Rotten Capitalism

Breaking up the banks?

After the great repression the Glass–Steagall Act from 1933 limited the use of bank credit for speculation and separated classical banking from investment banking. Classical banking involves taking deposits of customers and give with those credit to others. Investment banking however is the speculation with the customers money. After a long time of lobbying the act was repealed in 1999 and what followed where 2 major financial crisis. Now again, the questions is asked why banks shouldn’t be broken up again.

So whats the problem? Essentially, what we have seen in the financial crisis is that all banks engage in investment gambling and when they loose its the tax payer who pick up the bill, since they are “too big to fail”. The problem is, that its hard to let down the simple small bank client, who just has a mortgage or his saving with that bank. If per contra, the banks were split there would be in theory less problems. Whoever works with an investment bank should know the risk and bare eventual consequences. Also, smaller banks are less prone to be “too big to fail”.

However, not only would a split up be very difficult to carry out in practice, also splitting up banks like Citigroup, RBS and Deutsche Bank, would just create 6 systemically important banks instead of 3. Hmm, now what?