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Downsizing the Banks: A U.K. Plan

David Callahan

The United States isn't the only country that has a problem with giant banks that take too many risks, are not transparent, and are effectively above democratic oversight. The U.K. has the same problem, and in fact, that country's economy is even more financialized than the U.S.'s -- with all the attendant problems: banks helped inflate the U.K.'s huge real estate bubble in the early 2000s, inequality has risen amid outsized pay for bankers and traders, and the U.K.'s economy has become less stable as it has leaned more heavily on a sector addicted to risk-taking. 

So when a U.K. think tank, IPPR, issues a 70-page plan to rein in big banks, we should listen on this side of the Atlantic. Here's what IPPR proposes:

  • Retail and investment banking activities should be split into separate organisations.
  • Competition in retail banking should be increased, for example by reducing barriers to entry.
  • Risk-taking in investment banking should be reduced, for example by making senior directors and managers liable for financial loss when things go wrong.
  • A British Investment Bank should be set up to fill the financing gaps left by commercial banks.
  • Investors should stop paying extremely high fees for what can only – on average – be investment performance in line with the market.
  • More should be done to make the case for wide-ranging financial transaction taxes and to explore ways to minimise avoidance of them.
  • The overall level of credit in the economy – in particular speculative credit – should be controlled.

Elements of this plan are familiar, of course, and already under discussion here -- like reinstating Glass-Steagall to break up the big banks, imposing a financial transactions tax, and controlling fees for mutual funds and 401(k)s. But other of these ideas are not percolating here and deserve attention as we think about another round of reforms that go beyond Dodd-Frank and do more to regulate the financial sector.

I particularly like the idea of finding better ways to hold senior executives directly accountable for financial loss when things go wrong. As it stands now, finance is too often a game of tails I win, heads you lose -- with insiders benefiting no matter what happens, as investors lose their shirt. Case in point: executives like Merrill's Stanley O'Neal made hundreds of millions of dollars as their banks peddled mortgage-backed securities and yet didn't have to give back a dime when things fell apart and Merrill's investors got creamed (not to mention all the suckers who loaded up on mortgage-backed securities.) This disconnect must be addressed. Oh, and prison time would be nice when bankers and traders break the law, as they have routinely done in recent years. 

Ultimately, though, the most important thing about IPPR's plan is that, if fully implemented, it would effectively downsize the U.K.'s financial sector and make it a more boring and less profitable business. We need to do the same thing here. And while it's generally been progressives advocating a breakup of the banks, some on the right are also seeing the merits of this idea. After all, anyone worried about crony capitalism and the dominance of East Coast economic elites can't ignore the power of the banks. As Peggy Noonan recently wrote:

If you are conservative you are skeptical of concentrated power. You know the bullying and bossism it can lead to. Republicans should go to the populist right on the issue of bank breakup. Too big to fail is too big to continue. The megabanks have too much power in Washington and too much weight within the financial system. People think the GOP is for the bankers. The GOP should upend this assumption. In this case good policy is good politics.

That is exactly right.