When it comes to fixing the failed banking system, there exists two groups with two very different approaches.
One group believes that there is a need for further regulation. The other group calls for less regulation. Now even though these are two very different approaches, both groups share something in common; the understanding and awareness that there is a fundamental flaw that needs attention. We all want stable banking and no matter how we arrive at that is irrelevant. The main thing is that we do. This is something we can all agree on.
So let's tackle that right now.
There is a sense among most people that banks are just "too big to fail" and playing such an important role in the economy, it only makes sense that the government must step in with taxpayers money to fund private gambling losses (they say). Both groups on this issue would wish this wouldn't be the case as it's morally wrong, that much everyone can agree on. So how do we change the "too big to fail" situation?
Firstly, banks are "too big to fail" because of the government. This much is clear. Now you might say that banks are a "special case" and you'd be right, they are. They are because they're not restricted by the same laws that, say a grain silo are. Banks of course have a special legal privilege. It's called Fractional Reserve. When a depositor deposits €10 into a bank, the bank is only obliged to keep €1 of the depositors money. The other €9 is used to gamble on let's say a mortgage. Now what happens when the new house owner has empty pockets? It's clear where the problem arises. The banks do not have your money in their vaults. They have gambled with it. It's not there. It never was. If everyone withdrew their cash at the exact same time, people would simply get nothing back. The banks have grown to such an unnatural size, not because of the market, but because they're allowed to continue this practice of obtaining that extra €9 to gamble with. The market didn't give the banks this opportunity, the government did.
Not only does this incredible funding source that would otherwise not be available to them if they conducted themselves by the same laws of other businesses allow the banks to grow beyond scope what they couldn't do naturally in the free market, but it makes them more risky. Every time a deposit is not backed 100%, the depositor is exposed to not getting his deposit back in full. If we end the legal privilege banks have over other businesses, the landscape would be totally different.
How do we do this? Certainly not by regulation. If we regulate further, the banks will only cement and further solidify their legal status. Because out of all of the people calling for further regulation, not one of them have even whispered the fundamental problem here, Fractional Reserve Banking. Alternatively, if we deregulate we get the best of both worlds without the headaches. New banks will spring up overnight as there won't be any hurdles for them to jump through and of course they'll be successful if they offer the customer a 100% reserve on all deposits (with a small annual fee).
The solution to the banking problem is deregulation.