Huber

      Some aspects of what you state here might be true to some degree. But let’s face it, banks were given an important privilege to create money in the form of extending credit. This function demands diligence and prudence in regard to monitoring overall debt levels as well as the proper evaluation of credit risks in regard of a creditor’s ability to service a debt and to pay it back over a reasonable period of time. No one forced the banks to extend credit to questionable entities. What did the banks do? Well, they did not care much about credit risk but built up an unsustainable credit bubble that allowed them to reap enormous personal benefits without any downside risks involved for them on a personal level. It has been a looting festival and the bankers try to continue their happy looting as long as possible.

      Unfortunately they were able to influence legislation and regulators in their favor over the past 20 or so years.

      I think the time has come that regulators and politician on the basis of popular demand are shoving back and start to play hard ball with banks.

      I would recommend that these employees (bank managers are not entrepreneurs but simply employees who rigged the system to allow the looting) should be made accountable on a personal level as they lined the pocket on the same level as an entrepreneur would have done with the only difference the entrepreneur risk his own money and has serious downside risks.

    3. F. Beard

      To be fair to Gordon Brown (not often I or anyone says that) but the rapid deleveraging in 2007/8 had at its root the blatant govt “encouragement” over the previous 15 years for US banks to lend to sub-prime borrowers. Mark T

      That was a mistake. The solution to unequal access to “credit” is to ban it altogether or at least remove all government support for credit creation so as to let the free market keep it in check.

      “Credit” sounds so wonderful but it is really just a means for banks and the so-called “credit-worthy” to steal purchasing power from everyone else.

    4. Hugh

      Kleptocracy needs rationales like this one to explain away the looting. Class war needs them to shift attention (and blame) away from the looters. Note the lack of any reference to the great wealth inequality that resulted from these activities or how it is that the supposed victims, the rich, were the ones who benefited the most from them.

  5. Change Alley

    Some relevant reference docs. for those interested in detailed debate, language and argumentation, the instruments involved and the stated cost & benefits.

    Hat tips Alea, FT alphaville ‘n yrs truly





  6. Another Gordon

    “…may lead to a rise in costs for the nation’s biggest borrowers of up to 1.5 percentage points.

    So, if the banks are partitioned the “biggest borrowers” might pay a bit more. And the rest, the SME’s that will create most of the growth and new jobs?

    Just this afternoon I was told by the corporate finance specialist of mid ranking firm of accountants to that bank finance just isn’t available except fully secured against property and at a high price.

  7. anjon

    “But, but, but, isn’t Bank Profitability the single most important indicator of a healthy, vibrant, pro-business economy???? ”

    – so said the professional looter

  8. Ralph Musgrave

    Banks claim that curtailing their activities will “wreck the economy” to quote Yves (as if banks are concerned about “wrecking economies”!!!) Another argument against this BS bank argument which Yves could have cited is thus.

    The extent to which economic activity is loan funded as opposed to equity funded is infinitely variable. Banks want an economy where no one has any money except banks, so everything is loan funded. But the alternative is to cut banks down to size and channel more money into the pockets of every household and business, and that is easily done.

    Bank assets relative to GDP in the UK have expanded TENFOLD over the last forty years, and to what benefit?

    As to ring-fencing banks’ retail activities, this involves putting the fence in the wrong place. The separation needs to be made between accounts that customers want to be 100% safe and taxpayer backed, and which thus earn little interest, and on the other hand, accounts where customers want to see their money invested in commerce, and which thus involve risks, but earn more interest.

    The absurdity of the present system is that money from taxpayer backed deposit accounts is used for commercial purposes. That is a subsidy of commerce.

    For more on the above ideas, see: http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

  9. totally anonymous

    i dont know exactly what ‘retail’ and ‘wholesale’ are referring to since i cant get behind the paywall on my shitty bank-operations person wages.

    however. every part of bank-ops that i have worked in (not a lot, but … at least some) would introduce a lot of redundancy and inefficiency if ‘joe blow’ customers were split off from ‘business’ customers.

    sort of like… a lot of redundancy and inefficiency would be introduced if we brought back the law that makes banks have to operate only in a single state.

    on the other hand, maybe redundancy and inefficiency in bank operations are a good thing… considering the Robo-singing scandals, the RMBS securitization chain scandal, the abandonment of basic property law going back centuries, the destruction of the world economy, mass unemployment, food riots, etc.

    redundancy and ineffiency might actually improve quality… with the added effect of reversing the ‘share of the pie’ of bank income, away from a tiny number of hyper-wealthy in management that have been taking credit for all the ‘effiency produced by consolidation’ over the past decade or two. . . . that wealth would then start flowing back out into the masses, so they could buy products in the real economy.

    i think of it as ‘trickle through economics’. if only i was a major hollywood actor, maybe i could be elected president and implement my voodoo.

    Mr Blankfein!

    Put up this wall!

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