Re: banking system proposal

Dear Philip,

Yes, as in my previous posts, bank stability is all about credible deposit insurance.

I would go further, and have all regulated, member banks, be able to fund via an open line to the BOE at the BOE target rate.

That would eliminate the interbank market entirely, and let all those smart people doing those jobs go out and do something useful, maybe cure cancer, for example!

This would not change the quantity of retail bank deposits, only the rate paid on those deposits, which would be something less than the BOE target rate. Loans create deposits so they are all still there, but with this proposal all the banks would necessarily bid a tad less than the BOE target rate for deposits. And note this pretty much the case anyway.

With insured deposits market discipline comes from via capital requirements, and regulators also tend to further protect their
insured deposits by creating a list of ‘legal assets’ for banks, as well as various other risk parameters. The trick is to make sure the shareholders take the risk and not the govt.

This would change nothing of macro consequence but it would enhance the efficiency and stability of the banking sector, presumably for further public purpose.

Note to that the eurozone has the same issue, only perhaps more so, as the ECB is prohibited by treaty from ‘bailing out’ failed banks. Hopefully this gets addressed before it is tested!

All the best,

Warren

On Jan 5, 2008 7:46 PM, <[email protected]> wrote:
>
>
> Hi Warren Moslder,
>
> Philip Arestis stopped by Sunday Herald
> website and suggested that you visit the following URL:
>
> http://www.sundayherald.com/business/businessnews/display.var.1945229.0.outbreak_of_common_sense_could_save_british_banking.php
>
> Here is their message …
>
> Dear Warren,
>
>
>
> Interesting developments over here. Would it make much difference I wonder.
>
>
>
> Best wishes, Philip
>
>


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