It seems like it would police it, but it does not.
No matter what you do with the alignment system people will find a way to abuse it.

Then they will go out gank a few people, go back to town and bank most of the loot. They will do this over and over until someone kills them.

And you are right they will get looted, but so what? They stashed all their real loot in the bank before heading out to gank others. Big whoop you got enough loot that they may have to loot 2 whole other people before they are back to even.

Back in UO, people realized the best and quickest route to riches and power was to gank other people. As soon as people started hunting them, they just moved off to another area and started up there. Or heck just logged off for 20min.

If people in the real world were punished by the police for killing someone by having them take all the stuff on them, we would have non-stop murders and theft. What keeps them from doing that is not the loss of a tiny % of their stuff, it is the chance that they are going to be locked in a small room for a LONG time with someone who thinks they are pretty.

Until a MMO finds a way to allow real punishment, then open PvP worlds are just a place to see who can abuse the systems the best. Yall have fun.