14 September 2010

Carswell and Baker's Bank Bill - Ultimately Pointless

There's been a fair amount of online discussion about Douglas Carswell and Steve Baker's bank reform bill. In simple terms, their proposal is to make banks specify whether an account is a straight deposit account, where the bank effectively holds the deposit in a vault, or an interest paying account, where the bank lends on the money to borrowers in order to generate that interest. I agree with the general principle, as I've said previously, but I think this particular bill, in the unlikely event that it were to become law, would be pointless.

The person putting money into a bank account would be faced with two options:
  1. Put the money into an account where the bank would act like a safety deposit box and would almost certainly charge you for the privilege.
  2. Put the money into an account where the bank lends the money on, with the risk that the money isn't repaid or the bank doesn't have the money available at the time you want to withdraw it, but with the benefit of receiving interest.
It would be a reasonable choice to present the depositor with, but for one thing; the government currently guarantees deposits up to £50,000.  If the depositor knows that any money put in the second type of account will be guaranteed up to that amount, then there is little point in taking on the extra cost of the first type of account, if the deposit is less than £50,000.  On that basis, the law would only serve any useful purpose if it also removed those guarantees and the UK doesn't have the power to unilaterally do that.  EU directives require that credit institutions in member states be members of deposit guarantee schemes, with the cover being a minimum of 50,000 Euros, rising to 100,000 by the end of 2010.

So in short, while the principles behind Carswell and Baker's proposal may be good, their execution of it is pointless.

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