TRUSTED post offices should become the UK's most high-profile bank with a branch in towns and villages across the country, a think tank has recommended, writes London Editor Matt Chorley.

Phillip Blond, from Demos, said it is "madness" for branches to keep closing and called for the network to become a state-backed lender.

He said the move was needed to expand credit by giving the poorest access to money.

Unlike many of the major banks, the Post Office remains "uncontaminated by toxic debt" and could provide the "architecture" on which to build a new parallel banking system.

The suggestion comes as a House of Commons committee continues its inquiry into the future of post offices, with ministers keen to explore how the remaining network can survive and expand in the future.

Some 140 branches were closed in Devon and Cornwall last year as part of a massive cost-cutting exercise.

But Mr Blond, director of Demos's progressive conservatism project, said the Government should realise the value of the offices which remain.

"Badly managed, unmodernised and under-invested but with a loyal workforce, the Post Office has a large though steadily declining branch network," he wrote in the Sunday Times. "In the face of bank mergers and the collapse of banking competition on the high street, it is madness to continue to close branches."

He said the Royal Mail's "horrendous pension deficit" of some £7 billion could be refinanced by the Government in the same way hundreds of billions has been underwritten for private banks. The firm is still one of Britain's most trusted brands and "inspires almost fervent local loyalty".

The Commission for Rural Communities said: "There may be scope for enhancing banking services and credit availability by making more use of the Post Office – perhaps by the Government working directly with the Co-operative Bank as well as others to increase lending in rural areas."

The idea has been put to business minister Pat McFadden. The Western Morning News has teamed up with the Commons business select committee inquiry into the future of post office branches.

More than 500,000 Post Office account holders have been sent letters telling them their money is not now covered by the UK's savings protection scheme, it has emerged.

Customers received letters this month telling them their money was no longer covered by the Financial Services Compensation Scheme, with it instead being covered by the Irish Deposit Protection Scheme.

The situation has come about because the Post Office's financial products are provided through a partnership with the Bank of Ireland.

If you have an idea on how to improve the way branches operate, write to us at: Post Office Inquiry, Newsdesk, Western Morning News, Derriford, Plymouth, PL6 5AA, or e-mail: mchorley@ westernmorningnews.co.uk