Your banking system -- free

Interfluidity has a long an excellent post on bank rescues and nationalisations here. I won't reproduce the main ideas, interesting though they are, because I want to comment in particular on one particular proposal:

The government should commit to fully reprivatizing nationalized banks (really their sliced-up and reorganized successors) within a year of taking a bank into receivership. But rather than selling the reorganized banks, the government should structure the divestitures as spin-offs. The government should distribute equal numbers of shares to every adult US citizen

I don't really like this idea because artificial time periods, like a year, simply add stress to the market. Nevertheless it does solve the problem that the government doesn't necessarily know how to run a bank. And given that everyone did not contribute to the bailout, why should everyone get shares? No, instead why not provide an incentive to pay your taxes? Divest the banks over three or four years, and each citizen gets shares in proportion to the tax they pay.

One last point. Size matters. What we need is a banking system with lots of small banks, so no one is too big to fail. (See Baseline Scenario here for more on this.) So when we spin off the privatised banks, we should create many small ones. Banks like Citi, RBS, BofA, or LloydsHBOS are far too large. Given that retail is the most politically sensitive (for which read 'bailout deserving'), the retail arm of each of those should be turned into at least 4 separate banks. I'm less concerned by how wholesale is treated - just split it up in some rational way. And then set capital requirements based on size so it is very hard for banks to get big again.