This paper offers a  radical option for banking reform: government should offer central banking services not just to commercial banks, but directly to citizens.

Key Findings

• Nicholas Gruen argues the UK and other countries need radical banking reform
• This can be achieved by a simple change: giving ordinary people the same right to use central banks’ services as big commercial banks have.
• Though they enjoy high margins and/or fees, banks add little value to ‘commodity services’ like customer accounts and highly-collateralised mortgages like older ones that are partially paid off which are basically riskless.

There’s widespread agreement that the UK needs better banks and a better deal for bank customers. This report by Nicholas Gruen, economist and founding chairman of Kaggle and The Australian Centre for Social Innovation, proposes a simple but radical solution.

Gruen argues that in the age of the internet, the Bank of England can now extend the services it currently offers only to banks to everyone in the UK.
In particular, it should offer (for instance through National Savings & Investments) simple, cheap deposit and savings accounts to all, paying interest at Bank Rate. Second, it should offer to guarantee any well-collateralised mortgage (for instance a residential mortgage for less than 60 per cent of the value of the collateral).

At the moment, commercial banks provide these services at a cost (both in terms of worse rates, fees with their margins inflated by their funder’s knowledge that they are implicitly government guaranteed).

By cutting out the middle-man in the form of the banks, Gruen argues customers would get a better deal, and private competitors providing finance could focus on the provision of finance where the efficient pricing of risk is essential – most particularly residential finance above 60 per cent of the value of collateral.

Policy Recommendations

• The government should allow the Bank of England to provide central banking services directly to anyone who wants them, not just banks.
• The Bank should offer to fund or guarantee any well-collateralised mortgage (e.g. with less than 60 per cent of the property value outstanding)
• The Bank should, through National Savings and Investments, offer simple deposit and savings accounts to anyone who wants them with no upper limits, paying Bank Rate of interest.

Author
Nicholas Gruen

The views expressed in this report are those of the author(s) and do not necessarily represent those of Nesta.