>Breaking up is so very hard to do


On 12 September 2011 the final reportof the Independent Commission on Banking under Sir John Vickers will be issued.It is likely to recommend the ring fencing of the UK’s retail banks, and thusthe separation of the riskier investment banking operations. Whether this willbe accepted by the government has been castinto doubt amidst strong lobbying that it will impact on economic recoveryand Britain’s future growth prospects.

Although the current economic crisislooks set to rival the Great Depression in length, it has not yet had quite thesame cataclysmic social and political impacts. It is therefore unsurprisingthat the political response to the credit crunch and systemic failure of thebanking system has not yet yielded reform on a scale comparable with thosepromulgated in the US in the 1930s.

The Banking Act of 1933 is morecommonly known as the Glass–Steagall Act, namedfor the Democractic Senator from Virginia, Carter Glass, and the DemocraticCongressman from Alabama, Henry B. Steagall. It was a revolutionary piece oflegislation for revolutionary times.

It was enacted as part of Roosevelt’sNew Deal legislation, and against the backdrop of thefailure of more than 5,000 banks in the Great Depression. Most totemic ofall was the failureof the Bank of United States on 11 December 1930, which saw one of America’slargest commercial banks collapse.

Confidence in America’s fiscal systemwas already at rock bottom when the new FDR administration attemptedcomprehensive surgery to revive the banks. On Monday 6 March 1933, PresidentRoosevelt issued aproclamation ordering the suspension of all banking transactions, effectiveimmediately. The nationwide bank holiday was to extend to Thursday 9 March,during which time emergency legislation was considered in Congress.

The emergency banking legislation wasfollowed by the Glass-Steagall Act in June 1933. The Act forcedthe separation of commercial and investment banks. Commercial banks couldnot embark on risky trading activities (such as underwriting the sales ofstocks and bonds), and investment banks could not take deposits.

Glass-Steagall wasrepealed in November 1999, and was followed by a wave of mergers thatcreated the banking behemoths – the banks that were “too big to fail”.

The UK is not the only country that isconsidering greater regulation of its banking industry. The US has implementedthe Dodd–Frank Wall Street Reform and Consumer Protection Act. The EU hasagreed a new financialsupervision framework, including the European Systemic Risk Board. AndBasel III promises to strengthenregulation, supervision and risk management of the banking system.

But there is, as yet, no new Glass-Steagaland no new Bretton Woods, which is a shame. As economist Paul Romernoted: “a crisis is a terrible thing to waste”.