“Make it a legal requirement that banks have at least £1 on deposit for every pound they lend”

What do you mean by this?

When a bank takes £1 in the form of a deposit from people like you & I, if it then lends out that £1 it would then have zero capital reserves … this cannot be what you mean by having £1 “on deposit” for every £1 lent.

If for every £1 it takes as a deposit, it lends out 50p, it has a reserve ratio of 50%. If you mean that for every £1 lent out, it has to have £1 in reserves (“on deposit”), you are talking about 100% reserves, and an end to fractional reserve banking.

This means that when you & I put money in savings accounts, or just in our current accounts, the bank cannot lend that money out again (otherwise it wouldn’t have it “on deposit”), which means it cannot pay us interest on our savings (where would the interest come from?) and that banks would have to charge us for its services (to cover all the overheads of providing current and deposit accounts).

If the money lent to businesses and households cannot come from fractional reserve lending, where does the money come from? One interpretation of what you seem to be suggesting is that for every £1 lent to a business, £2 are required – £1 for the business, and £1 to be held “on deposit”. Who supplies the money? This is risk capital, isn’t it? – if you stump up the £2 you may lose some portion of it, if the loan does not perform. What sort of returns will people require on their £2? What will this do to the cost of capital in this country? What are the economic consequences of a sharp increase in the cost of capital?

please clarify!

It’s rather peculiar that you call for “further regulation”, only to later outline the kind of measures that the Bank of England used to have in place before 1997 e.g. watching over the debt in the banking sector and instructing banks to do something about it if necessary. Smarter regulation, not more regulation, is the answer.

Having said that, I agree that retail and investment banks should be split up and government protection focused solely on the former in order to protect consumers.

“reintroduce the distinct between retail and investment banks”

FAIL: this distinction never existed in the UK. It also had absolutely no bearing on the UK end of the financial crisis – the banks which failed were mortgage banks with no i-banking operations, with the exception of RBS which failed because of the money it borrowed to buy ABN. The combined retail/i-banks, notably HSBC and Barclays, have been doing fine.

@2, I’m assuming he means that a bank’s total loan-book should be equal to its total retail and commercial deposits, rather than the UK situation where banks like NR lent out more than twice that sum by borrowing in the international money markets.

john b. ah, that makes sense. ta

(makes sense, but is not necessarily much more sensible … there are some negative consequences to denying banks access to wholesale financing. Also it doesn’t say anything about what the “right” reserve requirements are … even if banks are constrained to funding from retail and commercial depositors…. we might want reserve requirements to change depending on what the banks are doing with the money they’ve got from those depositors, counter-cyclical reserves being one possibility)

I think these are all bad ideas.

I don’t think centralised authorities are better at dictating which sources of funding are more liquid/reliable/rational – in fact, funding by depositors is highly problematic because such people do not have the the ability to monitor the quality of a bank’s asset base. Banks need to feel they are under more, not less market pressure. The wholesale funds, in a sense, did their job in exercising their ability to withdraw funding from dodgy banks. Under deposit-only you are increasingly reliant upon (fallible) regulators

The old Glass-Steagall distinction has some merits in stopping investment banks free-riding on the implicit insurance for deposit-funded banks – an ever bigger problem if bad idea #1 is allowed. But the major failures of this banking crisis have not been anything to do with this otherwise arbitrary distinction. Lehmans, HBOS, NRK are nothing to do with this. Reintroducing it would hurt European mega banks more than investment banks – and lower the returns that retail depositors could receive by restricting their potential avenues for investment.

FInally, point 3 is a good way of guaranteeing that finance remains the preserve of the rich and well-connected/those endowed with equity. I recall Martin Wolf at a seminar urging the audience to remember what it was like when mortgage finance was so heavily restricted.

I agree with Duncan that the problem is banks. Banks as OPPOSED to markets – they are opposite models. I would like to see liberals falling in behind ideas like http://www.zopa.com, for example.

“whilst rightly calling for further regulation” – this is not a matter of fact and is very much open to debate. You might be right, but to suggest there is no argument over the need for more regualtion is inaccurate.

From what I can tell from the article and comments, you are suggesting an end to inter-bank lending (“Make it a legal requirement that banks have at least £1 on deposit for every pound they lend. This would stop banks being dependent on the capital markets for funding”). For many banks this is a major source of income, and in general is a lot safer than lending out to individual customers. Providing there is sufficient competition among banks the lower premiums they charge translates into better savings rates (they don’t have to mitigate so much for bed debt). Also, how are new banks meant to start up if they are not able to gain access to funds to pay for interest and new loans (if I start a new bank I would have to wait for deposits before I could loan money out, therefore I couldn’t offer people a decent rate of return on their savings as I couldn’t be sure what level I am able to make money at, meaning that I’ll never get initial depositors to start up).

Yes, adding to what Mark M says, these proposals would clearly:

- balkanise banking, thereby striking a blow against free markets/open borders
- make capital in general less efficiently used (a bank with a surplus could not sweep it off to a bank with a deficit, the latter being regarded as immoral/beyond the pale of prudent behaviour) thereby hitting economic growth
- reduce competition/reduce new entrants/add greatly to incumbency advantages.

Is this site called “a conspiracy against liberalism”?

“First do not allow banks to run a loan to deposit ratio (LDR) of over 100%. Make it a legal requirement that banks have at least £1 on deposit for every pound they lend.”

@ 10′s observation.

Quite. You’ve just destroyed the inter-bank market (and LIBOR with it of course).

That is, if you mean that banks can only lend out deposits that they have from individual or corporate, but not banking or wholesale depositors.

On the other hand, if you think that inter-bank lending can continue (and there is absolutely no way that a bank can balance its books day by day, as it legally has to, without such) then you cannot create a rule or law which differentiates between inter-bank lending and the wholesale credit markets.

You can indeed create a regulator who comes along and says “Look, Old Chap, you know, we think your reliance upon the wholesale markets short term rollovers to fund your long term mortgages is, umm, a bit risky really so could you please stop it” but that would just be recreating the Bank of England pre-1997.

I would be quite happy with that last: while I’m usually a “rule of law” man I’m entirely happy with there being exceptions to it, with the idea that there are times and places, like the detailed regulation of financial markets, when we cannot frame detailed laws but need to rely upon the rule of man (or of officeholder).

Tim,

Normally I’m in (almost) complete agreement with what you say, but I think you’re wrong on this one. Are you not at all sympathetic to the Austrian view of banking?

“at all sympathetic to the Austrian view of banking?”

Fully in favour of fractional reserve banking I am…..

#9 Haven’t investors in Zopa found that the model doesn’t work during a recession because more people default on their loans and so micro-investment in individuals becomes a massive gamble? It seems like a model which can only work when the economy is doing fine.

#15

I’m an investor in zopa – doing fine so far. Given the way your lending is split over everyone, you need a massive systemic default by individuals – which is not happening. People tend to get all melodramatic during a recession (“how to cope in the crunch on £5 per day”) but people either (a) lose jobs or (b) don’t, and (b) is by far the greatest number.

Fact is, you get a decent rate which ought to be enough to cover bad debts, over the cycle. So far, my bad debts are only a small % of my interest received.

From a government perspective, it also seems to be a bit more robust – my savings are being used to fund borrowings, without the intermediary of a bank which cannot afford to take more than a 2% hit on its assets before it needs to drastically curtail its lending.

(ps: ask me again in 5 years, I know!)

keep it simple.
1. Maximum of 90% mortgages.
2. Maximum of 4x times salary for mortgage- minus credit card/hp payments.
3. Self certified mortage to be supported by report from accountant, 4x average income over 3 yrs to be used.
4. Buy to let mortages to be max of 90% for first property, and 10% decrease for every property after that . Aim is to increase deposit required for furter properties to reduce financial house of cards .
5. Mortgages to be based on money held by institution and not by money borrowed- revert to mutuals to provide mortgages .
It was the fact that people could borrow so much which helped to increase prices.
If two or more people, competing for the same property can borrow 5x times their salary( exluding credits cards etc, etc) and obtain a 125% mortage then they can pay more than if they can only obtain a 90% mortage and 3.5x their salary including credit cards.

The B of E should be responsible for preventing asset bubbles- Brown removed this responsibility in 1997. The FSA did not contradict Northern Rock, Bradford and Bingley’s , HBOS or RBS business plans.

4. john b. You are correct Lloyds, Barclays, HSBC and Standard Chartered were fine, Northern Rock , B and B , and HBOS were brought down by the housing price asset bubble and RBS overpaid for Ambro and lent to everyone, including a few Russians whose businesses have lost 60-80% of their value.

Northern Rock raised 75% from markets and offered 125% mortgages, Lloyds raised 25% from markets and I think, only offered 90% mortgages. In 2007 , NR held 20% of UK mortgages.
7% of mortgages have been made to people with poor credit history
5-6 % mortgaes have been self certified mortgages
10% of mortgaes are buy to let compared to 1%, 10 years ago B and B dominated this market.
One study has said that of the doubling of the hous prices (200% ), 62% of this or 120% of the price incrase is due to expectation of future rises with rising population only responsible for a 9% rise. In another words brown allowed vast amounts of credit to cause a house price bubble to occur.

Basically Brown allowed profits from the City to ballon and income from property because it provided tax revenues for his spending plans. Cable warned of problem in November 2003 as did Governor of B of E.
“House rices have fallen because cost of and non availbility of credit” The storm p 20.

these are good tips and useful thanks for sharing and most of the peoples are give good comments really thanks

Agree with point 2, but disagree completely with point 1. Abolish fractional reserve banking?? FFS, are you stupid?