Treasury minister Paul Myners rejected splitting the retail and investment banking operations of the biggest U.K. banks, saying large institutions are needed to compete internationally.
Myners said the some of the biggest victims of the financial crisis, from Lehman Brothers Holdings Inc. in the U.S. to Northern Rock Plc in the U.K., have been institutions that didn’t combine commercial and investment arms.
“The concept of a narrow bank versus a broad bank is not an appropriate way to look at this,” Myners told reporters in London today. The approach is “altogether too simplistic. What we have to be aware of is how we manage risk.”
His comments harden the government’s position ahead of a report by the financial regulator in July and set up a clash with opposition Conservatives, who say there is a case for such a separation. The financial crisis forced Prime Minister Gordon Brown to pour 37 billion pounds ($56 billion) into Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc (LLOY) to avert their collapse. Both lenders have international operations.
The U.S. introduced a separation of commercial and investment banking in the wake of the Great Depression in 1933. Those provisions, in the Glass-Steagall Act, were repealed in 1999 by then-President Bill Clinton, triggering a consolidation within the industry.
No such separation has existed in the U.K., and calls for one have grown out of the banking crisis as investment losses led to a curtailment of credit for companies and households, plunging the economy into its worst recession for 60 years.
‘Advantages of Scale’
Myners said U.K. banks need to keep their “advantages of scale” to maintain their global standing, although the government would keep a close eye on the practices of Lloyds at home to allay competition fears. The bank absorbed HBOS Plc last year in a government-brokered rescue, giving the combined group almost 30 percent of the U.K. mortgage market.
“Driving back to cottage industry scale in which the U.K. no longer aspires to compete internationally is not an attractive outlook,” Myners said.
The Conservative Party says reshaping the industry needs greater consideration given the British taxpayer’s stake in RBS, whose investments abroad such as the takeover of ABN Amro Bank NV forced it to seek public aid.
“We should keep our options open,” Philip Hammond, a Conservative lawmaker who speaks on Treasury affairs, said in an interview. “Gordon Brown has been too hasty in saying ‘no’ to a Glass-Steagall type approach.”
He said taxpayers are asking “quite legitimately” how big a banking industry should be underwritten. Conservatives say three options should be considered: for support to be extended only to domestic retail operations, for banks to be split or to go on supporting all operations “but accepting that the U.K. can’t have a banking sector as big as it previously did,” Hammond said.
Myners dismissed the Conservative approach, saying their “thinking on business matters is still developing.”
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