Finance Watch: Bank separation is essential for banking competition and the economy, the time for indefinite bank subsidies is over
08 April 2013
Finance Watch, the public interest association, published a policy note “The importance of being separated – making the public interest sovereign over banks” on the benefits of separating trading from lending activities among Europe’s largest universal banks.
Finance Watch calls on policymakers to ignore misleading claims that “we have done enough bank reform already”, or that “separation would hurt the real economy”. These and other myths are addressed in the document and comprehensively debunked. The document explains why bank separation is vital if the EU’s other bank reforms are to be coherent and protect the public.
Key points include:
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today’s banking market is distorted by funding subsidies which harm competition in the banking market and discourage banks from serving the wider economy as they should;
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existing bank reform proposals do not stop banks from being too-big-to-fail and will not protect the general public from future banking crises; and
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the separation of banking activities is a critical step in restoring both Europe’s banking sector and economy to health.
Duncan Lindo, senior policy analyst at Finance Watch and the paper’s author, said: “For the EU’s package of bank reforms to be meaningful, policymakers must confront the issue that lies at the heart of Europe’s banking troubles: too-big-to-fail.
Arguments against separation typically include threats that it could put the EU banking sector at an international competitive disadvantage, and attempts to draw the wrong conclusion from the observation that “no one bank business model did better than others in the crisis”.
To these, policymakers should recall:
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the crisis cost hundreds of billions in direct bank support and brought five years of recession to the EU; a banking system built on moral hazard is clearly unaffordable;
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a reformed and stable banking system would attract long-term investment to both banks and the economy; and
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the survival of banks with too-big-to-fail status in the crisis does not prove their resilience, it merely proves they were too big to be allowed to fail.
Press release
Full policy note
© Finance Watch
