Should we break up the banks?

No
The proposal on the American table is simple: break up the so-called super banks. To have the deposit-taking banks in one place, and the risk-takers (or proprietary traders) in another. The aim is laudable: that Main Street should not have to pay for Wall Street. This is, after all, the system which existed under Glass-Steagall, the Depression-era legislation. But that broke down, because finance became much more international, ingenious, complex and important. That global genie cannot be squeezed back into the national bottle — and if Obama tries, some genies may well bring their tax dollars here.

The banking disease was not obesity but behaviour. Financial institutions got into deep trouble principally because of old-fashioned bad banking and weak risk management, not because of proprietary trading or newfangled derivatives. Lehman Brothers, whose failure precipitated the crisis, was not even a bank. To draw distinctions between the types of banks may well be a radical solution — but it is one which does not address the problem.

Whenever American presidents embark on raids on their financial sector, Britain has had plenty to gain by taking a less vindictive, more moderate line. In 1963, JFK taxed income on foreign-owned stocks and shares, hoping to discourage Americans from investing abroad. So what did American companies do with the dollars they held abroad? Rather than repatriate them, they simply loaned them to non-American investors — and the Eurobond market was born. London was its centre and New York was the loser. Then, after the Enron scandal, America tightened regulations on companies trading on its stock exchange. They were too tight for foreign companies, who listed in London. The City benefited again.

If London and New York make the same regulatory mistakes, then both will lose out. Although controversial, the listing of Rusal, the Russian aluminium giant, in Hong Kong, along with HSBC moving its strategic headquarters there, illustrate how capital markets are moving east.