Tag Archives: banking reforms

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 The difference between these two types of deposit, is that in the former case the account holder can withdrawn his money from this deposit at any time, whilst in the latter case the account holder deposits his money to the bank for a certain period of time, during which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

The Federal Credit Bank

A few months ago we did a few post on monetary reforms. In the first two posts of those series, we argued in favour of debt-free money and full reserve banking. In short our argument can be summarized as follows: since the government can demand that taxation has to be paid in a certain currency, it is able to create a demand for that currency. Hence the government can spend money just by creating its own currency, and this without having to borrow anything. Because the government should be in charge of creating and allocating the money supply, private banks shouldn’t be involved in the creation of money. Instead banks should return to their role of intermediaries between savers and borrowers.

In order to prevent that politicians will manipulate the money supply for electoral gains, we have proposed the establishment of an independent body, the National Monetary Authority. This body will have to authority to determine the amount of money the government should spend, and also has the power to raise (or lower) the general level of the Land Value Tax.

In the third instalment of our series, we introduced another financial institution, the Federal Credit Bank (MFK). The primary objective of this institution is to provide zero-interest loans to the public. The National Monetary Authority would also in this case set a limit on how much money the MFK could lend. In this post we will expand on the function of the MFK.

During our discussion of full reserve banking, we made an implicit assumption that the amount of savings and the demand for loans would be equal. There is of course no reason to assume that this will indeed always be the case. Actually it’s reasonable to assume this will almost never be the case. We will discuss the role of the MFK on this matter, by discussing how banking would look like under full reserve banking.

If a bank wants to lend money to the public, it should attract funds from the public since it cannot create money through fractional reserve banking. The bank could attract funds either in the form of term deposits or by issuing bonds. For the sake of simplicity we will assume that banks will only issue zero coupon bonds.

A zero coupon bond is a bond which does not pay interest. Instead the bond is issued at a lower rate than its nominal value. Suppose that a bond has a nominal value of 1,000. This bond will then sold by the bank for a price less than 1,000, and the buyer of the bond will make a profit when the bank will repay the bond at maturity.

When people want to have a bank loan, the bank should attract funds to lend to them. In order to do this, the bank will sell bonds at the capital market. As long as there are sufficient buyers for these bonds, there will be no problem. If however, the demand for loans would be higher than the demand for bank bonds, problem can arise. Businesses can’t make investments, people can’t get a mortgage loan to buy a house. If this discrepancy becomes too large, the economy might be disrupted.

How can the MFK help in such situation? The MFK can use its lending power to buy bank bonds at the capital markets. By doing so banks receive the funds to lend to the public. But again, the MFK cannot buy more assets than the limit set by the National Monetary Authority.

By raising the MFK lending limit, the MFK can buy more bonds and hence their rates will increase, which equivalent to lowering interest rates by central banks. If on the other hand the National Monetary Authority would lower the MFK lending limit, the MFK will be forced to sell off some of its assets. This will result in a lower rate of bank bonds, and this is equivalent to raising interest rates.

Shifting the MFK lending limit gives the National Monetary Authority an additional tool to adjust the money supply of a space settlement.