I was interested to see Mervyn King advocate "narrow banking". At last the debate seems to be moving away from monetary policy, and towards monetary regimes. The Economist has a useful list of alternatives:
- Higher capital ratios
- Living wills
- Catastrophe insurance
- Higher fees for lender-of-last-resort service
- Windfall tax on bank profits
The problem with most of these are that they are piecemeal social engineering. I have no idea what the unintended consequences of any of these would be, and neither do their advocates. Rather than neat ideas (and borderline gimmicks) for particular policy measures, and reforms of the financial system need to be widespread and based on principles. Principles such as:
- No one is too big to fail
- No one can mis-match maturities without auditors approving it
- If people want their deposits to be safe, they should be safe
I find the notion of narrow banking intuitively sensible, however in practice I struggle to see how you'd divide "utility" and "casino" banking in a clear way. Ultimately these sorts of distinctions should be made by individual customers, not regulators. And whilst I wouldn't mandate this, I would like to think that in future banks would publish their reserve ratios in the financial newspapers, and customers would use these as one of a number of factors influencing where they deposit.
Update: Greg Mankiw links to a proposal by Laurence Kotlikoff and John Goodman for "Limited Purpose Banking". The original link seems to be broken but there is a discussion of it here.
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