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Trade Desk Thoughts:
Too Big To Fail- Not In The U.K.
The U.K. financial system, like many other regions, became paralyzed during the credit crisis, with the U.K. Treasury being forced to nationalize the vast majority of banks. Nothing exceptional maybe in that, outside of the fact that the U.K. just cannot seem to extract itself from the shadow of the moves to save those that were deemed too big to fail.
In the U.K., the Treasury had to take a 43% stake in Lloyds, a 70% stake in Royal Bank of Scotland and had to nationalize the mortgage lender Northern Rock, while the Bank of England was force to approve emergency loans to swathes of other financial institutions, including the bell-weather, Barclays. To some extent, it seems that the U.K. financial system may have been hit by the credit crisis in a far harder and deeper fashion than other regions.
Now that the Government owns the country’s biggest financial institutions, something that opposes free enterprise principles, there had been speculations that these state-owned banks are to be split and sold as separate entities.
These rumors caught wind a few weeks ago, when Mervyn King, the head of the BoE said that the government should split institutions that are too big to fail. In the same way, Chancellor Alistair Darling confirmed the rumors, saying that RBS, Lloyds and Northern Rock will be broken into smaller entities, and sold. The immediate effect of this action would be that the government artificially increases the number of banks, and thus increases banking competition.
In the euro-area, of which U.K. is a member, the law forbids the state to offer any help to privately owned companies, such as banks. During the prior months, the Dutch giant ING was forced by EU officials to split its banking from its insurance branches, a verdict that may have been a precursor for the U.K.’s decision.
On the other hand, in the U.S., the financial sector is actually getting smaller via the 100+ regional bankrupt banks, and throughout the bankrupt or merged investments banks. It looks like the U.K. and U.S. are taking different roads; the U.S. ‘too big to fail’ slowly becomes ‘far too big to fail’, while U.K.’s ‘too big to fail’ becomes ‘very appropriate to fail’.
Whatever the outcome, the clouds hanging over both scenarios are creating some volatile reactions in the value of risk attached to each economy. This red-flagged economic week that is slanted heavily towards the U.K. and the U.S. may finally break the dead-lock of doubt that has crept into how each region will cope with the extraction of their central banks from their quantative easing programs.