The Wall Street Journal reported on Thursday January 31 that the German government will propose splitting off bank's risky activities into a separate bank. I have made that proposal often in the past in this space along with imposing 100 percent reserves on the bank that holds deposits (http://haroldblack.blogspot.com/2008/10/100-percent-reverse.html). My notion is that the fiduciary deposit taking side of the bank should not be exposed to risk taking. Moreover, the beauty of 100 percent reserves is that there is no need for the FDIC, the banks could no longer create money and there is no risk to depositors. The deposit taking bank would make money by having the Fed continue to pay interest on reserves. The risk taking bank - it could be a subsidiary in the bank holding company - would not finance its portfolio from deposits. Rather it would borrow the money, much like mutual funds do now. My idea was to have this risk taking bank also make loans as well as investments. The German proposal is an outgrowth of a proposal from Finland's central bank and is being also considered in France. So instead of the mish mash that is Dodd Frank which does precious little to address bank risk taking, such a proposal would allow banks to take risks and be regulated by the market place. It would also shield depositors from such risks since no risk taking can occur since the deposit taking entity would not make loans. Of course, the government and the regulators would oppose such a proposal here since it limits their role and reduces their power. But still, its a thought.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com