The Atlantic Wire reports that various economists and econo-pundits are applauding Great Britain's decision to break up some of its largest banks, which include Royal Bank of Scotland, Lloyds Banking Group and Northern Rock. I think whether banks should be broken up is a complicated question, probably best considered from antitrust and systemic regulation standpoints. With that said, there's something about Britain's actions here that really bother me: discrimination.
For starters, when should regulators break up banks? First, if the banks have price-setting power, then you want to eliminate those monopolistic tendencies. Second, if there's no way to resolve the institutions without also causing catastrophic damage to the financial system. If either of those criteria persists, then regulators should take this action.
But this doesn't appear to be what Britain considered. Which banks did it break up? Those with the most problems. For example, Barclays and HSBC, two completely mammoth British banks, remain intact. If there were antitrust concerns, then surely those two banks would have them too. If the break-up banks couldn't have been easily resolved, then I find it difficult to believe that the other two could have.
I somewhat doubt that big banks in the U.S. will be broken up. I just think there's too much political pressure to let them be. But if regulators did go this route, I certainly hope the action wouldn't be reserved for just Citigroup and Bank of America. Other banking behemoths like JP Morgan, Goldman Sachs and Morgan Stanley pose as much or more risk to the financial system as Citi and BofA if they cannot be resolved without causing another crisis.
Make no mistake: I'm for breaking up banks if it makes sense to do so from an economic standpoint. What I'm not in favor of is breaking up only the banks with a poor track record. That's precisely the kind of reactive policy that utterly fails to prevent future economic meltdowns. Bank breakups need a proactive approach, which is why no bank -- no matter how healthy -- should be immune.
Breaking up banks is just more government intervention, with more political considerations. What we need is a bankruptcy procedure that can handle systemically important banks. And the political will to use it.
Couple of points:
1) Northern Rock is not a large bank by any means.
2) Northern Rock is wholly owned by the UK Government
3) RBS is currently 80% owned by the UK Government
4) Lloyds Banking Group is 43% owned by the UK Government. The UK Government is the majority shareholder. Furthermore the group itself was created by the government backed merger of two very large banking groups, created in late 2008.
This is why the UK Government can break up banks. It is not discrimination.
You seem to have taken what happened at Northern Rock out of context (A far better example would be the EU splitting the Dutch bank ING). Lloyds and RBS are not being split up by the Regulator. Areas of these banks are being sold off to "streamline the business", much like Barclays selling BGI to Blackrock earlier this year. These decisions are being made by the majority shareholder (the UK Government). The UK Financial Regulator is independant of the Government
And the same IS happening with US banks, eg the sale of Phibro from Citi under duress. In fact this is exactly the kind of piecemeal sale being mooted at Lloyds (eg selling the realtor Halifax Estate Agency). As for BoA/Merrill Lynch: just watch this space.
Now, whether the Government should have the same rights as any other major shareholder in instigating this kind of change: that is another question.... And the other question (which you originally ask), when and why should a bank be split up: that is another. Regardless, this article does nothing to answer any of these questions.
It is a naive and poorly researched article. Take no lessons from it.