Banking to go back to the future?

By Scott McCulloch on Dec 4, 09 04:35 PM in Banking

In the wake of the 1929 stock market crash, banks in the United States were banned from mixing commercial and investment banking for more than 60 years.

The first of two Bills which made up the Glass-Steagall Act was brought into law in February 1932 in an effort to curb deflation and increase the US government's ability to provide financing to the banking sector.

This was followed by the second Act, passed in June 1933 separating banking types according to their business.

The argument being the new law would protect shareholders from undue risks made by the investment side of the business which investors had no voting control over.

But the separation of investment and commercial banking enshrined in the Glass-Steagall Acts of 1932 and 1933 were repealed in 1999.

In the UK, financial regulation governing the separation of investment and retail banking was swept aside in 1986. What is now known in financial history as Big Bang also brought electronic share dealing to the City.

More tellingly, deregulation meant Britain's retail banks were free to set up integrated investment banking operations for the first time.

Now The Bank of England Governor, Mervyn King is in favour of introducing a UK version of the now defunct Glass-Steagall Act.

Seems like a fairly sensible notion you would have thought.

However the British Bankers' Association (BBA), which has also denounced attempts to limit bankers bonuses, isn't keen.

Its chief executive Angela Knight recently warned Whitehall and Brussels not to rush new regulations for the banking industry and dismissed the notion retail and investment banking could be separated.

"Only investment banking", she said, "could raise the funds needed by the retail side of the business to keep lending to homebuyers and businesses."

The fact the BBA is funded from fees derived from UK banks, including the part-nationalised ones, would have nothing to do with their position, would it?