New UK Bank Rules: US Looks Even More Pathetic

11 April 2011.

As Wall Street banks successfully mobilize their lobbying muscle with both Congress and the Obama regime

to fight to fight off both further regulation AND any real implementation of what weak regulations DO exist,

in Britain the battle is just beginning over how best to manage financial institutions considered too big to fail, aka TBTF.

Today, a volley will be fired at the country’s politically and economically powerful financial sector by a government-backed commission,

11 April 2011.

As Wall Street banks successfully mobilize their lobbying muscle with both Congress and the Obama regime

to fight to fight off both further regulation AND any real implementation of what weak regulations DO exist,

in Britain the battle is just beginning over how best to manage financial institutions considered too big to fail, aka TBTF.

Today, a volley will be fired at the country’s politically and economically powerful financial sector by a government-backed commission,

which is expected to propose that Britain’s largest banks take steps to separate their trading and deposit-taking functions.

That goes further than the so-called / self-styled / alleged financial “reforms” signed into US law last summer,

which — typically and predictably — do not draw as clear a line between speculative trading and more traditional banking services.

The proposals from the UK panel, the Independent Commission on Banking, will not be definitive —

the commission is to produce a final recommendation to the government in September.

But its expected recommendations on how to handle the systemic risks that large banks pose to the health of the economy

represent a far more direct challenge for British banks than the Dodd-Frank financial “reform” rules have been for American institutions,

which have basically continued “business as usual” despite their braying cries of interference.

While British regulators are expected to propose that banks make structural changes to defuse the threat from institutions considered too big to fail,

their counterparts in Washington have focused on putting in place shock absorbers to mitigate the effects of another — totally foreseeable — financial crisis.

Typically, the British are looking to make structural changes that will strengthen the system as a whole,

while the bought-and-paid-for American political elite is doing everything it can to help TBTF banks profit their way into another Black September 2008 meltdown.

These American “rules” include making banks hold more capital to cushion unexpected losses

and giving new legal powers for regulators to help failing financial institutions unwind in a way that does not threaten the entire system.

Which, of course, has yet to happen in the aftermath of the 2008 meltdown — but who’s paying attention ???

Despite the utterly disingenuous and not-credible complaints from Wall Street about Dodd-Frank,

several British institutions have hinted that they might move their base of operations to New York from London. 

Which, if you believe the time-honored maxim, “follow the money”, indicates just how weak and easily manipulable the TBTF banks see the so-called US “rules”.

By contrast, the completely non-believable threats by American banks that they might go elsewhere,

voiced when the Dodd-Frank legislation was being debated, never went anywhere — so to speak.

What a surprise.

Last week, Robert E. Diamond Jr., the chief executive of Barclays, issued the usual nonsensical defense

of keeping risky investment banking and safe deposit-taking under the same roof.

“It’s the model,” he chundered, “that’s enabled us to build a bank that’s diversified by business, by geography, by customers and by funding sources.”

Okay, dude, whatever.

But leaders of the UK commission have already called into question the argument — a core maxim of international banking —

that universal banks like Barclays in Britain and Bank of America in the United States provide a public benefit

because of their size, diverse range of services and ability to attract low-cost capital.

“In this regard,” John Vickers, a former chief economist for the Bank of England who is chairman of the banking commission, said during a speech this year,

“it seems quite hard to identify and quantify real efficiencies as distinct from purely private gains.”

Get that ???

“It seems quite hard to identify and quantify real efficiencies as distinct from purely private gains.”

So much for concern for the public benefit.

Vickers’s tone may be more subtle than the one used by the country’s chief bank critic, the Bank of England governor, Mervyn A. King,

in arguing that banks in Britain are still too large for the country’s good.

But the broader message is clear:

the drive for profits in large banks surpasses the drive for efficiencies,

resulting in actions that continue to pose a systemic risk to the national and global economy.

With the British banking sector much larger as a share of the national economy than its United States counterpart —

hence giving political leaders there a real interest in confronting the TBTF menace —

it is no surprise that the debate has been more pointed in Britain than in Washington.

The three largest British diversified banks — HSBC, Barclays and Royal Bank of Scotland — have assets that exceed Britain’s total economic output.

At the same time, the government has majority stakes in R.B.S., and Lloyd’s, another large financial institution.

“This is a midsize country with an oversized bank system,”

said Peter Hahn, a former investment banker at Citigroup who teaches finance at the Cass Business School in London.

“We need to figure out a scalable bank system for the taxpayer to back.”

Gee, imagine that — guess he learned SOMETHING at Citibank.

The most far-reaching proposal under consideration by Mr. Vickers’s panel would

separate, or ring fence, the deposit-taking areas of the banks from their investment banking activities.

Wow, sounds like the old Glass – Steagall Act,

which the ever-agreeable-to-corporate America Clinton administration —

in the person of hacks-in-chief Larry Summers and his faithful companion Tim Geithner —

joined with the even more corrupt Republicans in the late 1990s to “take care of” — in the Mafia sense.

The commission is not considering requiring banks to separate into independent companies, as happened in the United States in the Depression —

guess that would be too much even for the UK —

but to operate as distinct subsidiaries, with their own balance sheets belonging to a broader holding company.

That proposal, which allegedly would make it considerably more expensive to raise capital for investment banking,

would supposedly be much more inconvenient for Britain’s banks than the so-called Volcker Rule in the United States.

Under the United States approach, originally advocated in a stronger form by Paul A. Volcker,

the former Federal Reserve chairman who served as an adviser to President Obama —

which was, of course, watered down by the even-more-eager-to-please-than-Clinton Obama regime —

banks’ freedom to trade with their own capital and manage hedge funds would be SLIGHTLY limited.

But they would still be able to borrow money cheaply,

and without much oversight or accountability,

because their balance sheets would remain unified.

American regulators have been grappling with how to apply the Volcker Rule, and intense lobbying has been taking place. 

Don’t worry, folks — by the time the lobbyists are done, the “captured” regulators will be giving the TBTF sector whatever it wants.

Banks would still be allowed to trade to serve customers — but not to speculate. 

Yeah, right.

Telling the two apart can be difficult, and banks have been hoping to blur the lines as much as possible

so they will have maximum room for maneuver to be able to approach, but not go over, whatever close-to-nonexistent line is finally established.

Not surprisingly, given this, some banks have spun off large trading operations,

and American regulators have cravenly accepted that there will still be banks that are too large to fail.

Again, what a shock.

Efforts to define just what additional rules they MAY face are still in their infancy — and are excellent candidates for SIDS.

For most experts in Britain, the approach in the United States is laughably inadequate.

“In the end, you just can’t regulate these banks — they have too much money and too many lawyers,”

said Andrew Hilton, the director of CSFI in London, a financial services research group.

“We should be prepared to split the casino bank from the utility bank.”

An un-American attitude if we’ve ever heard one — casino banking is what BUILT the US !!!

After successfully diluting the toughest elements of the Volcker Rule before it passed,

the banking lobbyists are now putting their effort into other parts of the Dodd-Frank law

that they unconvincingly argue might / possibly / conceivably / someday cut into profits at their lucrative consumer banking businesses.

Banks want to reverse, or at least delay, the adoption of new interchange regulations,

which would cap what banks charge retailers to process debit card transactions.

Last year, those fees totaled more than $20 billion.

The secondary target of banks is the new Consumer Financial Protection Bureau,

an “independent” agency that will oversee nearly all consumer financial activity once it is up and running in July —

if, that is, “President” Obama has the guts to override the strident objections of the finance business,

and appoint as its head Betsy Warren, the current “interim” chief, whose idea the Protection Bureau was in the first place.

But I don’t think the banks are too worried that he’s going to go against them on such a — potentially — key appointment.

If he did, it would be at RADICAL variance with his “performance” in this area so far.

Republicans in the House — whose most prominent local constituents are often community bankers —

have introduced bills to cut back the bureau’s authority over mortgage loans and other consumer products.

Can’t imagine why …

No, really, since it’s precisely these smaller banks that remain in trouble, because the TBTF boys won’t lend them any money —

despite getting it from the Bernanke Federal Reserve at essentially negative interest rates.

So good luck to the UK regulators in trying to bring SOME sanity into the financial sector there.

At least they can look at the US to get a good idea of what NOT to do.

 

David Caploe PhD

EconomyWatch.com