Martin Gilbert, chief executive of Aberdeen Asset Management, has declared that big institutions that straddle investment banking and commercial and retail banking should be broken up.
Echoing the views of Scots economist and author John Kay, who coined the widely used “casino” and “utility” banking analogy for the divide, and Business Secretary Vince Cable, Gilbert claimed the UK’s banking sector must undergo radical structural change in order to become safer, serve the customer better and be less prone to blow-outs.
“The banks should be split up. That’s our view,” said Gilbert. “Now the banks will argue that it’s very complicated. But they’ve got to decide what they’re going to do. Lloyds Banking Group is a good example of a utility, but it should not be engaged in things like proprietary trading or private equity.”
Martin Gilbert, chief executive of Aberdeen Asset Management, has declared that big institutions that straddle investment banking and commercial and retail banking should be broken up.
“If you’re a big deposit-taking bank you shouldn’t be punting the money on a prop trading book on the other side. The banks that the Government should support, and bail out if necessary, are the ones where public go and deposit their cash.
“Where the [banks with large investment banking arms] have got to reinvent themselves is that they were previously making the bulk of their money in proprietary trading. They’re going to have decide whether they want to service their clients or just be giant hedge funds.”
Aberdeen Asset Management, which Gilbert bought out from an Aberdeen law firm in 1983, is the world’s largest independent asset management group with £165 billion under management. It is also the biggest asset management business of any type in headquartered in Scotland, with about £20bn more in assets than SWIP and Standard Life Investments.
Gilbert, who sits on the board of industry/government initiative the Financial Services Advisory Board (FiSAB), said the UK Government and especially Cable would “love” to break up the banks in this way.
However, Gilbert added: “Vince Cable has a problem. He’s got stakes in the banks as a result of the bailouts. It’s a political nightmare for him.” He added that he awaits the findings of the Independent Commission on Banking, chaired by Sir John Vickers, with interest. Overall, Gilbert said it is essential that “banks get back to much more sensible behaviour”.
Gilbert also stressed that the government must ensure that banks are better regulated. “I believe the old-fashioned Bank of England would have had the common sense to have asked why HBOS was dominating the property lending market in the way it was. They should also have looked at the 40% funding gap it had.”
The Aberdeen Asset Management chief executive expressed support for Lloyds Banking Group chief executive Eric Daniels. “I think that, in five years time, the takeover of HBOS will look like a very good deal. I’ve got a lot of respect for Eric. I think he’s done an extremely good job. No-one will know how much he was leant on to do the deal.”
Gilbert said he does not believe Lloyds will be forced by the Government to offload HBOS. It will, however, have to sell off 600 branches by 2014 as a condition of state aid.
Gilbert: financial crisis has done “huge harm, real damage” to Scotland’s economic position
Until now, industry lobby groups Scottish Financial Enterprise and FiSAB have played down the effects of the financial crisis on Scotland’s reputation for financial services. However, Gilbert conceded the banking crisis of October 2008 has done “huge harm, a lot of damage” to Scotland’s position.
“The real damage is not the fact we no longer have HBOS headquartered here. The real pain is being felt in property development and housebuilding. The bulk of the £200bn contraction of Lloyds balance sheet is coming in property. There is a lot of pain still to be felt in that sector and that’ll go on for a few years.”
Martin Gilbert told the Sunday Herald that he believes Scotland should have fiscal autonomy. “Scotland does not know where it stands at the moment. I think Alex Salmond’s doing as good a job as he can within the very tight constraints that he’s got.” Salmond will address Aberdeen’s annual investment conference in Aberdeen this Friday.
Owen Kelly, chief executive of Scottish Financial Enterprise, said: “The debate about ‘narrow’ and ‘universal’ banking, and the advantages and drawbacks for customers of the various options, continues in the UK. The chief vehicle for this is the Independent Commission on Banking, which is to report in several months’ time. However, the US, China and other major economies have already made some of these decisions and whatever we do in the UK will have to take account of them. We can’t decide these things in isolation.”
Speaking in Glasgow last week, Stephen Hester, chief executive of RBS, said: “The essential element is to ensure that financial institutions can be safely resolved and if bailed out it should be by shareholders and creditors, not the state. My analysis of what has just happened and my experience of banking tell me that size is probably not the key issue.”
This article was the business splash in the Sunday Herald on 29 August 2010