From City AM Forum:
Deposit insurance has been the most sacrosanct component of the regulatory regime for banks since it was widely introduced during the 1970s following the collapse of the Bretton Woods regime. However, while it seeks to protect consumers against the undercapitalisation of banks and their tendency to collapse in times of stress, it has also encouraged such undercapitalisation.
Since the early 1970s, the number of countries with government insurance of customer deposits has increased tenfold while the number of banking crises worldwide has risen by a factor of almost 500 compared with the preceding 25 years. Deposit insurance subsidises an already cheap form of debt whose supply is almost unlimited for banks. Banks have therefore been able to operate at very high levels of leverage with very limited constraints on growth.
All very true. So what's the solution:
First, the abolition of deposit insurance after two years together with an amendment of the Financial Services Act 2013 to make all deposits preferential liabilities in an insolvency.
Second, legislation banning compensation paid to depositors as a result of losses they may suffer in the event of a bank insolvency.
Third, an announcement that National Savings and Investments (NS&I), the state-owned bank, would henceforth offer savings and current accounts to everyone; and
Fourth, a requirement that all deposit-taking banks publish prominently their capital/leverage ratios.
To really nail this down, we would of course have to add...
Fifth, public collection of all or a large part of the rental value of land to prevent credit- and land-price bubbles with purchase mortgages for land only available from the NS&I (private loans would not be recognised by HM Land Registry);
Finally, a strict ban on central bank lending to private banks and abolition of the 'lender of last resort' concept
Even if that were not full-on LVT, it would be the government collecting the interest on land purchases, i.e. quasi-LVT in a politically sellable form.
Debate Magazine
