Advanced governments could easily get their high street banks in order, make them as honest as most other businesses, and to cease being a potential source of widespread economic instability if they didn’t treat them like kid gloves. They do this at present in two main ways: (a) guarantee depositor’s money up to a modest amount — enough to reassure most people; (b) more often than not, to use their central banks to rescue banks getting into difficulties — whether on a day by day cash basis or when likely to be heading for bankruptcy.
Governments can’t carry out (a) because there’d be outrage from most of the electorate. But what they could do, however, is to do so in conjunction with a requirement that banks publish regularly what their reserves/asset percentage — or fractional reserve — is. In other words, how much credit a bank can safely create for its customers. At the time of the 2008 Crash most high street banks were effectively down to 0% to 1% reserves — so low, in fact, that, at around 15 September 2008, they didn’t lend money overnight to one another for fear of the other not surviving.
Today, the various high street banks in this country are at around 12% reserves and governments feel this is safe. It isn’t, of course, It hasn’t reached what the best banks carried in the late 19th century — about 20% reserves — or what American banks had earlier in the century — 50% reserves.
Such is the widespread fear abut tomorrow’s economy — among the public as well as economists and bankers — that if banks were forced to publicise their reserves then they would gradually compete for depositors over the years until they all reached well nigh 100%. Much more careful managements would also tend to break up the over-large banks we have today, and encourage more smaller banks to come into existence
As for (b), the 2008 Crash has meant that central banks are possibly being counted out. By instituting a rate of 0.25% — how pathetic! — the Fed is now attempting to find out whether it has any relevance at all in tomorrow’s world. There is no structural, or economic, reason why central banks should exist. But high street banks remain necessary if man is to remain innovative and wants to realise practical fulfilments of his ideas.