Comment by cm2187 | Hacker News Reader

Comment by cm2187 | Hacker News Reader

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> Commercial banking and investment banking are split again

If we take the example of the UK, all of the bank failures were because of non investment banking activities. RBS failed because of its excess of leverage as a result of its disastrous acquisition of ABN AMRO and because of its loan book, HBOS because of its loan book (essentially commercial real estate exposures), and Northern Rock because of their over-reliance on wholesale funding.

There are examples of banks failing or making large losses because of the investment banking activities (Lehman, Merrill, Bear Stearn, UBS) but my point is rather that the principle "Retail banking = safe, Investment banking = risky" is simply not true.

In a way, universal banks tend to be more robust than a specialized bank, as it benefits from funding and revenues diversification (and cheer size to absorb losses).

> we didn't pursue many personal penalties nor criminal cases

I am not saying that there hasn't been any fraud in the financial crisis but I am of the opinion that it is not fraud that caused this crisis. It is the over-reliance on leverage, short term funding, and a belief that the US real estate market would never go down (belief that many people have today in the UK).

You can't send people to jail for making bad business decisions. Some banks were run in a moronic way, but being incompetent or missing a fundamental economic driver is not a crime.

I fully concur with you that the sorts of investments that depository banks can make should be more highly regulated, as should their leverage ratios. I didn't include that on my top list for "taming Wall St" because we were discussing Wall St and this wasn't as much of an issue in the US/Wall St as in the UK. That said, I definitely agree this was an issue in the UK.

Another note here is that much of what brought down these UK banks was contagion, due to the bubble in commercial and residential real estate pricing and then to the spreading financial crisis and it's effects on chilling available financing and liquidity.

> In a way, universal banks tend to be more robust than a specialized bank, as it benefits from funding and revenues diversification (and cheer size to absorb losses)

This is not only an unproven claim, but a disproved claim. In the US, cross-breed banks resulted in greater contagion across the financial sector and put depositories at risk, increasing the need for bailout.

You could in theory get the best of both worlds by having a highly, highly regulated and constrained investment banking arm of a depository bank. But then how well would it compete with standalone investment banks? And would we really be able to ensure complete separation of risk between activities? Doubtful, in practice. This is a suboptimal set up.

Depositors in a bank do not deposit their money with the idea that it is going to be put at any significant risk. It's supposed to be effectively warehoused and insured. Taking complex and risky bets with deposits, or capital derived from or backed by a depository base of capital, makes no sense on first principles and the theory of combining operations for some benefit in diversification has been falsified in practice... the opposite happened, with higher degrees of correlation and contagion happening in reality.

> You can't send people to jail for making bad business decision

No, but we didn't pursue even a tiny fraction of the cases of negligence, let alone fraud. Also, reducing the discussion purely to jail time is a straw man. Civil penalties for individuals are perfectly justifiable, especially when you're well-compensated and when your decisions result in gross harm to the public.

> In the US, cross-breed banks resulted in greater contagion across the financial sector and put depositories at risk, increasing the need for bailout.

I am not sure I agree. The example of Lehman has shown that a pure investment banks (and technically not even a bank, it was a broker-dealer) can cause a financial collapse. So I do not think we can work on the assumption that we only need to worry about deposit taking institutions and let investment bank collapse. Investment banks can be too big to fail too.

You seem to keep taking my positions and reducing them to absurdity.

> So I do not think we can work on the assumption that we only need to worry about deposit taking institutions and let investment bank collapse.

I did not say that. Or anything like.

I'm consistently saying:

We should regulate both retail banks and investment banks more.

And part of that increased regulation ought to be splitting investment banking risk from retail banking risk again. Both are risky enough as is. Combining their (sometimes correlated!) risk is a really bad idea.

I agree with you that retail banks can cause huge problems (eg your UK examples). I agree with you that pure investment banks (or merely broker-dealers) can cause huge problems. Hence the need to regulate both and do what we can to prevent crises (not just treat them more effectively), while constraining economic activity as little as we can, of course.

> And part of that increased regulation ought to be splitting investment banking risk from retail banking risk again. Both are risky enough as is. Combining their (sometimes correlated!) risk is a really bad idea.

the implication of calling retail and investment banking risks "sometimes correlated" is that they are also sometimes uncorrelated.

The two common examples of diversified survivors of the last GFC are Citi and JPMC.

Yes, they are not always correlated. Obviously. What point are you trying to make?

> The two common examples of diversified survivors of the last GFC are Citi and JPMC.

Are you actually holding Citi and JPMC up as examples of some kind in regard to benefits of combining retail and investment banking? If so, would you similarly argue that because not all S&L associations had gone bankrupt or been shuttered by the late 90s, that's somehow an indication that S&L associations needed no regulatory reform? If there are 10 people on an island and all of them eat a particular indigenous fruit and then 8 of them die from it-- but two survive unharmed!!-- would you say it is wise to continue eating the fruit?

as long as they have any kind of non-correlation, they will benefit from merging.

> would you say it is wise to continue eating the fruit

i would say it is wise to do what the 2 survivors did... which is to have a diversified portfolio of retail and investment banking revenue streams.

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