Banking on it

A friend writes to tell me that she has been appointed to the Future of Banking Commission set up by Which?. Which reminds me that I have yet to return to my September Blog on the subject of regulation, in particular the regulation of banks.

I don’t subscribe to the “too big to fail” approach. I don’t believe it is about size. Who, prior to 2007, would have thought that Northern Rock was “too big” in any meaningful sense of the phrase?

I look at this from the perspective of someone who first learned about regulation in the context of the utilities. Banks provide us with somewhere to place our funds, particularly any funds that exceed our immediate needs, so that the money can be loaned out to those whose immediate needs exceed their current funds.

There is no reason why all the depositors should ever need their money back simultaneously. We just need to ensure that they don’t all suddenly want their money back simultaneously. For this to happen, the depositors need confidence that the bank will be there – and be solvent – when their funds are required. Anything which jeopardises that confidence jeopardises the deposit-and-lend part of the banking system. It is these banks (regardless of their size) which need to be ring-fenced from harm – together with any part of the financial system which underpins them, for example, any related credit insurance operations.

There are those who say that splitting banks between “the part that needs protecting” and “the rest” is too complex to achieve at this point. I can accept that we may not, now, be starting from the ideal place. But, somehow or other, we need to create a position in which the banking function which exists in order for the financial system to operate is isolated from those operations which are capable of destroying the system. If that isn’t possible (and some say it isn’t), it would seem to follow that deposit-and-lend banking is implicitly a self-destructive system. I don’t believe that is true.