Ok, so we don’t let banks loan money. I guess they may still take deposits but if they are not going to pay any interest people will keep accounts as low as possible.
On the other hand, all the financing needs will be covered by other means. These “non-banks” will have to obtain capital as equity and debt, maybe even loans from other non-banks, but certainly not as deposits.
What was the problem that we where trying to fix anyway?
> What was the problem that we where trying to fix anyway?
Risk of financial collapse. Banks are risky because they have a lot of leverage, people more directly loaning money may take a 20% hit after a housing collapse, but that's not such a big deal.
The banks that collapsed during the last crisis are not the kind of banks that take deposits and give out loans. They were the kind of non-banking businesses that you talk about.
And one of the reasons for the crisis was “shadow banking”, because many home loans were not really given by banks (some were directly created by other institutions, some were first created by banks but then packaged and sold). The subprime crisis would not have happened, at least to the same extent, if loans had been kept in the balance sheets of banks.
You are right, I was thinking of large (systemic) failures and actually I had completely forgotten about WaMu. Clearly forbidding the banking business (as in savings and loans) would prevent bank failures. But I´m not sure the alternative businesses that would fill the void would be much better.
I suspect, but can't prove companies that need to demonstrate comptitence in lending to gain access to capital would be better at making loans than companies who gain capital by doing other things and then suddenly have access to a lot of capital and need to find a use for it.
Consider tech companies like Apple/Google/Microsoft have access to vast amounts of Capital yet does not really effectively use it for much.
Often the capital for many bank issued credit cards does not come from depositors at all.