Douglas Carswell's Blog

Banking needs radical surgery

Sir John Vickers, head of the Banking Commission, has today said that UK banking needs some radical reform.  No kidding.

Everyone - including Sir John - seems intent on some form of separation; retail banking from investment, or - in Vince Cable-speak - the sensible from the casino.

I'm a little sceptical about attempts at drawing such neat distinctions between different types of bank.  And before we buy into the idea that politicians and technocrats can redesign the entire architecture of UK banking, first remember that these were precisely the kind of people who could not even get central bank interest rates right.  Each time you hear an expert telling us what banks should all now look like, ask if they were also wise enough to see the crash coming.

So why not try a different approach to reform, which does not depend on the "wisdom" of any experts?  Rather than replace one overly centralised, busted system with a series of centrally planned reforms, allow organic change instead.  It need be no less revolutionary. 

My proposal is that instead of dividing banks into two different type of institution (with all the unforeseen consequences), create instead two tiers of legal status for deposits. 

Have a look at the Bill I introduced on the floor of the Commons here.  It would require banks to offer two kinds of account going forward; accounts where they can continue to lend against your money, and accounts where they cannot.  This would ensure that banks could not endlessly create credit out of thin air - but leave those owing money with very real debts (More details of the Bill are here.)

It would provide customer protection - and the prospect of an alternative to fractional reserve banking's ruinous cycle of credit boom and bust.  But who knows what the take up would be, or what innovations in banking services it would prompt....  

Critics say it would mean less credit.  Surely it is the status quo that is failing to provide credit where it is needed?

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