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.