Memorandum from AKM Ismail
1.8 OF TERMS
The deposit taking system has to be refined
given the advance of technology ie all individuals will have a
single account with say HMRC or National Insurance which will
receive all deposits such as salary directly from employer and
all self-employed income for the self employed.
All major payments to credit card, mortgage,
council tax, utilities and telephone will be paid automatically
from this account.
Any excess can be transferred to banks who will
market their deposit business to them. This will remove the need
to guarantee bank deposits and reduce the contingent liability
of the government.
The Government will only be used to fund UK
Treasuries using any surplus in the account. The idea is not for
Government to enter banking business BUT on the contrary provide
an efficient transparent system.
Twenty years of banking experience: DBS Bank
in Singapore and Citibank including Head of Restructuring at the
peak of the Asian Financial Crisis. Latest job was Senior Corporate
Finance Manager at Treasury Holdings, an Irish Property developer
that owns the Battersea Power Station project. In addition to
the experience of working for banks, investment companies and
property companies, I have provided training and consultancy with
emphasis on capital restructuring of companies.
I would like the committee to look at how Singapore
survived the Asia Financial crisis in particular its housing finance
system under its Housing and Development Board which then provided
bankruptcy remote housing based on compulsory savings through
the Central Provident Fund.
I would be pleased if the committee would look
at abolishing the deposit guarantee system and replacing it with
a simple account to be maintained with HMRC or National insurance.
I will focus the written evidence on Para 1.8
of the Terms of Reference.
1.8 Possible improvements to the architecture
of (international) financial regulation and maintenance of global
The final score card of billions of public funds
being pumped into banks is a statement of the dire situation we
are in. The "tombstone": for these preferred share issues
to the banks are in effect the tombstones of the current financial
Going forward, the solution has to be capitalist
as history has taught us that a central government run system
for the common good does not work.
Co-operative solutions have also failed in the
long term as the underlying need to have a business model that
generates profit is necessary to function over a long term.
The solution has to be far-reaching and there
shall be no sacred cows. Paramount importance shall be on the
stability of the system rather than ensuring current jobs remain
and the current financial system is safe-guarded.
The recommendation to change the current deposit
taking system so as to combine the efficiencies of the various
players: (a) government, (b) regulators, (c) banks, (d) housing
developers and (e) consumers.
Banks have traditionally been doing both the
deposit taking role and the lending role. Consumers have always
been encouraged for a number of reasons to use the banking system
to save their money which helped fund the basic needs of other
consumers of which the housing needs were among the most significant
in any ones life time. This process became complex with the advent
of merchant/investment bankingwhich then took a life of
its own and the ill effects we are now realizing. Now, the panacea
for that seems to be the merger of the merchant/investment banking
with the deposit taking institutions as has been seen in the various
bank mergers in USon the contrary, what needs to done is
the split of the deposit taking roles and the lending roles.
Given technological advances, there is no longer
a need for High Street Banks to collect deposits and in the proposed
solution is an out of the box solution that envisages a monetary
system where the government does NOT enter into banking business
but creates the platform for efficient deposit taking. This will
remove the need for Government to guarantee deposits which could
cost GBP 1 trillion in contingent liabilities and push the GBP
even weaker and the whole population pays for the costs in terms
of dearer imported products.
The deposit taking can be done by legislating
that all employment income shall be deposited in an account with
HMRC, National Insurance etc. It is NOT a bank and thus not the
same as depositing into nationalized Northern Rock etc. It is
only a deposit taking institution and all regular payments will
be made electronically from this account to (a) Mortgage Payment,
(b) Council Tax, (c) Utilities,( d) Telephone/Internet, (e) Government
Agencies, (f) Credit Cards and (g) Insurance paymentscar,
house, mortgage. It is an efficiency tool. Any surplus remaining
can be transferred to High Street Banks which will provide the
necessary savings products. Similarly, the banks will continue
to provide the mortgage products from the savings they are able
to obtain from savers not just consumers who have no choice but
to open an account with them- as is currently the case now.
The advantages of the system are the transparency
provided by the system will permit banks to set limits and monitor
the mortgage payments and the credit card paymentsfor example
that it shall not exceed 50% of the salary. We will move from
a country of debt to a country of savers over say the next 20
years. Banks will not be able to lend more money to pay the interest
on bad loansthis has been one of the causes of the current
weaknessnot only are the assets weaker but the reward system
encourages the process.
Draconian over regulation will result in a drastic
failure. So what is required for a silent achiever where each
party does what it is best in? Government is expected to play
an effective role in increasing productivity, data control (in
which it does have a dismal record, but we have no choice), clear
and concise regulation which can be easily implemented. Banks
are expected to market their savings products and mortgage products
and take risks that it is prepared to do according to the strength
of its balance sheet.
The changes proposed needs substantial moral
conviction and strength and have to be discussed at length before
implementing it across the nation in phases. Perhaps, for a start
key workers and first time home owners can be brought into the
system. It has been voluntary to succeed.
There must strict rules on the surplus funds
in the account and that shall be used only to purchase UK Treasuries,
there shall be no exceptions. The effect of cheaper fund raising
by the government should be ploughed back in terms of lower taxation.
The timing of the financial crisis requires
a more urgent solution and thus there is a need to work on the
solution on a relatively urgent basis. It is thus proposed that
such work starts immediately and must involve discussions with
various government bodies to arrive at a practical solution which
has been given full consideration of the various issues.
Suggest that the committee recommend the following:
(a) the deposit guarantee system be removed and
replaced with the ability to open an account with HMRC/ National
(b) That the savings on a deposit guarantee system
be passed on individuals who are prepared to migrate to this system;
(c) Government shall also undertake to effectively
reduce taxes as the tax net will become wider and efficient; and
(d) all state subsidies relating to deferment
of mortgage etc shall only apply if the citizens have migrated
to the system of maintaining account and have maintained certain
prudent borrowings ratios.
Once we in Great Britain have successfully implemented
it we can push for the implementation of this in other European
states and developing economies.