My former lecturer in economics, Sir John Vickers, is wrong in his assessment of ring-fencing retail banking and ‘breaking banks’.
1.he wants to do that to prevent retail client panic and run on banks. You can do that without breaking banks up. 2. He is a labour and organisational structure economist. You don’t want a theoretical economist telling you how to structure business! As a businessman if I am looking at risk management I don’t call up my economics tutor! 3. It’s unworkable and isn’t going to happen. Complete waste of time and money so can look like ‘we’re doing something’.
The answer is simple: liabilities are easily ring-fenced in a separate Ltd co without breaking a bank’s economy of scale and scope competitive advantage (smaller banks equals more costs to consumer and less competitive british companies).
Also the idea of greater capital adequacy won’t solve it either: just makes companies return on capital employed worse and so share price drop and raises cost of capital for them too. Double whammy.
Finally, the cause is not being addressed (of credit crunch). It’s like telling someone the best way to protect against a recession is have smaller telecoms companies). No. Bubbles (like credit crunch) happen when ANY sector is making excess or super-normal profits. They are the early warning system something is going wrong. (Ie someone is selling something (misselling usually for more than its worth) so expect misselling or worse corruption. Same happened with dot-com bubble (analysts misold share valuation at ipo) or 1990s recession (property) or tulips.
Answer is prevention not how to deal with aftermath. Prevention is simple – just focus on ANY sector with supernormal profits and get to bottom of how they claim its happening. You will usually find if its in a whole sector (so not a unique invention of one company which can generate super profits) find something ugly going on eg selling mortgages to people with no prospect of repayment.
Bank shares will probably rise next week as stockmarket is relieved that the ideas are not clearly going to be implemented.
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