Douglas Carswell's Blog

Alternative budget: How to reform the banks?

Five years after the credit crunch, not a lot has changed.

For all the bank bailouts and talk about Basel rules, we have only really been dealing with the symptoms of the problem. The structure of banking itself has changed surprisingly little. Until now.

The Vickers proposals seek to create a division between retail and institutional banking. All that high risk, irresponsible casino banking is, apparently, going to be separated from that nice, cosy high street banking. Or so we are supposed to believe.

Perhaps. But is retail banking really risk free? How meaningful will the retail-institutional split really be? Would these changes have prevented the kind of problems we have seen?

Reform is really about trying to rein in the worst excesses of fractional reserve banking. I think there is a better way of doing that.

Rather than a horizontal division between retail and institutional banking, we need a vertical line drawn within banks. There needs to be a clear legal distinction between money given to a bank as a loan and money given as a deposit. Details of my Bill to do precisely this can be found here.

How would this help?

If, when paying money into a bank, you had to specify if you were making a deposit (safekeeping) or loan (to be lent on), you would allow the capital rule for each bank to be determined organically. Well run, trusted banks would be able to issue higher multiples of loans and credit. Badly run banks would not.

Secondly, you would make it easier to define the limits to state responsibility. Government would only be responsible for underwriting people's deposits.

Third, it would limit the ability of banks to conjure candy floss credit out of thin air. It is perhaps this, which leads to periodic credit booms - followed by bust - that has proved to be so damaging to the wider economy.

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