Focus on the Glass-Steagall policy continued in the U.K. on Sunday with the posting of a Financial Times 5-minute video: "John Authers' Morning Note" on "Let's talk about the banks." Our transcript picks up after opening reference to the LIBOR scandal, which host Authers says goes beyond Robert Diamond, beyond Barclays, and beyond LIBOR, to the issue of banks being too big and complex: "It does now seem that radical moves to restructure the sector ... are back on the agenda."
Authers (A) then introduced Financial Times contributing editor John Plender (P).
A: In the case of Barclays, how good a case is there that Barclays is simply too big?
P: I think that one of the things that emerges from this is that Barclays — and other large banks — are not only too big and too interconnected to fail, they are too big to manage. It's a real question of whether boards of banks have a real idea of what's going on below, and even whether top executives have a clear idea of what's going on below...
A: Now that has the aspect of both scale and complexity, doesn't it; that banks are both too big, and that there are too many moving parts.
P: Indeed. It's a very curious thing that in banking everybody seems to accept the idea that conglomeration is a good thing; that what are very different businesses, investment banking and commercial banking — retail banking — can be put together on the idea that there are synergies. Whereas in fact, there's a lot of academic research that suggests that banks are valued at substantially less than the sum of their parts, and that there are few benefits from conglomeration.
A: OK, now let's take a look at the course of earnings, because this is another argument, that banks simply make too much money. This [chart] shows the earnings of U.S. banks going back to 1973....
P: Well, this chart is showing you figures that are essentially meaningless, in that they are not risk adjusted.... Now we know, that far from being a productivity miracle [in banking], most of the profits in this period where you see the graph shooting up, were unreal. They were derived first of all, from leverage...
A: So what this shows, in effect, is that they were taking more risk, and everybody was allowing them to take more risk.
A: So we need, therefore, to make sure that we don't allow them to do that again. [Next is "too big to fail" chart of the large banks' assets as proportion of GDP, well over over 100% in all cases except the United States, and usually multiples of GDP.] How big is the too big to fail problem? How can it be dealt with?
P: Essentially what needs doing is to break up the banks.... Not enough of the debate, so far, has been about the case for breaking up the banks, and indeed, the case for going back to some sort of Glass-Steagall division between investment banking and retail banking.
A: And it should, at least, be possible, to put that on the timetable ... to make it clear that that's the direction we're heading in ....
P: Well, I think that Barclay's does provide a catalyst for us to start thinking that really, if you take this country, the Vickers Commission has put the case that there should be ring-fencing of retail banking; how far that addresses the problem of too-big-to-fail, is moot. I think, now, the Barclays affair is pushing us in the direction of reopening the question of whether we shouldn't be doing something much more fundamental than that — splitting or breaking up these big conglomerate banks.
A: [Closes with "the takeaway, what are we going to do to make the banks smaller?"]