The banking reform Bill will be a missed opportunity if it does not support community banking

The second reading of the Financial Services (Banking Reform) Bill is today. This is the main debate on the principle of the Bill.

It was previously provisionally scheduled for last Monday. I have found myself assigned to statutory instrument committees on both occasions, potentially preventing me from speaking in the debate. I was notified of today’s duty late on Friday, too late to find a substitute. Of course I am disappointed this means I probably won’t be able to make a personal contribution to the debate.

If I am able to speak, I expect I will:

  • Welcome depositor preference but explain the Bill does not adequately address the question of who owns the money in your current account. The bank does and that is a feature of the banking system which isn’t compatible with other features, like limited liability, taxpayer-funded deposit insurance, central planning and fiat money.
  • Explain the shortcomings of ring-fencing. Apart from the inevitably counterproductive consequences of officials trying to make it work, the real problem isn’t investment banking: it’s easy money thanks to problems with the set-up of deposit taking and lending plus dangerous incentives.
  • Point out that taxpayer-funded compensation subsidises risk taking and therefore encourages reckless behaviour.
  • Refer to Dave Fishwick’s heroic efforts to serve the public by creating a bank whose risks he personally underwrites and which serves both savers and entrepreneurs. In his book, Dave explains that he believes in full-reserve deposit taking, eliminating a key reason for regulatory supervision: the risk of bank runs.
  • Propose two better reforms to banking: my Financial Services (Regulation of Derivatives) Bill which corrects crucial accounting problems and my Financial Institutions (Reform) Bill which realigns incentives.

As Bank of Dave has shown, little regulation is needed for simple, productive banking services when the owner puts his or her own assets at risk.  Big banks are necessary but we also need local banks that serve society by providing a safe return to savers from loans to small productive businesses which wish to grow.

This Bill will be a missed opportunity if it does not support community banking. I hope I am able to escape the committee and say so.


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