A simple way to reform the banks

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.

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.

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.

  • Andrew H

    This, plus scrapping the lender of last resort i.e. the central bank, no implicit support from the tax payer if it all goes wrong (like every other business), and an end to limited liability (if a bank throws away depositors money on a risky bet then the depositors should be able to come after those that run the bank for everything they own).

  • GFL

    Sensible idea – the only problem is this would cause a massive contraction in the money supply over a very short period. There is no way the banks would be able to absorb this level of deleveraging.

    Slightly off topic, but when there is talk of separating retail banks from investment banks, I never really understood how this would work in practice. Peoples deposits have already been leveraged to the hilt by banks, how can this ever be wound down without a huge crash?

  • Jim C

    @1 & 2, good comments. And I agree GFL, all those people wishing for a re-enactment of Glass-Steagal appear not to realise this would mean more tax-payer bailouts unless we were to let the banks fail ( which of course is exactly what should have happened back in 2007/8)

    Also, we have a subsidy of risk via the government’s deposit guarantee scheme; get rid of this and people would keep a a much closer eye on what ‘their’ banks were doing with ‘their’ money.

    Getting rid of the commercial banks’ cartel in our single-currency money creation (via credit) would be the real solution, but there are too many powerful people who benefit from the current system for this to happen unless enough of the electorate understand how the system is rigged in our oligarchs’ favour.

  • Alan

    Nice idea but it won’t happen. Even if it did banks would start offering 2 tier rates and everyone would be enticed by the higher rates, just like they were with icesave etc then get a bailout when it all goes wrong.

    As others have said, the banks should have gone bust. Short term pain, long term gain for the common people.

  • Jim C

    @4 Alan – I think the idea would be that if the depositor were to be happy for the bank to loan out their money, s/he would be paid more interest… but also have increased risk of losing some or all of their money.

    Short of getting rid of fractional reserve banking altogether, this would at least tame *some* of the credit creation that leads to so much monetary volatility in the current system.

    The banks would hate it – but why should we continue to allow our ‘representatives’ to give them a free ride?

  • Joe Wilson

    Might work when inflation and base rate is higher.

    Otherwise, with base rate at 0.5% and short term gilt yields around the same, a bank would probably have to charge for such an account – particularly for low balances.

    Personally I think current accounts (for companies and individuals) should be ‘gilt edged’ but savings and deposit accounts paying interest should be classed as loans to the bank as outlined.

  • Michael Lewis

    More or less going back to a gold standard. Can’t see how this would work – from where we are now – it would be good for on-line stock brokers. Would be safer to just have your salary paid in cash and keep any savings in a varierty of stocks/bonds/commodites. Think of the millions of voters that wouldn’t know what to do – they by virtue of chosing who is in government – would ensure that the taxpayer would always make good.

  • Ian

    Sounds like a very good idea to me, even if one had to iron out problems like 2-tier interest rates.

    We would have to find ways to increase the number of small banks, rather than have the existing few megabanks dictating the agenda. Then we’d have more free market competition.

    Off-piste I know, but I do like some of Carswell’s ideas on government. I’m going to order his book.

  • BobT

    Not so much a comment on this article, but with the announcemnet of Mark Carney as the next BofE chairman, it might have some impact on some much need reform.
    Its a shame he’s not a Brit, but if he’s successful…

    A shrewd move lets hope!

  • The Politicoid

    The watered down reforms outlined in the banking reform bill clearly are insufficient to do the job or raise confidence in the general public. Every man woman and child over 13 should be made to write a 500 @ essay on the reasons why the public got hit so hard by this recession, for their future reference. They can check out my own article on the matter to get themselves started off… https://politicoid.wordpress.com/