Tuesday December 4, 2012
Prominent banker says commercial and investment banking should be separated
By DANIEL KHOO
KUALA LUMPUR: The global banking industry which is going through a confidence shakeup of late must go back to the heart of the GlassSteagall Act and separate their commercial and investment banking entities, said prominent Islamic banker Iqbal Khan (pic).
This should be done to ensure the overall health and sustainability of the banking industry moving forward, he said.
“An ethically enhanced Glass-Steagall Act as advocated by Paul Walker and as recommended by the Vickers Report will provide the systemic resilience which is needed to bring stability to our economies,” Iqbal told journalists after his public lecture here yesterday.
The Vickers Report, also known as the Independent Commission on Banking, released in the United Kingdom last year had recommended that Britain-based banks should “ring-fence” their retail banking divisions from the investment banking entities to safeguard against the latter's perceived higher-risk financial business.
“If you look at what has happened in the western banking markets, over the last 20-25 years there have been a gradual chiselling away of the Glass-Steagall Act which was put in place after the 1920's financial crisis where commercial and investment banking were separated,” Iqbal said.
“What this did was to create huge universal banks which were doing all kinds of risk-related activity while the fundamental activity that a bank does is to be a financial intermediary. At the same time, these banks were also controlling the payment systems,” he added.
Iqbal said after his public lecture at the Securities' Commission titled “Our Markets, Our Values” that the investment banking entity would come under pressure should an economic crisis or any slowdown in the economy come about because of highly-leveraged activities that it undertook such as what happened before.
“This had an impact on the banks where their share prices and equity values came down while Tier-1 capital ratios were also impacted. Non-performing loans also went up then. As a result, taxpayer's money were used to bail out the banks in many countries,” he said.
He said the likely reason the banking industry was bailed out was because they were the controllers of the payment system.
Meanwhile, Iqbal said the Islamic banking industry should aim to widen its appeal among the masses to ensure growth of the market moving forward.
This should be done by offering competitive products, educating customers of the benefits of their products and make these known through effective marketing strategies such as advertising, Iqbal explained.
“Finally, they can pursue cause related marketing' whereby the banks can say: if you bank with us we will donate a percentage of our profits to a (honourable) cause which is on the top of the customers' mind,” he said.