Banks need radical reform, not tinkering
The Banking Commission says its key objective is to protect the UK taxpayer from another bailout. At the same time, they suggest a sort of two-tier system within banks, as opposed to institutional separation.
Sounds to me like they're proposing the sort of changes I was aiming at with my draft Bill last autumn* (Financial Services (regulation of deposits and lending) Bill).
My change in the law would be to create an internal distinction within banks between deposits that a bank was free to lend on (the status quo), and those where the legal ownership remained with the account holder (a new legal status).
In short, fractional reserve banking, with its credit pyramid of IOUs piled upon IOUs would no longer be guaranteed by the state.
Customers would have the option of choosing between 100 percent reserve accounts, or the next Northern Rock. There would be a trade off between risk and reward. To impose a system of banking regulation that ignores such a trade off - which is what some propose - would be to try to ignore the laws of financial gravity.
Taxpayers, under my scheme, would no longer be forced to underwrite other people's risks.
Rather than impose big changes on the architecture of banks - with all the attendant risks and unintended consequences - my reform would allow organic change over time. We could see what works.
Incidentally, reforming the legal privilege that allows banks to conjure credit out of thin air might just stop the build up of dangerous credit booms - which as we know caused the credit crunch.
If banks wanted to supply customers with more credit, they'd have to increase the price of credit (interest rates) to stimulate supply. That might also address the problem of under saving and over consumption that has been an unwelcome feature of the UK economy for so long.
* - Weirdly, I notice this morning that over 10,000 people have watched the You Tube clip of my banking reform Bill. It's not quite up there alongside Daniel Hannan's Gordon Brown clip, but it's still rather surprising. But then perhaps there's growing interest in these radical new ideas.