Sean Garman: Splitting up the banks will cause more problems than it will solve

Sean Garman works in corporate finance in the City of London and it a member of the Conservative Party’s Business Relations grouping. He is a Committee member of City Future – the under 35s organisation for Conservative supporters in the City of London.

The recent appointment of an investment banker to the helm of Barclays has raised the profile of banking once again. Vince Cable and other left-wing politicians and commentators have stated that separating retail from investment banking is vital for the health and stability of the sector. This is a hopelessly misguided analysis based on ideology rather than empirical facts.

‘Universal’ banks have steadily arisen over the past twenty years. They provide not only banking services on the high street, but also insurance services, pensions, corporate and investment banking services. This multiple product platform provided a competitive advantage over the traditional banking structure as it diversified income streams and allowed banks to increase overall profits by selling multiple products to a single customer.

However this comes with risks. Multiple asset classes have different risk profiles and the collapse in one area can lead to a chain reaction causing the entire bank to go under including better performing divisions. The near-collapse of Citigroup in the US is testimony to this multiple disequilibria theory.

Yet there is no evidence to suggest that universal banks are riskier than ‘narrow’ banks (whose services focus on a specific asset class such as retail or investment banking). All the toxic sub-prime mortgages were lent out by retail banks. Northern Rock, the first bank to go under in the UK, was a narrow bank focused on retail lending. Since 2007, there have been nearly 300 bank closures in the United States, a vast majority of which are narrow banks focused on retail lending or property finance.

The facts suggest that neither model was perfect. The push against Barclays is representative of regulatory overshoot. Investment banks do serve a purpose; they provide advisory roles, hedge client risks and invest client money. They employ tens of thousands of people, contribute massive amounts of tax and they serve as a vital clog in the financial and capital markets machine.

While not perfect, banking and finance is Britain’s only world leading industry. For the past three centuries, London has been one of if not the largest financial centre. Breaking up the banks - despite no evidence that it works, attacking our only world-leading industry and increasing uncertainty and risk for investors - is not wise, is not rational and ultimately it will cause more problems than it solves.

If the Government wants to rebalance the British economy, then it should not reign in one sector but free up other sectors by reducing their regulatory burden, by ensuring high quality and skilful migrants can enter the country, by promoting exports of physical goods and intellectual services. Politicians typically aim for policies that hit the front page. I would prefer if this Coalition Government would actually implement policies that work.