UK bank breakup: A go-it-alone strategy for breaking up the UK's banks would be crazy. Separating retail and investment banking would be a body blow to the UK financial industry. Unless other countries follow suit — which they won’t — Barclays, HSBC and Standard Chartered would move offshore. The new government-sponsored banking commission should reject the idea.
Advocates of breaking up the banks are attracted to the idea because it looks like a silver bullet. Nice safe retail banks wouldn't be contaminated by nasty investment banks, or so the theory goes. The problem with this analysis is that it ignores the fact that during the bubble there was excess risk-taking across the board.
Lots of pure retail banks — from the UK’s Northern Rock to German savings banks, Spanish cajas and Washington Mutual of the United States — got into trouble. And when Lehman Brothers, a pure investment bank, went bust, it almost dragged down the entire global financial system. Merely separating the two functions wouldn’t solve the problem.
But even if it did make sense to split banks up in this way, it would still be foolish for the UK to take unilateral action. HSBC would rapidly relocate its headquarters to Hong Kong.
Barclays, which swallowed much of Lehman's carcass, might move to New York. And Standard Chartered would probably shift to whichever country offered it the best deal. With its fast-growing emerging markets business, there would be many suitors.
The UK would be left with Lloyds Banking Group and Royal Bank of Scotland — but only because these are wards of state.
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The UK is the only large country currently giving this idea serious consideration. At worst, the United States is likely to do is stop its banks from engaging in proprietary trading and taking positions in hedge funds and private equity — while forcing them to put their derivatives operations into separate subsidiaries. But this would leave most of their investment banking operations intact.
Other countries aren’t even thinking of going this far. If the UK’s new commission doesn’t kick this idea into touch, it will score a spectacular own goal.