With out regulation, banks would have to market themselves and compete agaisnt one another as being the SAFEST bank to which to deposit money into. Then with their 100% Reserve ratio, bubble's would not be allowed to grow because their would be no increase in the money supply (ignoring actions by the fed, which I too think they should be replaced) via the money multiplier.
Furthermore, with the activities of the banks such as taking depositors money and lending them out (the 3-6-3 club, thanks Michael Lewis) prevented, this would cause a shorten supply of loanable funds pushing the savings market interests higher . This would signal two things:
1) That investments of higher quality and better earnings growth be funded since they can bear the higher interest rate and
2) The increase in the interest rates for loanable funds from the savings market would encourage depositors to allocate more of their money into the savings market (since they're getting 0% on their deposits) encouraging more Americans to save.
With 100% reserve ratio's there would be no concern for a run on the banks. Lesser regulation reduces moral hazard (i.e. discourages banks from taking more risks). Surely then the ability for your clients to trust you, being trustworthy, becomes a profitable advantage.
Capitalism works even if it hurts.
"I want people to take thought about their condition and to recognize that the maintenance of a free society is a very difficult and complicated thing and it requires a self-denying ordinance of the most extreme kind. It requires a willingness to put up with temporary evils on the basis of the subtle and sophisticated understanding that if you step in to do something about them you not only may make them worse, you will spread your tentacles and get bad results elsewhere."
--Milton Friedman
Nobel Prize Winning Economist
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