The recent discussion about the virtues of a re-introduction of Glass-Steagall may have taken a wrong turn. Glass-Steagall was introduced to physically separate lending from securities underwriting and trading. The new debate is not about the same concept, but rather about the delineation of banking services to clients from proprietary trading activity. It is no longer feasible or helpful to try and separate lending from securities – they are wholly intertwined. Any forced separation would be hugely disruptive to the banking industry – with inevitable downstream impacts.

What is being discussed in regulatory circles is a restriction on banks behaving like hedge-funds. Is it appropriate for a high-street bank that benefits from implicit sovereign guarantees and has retail shareholders to risk depositor and shareholder capital in high-risk markets? Were the shareholders and depositors aware of the implicit risk and change in business model? I’m sure they weren’t. I even know some investment bank staff who unaware that their firms had become so dependent on risking their own money.

The de Larosiere report does not state outright that banks should refrain from proprietary trading and principal investment. It does however (Recommendation 8) talk about “appropriate capital requirements on banks owning or operating a hedge fund or being otherwise engaged in significant proprietary trading…”. Regulators could achieve the separation by imposition of higher capital charges on proprietary activity – it would become uneconomic.

A very senior regulatory advisor recently said to me: “If you want to behave like a hedge fund – you should be a hedge fund”. It’s very hard to disagree,