Thursday 12 July 2012

Bank of Dave

So, this guy called Dave wants to start his own bank, as shown on Channel 4. A self made man (a minibus dealer), a proper capitalist. Should be exactly the sort of guy to start a new bank. He has some money behind him, should be easy, right? Nope. Contrary to the opinions of many, the banks do not suffer from a lack of regulation; Thatcher's deregulation is mostly a red herring. Not only does the UK have tonnes of regulations of its own, with the FSA and to some extent the Bank of England acting as policemen, but we have the Basel Accords on a more international level. You need to have a government license, for which you need to take of bunch of (costly) exams. This means you either have to be pretty well off, or already working in finance. This means that it is hard for new banks to start, as Bank of Dave showed. Dave could go to prison for using the work "bank" without the proper licences.

Dave starts his business by paying the local business taxes, before he even opens the doors. The government giving a helping hand to new start-ups, in its own special way. But he has to wait for the FSA to make up their mind before he can hold deposits or make loans. The deposit part of which is still undecided at the end of episode 1.

Capitalism rests on the idea that businesses can enter and leave markets, in the banking sector, this is clearly not the case. The normal risks of a business are not permitted, the regulations are so complex that only companies with a huge amount already invested in the sector stand a chance of getting through them. Is economist lingo this is called a Barrier to Entry.

Dave is doing exactly what I'd want a good bank to do, instead of going to some credit history, he goes and looks at the businesses he lends to. Whilst it might take some time to do, it will reduce risk as you know what you are investing in. Someone with no blips in their record might have a terrible business idea, and someone who has been unlucky might have a great idea, but not be able to get the credit he needs. It seems the current banks, and their focus on computer models for risk instead of people, means that they are less good at analysing where to lend (and unable to see a huge crash coming, as explained in the great book A Colossal Failure of Common Sense). If only new banks could start up and compete with them, we might end up with a better banking sector. Lending based on contact with local businesses to help them expand is how banking took off in this country, with most loans in the 19th century being to small businesses, often rolling over as they expanded. This model is also the kind that, in my opinion, would most suit developing nations. Letting small, one man businesses, often unregistered with the authorities, get money to expand and deliver the goods that people want and need.

Dave is a capitalist, a proper one, and the thing standing in his way is the regulator. We need to unleash Dave and others like him. Scrap the FSA and bring in Free Banking I say. Let Dave call his bank a bank, let him take deposits and make loans, and if he fails, then he fails, but on his own merit. Before anyone suggests it, no, free banking is not unstable. Indeed, free banking is a tried and tested model, working historically in Scotland, Canada, Australia, Sweden and a host of other nations.

Help out Dave, support real capitalism, free the banks!

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