The way to prevent yet another US bank crisis

This is the third part of a three-part series.

Financial system default crises can be rendered less frequent, and future bailouts of the financial system can be obviated, by private conversion of limited-liability corporate-form banks into non-corporate-form proportional-liability financial firms.

Such firms would be less prone to default than banks are, and would not need government insurance to protect their depositors – even if they keep the same employees, payrolls, physical plant and equipment, deposits, depositors, and outstanding loan portfolios as the banks from which they are converted.

Private conversion of banks to proportional-liability financial firms is impeded not only by its conceptual novelty – no one seems to have done it or publicly suggested it until now – but also by governmental obstacles that reduce its profitability or administrative feasibility.

Government insurance of bank deposits effectively eliminates the greatest profit incentive to convert a bank to a proportional-liability financial firm, namely that this conversion would lessen the default risk borne by its creditors including its uninsured depositors and hence the compensation that they demand.

In addition, central, state and local governments, having no experience of non-corporate proportional liability firms, make no provision for them in diverse kinds of business regulation and taxation. One example is the issuance of business charters, the standard term for which, “articles of incorporation,” reflects the ubiquity of the corporate form.

Partly due to the intrinsic advantages of converting banks into proportional-liability financial firms and partly due to political considerations described near the end of the second part of this