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This is an interesting proposal. Private banks have two very important functions in society: they provide the infrastructure for the payment system and they co

This is an interesting proposal. Private banks have two very important functions in society: they provide the infrastructure for the payment system and they control credit. This proposal would disentangle those functions making, I think, a more robust financial infrastructure. The payment system is, by its characteristics, a natural monopoly, and it's so important that makes sense that it become public. If that was the case, the main function of private banks would be to control the issue of credit.

closeparen 6y ago
Customers expect to have use the of the money they deposit with you, so once you take deposits you are the payment system. “Robust banking system” is inherently tied to reserve ratios, or having the deposits on hand to cover the loans you’re writing. A bank that only writes loans and doesn’t have deposits is the opposite of robust. If any bank gets to do this it would be the central bank. Payment facilitation is less of a superpower and can be more safely entrusted to the private sector.
- RobertoG 6y ago
  >>"A bank that only writes loans and doesn’t have deposits is the opposite of robust." Maybe they are, but modern private banks already do that. Before a bank concede a credit it's just checking if it's a good business, not if it has enough deposits or enough reserves. When giving a credit, banks, are, basically, creating money that it's destroyed when the debt is payed. A posteriori of giving the credit, the bank will search (assuming it have not already enough) the legal reserves requirement for the new created money. Note, that this is the opposite of what we normal hear. In reality, first come the credit, then the reserves. The bank that gave the credit, trying to meet its legal obligations of reserves, will try to get reserves loaned from other banks, creating demand for reserves in the inter-bank system. If the Central Bank does nothing, the added demand would increase the interest rate. Modern Central banks don't try to control the quantity of money in the system, but the interest rate. If the are not enough reserves for the existing demand, in order to keep the interest rate in their target, the central bank will increase the reserves in the system. So, deposits are not necessary, otherwise, the quantitative easing programs of the last years, would be impossible.
  - chii 6y ago
    dont know why you're downvoted - but you're absolutely correct.
  - atq2119 6y ago
    To complete the picture, it's helpful to point out that what banks need to create loans is capital, not deposits. If a bank is constrained by the Basel capital requirements, it can e.g. attempt to issue bonds. If it does so successfully, it can then create new loans corresponding to a multiple of the value of those bonds.
- deleted 6y ago
  [deleted]
- dathanb82 6y ago
  I don't think I agree with your definition of "robust" in this context. A bank that only writes loans and doesn't have deposits must be lending out its own assets. In that case, they don't have a reserve, because the assets they're using to back their loans aren't liabilities, and aren't subject to runs. The reserve ratio is there precisely because banks are loaning out deposits, and deposits are liabilities. If a crisis comes, there can be a run on the bank, and all of a sudden the bank is insolvent. So a bank that's only writing loans and not taking deposits (if you can call it a bank at all; it's really more of a hedge fund) is in some ways more "robust" than a traditional bank that's lending out its deposits.
  - neffy 6y ago
    The reserve ratio (which in most places is now down to 2% or less), is there to prevent runaway monetary expansion through lending/deposit creation. The Central Bank's role as lender of last resort is the backup for bank runs. In the event of a run, a bank is considered illiquid, an insolvent bank is one where losses on debts exceed loss provisions and capital. An entity that only wrote loans, and didn't have deposits would not be a bank - the definition of a bank is implicitly that it is performing fractional reserve banking via double entry book keeping. (Unless it's the World Bank, which is actually a fund, because the US and UK had an argument about who would control the International Monetary Fund (which is actually a bank) when the Bretton Woods agreement was setup. No banks, including central banks can really be described as robust. They have at best around 1% fault tolerance in terms of the quantity of loans as a percentage of total lending that they can write-off each year. Yes, that is about to become a huge problem.
    - nendroid 6y ago
      The reserve ratio is currently zero percent. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...
    - atq2119 6y ago
      The reserve ratio is mostly a historical relic and is zero in many places, yet those places don't see an infinite amount of money. This indicates that the traditional story of how fractional reserve banking causes money growth is wrong. In reality, even a non-zero reserve ratio doesn't limit money creation if you look at the financial system as a whole, because the created money will simply become deposits elsewhere. The true limiter of money creation is capital constraints: somebody must give money to the bank and be willing to lose it - only then is the bank allowed to make loans.
- burntbridge 6y ago
  Just to clarify, most central banks do not have reserve requirements. In the U.S. the reserve ratio is 0% so it doesn't have one either.
toomuchtodo 6y ago
The Fed already intends to provide a real time payment system by 2023-2024 [1]. These accounts wouldn’t provide credit, simply hold deposits, hence the desire of this proposal to make the (arguably) trivial leap to issue retail accounts directly. The Fed implicitly backs the currency, so no FDIC insurance is required (an antiquated holdover from the savings and loan days, superseded by securitization of debt in the capital markets). I assume fintechs of any size would be permitted to issue credit to folks by transfers directly into these accounts (in real time), thereby allowing for innovation while providing a bare minimum of financial service to citizens. [1] https://www.bankingdive.com/news/fed-gives-new-details-on-its-real-time-payments-system/583153/ https://www.bankingdive.com/news/fed-gives-new-details-on-it...

closeparen 6y ago

Customers expect to have use the of the money they deposit with you, so once you take deposits you are the payment system. “Robust banking system” is inherently tied to reserve ratios, or having the deposits on hand to cover the loans you’re writing. A bank that only writes loans and doesn’t have deposits is the opposite of robust. If any bank gets to do this it would be the central bank. Payment facilitation is less of a superpower and can be more safely entrusted to the private sector.

RobertoG 6y ago
>>"A bank that only writes loans and doesn’t have deposits is the opposite of robust." Maybe they are, but modern private banks already do that. Before a bank concede a credit it's just checking if it's a good business, not if it has enough deposits or enough reserves. When giving a credit, banks, are, basically, creating money that it's destroyed when the debt is payed. A posteriori of giving the credit, the bank will search (assuming it have not already enough) the legal reserves requirement for the new created money. Note, that this is the opposite of what we normal hear. In reality, first come the credit, then the reserves. The bank that gave the credit, trying to meet its legal obligations of reserves, will try to get reserves loaned from other banks, creating demand for reserves in the inter-bank system. If the Central Bank does nothing, the added demand would increase the interest rate. Modern Central banks don't try to control the quantity of money in the system, but the interest rate. If the are not enough reserves for the existing demand, in order to keep the interest rate in their target, the central bank will increase the reserves in the system. So, deposits are not necessary, otherwise, the quantitative easing programs of the last years, would be impossible.
- chii 6y ago
  dont know why you're downvoted - but you're absolutely correct.
- atq2119 6y ago
  To complete the picture, it's helpful to point out that what banks need to create loans is capital, not deposits. If a bank is constrained by the Basel capital requirements, it can e.g. attempt to issue bonds. If it does so successfully, it can then create new loans corresponding to a multiple of the value of those bonds.
deleted 6y ago
[deleted]
dathanb82 6y ago
I don't think I agree with your definition of "robust" in this context. A bank that only writes loans and doesn't have deposits must be lending out its own assets. In that case, they don't have a reserve, because the assets they're using to back their loans aren't liabilities, and aren't subject to runs. The reserve ratio is there precisely because banks are loaning out deposits, and deposits are liabilities. If a crisis comes, there can be a run on the bank, and all of a sudden the bank is insolvent. So a bank that's only writing loans and not taking deposits (if you can call it a bank at all; it's really more of a hedge fund) is in some ways more "robust" than a traditional bank that's lending out its deposits.
- neffy 6y ago
  The reserve ratio (which in most places is now down to 2% or less), is there to prevent runaway monetary expansion through lending/deposit creation. The Central Bank's role as lender of last resort is the backup for bank runs. In the event of a run, a bank is considered illiquid, an insolvent bank is one where losses on debts exceed loss provisions and capital. An entity that only wrote loans, and didn't have deposits would not be a bank - the definition of a bank is implicitly that it is performing fractional reserve banking via double entry book keeping. (Unless it's the World Bank, which is actually a fund, because the US and UK had an argument about who would control the International Monetary Fund (which is actually a bank) when the Bretton Woods agreement was setup. No banks, including central banks can really be described as robust. They have at best around 1% fault tolerance in terms of the quantity of loans as a percentage of total lending that they can write-off each year. Yes, that is about to become a huge problem.
  - nendroid 6y ago
    The reserve ratio is currently zero percent. https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone...
  - atq2119 6y ago
    The reserve ratio is mostly a historical relic and is zero in many places, yet those places don't see an infinite amount of money. This indicates that the traditional story of how fractional reserve banking causes money growth is wrong. In reality, even a non-zero reserve ratio doesn't limit money creation if you look at the financial system as a whole, because the created money will simply become deposits elsewhere. The true limiter of money creation is capital constraints: somebody must give money to the bank and be willing to lose it - only then is the bank allowed to make loans.
burntbridge 6y ago
Just to clarify, most central banks do not have reserve requirements. In the U.S. the reserve ratio is 0% so it doesn't have one either.

toomuchtodo 6y ago

The Fed already intends to provide a real time payment system by 2023-2024 [1]. These accounts wouldn’t provide credit, simply hold deposits, hence the desire of this proposal to make the (arguably) trivial leap to issue retail accounts directly. The Fed implicitly backs the currency, so no FDIC insurance is required (an antiquated holdover from the savings and loan days, superseded by securitization of debt in the capital markets). I assume fintechs of any size would be permitted to issue credit to folks by transfers directly into these accounts (in real time), thereby allowing for innovation while providing a bare minimum of financial service to citizens. [1] https://www.bankingdive.com/news/fed-gives-new-details-on-its-real-time-payments-system/583153/ https://www.bankingdive.com/news/fed-gives-new-details-on-it...