The solution is about changing the shape of banking, not maintaining it and asking us to insure it.
The Bank of England should be lender of last resort to a bank\’s retail deposit base – but only that. That business needs to be stand-alone, or ring-fenced internally in banks integrated with wholesale functions, and policed by the regulator.
The risks associated with other activities, and sources of funding, should be borne by creditors and shareholders and absolutely not, as is the case today, by taxpayers.
But this still doesn\’t solve the problem. We know that banking systems without deposit insurance are subject to runs.
We also know that the modern banking system operates more on wholesale deposits than retail. Without some form of insurance available for those wholesale deposits then the system will be subject to runs.
So, we need to do one of three things. Either stop the use of wholesale funding altogether, insure such deposits or accept that there will be runs.
The effects of the first would be horrendous, a massive reduction in lending capability right across the economy. The second is, of course, subject to the usual moral hazard problems. The third, well, no one really seems to like the third as current complaints show.
But just because there are no particularly attractive options in our possible solutions set does not mean that there are others more appealing. As far as I can tell those are our options (there are many other more minor ones but at the heart of the matter those are the three) and we\’ve got to pick one of them.