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The suggestion that we might partially turn back the clock has been described as a call for “Hovis banking”, referring to an advertisement that plays on nostalgia. The commercial succeeds because we believe the bread our grandparents ate, before innovations in technology and marketing, was nicer and more wholesome. Perhaps that is true in banking as in baking.
We will succeed in managing financial risk better only when we come to recognise the limitations of formal modelling. Control of risk is almost entirely a matter of management competence, well-crafted incentives, robust structures and systems, and simplicity and transparency of design.
The value of Modigliani-Miller – like any good model in physics or economics – lies as much in the questions it raises as in the truths it reveals.
The Independent Commission on Banking headed by Sir John Vickers which the coalition Government has established will be told that such a separation between utility and casino can't be done – although it was done in Britain for most of the 20th century.
More competition and a reduction of the conflicts of interest between different financial services activities is the antidote to gouging. The separation of retail and investment banking would begin a move away from the transaction-focused, sales-driven culture of recent years and reassert the development of long-term relationships with customers.