Terry Murden: Osborne's break-up plan means back to basics banking

Published on Saturday 11 April 2009 13:48

SHADOW chancellor George Osborne's suggestion that the nationalised banks be broken up has raised the political stakes and prompted some serious questions about the implications of such a policy on Scotland.

His proposal is one of only two realistic options: sell them whole to whoever has the means to acquire them (a US bank such as Wells Fargo, perhaps) or slice and dice them into saleable bits, much the same as they themselves did with the dodgy mortgages they acquired.

What is becoming clearer is that nothing will be the same again. For Edinburgh in particular it will come as a blow to know that we've probably seen the banks get as big and powerful as they'll ever be. A moment in history has passed and the city will have to reacquaint itself with a more provincial profile after its flirtation with the big boys in the global world of finance.

That's not to say it's all bad. As our feature on page 5 explains, there are some who regard the break-up of the banks as not only inevitable but desirable for a number of reasons. If it means a return to knowing who is managing your money, then that's a good thing. So is the notion of a bank that keeps it simple and is run by people who actually understand what businesses they are running.

But how far should a break-up go? In the case of RBS would it mean a continuation of the asset-stripping already under way? Or would it go further, maybe breaking off the NatWest business, or forcing the sale of the insurance arm? There is surely some merit in retaining the retail elements as one, and few doubt the success of the RBS-NatWest merger.

Lloyds TSB-HBOS is another matter. The merger has gone wrong, but its architects insist it will come right. Should it be given more time to prove its worth? To dismantle it just as it is getting the integration to work would be folly and risk recreating the situation that the merger was intended to resolve. However, some are clinging to the hope that one day Bank of Scotland will be demerged.

The danger in all this is that we get a break-up for break-up sake, a form of punishment beating that would benefit no one. It would threaten the banks' international competitiveness and drive them into the arms of overseas rivals whose governments have no restrictions on development.

Far better that any break-up is restricted to the key cause of banking's demise. A separation of the investment and commercial banking functions is topping most critics' hit lists and is firing calls for a reintroduction of a form of the former Glass-Steagall Act in the US.

The Act was passed in the 1930s to keep the two activities apart, thereby preventing the fee-driven investment bankers from abusing the savings of ordinary Americans. Amid the clamour for deregulation in the 1980s and 1990s, Margaret Thatcher introduced Big Bang and Bill Clinton repealed Glass-Steagall. They allowed a Greed is Good culture to flourish and the consequences are all around us.

Osborne is the latest to sign up to a campaign against Big Banking that will be taken up by the Treasury select committee and has the sort of popular support that makes it a vote-winner, especially against a prime minister who finds himself tarnished by the free-and-easy-credit crisis.

Osborne knows he can't go wrong while the public remains in vengeful mood against the banks. It is notable that the Co-operative bank was last week crowing about a sharp increase in business, no doubt a result of the public's appetite for what they view as more ethical and reliable homes for their investments.

Such sentiment shows little sign of changing any time soon and Labour will need to respond with its own long-term plan for the banks. Don't expect it to differ too much from George Osborne's proposal.

Budget confidence won't cost a penny

LET'S hope the end of the first quarter marks a turning point for the economy. Housing sales have picked up and the buy-out market is seeing signs of life. HSBC's rights issue, the biggest ever, got away successfully and stock markets rallied on better news from the US banks.

Yet for every green shoot, there is another pest on the horizon preparing to kill it off. North Sea oil exploration has slumped, unemployment is heading towards three million and profits warnings are at their highest since 2001.

The Chancellor may have little left in his kitty, but his budget on April 22 is an opportunity to inject some badly needed confidence that won't cost anything.