Douglas Carswell's Blog

How should we reform the banks?

Next week, Steve Baker and I are floating an idea for banking reform with the Financial Services (Regulation of Deposits and Lending) Bill in the House of Commons. 

At present, when you deposit money in a bank, that bank - not you - legally owns the money.  The banks can - and do - use that money as they please.  Apart from a few capital ratio requirements, they can lend what you deposited as though they owned it.  In other words, they behave a bit like a hotel guest who books a room for a few days, and then sub-lets it.  Try doing that in most hotels, and you’d be thrown out. 

So why are banks able to sub-let your money?  Allowing banks to treat your deposit as a loan is a form of legal privilege extended to no other business I can think of.

It has profound implications, however, as banks can carry on lending credit on the back of your deposit from one financial institution to another, creating a pyramid of IOUs. At the time the credit crunch struck, every £1 deposited had been lent on as credit over 40 times.

That in turn has a very damaging effect on the economy, creating a glut of credit and an artificial boom.  Followed by crunch and bust.  

"But, Carswell, without banks being able to lend on your money, there'd be a shortage of credit and capitalism would collapse!", I hear sceptics say. 

It's the current system of scam banking that has given us today’s credit shortage. It's the crony corporatism we have now that so damaged capitalist economies - bringing about a massive extension of state power. Under my plan, you would still have credit - but credit that was backed by real savings.  And by virtue of being backed by someone else's savings (or deferred consumption), that credit could only provide for investment in increased economic output that was sustainable.    

Under my Bill, when opening a new bank account, you'd still be free to tick the box that says "it's fine to lend on my money".  My Bill removes the legal privileges that allow big banks to act as crony corporatists, with customers required to act as unwilling investors in madcap deals on credit instruments few of the bank's own board even understand.   

What would disappear is the ability of banks to conjure up bogus, candy floss credit, which then fuels reckless economic expansion.  Followed by inevitable contraction. Ending in demands that every taxpayer then bail out the guys that built the ponzi scheme.

Far from anti-free market, my proposal enshrines the individual property rights.  Rather than undermining Western capitalism, my proposal attempts to address the problem of crony corporatism, which gives the free market such a bad name.

UPDATE:  To be clear, this Bill does not stop banks from treating your deposit as a loan.  You just have to make clear that you give them permission to do so.  There would, in effect, be two types of bank account; one where it was made clear that you owned the money (and probably paid for banking services in fees), and one where the bank was free to lend on your money like they owned it. 

And even may be put it into complex financial instruments not even they understood, for example.  

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