The UK is proposing legislation that will force banks to separate their investment banking and consumer banking business. The move is part of complying with the findings of an independent commission on banking led by John Vickers, a former Bank of England Chief Economist.
Back in September, Vickers suggested that banks should create fire walls between their consumer and investment banking divisions, and boost the amount of equity or capital they hold to between 17 to 20 percent, to better withstand shocks to the system. It was in response to the 850 billion pounds (US $1.3 trillion) that the British government has had to spend, pledge and loan to big UK banks since the financial crisis took hold in 2007.
The announcement comes a week after British Prime Minister David Cameron opted out of a European accord to stem the Eurozone’s debt crisis, reports Bloomberg. Cameron’s position was joining the pact would stifle the UK’s ability to support its own financial industry. The Vickers proposals are Britain’s own attempts at preventing another financial crisis and shielding taxpayers from having to shell out for massive bailouts.
“We cannot risk having a repetition of that financial catastrophe that we had three years ago,” said British business secretary Vince Cable. “We can’t have a position where the banks are too big to fail.”
The move sounds similar to the Glass-Steagall legislation passed by Congress in 1933 that prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities. Glass-Steagall was repealed in 1999. As a result, the distinction between commercial banks, investment banks, and brokerage firms has blurred. Many banks own brokerage firms and provide investment services, according to Investopedia.
Which leads to the question: do you think the UK developments will put further pressure on Congress to pursue similar regulations, or reinstating Glass-Steagall? And what effect would that have on the health of the investing banking industry and investment banking jobs? Add your comments below.