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At the ASI: Mervyn King and narrow banking

Via Tom Clougherty at the Adam Smith Institute, Mervyn King and narrow banking:

Ultimately, the problem with modern banks is that they do not operate in a free market. They haven’t done for decades. Deposit insurance means depositors take no interest in the stability of the banks they give their money to. The inevitability of bailouts means bondholders and shareholders take no interest either. Expansionary monetary policy encourages banks to lend too much and reserve too little. Accounting regulations encourage all banks to invest in certain asset classes, ensuring that when problems emerge, they are likely to be systemic. All of these things are government interventions, and all of them make the financial sector more risky and less stable.

3 comments to At the ASI: Mervyn King and narrow banking

  • Nice
    So what solution does he offer now? Some more regulamentation?

  • Tony

    “Ultimately, the problem with modern banks is that they do not operate in a free market. They haven’t done for decades. Deposit insurance means depositors take no interest in the stability of the banks they give their money to.”

    This would be true if 100% of deposits with UK banks where covered by the Deposit Protection Scheme. However, deposits over £85k which would include almost all of the deposits from large corporate, investment, and financial institutions. A look at Tesco’s balance sheet shows they alone have £2.8bn on deposit at banks. I have never seen any figures which provide this split but my own estimation is that no more that 20-30% of the UK banks deposits are covered by the DPS. I think therefore the majority of depositors in terms of money care very much about where they deposit there money.