Game Changer: U.K. Decides Too Big to Fail Is Too Big to Exist

In a clear break with US economic policy, the UK government has decided that too big to fail is too big to exist. As a result, three large financial institutions now owned at least in part by government are to be dismantled. Moreover, talk of Tesco’s or Virgin getting the assets is yet another momentous shift in the British banking landscape.

The BBC reports:

Chancellor Alistair Darling has confirmed that Lloyds, RBS and Northern Rock will be broken up and parts sold to new entrants to the banking sector.

He said there could be three new High Street banks in the UK over the next three to four years as a result.

But the chancellor said he would only sell parts of the banks when "the time is right", to ensure taxpayers get their money back.

There is speculation that buyers might include Tesco and Virgin.

One should not understate the importance of this decision. This is a game-changing move by the UK government. One year ago, it was the U.K.’s decision to recapitalise its banks which change the economic policy landscape. U.S. policy makers were forced to switch TARP policy from buying up dodgy assets at inflated prices to injecting capital (see my post “Recapitalising Britain” from 7 Oct 2008).

Yet again, the British are leading the way in reform. If you recall, just two weeks ago Mervyn King, the Governor of the Bank of England, made a blistering attack on government policy and advised breaking up too big to fail banks. At the time, Prime Minister Gordon Brown publicly rejected this idea.

However, it seems Labour were not as against King’s ideas as Brown’s comments suggested. The move last week by the Dutch to break up the bankassurance giant ING may have been the impetus. The Chancellor, Alistair Darling, suggested an increase in competition on Britain’s high streets was uppermost in his mind.

Mr. Darling said this was the best way to ensure "proper competition and choice". He said having just "half a dozen big providers was not acceptable".

Why Bradford & Bingley was not mentioned with the other three banks under government control is unclear. Tesco’s and Virgin have been two of the more innovative financial service providers on Britain’s high streets and we should look on their ability to compete at scale as something which will shake up financial services in Britain. Tesco’s bid to compete in the banking sector is particularly noteworthy because of its enormous presence on high streets and immense customer base.

I reckon this move will put pressure on the US where the Obama Administration has been completely unwilling to break up the large banks, which are now even more dominant than before the crisis.

Comments

[john s. gordon:]

it seems the brits see reality more clearly than the politicians in the administration and the u.s congress,
> jack

Nov 02 09:02 AM

[Barking:]

I think thats a great innovation by the British...and someday the US will end up in the same spot....but for now the investment banking cartel and their lobbists runs this country. We are going to have to reach a point of real pain before someone in power gets enough nerve/backbone to stand up and say ENOUGH....and break up these "too big to fail" companies that have taken our country and financial markets hostage.

Nov 02 09:53 AM

[stark naked:]

Do not bank with the big banks. There is still enough choice out there that you do not have to get gouged but these banks. Try out the credit unions. I have been doing all my banking with CUs for the past 25 years with narry a problem and they have as innovative products as the blood sucking banks.

Nov 02 10:09 AM