Traditionally the banks' role was to be a risk agent between a depositors and lenders. Banks were talking deposits and were lending them making money on the interests rate difference between the two. This process was underwritten by banks capital which was risked by banks' owners in case they ended up with too many bad loans and the bank failed. In this case banks owners lost money and possibly some depositors. So on one side there was a pressure on the banks to be careful (as owners did not want to lose their capital) but on the other as there was a large number of banks (in the past) there was competition pushing the cost down and innovation up.
For the last couple of decades the number of banks decreased and they became too big to fail. As a result they were rescued by the government. Banks are no longer risk agents (underwritten by private capital). They became public utilities, huge oligopolies, whose business is underwritten by the state. And they behave as such.
The only way to restore a proper banks' role in the economy is to do what, quite likely, Margaret Thatcher would have done. In line with principles of free market, the banks should be broken up into much smaller enterprises so no bank is too big to fail and capitalise them by selling additional share if necessary. And these banks, indeed a large number of them, should be forced to compete against one another. Depositors will be able to buy an insurance policy against failure or a state may charge a levy on banks as such insurance. And like any other business, sometimes, one of those banks will fail. This will be a proper free market cleansing of weak business which is necessary for free markets to operate. Other banks will pick up the pieces to take over a customer book - a major value of any bank - of a failed bank and if this did not cover deposits of the failed bank the insurance would cover the rest.
The government has to understand such basics: if banking system is regulated properly, there are no banks which are too big to fail, it is not different than any other business.
For the last couple of decades the number of banks decreased and they became too big to fail. As a result they were rescued by the government. Banks are no longer risk agents (underwritten by private capital). They became public utilities, huge oligopolies, whose business is underwritten by the state. And they behave as such.
The only way to restore a proper banks' role in the economy is to do what, quite likely, Margaret Thatcher would have done. In line with principles of free market, the banks should be broken up into much smaller enterprises so no bank is too big to fail and capitalise them by selling additional share if necessary. And these banks, indeed a large number of them, should be forced to compete against one another. Depositors will be able to buy an insurance policy against failure or a state may charge a levy on banks as such insurance. And like any other business, sometimes, one of those banks will fail. This will be a proper free market cleansing of weak business which is necessary for free markets to operate. Other banks will pick up the pieces to take over a customer book - a major value of any bank - of a failed bank and if this did not cover deposits of the failed bank the insurance would cover the rest.
The government has to understand such basics: if banking system is regulated properly, there are no banks which are too big to fail, it is not different than any other business.