Much like the U.S., the United Kingdom has been grappling with what to do about its bailed out, “too big to fail” banks. But unlike the U.S., the British are now telling the banks that are “too big to fail” that they are also too big to exist:
The British government — spurred on by European regulators — is forcing Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.
The two banks are being forced to sell of hundreds of branches, credit card payment businesses, and online financial service companies. The mortgage giant Northern Rock, meanwhile, is being cleaved in two. According to Britain’s Treasury the forced divestments “together represent almost 10 percent of the UK retail banking market.”
One particularly interesting aspect of the British bank-busting is that the banks’ assets will be sold “only to new entrants to the British banking market to ensure more competition.” The American response to the financial crisis was to push failing institutions into the arms of other firms (like Merrill Lynch going to Bank of America), which has resulted in more consolidation, with previously “too big to fail” firms getting even bigger.
But as British Chancellor of the Exchequer Alistair Darling said, selling only to new entrants is the best way to ensure “proper competition and choice.” Having just “half a dozen big providers was not acceptable,” he added. The sales will take place over an extended period of time — at least three to four years — “so that the assets are not dumped at fire sale prices.”
Since RBS and Lloyds were 70 percent and 43 percent owned by the British government, respectively, the most direct comparisons for U.S. purposes are Citigroup and Bank of America, the two banking behemoths in which the U.S. taxpayer has a stake. So is it time to use that stake to forcibly unwind them as well?
“We still need to see exactly which parts the [British] banks will need to sell off to judge whether the goal of having smaller banks is really achieved,” said Richard Portes, an economics professor at the London Business School. “But there are lessons here for the United States. The supposed economies of scale of massive financial institutions are outweighed by the difficulties in controlling risk inside them.”
Indeed, as Felix Salmon put it, for these companies to be successful, they need to be boring — “the kind of companies that Warren Buffett has made his fortune by buying-and-holding.” But instead, we have let our perpetually bailed out banks (particularly Citigroup) go right back into the betting business, this time with taxpayer money. Breaking up three of its behemoths will not fix all that ails the super-concentrated British banking system. But at least for the U.S. banks which are still “too big to fail” and too weak to survive without government support, it may be time to follow the British model and force them to unwind.