Bank reform? What bank reform?

It is not a retail/investment banking split that we need, but a clear distinction between money paid to banks as a deposit, and money paid in as a loan

What kind of reform do we need?
Douglas Carswell MP
On 27 December 2012 17:50

Remember how the banks went belly up - and we all had to rescue them? Remember how politicians promised real reform, as they handed over billion of pounds in bailouts?

Several years on and frankly not a lot has changed. Many banks remain zombies, dependent on vast state handouts. And as for reform, there's been a lot of talk ... and not much else.

The Vickers report recommended some kind of separation between retail banking (where ordinary folk put their money) and investment banking (the supposedly more high-risk kind of banking).

The idea behind a Vickers-style division is good - your money, put for safe-keeping in a bank, shouldn't be at risk from all that other stuff that bankers do.

Yet how complete a separation should this retail/investment split be? Almost total, think most MPs, according to today's FT. A sort of separation, say the Treasury team.

I'm unconvinced either way. Why?

A retail/investment banking split is basically about trying to safe-guard small retail customers from the worst excesses of fractional reserve banking - that process that allows banks to lend endless multiples of credit against actual deposits.

Any effort to rein in the excesses of fractional reserve banking will fail unless it deals with the legal ambiguity that lies at the heart of our banking system; is the money you pay into your bank a loan or a deposit?

Instead of a distinction between retail and investment banking, we should look to draw a clear line between money that you place in a bank, expecting the bank to look after, and money that you give to a bank against which they might conjure up credit.

It is the fact that banks can conjure up credit multiple times, against the money that retail customers pay into the banks, that means that retail customers need protecting in the first place.

Two years ago, I presented a Bill designed to ensure not a vertical separation between retail and investment banks, but a horizontal separation between deposit accounts and loan accounts. Two years on, I reckon it makes a lot more sense than anything proposed by Vickers or the Treasury.

Bank customers paying money  need to make it clear if the bank was able to conjure up credit against their money or not. Not only would this give punters security, but it would rein in the worst excesses of fractional reserve banking.

Banks that were badly run would find more and more customers declaring their accounts to be deposits, rather than loans, thereby forcing up the banks reserve ratio and preventing the bank from generating vast mountains of candy floss credit.

It is not a retail/investment banking split that we need, but a clear distinction between money paid to banks as a deposit, and money paid in as a loan.

Douglas Carswell is the Member of Parliament for Clacton. He tweets at @DouglasCarswell. This post was cross-posted with permission from his blog at

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