Breaking up the Banks

By Dave Anderson:

Too big too fail has failed. At least it has failed as an argument against systemic reform in Great Britain.

The BBC reports that the British government will be selling off their chunks of their too big too fail banks as stand-alone entities instead of parts of the corporate whole: [h/t Robert Patterson ]

Chancellor Alistair Darling has confirmed that Lloyds, RBS and Northern Rock will be broken up and parts sold to new entrants to the banking sector.

He said there could be three new High Street banks in the UK over the next three to four years as a result.

But the chancellor said he would only sell parts of the banks when "the time is right", to ensure taxpayers get their money back....

In order to boost competition, the banks' assets will only be sold to new entrants to the UK banking market and not to existing financial institutions.

The new banks will be standard retail operations concentrating on deposits and mortgages.

The British have been ahead of the curve in recognizing the obvious that having banks that are too big too fail and clean up neatly is just an invitation for hostage taking and institution capture situations. Breaking up some of the systemically critical companies into banks that are traditional banks and not the hydra headed monsters of self-enriching destruction is a good start. Robert Patterson notes that this may be a gentle nudge towards smarter and more effective action from the Obama Administration on our banks, hedge funds and investment banks along with the associated looters that are deemed too large to fail.

One should not understate the importance of this decision. This is a game-changing move by the UK government. One year ago, it was the U.K.’s decision to recapitalise its banks which changed the economic policy landscape. U.S. policy makers were forced to switch TARP policy from buying up dodgy assets at inflated prices to injecting capital (see my post “Recapitalising Britain” from 7 Oct 2008).

Yet again, the British are leading the way in reform. If you recall, just two weeks ago Mervyn King, the Governor of the Bank of England, made a blistering attack on government policy and advised breaking up too big to fail banks. At the time, Prime Minister Gordon Brown publicly rejected this idea.

Let's hope sanity or at least self-preservation continues to break out.