July 6, 2010

Incentivising boring banking: an alternative approach

Incentivising boring banking recommends abolishing the current system of deposit insurance. The report argues that deposit insurance in a fractional banking reserve system is economically damaging and financially destabilising (as it encourages excessive risk-taking by the banks), but politically impossible to avoid.

As an alternative, Incentivising boring banking proposes that:

  • Every  bank  licensed  to accept  retail  deposits  is required  to offer a form of pure “storage deposit” account. (This is a form of nested 100%-backed bank within a standard “wide”  bank – standard fractional reserve banking with universal banks would still continue as now.) Holders of “investment deposits” (the currently normal deposits) become preferred creditors.
  • No investment deposits are insured by the state. All (100%) of storage deposits are insured by the state. One chequing  account per person (the account into which salaries are paid) is insured, at 100%, to a limit (a reasonable current value would be £10,000).
  • As part of the special administration regime for banks, in the event of a bank being placed  in administration,  investment depositors would be able to withdraw their money as normal but such withdrawals would constitute a form of borrowing from the state.


Dr Andrew Lilico

Chief Economist, 2009-2010

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