An Austrian professor and Swiss author Gian Trepp have intervened against the arguments brought forward by the banking lobby against the current bank separation initiative in the Swiss Parliament.
Prof. Karl Socher from the Innsbruck University wrote a letter to Neue Zürcher Zeitung, challenging the "three arguments against a forced split of the large banks" pushed by the Swiss financial daily. First, it is true that a bank separation won't prevent crises in the future, but such crises will be easily manageable, in the real estate sector, for instance. Second, it is not difficult to separate "good" from "bad" business. Deposit business must be insulated, so that the payment system is protected. If the payment system collapses, the economy is endangered. It is not politicians who must define what business is what; they should simply establish the separation "which has proven effective in the past, as, for instance, in the Glass-Steagall Act in the USA." Experts will then make the definition. Third, capital increase is no alternative to bank separation; to the contrary, the risk of losses for depositors because of investment banking increases.
Gian Trepp, who is an independent member of the Social Democratic Party (SP) task force for bank separation, exposes the general inadequacy of economic theory to deal with the problem of Too Big To Fail, which affects even those in favor of separation. The SP task force is working on a constitutional referendum on bank separation, parallel to the initiative in the Parliament.
The alliance between the SP and the conservative Swiss People's Party (SVP) on the issue "is only logical: neither billionaire businessmen [Blocher], nor small taxpayers want to be forced to pay for the losses of speculators in case of a crisis." Thus, "concrete contacts between the two sides were only a question of time. Meanwhile, these contacts led to two (almost) identical Motions by SP and SVP in the National Council [lower house of Parliament]. I was part of the preceding talks."
Now the ball is in the Parliament's court. "The best way to exclude a new bailout of our costs in the future is to separate legally, operationally and in capital form, the high-risk UBS investment bank from the holding company bank (it goes, mutatis mutandis, for Credit Suisse too). Such a separation of the investment bank will condition a deep reform of the Swiss banking system at the level of constitutional and bank law.
"Finance theory does not help us in this. It gives no answer as to what is an investment bank, what is proprietary trading, how much capital does a bank need. However, the parliamentary initiative must come with a definition. Since both Pardini and Blocher want to move forward with a solution to TBTF in Switzerland, they found a formulation which avoids the term 'investment bank.'"
The issue of "proprietary trading", however, was the center of the Volcker Rule, which, in order to be implemented in the USA, has produced a more than 1,000-page set of regulations.
"Regulations that cannot be implemented in reality by the administration are bad regulations, and the Swiss Parliament should AVOID REPEATING THE MISTAKES OF THE U.S. CONGRESS WITH THE VOLCKER RULE [emphasis added]. The more clearly the two types of bank — which replace the universal bank — are defined at the level of the constitution and the (positive) law, the easier the supervision and regulation of financial markets will be. Reducing the complexity is urgent also in the field of financial and banking law.
"Full structural separation of financial trading — with clearly defined exceptions — is, in my view, still the best recipe for a durable solution of the TBTF problem. Only, as Bill Clinton said to the allegations of cannabis consumption: smoked, but not inhaled. Or our Doris Fiala to the allegation of plagiarism: copied, but not realized. My small incursion in the bungling of Parliament work similarly makes me worry."
The website/journal GHI in Geneva also published an editorial piece in favor of Glass-Steagall, under a quote they attribute to Winston Churchill: "Those who forget the past are doomed to relive it."
