There is little competition in banking and consumers have no real choice at all.
A fundamental but simple change would alter that by shifting the risk decision to the consumer and opening up the market to vigorous competition.
A consumer needs to know what their risk is and what their reward is.
This was the big problem in 2008: consumers were encouraged to get the best returns without any understanding of the risks they were undertaking. Mr and Mrs Smith had no idea that their life savings were at risk and therefore the government inevitably picked up the bill.
If depositors are given entirely clear options then they can choose and the market can flow.
If consumers are risk averse then they will choose lower returns for total certainty, giving governments a clear direction for their future potential liability.
If consumers choose risk that they see as rational then government can transparently, up front, limit its guarantees. Indeed for some situations it could choose to offer no guarantees.
To facilitate this we would need new consumer ratings agencies that – unlike their wholesale counterparts – would look at products and businesses holistically and would not rely on the institutions they purport to regulate for their profits.
A bigger risk averse market might grow, but certainty has a long term investment strength.
By contrast, Vickers’ ring-fence would leave the consumer blind to the different levels of risk from different kinds of saving account.
For once, we should trust the market, but regulate and guarantee it in a rational way. The Vickers Commission, like the Chancellor and Governor of the Bank of England, seeks bureaucratic and complex solutions that by definition will be opaque. Transparency in retail banking is its future.
Below I have outlined what I believe is needed to prevent future banking crises.
Increased capital reserves – as rightly identified by the Basel process and the Vickers Commission
Transparency of savings risks. A depositor should have three levels of risk, with government guarantees based on the risk profile of the institution which the saving lies within.
Tier one should be guaranteed, with much stronger rules on capital requirements, risk options and full transparency. This model will generate lower interest and smaller profitability. It is however a very secure and safe model and allows government risk to be carefully assessed. 100 per cent of savings should be guaranteed to the current cap of £85,000.
Tier two should be a relatively safe but less controlled option for savers, allowing more market flexibility and higher potential profits, but with higher potential risk. Government should guarantee a lower proportion of savings again with a cap on the guarantees.
Tier three should be profit maximising and more akin to current well-run retail banking models. The savings guarantee should be restricted to 50 per cent and to an agreed upper limit cap. The depositor shares the risk as well as the potential profits.
Increased competition in retail banking. The principles of a three tier risk system for retail banking requires a major increase in banking competition.
Any ring-fences should be dependent on how risky a bank is. Tiers one and two should have a ring-fence or entire separation from investment banking, tier three need have no ring-fence.
John Mann is the Labour MP for Bassetlaw and a member of the Treasury Select Committee