The desirability of separating the utility aspects of banking from the riskier investment banking side has been a regular theme of this blog. Policymakers in the UK and everywhere else seem reluctant to take such a step, which would obviously be ferociously opposed by the banks themselves.
Tim Harford has written a fascinating piece, originally in the FT but reprinted on Slate, showing the risks inherent in any mechanism that is both complex and tightly coupled, like strings of dominoes, or nuclear reactors -- or the global financial system. Measures adopted to add safety often simply create new ways for things to go catastrophically wrong.
As with safety measures at Three Mile Island, Harford argues, so also with "insurance" mechanisms like CDS in the financial market. Makes sense to me -- I've long observed that banks always find new ways to lose money, despite the best efforts of their own risk managers and the exertions of government regulators. Separating utility banking from banks' investment activity would loosen the coupling within the financial system, making it less likely that a future Lehman-style crisis would go global. You can take a look at Harford's article here.
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