After a global financial crisis, an epic price fixing scandal, and embarrassing criminal conduct British regulators are considering ending Too Big To Fail Banking. British Finance Minister George Osborne has proposed legislation that if banks do not shield their riskier investment activities from day to day banking they will face restructuring.
Britain is shaking up its system of bank regulation following the 2008 financial crisis, when the government poured 65 billion pounds ($102 billion) of taxpayers’ money into rescues of Royal Bank of Scotland and Lloyds.
The sector has also come under fire for rigging the Libor global interest rate, mis-selling insurance, breaking money laundering laws and paying bonuses widely seen as excessive.
That sounds familiar.
Banks were already expected to have to “ring-fence” operations such as standard bank accounts and payments from their riskier investment banking activities, which will hit major players such as Barclays , HSBC, and RBS.
But Osborne said he was prepared to go further. “If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether — full separation, not just a ring-fence. In the jargon, we will ‘electrify the ring fence’,” he said in a speech.
The “ring-fence” concept is equivalent to the regulations America enacted in the 1930s to protect commercial banking from investment banking known as Glass-Steagall laws. Those regulations helped keep the financial system safe from a meltdown for generations until the Clinton Administration under Treasury Secretary and former Goldman Sachs CEO Robert Rubin lobbyed to repeal the laws so Citibank could merge with Travelers Insurance Group to form Citigroup. Rubin would later go on to work for Citigroup as Chairman of the Board and make roughly $100 million. Ironically the first Chairman of the newly formed Citigroup, Sandy Weill, would later call for breaking up Too Big To Fail banks, Citigroup included.
Under Minister Osborne’s proposal not complying with the “ring fence” will lead to serious penalties for the banks including a break up and executives of failed banks being banned from the industry.
Under the new rules, the Bank of England will monitor whether banks ensure that risks taken by their investment banking arms do not endanger their retail divisions.
If the central bank finds a breach, the government will make the politically sensitive decision on whether to employ the “nuclear option” of forcing banks to sell one of the two arms.
Osborne said the government could punish directors of failed banks by banning them from the industry. “I want to see how we can strengthen the sanctions regime for senior bankers — for example, should there be a presumption that the directors of failed banks do not work in the sector again?” he said.
Once the British are done with him would Mr. Osborne consider running our Treasury Department? I am sure Jack Lew can find his way back to Citigroup.
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