Is the UK Breaking Up Big Banks?

Question: Why is the United Kingdom breaking up big banks that got bailed out? Are they wrong?

Paul Solman: The UK seems committed to one interesting idea in the wake of the crisis, but it doesn’t appear to be breaking up its big banks. It’s true that Mervyn King, Governor of the Bank of England (their Fed), made headlines this summer with statements about ending too-big-to-fail.

“There has been pressure in the higher echelons of the Bank of England to dismantle banks that are too big to fail,” wrote Reuters blogger Peter Millership a few days ago in reference to King’s much-heralded remarks, “but in government this so far has had little resonance.”

Indeed, Millership’s blog post was about the recent revelation that during the crisis the UK had “secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.” Using the defense budget metric, that would be secret U.S. loans of half a trillion or more, on top of TARP and the rest.

So what HAS the UK done that might be instructive? It’s pushed the idea of an international “Tobin tax” on financial transactions to make them more expensive and thus, presumably, discourage them. Paul Krugman wrote about this in Friday’s New York Times. It’s well worth a read.