'Liborgate’ could trigger crucial banking reform.
A Glass-Steagall split needs to happen and someone needs to get it done. There really is no alternative.
“The Glass-Steagall divide between commercial banks (that take deposits) and investment banks (that take big risks) was incrementally removed in the UK and US during the late 1980s and 90s. Financial markets have lurched from crisis to crisis ever since. No other single act did more, in fact, to cause “sub-prime”, and transform it from a banking crisis into a broader fiscal and economic crisis too.
That is because once the depression-era Glass-Steagall legislation was repealed in America in 1999, Wall Street investment bankers were able to use taxpayer-backed deposits to take ultra-risky bets, knowing they would be rescued if their bets backfired. In doing this, they were following and competing with their City brethren, the UK having earlier removed its “informal Glass-Steagall” – the split between commercial banks and the old merchant banks – as part of the 1986 “big bang”.
Re-imposing the separation would prevent investment banks from betting with ordinary deposits, exposing them to the full force of the market. At a stroke, our banking system would be far safer and the “too big to fail” issue largely resolved.”