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On 9/7/10 the government appointed Commission on Banking convened for the first time. It is expected that the Commission will take a hard line stance on the current structure of the banks with the majority of the Commission expected to favour a break-up. While a break-up would favour public opinion and give the government the image of being tough on banks. In reality a break-up of the Universal bank into retail and investment would see the newly created investment banks move out of the economy and the newly created retail banks flounder with lack of investment.

The appointments to the Commission are driven by Mervyn King, the Governor of the Bank of England. It would appear that Mr King is seeking his Steengall-Glass moment but this is not the time for a Steengall-Glass moment. What is needed is a careful restructuring of the banks which protects the interests of both the City and consumers. A break-up would damage both.

Many have and will continue to argue that the recent financial crisis was driven by the ‘rampant greed’ of investment banking. It was, however, driven by retail banking as consumers increasingly relied on cheap and easy credit, such as mortgages and credit cards, to sustain their lifestyles. Mortgages and credit cards were the biggest drivers and cannot be supplied by investment banks. Investment banks did, however, supply the fuel and the two, main, arms of the financial sector created the perfect vehicle for growth until it crashed.

By breaking up the banks it places blame on investment banking when blame, in this situation, cannot be apportioned. One thing that can be done, whilst maintaining the Universal bank, is to legislate a securitisation of retail assets against the risk of investment by making sure that banks have X% of total assets in capital by year X or they will be broken up. This will ensure that if a situation like the recent financial crisis does occur again then the banks have enough capital to bail themselves out, which in turn means they will no longer be Too Big To Fail as they will be self-sufficient. This move will also create long-term stability in the sector. Alongside the proposed legislation is to tighten the lend to deposit ratio from the current 10:1 to about 5:1. This will ensure that retail banking is secure, stable and will inhibit, if not stop all together, the volatility of retail banking. It will mean that credit will be harder to obtain but it will also mean that the economy is less dependent on debt.