Head of the financial system inquiry, David Murray has suggested that Australia's banks could be legally forced to split off their trading arms, to protect savers, tax payers, economies and governments.
Speaking to the Australian Financial Review (AFR), Mr Murray says a version of the controversial Volcker Rule in the United States that has banned principal trading should be considered in Australia. The United Kingdom also has a "ring-fencing" law, following its Vickers banking inquiry.
The key reason for the split is so that taxpayers would be less at risk of having to prop up one or more of the banks during a crisis. The move would hive off investment banking operations, proprietary trading and insurance from the more 'normal' retail and commercial banking businesses.
We would also argue that the big four banks, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) should split off their wealth management arms, given the recent issues surrounding Commbank and Macquarie Group (ASX: MQG) financial planners.
Until financial planners can operate independently of the product pushers, a question mark will continue to hang over their heads on truly independent advice.
Despite the appeal of splitting the banks, it appears unlikely to ever happen. It would cost the banks billions to split their businesses now, as the UK has found. The UK Treasury estimates their costs at about $5.4 billion, and ongoing costs potentially running into the billions each year, according to the AFR.
But those costs need to be weighed against the potential cost to Australian taxpayers and our economy, if we were forced to foot the bill to prop up one or more banks. That could be multiples of what it would cost the banks to split.
