Topic: Should banks be broken up into clearing banks and riskier investment banks? What will be the result of the changes now being proposed to banks’ capital requirements?


In the aftermath of financial crisis, it is widely recognized that wide-ranging reform is vital. Commission on Banking (ICB) considered reforms for the UK banking, in which the separation of retail and investment banking is an option to increase competition and stability among High Street banks, as well as protecting depositors’ money (Murchie, 2011).

However, numerous critics have accused such a move would make the British banks less competitive, as well as forcing certain exodus. Confederation of British Industry (CBI), British main business lobby group, warned against a full break-up of the banks, as it would damage Britain’s reputation as the global financial centre. HSBC Holdings, the European biggest bank, warned it would reposition headquarters away from UK if the coalition government decides to break up lenders, and so did Barclays and Standard Chartered.

At present, there is one term: subsidiarization, namely separating risk banking operation from the retail units financially not legally. This seems more reasonable and feasible at this stage.

  • Win the public trust. This break-up would at least give the public some hope that things could change (Baker, 2010).  
  • Reduce systemic risks. This could protect depositors’money from risky investment banking activities, and prevent taxpayers from bailouts when banks are mismanaged (Financial Times, 2011). These could, to some extent, maintain the financial stability. 
  • Establish more formal regulatory regimes according to differentiated characteristics of each unit, which are independentand integrated. There should also be specific and detailed regulations towards risk management within financial corporations.


Due to the complicated changes in the global and local markets, failures have the possibility to occur; however, the primary objective of this reform should be to reduce the risk and to guarantee the resiliency of the banking system in the decline period. Therefore, there are higher requirements of capital and liquidity. In particular, the size of balance between the value of banks’ assets and their liabilities should be large; and the more capital a bank possesses, the more losses it can take on its loans before going bust. However, more capital does not mean to impede flow of cash to businesses and households. Mervyn King the governor of the Bank of England, emphasized banks should establish capital buffers by their own profit, rather than bolstering dividends to shareholders or bonuses to staff (Treanor, 2010). Moreover, more required capital does not mean banks restrict loans, especially those to small- and medium-sized companies (Treanor, 2010). On the other hand, since the investment banking operation would be separated financially, there should be contingent capital securities, which are generally bonds and could turn into equity when banks hit trouble. Then, banks should set aside bigger capital cushions to absorb any future financial crash, which need having effective recovery and resolution arrangements. At the mean time, strict restrictions should be exerted on payments of dividends and bonus to stockpile more capital. No matter changing the structure of financial giants or the higher requirements of bank capital, these considerations aim to advance the loss-absorbing capability of the banking industry.


Baker, D. (2010) Why we must break up the banks. Available from: Accessed 28 February 2011.


Financial Times. (2011) CBI warns on breaking up banks. Available from: Accessed 28 February 2011.


Murchie, K. (2011) CBI opposed to bank break-up. Available from: Accessed 27 February 2011.


Treanor, J. (2010) Reform of banking system will take years, warns Mervyn King. Available from: Accessed 27 February 2011.


Treanor, J. (2010) Basel III: Vince Cable warns bankers to unlock flow of credit. Available from: Accessed 27 February 2011.