Banking reform

Intro and recapping

In part two of our series on monetary reform we briefly discussed the role of banks within the Mordan banking system. There we argued against fractional reserve banking, and to distinguish between on demand deposits and time deposits. The difference between these two types of deposit, is that in the former case the account holder can withdrawn his money from this deposit at any time, whilst in the latter case the account holder deposits his money to the bank for a certain period of time, during which he can’t withdraw his deposits.

Subsequently, we argued that banks should only allowed to lend the money from the time deposits, but not from the demand deposits. In technical terms we can see that time deposits are loans, more precisely a mutuum, from savers to the bank. And demand deposits are just money given to the bank for save keeping.

In this post we will give a further discussion of the Mordan banking system.

What are banks?

The term “bank” covers a whole lot of different kinds of financial institutions, hence it’s necessary to specify several types of banks. First we should make a distinction between retail and investment banks. Retail banks offer financial services to consumers rather than to corporations. Investment banks are usually involved in raising capital for corporations in other ways than by providing loans.

Retail banks offer a wide ranges of services to consumers and businesses: save keeping of money, facilitating financial transactions, accepting savings from and providing loans to the public. It’s perfectly possible to separate these functions in separate banks, saving banks typically only perform the last two function. And we can also imagine a bank which only accept demand deposits and facilitate transactions (in return for a fee), we could call such bank a transaction bank.

Many retail banks also offer asset management to wealthy clients, but we believe that asset management should be separated from the ordinary banking.

Organization of the new banking system

We propose a strict separation between investment banks and retail banks. This means a total ban on so-called universal banks. Practically investment banks are prohibited from offering retail banking services, and vice versa. In order to maintain this prohibition investment and retail bank should not be allowed to be united in any way.

Besides we also propose a strict separation between banking and insurance companies (we will cover insurances in another post). It’s nowadays a common practice for banks to sell insurance policies in addition to their banking services, this is mostly only for the purpose of raising more revenue for the bank. We believe that it’s in the interest of the consumers if banking and insurances are clearly separated from each other.

Currently most banks are stock companies, owned by their shareholders. Consequently banks have more incentives to serve the interests of their shareholders rather of the interests of their clients. Therefore we propose that all retail banks should be run as consumer cooperatives, i.e. only cooperative should be able to obtain a retail banking license.

Not only is this proposal in line with our commitment to a cooperative economy, but also because a cooperative bank is owned by its own clients, such a bank will pursue the interests of its clients. Additionally cooperative banks are by their very nature protected against hostile take overs. Hostile take overs have a disruptive effect on the financial sector and hence on the economy.

The obligation of being a cooperative will not apply to investment banks or asset managers.

Supervision

Of course these rules have to be enforced, there we propose the establishment of the Mordan Financial Services Authority (MFSA). This supervisory agency will be separate from both the National Monetary Authority and the MFK. The MFSA will supervise the entire Mordan financial sector, it will license banks and can retract those, and quite importantly it will have the authority to arrest bankers for noncompliance with the law.

Related topics

Space settlements and monetary systems. Part 1

Space settlements and monetary systems. Part 2

Space settlements and monetary systems. Part 3

A Cooperative Economy

The Federal Credit Bank

The Problem of Taxation. Part One

The Problem of Taxation. Part Two

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8 thoughts on “Banking reform”

  1. The idea of only cooperatives having retail licences is a novel one. For one thing, if that was to be tried now here at home, the cost of finance would come down considerably.

    1. “For one thing, if that was to be tried now here at home, the cost of finance would come down considerably.”

      Which is exactly the reason why we have proposed this one.

  2. Banking reform, or more specifically, reforming the global financial system, is a growing movement evident across the political spectrum. While many conservatives would disagree, I believe it is the focal point of a general reexamination of capitalism.

    Capitalism does provide economic impetus through the incentive of personal gain, but its inherent flaw is the social imbalance that naturally results from wealth consolidation. Government is tasked with maintaining a sustainable equilibrium between the two forces, and that responsibility has obviously been abrogated by today’s political establishment. Some would even assert the current empowerment of transnational corporations, at the expense of national sovereignty, isn’t capitalism at all but rather a highly restrictive and stratified oligarchy or plutocracy.

    Privately-held central banking systems, such as the U.S. Federal Reserve, are supra-governmental entities designed to protect consolidated wealth (e.g. Wall Street). Its history in America, and elsewhere, has been quite contentious with many ups and downs. The presidency of Andrew Jackson was one of its low points. If we’ve reined them in before, we can do it again.

    1. Government is tasked with maintaining a sustainable equilibrium between the two forces, and that responsibility has obviously been abrogated by today’s political establishment.

      That’s the core of the social and economic reforms we propose on this site, to seek such equilibrium.

      Privately-held central banking systems, such as the U.S. Federal Reserve, are supra-governmental entities designed to protect consolidated wealth (e.g. Wall Street). […] If we’ve reined them in before, we can do it again.

      Central banks should be hold by the public, giving them into private hands means that the public interest is abrogated in favour of the greed by the privileged few. And yes, if could control the banks in the past, it should be possible to do so today and in the future.

      Banking reform, or more specifically, reforming the global financial system, is a growing movement evident across the political spectrum. While many conservatives would disagree, I believe it is the focal point of a general reexamination of capitalism.

      Absolutely.

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