Monday, December 24, 2012

France moving forward to separate investment and commercial banking

The Wall Street Journal reports that French bank reform is focusing on separating investment from retail and commercial banking.

France's banks are lobbying against this saying the separation will hurt economic growth.

I can clearly see how it will hurt banker bonuses, but I fail to see the direct connection between separating the two businesses and hurting economic growth.  The reason I don't see a direct connection is that the two businesses still exist after they have been separated.

Regular readers know that your humble blogger sees reform efforts focused on separating investment from retail and commercial banking as a best a distraction and at worst a barrier to real reform of the financial system.

The starting point for real reform of the financial system is to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Not only does ultra transparency address the issue of reducing the riskiness of the investment and retail/commercial banks, but it also ushers in cultural change as sunlight is the best disinfectant for bad behavior.

The French government-planned reform of the banking industry, which seeks to separate speculative and highly risky activities from retail and commercial operations, is ill-timed, the head of the French Banking Federation said Saturday. 
Implementing the reform, which was an electoral pledge of socialist president Francois Hollande while the country is facing strong economic headwinds could further limit banks' profitability and ability to help foster growth, Jean-Paul Chifflet said in an interview with France Inter radio. 
In the U.S., banking reforms have been put on the back-burner because of the economic slowdown, Mr. Chifflet said.
Actually, in the US, bank reform was put on the back-burner by the Obama administration and the passage of the Dodd-Frank Act.  The administration didn't want to reform the banks and Dodd-Frank was written by and for the banks by their lobbyists.
The French government last week presented a bill forcing French banks to create specific units to house risky speculative operations, in a bid to address one of the causes of the financial and economic crisis that started in 2007 and to protect retail activities and customers' savings. 
The project, however, has been watered down from Mr. Hollande's original plan to split the banks into two and end the combined model of commercial and investment bank.

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