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Banks could face a mutual future

The second installment of the Treasury Select Committee's report into the banking crisis is a 120 page blockbuster. Predictably, it doesn't pull many punches when it comes to apportioning blame and roundly condemns the banks and their managements for what it sees as their reckless behavior. However, it offers alot more than the now almost obligatory public flogging of the bankers.
It is a well structured dissection of the events, especially the many government interventions, as the crisis unfolded and engulfed the UK banks. Inevitably, it is slightly selective in places, largely determined by the impact that different witnesses had on the committee, but the banks - their present and former managements - are given a fair hearing in this report.
Like many Select Committee reports, it is longer on criticisms of what should and shouldn't have been done than it is on detailed solutions of its own but there is enough of the latter to suggest where it might drive the debate in future.
Among its key observations is the lack of clear strategic objectives from the government for the state owned and controlled banks. The committee points to several weaknesses that have already been exposed by this absence of strategic vision, such as the conflict between demanding greater lending but then asking for a 12% coupon on the preference shares it issued, but it only gets halfway to creating a vision of its own. Let me help them along by joining up some of the dots in their own report.
The committee is supportive of looking further at the Governor of the Bank of England's suggestion that in future there should be some separation of investment banking and retail banking. He stopped short of recommending a wholesale return to the rigidity of the US Glass Steagall Act [Following the Great Crash of 1929, the US Congress passed the 1933 Glass-Steagall Act which, among other measures, prohibited a bank holding company (a retail bank) from owning other financial institutions (such as investment banks).This provision was repealed in 1999.] The committee seems rather more enthusiastic about the idea and commends it for further consideration but doesn't say how such an objective might be achieved.
The report then goes on to bemoan the absence of an exit strategy from the state ownership and while it seems lukewarm about the prospect of deploying 1980s style privatisation to achieve this it doesn't put forward any firm proposals of its own. This could well be down to political differences in the all party committee which couldn't be resolved in time for publication of the report and may, indeed, be irreconcilable. However, further into the report two further recommendations could, if you join them all up, provide the answer to both the desire for separation of retail and investment banking and the need for a coherent exit strategy. 
The first of these is support for a rekindling of mutuality which the committee says should be encouraged through start-ups and remutualisations. The second is the suggestion that rather than blockbuster privatisations the return of the banks to the private sector could be done by selling them off in tranches. This makes sense otherwise you could end up creating some huge financial institutions that dominate the market and distort competition. Combine these two ideas and you have a creative solution to the problem: for the retail banking side of the nationalised banks create a series of mutuals (protected from takeover for a certain period so they have a chance to establish themselves) while for the wholesale operations look for sales by tender or privatistation to other investment banks. This would have to be underpinned by a new regulatory requirement to create some distance, if not total separation, between retail and wholesale banking. This could probably be done initially through a clever use of the promised new capital requirements and risk profiling. It would be dangerous for the UK to go unilaterally down the road to a new Glass-Steagall regime, although there is alot of support for the idea elsewhere in Europe and it even has its proponents in the United States. Using the capital requirements would be a quicker and more flexible solution that enforcing the separation by legislation, at least until we see how the rest of the world moves on this.
This report promises at least four or five further reports on other aspects of the crisis from the committee which, on the promise of the first two, will be well worth reading. I do wonder whether all the committee's fine words and, so far, sensible, if rather cautious, recommendations might not drown under the sheer volume of its own outpourings.
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