Merryn's Blog

A simple way to reform the banks

Tory MP Douglas Carswell has proposed a simple and effective way to force banks to lend well and to limit their ability to indulge in fractional reserve banking.

In my interview in the magazine this week - which subscribers can read here - I talk to Douglas Carswell. There wasn't space to look closely at his views on bank reform, but when I asked him what he would do to make the UK a better place, this came pretty near the top of the list.

So close is it to his heart that he even introduced a bill on the matter back in 2010, which you can see here.

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The idea in a nutshell is that when customers visit a bank to deposit money, they should be asked to tick a box to say whether they consider the money to be a loan to the bank (in which case they may lend it out) or an actual deposit (in which case they may not) - ie whether the depositor or the bank retain ownership of the money while it is in the bank.

This, says Carswell, would "organically solve the problem of reserve ratios. "If you run a very sensible bank and it has a good reputation" lots of people would allow you to loan their money out. If you did not they would not.

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The result? An incentive for the banks to lend well and a limit on their ability to indulge in fractional reserve banking. Job done. More on this here and in particular here in an interview with Dominic Frisby.

The bill didn't get much support the first time around, but it is worth keeping an eye on the idea it appears to be gaining support.

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