To fix the financial system, nationalise money, not the banks: Guest post by Michael Haines

Michael Haines

Michael overheard me pontificating with a friend at my local café and we got talking. After lengthy emails on various topics including universal basic income, I invited him to post on Troppo — with this being the result. Michael has had 40+ years in senior management and consulting roles (including at CEO and board level), across: government, telecommunications, brewing, construction, consumer goods, car manufacturing, transport and logistics. He was a Board Member of Australian Logistics Council and Chair of its ICT Committee, as well as Member of Austroads Intelligent Transport Industry Reference Group. In 2011, he established VANZI, a ‘not-for-profit’ Initiative in collaboration with a range of national stakeholders to broker development of the Digital Built Environment. In 2016, he led the team that wrote the Road Map for 3D Queensland.

To fix the financial system, nationalise money, not the banks: Guest post by Michael Haines

This post outlines a novel way to stabilize the banking system by:- a) converting all bank deposits AND loans to ‘Central Bank Money’, and b) appointing each bank as ‘Agent for the Central Bank’.

At present, only 3-4% of our money is ‘risk-free national money’ (cash).

Most is in the form of deposits, created when loans are made by commercial banks, other deposit-taking institutions, and ‘fintechs’ that have a banking licence (together called ‘banks’).

This Bank of England paper explains the process in detail.

The deposits are liabilities of the banks; placing our money ‘at risk’ if our bank fails.

As banks underpin the financial system, it is generally agreed that they have a responsibility to lend only at the ‘low risk’ end. Risky ventures are seen as the preserve of equity

Unfortunately, banks often abrogate their social responsibilities by taking on unreasonable risks.

This is largely a ‘system problem’, that requires a system solution.

The system shields bankers from the consequences of their decisions, resulting in ‘moral hazard’.

We see it as some banks increase their risk profile to get more business, pulling other banks into the vortex to stay competitive; knowing deposits are guaranteed by the government.

While formal deposit guarantees are limited to a set amount, in practice, governments are forced to underwrite the solvency and liquidity of all the major banks, to prevent system collapse.

The system places the Central Banks in a dilemma.  They need to support the banks, while also deciding when to pull the plug against many powerful interests.  In practice, some banks may be shuttered, while the broad system is underpinned via massive bailouts, reinforcing ‘moral hazard’.

Essentially, the problem is how to put banks on the same footing as any business, so that instead of the Central Bank having the main role in insolvency; the directors and auditors have principal responsibility under corporate law for deciding when to call in an Administrator and/or stop trading -without impacting depositors or anyone else.

I suggest appointing all banks as Agents for the Central Bank.

We can have the Central Bank buy all outstanding loans from the banks, with the money used to pay out deposits and inter-bank loans; all redeposited with the Central Bank. This can be achieved by having a ‘round robin’.

The result would be that the loans and deposits would shift from the banks’ books to ‘subsidiary ledgers’ of the Central Bank. This would have no effect on the net assets or profits of the banks.

Each bank would continue to manage the deposits of their customers, as Agent for the Central Bank.

Banks would also continue to assess borrowers. However, instead of making the loans as principal, they would do so on behalf of the Central Bank, with the right to earn the interest and fees, as now.

In consideration for the profits earned in the process, the banks would be required to guarantee the repayment of any loans to the Central Bank, effectively reversing the guarantee that is now in place.

Faced with the realization that the risk environment had changed, some banks may feel suddenly ‘overly exposed’.  To mitigate the impact, we could provide a lead-in of (say) 5 years to enable them to alter their capital ratios, just as they must do now when the Central Bank believes there is a need to reduce risk across the whole sector.

Once in place, it would mean that if any bank loaned unwisely, so that its capital was lost, it would be wound up like any insolvent business.

This could be done without impact on depositors, or on any borrowers who were not in default.

Importantly, by taking inter-bank liabilities and deposits off the banks’ balance sheet, it would eliminate any possible flow-on effects because of any single bank failure.

In the event of a failure, all deposits and loans would remain on the books of the Central Bank, managed by the Administrator using the failed bank’s operational staff and systems, until they and the remaining business could be sold as a ‘going concern’ to another viable bank.

The bank officers would lose their jobs, the shareholders would lose their investment, and the defaulting borrowers would be chased for recovery.

Everyone else would carry on as normal.

IN SUMMARY

What does not Change

  • the bank’s relations with its customers
  • the banks basic business model: hold deposits, operate the payments system, make loans
  • the bank’s net assets
  • the bank’s net profit (though profits could be boosted when the switch is made, as a sweetener)

What Changes

  1. Loans and deposits move from the books of the banks onto the books of the Central Bank.

This change is key to stabilizing the banking system:

  • no deposits at risk
  • no loans that are not in default at risk of being called in if a bank fails
  • no need for interbank loans, eliminating flow-on effects from a single bank failure
  • no more liquidity concerns, as the deposits and loans would not be on the bank’s books
  • no more bank runs
  1. The ‘guarantee’ would be ‘reversed’.  Instead of the Central Bank guaranteeing deposits.  The banks would guarantee repayment of the loans to the Central Bank.This change is key to reducing risk across the banking system
    – eliminates ‘moral hazard’
    –     eliminates any need for Central Bank intervention in the case of a bank insolvency
    –     ensures directors alone are responsible under corporate law to halt trading if insolvent

    This reversal of the guarantee places banks in the same situation as all other businesses.

  2. It opens the opportunity to create a Central Bank Digital Currency, turning ‘deposits’ into ‘digital cash’ with instant settlement, while maintaining the current levels of privacy.
  3. The ability to offer instant settlement, with deposits and loans free of the risk of bank failure, would provide the banks with a competitive advantage
  4. It would enable more detailed real-time analysis of the money flows in the economy.
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22 Responses to To fix the financial system, nationalise money, not the banks: Guest post by Michael Haines

  1. Had Enough says:

    Surely this just means the Central bank more directly under writes the commercial banks. That is, they need to ensure they are happy in detail with the commercial models and responsible lending that the ADI’s engage in as they are eventually even more directly on the hook for the result. Sounds like back door nationalisation.

    A better idea I have heard suggested is to allow everyone to have a myRBA account where their money is 100% safe but at zero percent interest. Lets get the banks actually providing some real reason to deposit with them. Currently our deposits are unsecured loans to the bank. In the event of a bank collapse (unlikely but possible) we stand in line behind everyone else if there were a systemic event. The 250K guarantee only exists in the event of a bank failure, and no major bank will be allowed to fail in Aus , as the big four are 25% of the ASX200. ie they are the economy. And, not forgetting they are mostly ~65% overseas owned, and the bond holders will want their pound of flesh…

    • You’ve raised a number of concerns.

      1. While it may seem like an ‘underwriting’ of the banks, it is actually the reverse. The banks would underwrite the loans they make on behalf of the Central Bank. So if a loan goes bad, it is the banks capital that is at risk. There is no need for the Central Bank to come in a rescue it, because no deposits would be at risk and no loans that were not in default would need to be called in.

      The only people to suffer a bank failure would be the bank’s officers, shareholders and borrowers who were in default

      2. As you say, no major bank would be allowed to fail – is the whole basis of ‘moral hazard’. It is one of the main reasons why we have had so many banking crises over the last one hundred years.

      By switching banks to act as Agents for the Central Bank, we can eliminate moral hazard and the risk of ‘bank runs’, while enabling the banks to fulfill their functions of holding deposits, managing the payments system and making loans of ‘new money’ at ‘reasonable risk’.

      3. As for overseas ownership, under the proposal any bank operating in Australia would need to have its loans and deposits held by an Australian company prior to the switch to the Agency model. Any bondholders who were investors in the Australian company would remain as investors.

      As the proposal makes no change in the banks net assets or profits, the bondholders ‘pound of flesh’ would remain unchanged when the Australian company sold its loans to the central Bank, paid out its depositors and inter-bank loans and took on the Agency role.

  2. Thank you for the link. I have high regard for the principle of Islamic banking that says ‘money should not be made from money’

    Under, the Agency model, once the loans and deposits are on the books of the Central Bank it is easy to set it up so that the arrangements comply with this principle.

    However, it is necessary to recognise that inflation needs to be taken into account when applying this principle

    If I lend you $100 today and by the end of the year inflation means I need $110 to buy the same parcel of goods then if you only pay back $100, you have made money from the money I lent you.

    To be strictly adherent to the principle, all instruments the denote a sum of money owing should be subject to an inflation adjustment on the outstanding principle.

    Once the loans and deposits are on the books of the Central Bank, the Central Bank AT NO COST, can simply credit each deposit account with an ‘inflation adjustment’ each day, keeping the value of the deposit current.

    At the same time, the outstanding balance of all loan accounts could be similarly adjusted. When the borrower makes a repayment of principle, that would go back to the Central Bank and written off. No one would be ‘making money’ out of the extra repaid. The extra repaid simply ensures the borrower is not making money out of money by repaying less in ‘real’ terms than they borrowed.

    As for the ‘interest on the loan’, this can then be understood for what it is. It is not a charge for ‘the money’ which is provided cost free by the Central Bank. The banks are there to provide a service. The service involves assessing the risk that the person will or will not repay the loan. If they don’t repay it, they have got ‘money for nothing’. The banks have to employ people and equipment and other resources to assess borrowers and the security they offer and to ensure they repay the loan and to pursue those who don’t

    It is perfectly right that the bank should be paid for these costs. Another cost is the actual defaults. Despite their best intentions some defaults will occur. Since they can’t stay in business unless these are recovered it is fair to treat a small charge against all loans as a ‘cost of banking’. In addition, there is a need to recognise the value in the banks operations beyond the cost of its inputs. The bank can only deliver its services by arranging its people and assets into the unique set of processes that form its business. This arrangement has value that is reflected in the profit.

    The net result is that the ‘interest’ paid by the borrower would represent only a fair price for the banks services: its operating costs, a provision for default and its profit.

    The interest, though calculated as a percentage of the outstanding balance would in fact simply be going to pay for the ‘banking resources/services’ consumed in issuing and recovering the loan at its current value

    I realise this is a very different way of seeing money, banking and interest :)

    • ianl says:

      >” … ‘money should not be made from money’

      The very essence of envy.

      So I could “borrow” $300k from a bank or mortgage broker (whoever) and pay no interest, since I am borrowing from people who wish to make money from money.

      Essentially, your proposal is that BigGov assumes ownership of people’s life savings (which you call “deposits” to avoid this crucial point) so that, while these savings per se are not at risk of catastrophic loss, they may not be used to generate interest (no making money from money).

      I do see why you were asked to contribute here.

      • It’s all in the definition :)

        I’m simply saying that you should not make money from creating money.

        If I have earned money, I ought to be able to invest it, putting it ‘at risk’ in return for a share of the value that the borrower can create as a result of borrowing the money. That share is ‘interest’. The borrower has to create extra value (earn income) on top of what he borrows, and the interest is my share of his earnings for putting my money ‘at risk’. The risk is that I lose all or some of my money if it is not repaid.

        Banks are different. They create money. It costs them nothing to create it. It is an entry in their computers.

        My point was that, Western Banks can meet the Islamic principle of not making money out of money if we separate the ‘money creation’ process from the ‘lending process’.

        If we give the money creation process to the Central Bank, they can issue it ‘cost free’.

        The interest paid to the bank is then not for the money as such, but in payment for the services provided by the bank: assessing borrowers and security and risk profile and deciding how much to lend on what terms and then collecting repayment and chasing defaulters.

        It is simply a different way of looking at the transactions that meet one of the key principles of Islamic Banking.

        As for deposits, the proposal is for the Central Bank to pay an ‘inflation adjustment’ on deposits (tax-free) which would keep the value of their deposit current. This would be more than most after-tax deposits now return. As the deposits would not be at risk, they should not be entitled to any return. If people want more than inflation, they can invest instead

        Hope that makes it a little clearer

  3. Chris Lloyd says:

    I wonder if Nick or Michael could explain the basic claim, that I have heard so many times without any coherent explanation at all, that banks create money. Please assume that I am not an accountant, let alone a banker.

    • Chris is a bank and Nick wants $1,000,000 to buy a house. Are you really saying that a I am legally authorised to just give Nick money that I do not have?
    • Is this supported by legislation?
    • Can the reserve bank do the same thing?
    • How is this deposit a liability for Chris? If I give Nick $1,000,000 I cannot have a liability to him. Who do I owe?
    • If Nick sells his apartment after 6 months, and closes the loan and gives the $1,000,000 back to me, can I keep this money that never existed?

    I think that there is little point in reading your post until I understand this. And the BOE paper was meaningless to me.

    I really hope the catallaxy guys to not find this thread or there will be a DoS crisis!

    • The best way to understand is to look at the actual transactions in the books of a bank

      Let’s say the only money is $100 that you have in cash.

      Now you deposit in the bank.

      Now the Bank has $100 cash (asset) and you have a $100 deposit with the bank (which is a liability of the bank… the bank owes you this money)

      The banks books are in balance: cash $100 chris deposit $100

      However, due to the way we ‘count’ money there is suddenly $200 cash in the system. You regard your deposit as ‘cash at bank’, while the bank also regards the money they hold in their vault (which you deposited) as their cash.

      That is, depositing in a bank is very different to lending money to anyone else.

      When you lend to me, you give up the money. But when you deposit in the bank, you don’t give it up. You regard it as yours… and so does the bank

      Now I come along and want to borrow $100.

      The bank simply makes two entries in its books:

      1. $100 loan to michael (this records how much I owe)
      2. $100 deposit in the name of michael (this represents the money I can draw down)

      The banks books now show
      ASSETS LIABILITIES
      cash 100 chris deposit 100
      Michael loan 100 mike deposit 100
      TOTAL 200 TOTAL 200

      Once there was only $100 of money in the system, now there is $200 ($100 in deposit plus the $100 cash).

      No bank ever asks you to forgo your deposit. It has simply created the extra money by making entries in its books.

      After I take out the cash the situation is:

      Michael cash $100
      The bank shows:
      ASSETS LIABILITIES
      Loan to Michael $100 Deposit Chris $100

      At this stage, the money is back to $200, Michael’s cash $100 and Chris deposit $100

      When I repay the loan, the money that was created gets destroyed as the entries are reversed

      First I deposit the money to repay the loan.

      The banks books now show:
      ASSETS LIABILITIES
      cash 100 chris deposit 100
      Michael loan 100 mike deposit 100
      TOTAL 200 TOTAL 200

      Next, the the bank offsets my deposit against the loan I owe, wiping both out.

      This leaves the banks books are in balance
      ASSETS LIABILITIES
      cash $100 chris deposit $100

      If you take out your money, you have $100 cash, and the bank has nothing… which is where we started:

      Chris $100 cash

      However, if I fail to repay the loan, you lose your deposit.

      The $100 is still out there. When I borrowed it, I spent it by paying Nicholas $100 for a lavish holiday.

      So now Nicholas has $100 cash

      I have no assets for the bank to recover, so the bank has no assets to sell to get the money back, which means you lose your deposit.

      This is why the Central Bank has to step in and provide the money so you can get back your cash.

      Under the proposal the banks would act as Agent for the Central Bank

      In this case, there is no need to guarantee the banks, as your money would already be on the books of the Central Bank and could always be repaid

      • To explain what happens once the banks shift to an Agency role

        Let’s say you have $100 cash

        You go to your bank and deposit it.

        The bank puts the cash in its vault and records that you have a $100 deposit. The cash would also be recorded.

        However both the record of the cash and the deposit would be on the books of the Central Bank (in a subsidiary ledger managed by your bank)

        Now the situation is

        Cash in vault $100

        Central Bank
        cash $100 deposit chris $100

        Let’s say in this example the bank already has assets and equity:
        ASSETS…………………………………EQUITY
        Buildings + equipment $20……………….Capital $20

        All books are in balance

        Now I come along and borrow $100

        The bank writes my loan and deposit in the books of the Central Bank
        ASSETS ………………….LIABILITIES
        cash 100 ………………chris deposit 100
        Michael loan 100 . ..mike deposit 100
        TOTAL 200 …………………TOTAL 200

        Now I withdraw my deposit to pay Nicholas. Since his bank too is managing their own subsidiary ledger, the money I withdraw goes into his Central Bank Account

        So after I have withdrawn my money, and paid it to Nicholas the entries in the Central Bank would show

        ASSETS ………………….LIABILITIES
        cash 100 ………………chris deposit 100
        Michael loan 100 . ..nich deposit 100
        TOTAL 200 ………………….TOTAL 200

        No say I fail to repay the loan. That means the bank owes the Central Bank the full amount of the loan it made to me

        So the banks books would be:
        ……………ASSETS…………………………………EQUITY/LIABILITY
        Buildings + equipment $20……………….Capital $20
        ……………………………………………………….Debt due to CB $100

        At this point the bank would be insolvent and the directors would be required by law to stop trading

        The banks assets would be sold, say returning $5 which would be paid to the Central Bank.

        The Central Bank would simply recognise that the money I spent remained in circulation.

        The result is that you and nich still have your deposits with the central bank, even though your bank is liquidated.

        …………………….ASSETS ………………….LIABILITIES
        ………………………cash 100 ………………chris deposit 100
        money in circulation 100 ………………nich deposit 100
        ………………….TOTAL 200 ………………………TOTAL 200

        Because the Central Bank can never ‘run out of money’, you and nich can never lose your deposits.

        The only people to lose in this scenario are the officers (who’d lose their jobs) and shareholders of the failed bank (who’d lose their investment in the bank), and me, as I would be declared bankrupt for failing to repay my loan

  4. I like the original thinking, but I have a few questions.

    1. “The result would be that the loans and deposits would shift from the banks’ books to ‘subsidiary ledgers’ of the Central Bank. This would have no effect on the net assets or profits of the banks.”

    How does this work? The borrower owes the private bank, but the private bank does not have the loan asset on its balance sheet anymore?

    2. Doesn’t this then shift the risk of loan defaults and bank failures still sit with the central bank, since loans made by banks are now assets held at the CB (if they don’t get paid, or the bank fails, then the CB must write off these assets)?

    3. What is to stop private banks creating a new deposit layer on top of this system by doing what they already do?

    • Good Questions

      1. “The result would be that the loans and deposits would shift from the banks’ books to ‘subsidiary ledgers’ of the Central Bank. This would have no effect on the net assets or profits of the banks.”

      How does this work? The borrower owes the private bank, but the private bank does not have the loan asset on its balance sheet anymore?

      The borrower would no longer owe the private bank. The Central Bank effectively buys the loans from the private bank, so the loans are now on its books.

      In exchange for the private bank guaranteeing repayment of the loans, the Central Bank would grant it the right to earn the interest (and fees) payable on the loans.

      In this case, repayments of principal would go to the Central Bank, while the private bank would keep the interest to cover its costs, a provision for defaults (for which it remains liable) and profit… the commercial arrangements would be essentially unchanged compared to now.

      It’s primarily the legal relationships that change.

      2. Doesn’t this then shift the risk of loan defaults and bank failures still sit with the central bank, since loans made by banks are now assets held at the CB (if they don’t get paid, or the bank fails, then the CB must write off these assets)?

      Yes, the ultimate risk remains with the Central Bank, as it does now under its ‘guarantees’.

      However, it changes the legal status of the parties in the case of a default

      As soon as it became clear to directors that the amount of defaulting loans that they had made on behalf of the Central Bank (which the bank guarantees repayment TO the Central Bank) was likely to exceed the private banks capital, they would be bound by corporate law to stop trading. There would be no need for the Central Bank to rescue the failed bank, as its failure would not impact anyone but the officers and shareholders of the failed bank

      3. What is to stop private banks creating a new deposit layer on top of this system by doing what they already do?

      Nothing. Any business is able to borrow short and lend long.

      But everyone knows that their investment is entirely their own risk. The would be no need for the Central Bank to step in because even if there was widespread failure, the actual deposits that represent our base money could never be at risk

      Say I lend $100 to Institution A. When I lend it, the money goes from my Central Bank account to A’s Central Bank account. If A then on lends to B, the money goes from A’s account to B’s Central Bank account. Let’s say B spends the money buying a service from C, the money now is in C’s Central Bank account. In this case, I do not regard the money I loaned to A as ‘cash’. It is now an ‘at risk investment’. The same when A lends to B. There is only one lot of cash and it is the deposit held by C

      Say B, having spent the money, cannot repay the $100 to A who can’t repay to me. In this case, both A and I have lost our money, no different to a crash in the share market.

      However, no matter how widespread the crash, whomever is holding any deposit at any time will no longer be at risk of losing their money as all the entries simply circulate within the Central Banks Books.

      This means that the sum total of our base money is secure.

      As for all the weird and wonderful derivatives and options and other securities that add little to (and probably substract from) the production of real goods and services, they are an entirely separate topic!

      The proposed Agency system does not do away with all risk, it simply does away with ‘moral hazard’ and the systemic risk it generates in the current banking system, by putting banks in the same position as all other businesses in regard to insolvency and also by protecting deposits absolutely

      • Another factor that could change for the better is the banks ‘capital ratios’.

        At the moment, a great deal of regulation (and complexity) arises because different assets have different ‘risk weights’ to try to mitigate the risk that the assets cannot be liquidated for their full value if they need to be called in/sold to pay out depositors.

        With the Agency model, there is no need for regulators to be concerned about the ‘quality of the banks assets’.

        The reason is that the assets of each bank would only ‘back’ the shareholders equity (once all loans and deposits are off their balance sheet).

        In the Agency model, the purpose of the capital ratio changes. It is solely to ensure the banks have ‘skin in the game’.

        The level needs to be debated.

        It could be that we allow banks to lend up to 12 times their capital… though there are some who may feel 30 times is reasonable.

        With a 12 time ratio, the banks could afford for about 8% of their loans to be fully written down (or a much higher percentage to be partly written off) before the bank becomes insolvent.

        With a 30 times ratio, the banks could only afford about 3% of loans to be fully written down.

        The higher the ratio, the greater the return, but also the greater the risk.

        As the risk would be a purely ‘investment risk’, perhaps we could set a 30 times limit as the maximum, with the banks setting their own ratio below that, depending on their risk appetite.

        Shareholders would then have to decide which banks to invest in at what return, with what risk

        From a social perspective, we just need to know that the shareholders have enough ‘at risk’ to discourage poor lending practices.

        We have a right and responsibility to require such a restriction as it is ‘us’ who licence the banks to create ‘our’ new money that, when spent, determines what our resources are used for.

        If banks lend unwisely, they are in effect wasting our resources.

    • Cameron, I’ve added another post at the end of my response to you. As it is a reply to my own post, you may not be alerted to it.

      Hopefully you get notified by this post

  5. paul frijters says:

    Hi Michael,

    an interesting proposal that you have clearly put a lot of time in, and thank you for putting so much effort to explain it!

    Like Cameron, I am trying to work through where the ‘pain points’ of the proposal are.

    One nagging unease I have is the fractional lending system. At the moment the big banks can effectively print money at a certain ratio to particular parts of their assets, like cash and treasury bonds. So if the government gives out 1 billion in treasury bonds, the commercial banks can lend out another 10 billion or so in other loans with those bonds as collateral. It works similarly almost everywhere. Now, banks make a lot of profits from that lending and I understand it also allows them to allocate a portion of the extra money located to themselves (such as via their own salaries). As I understand your proposal and your answer to Cameron’s question on the deposit system, that fractional reserve system would continue. So much of the source of financial instability and the profitability of the big banks would continue.

    Is that the way you indeed see it, ie that the banks keep reserves they can use to make loans, which are then subsequently bought up by the central bank? So the incentives of the banks become to ‘cheat’ on their guarantee to the central bank by giving out more risky loans than the current guarantee fee to the central bank reflects.

    This then brings me to my main worry.

    Those guarantees of banks are a bit of a ‘deus ex machina’ in your proposal. Someone has to set their level and agree to them. If the guarantee fee is too low, banks lend far too much making the system extremely volatile, but giving the banks higher profits too. If the guarantee is too high, banks lend very little and their role as investment judges comes under pressure. Moreover, the guarantee has to be specific to each bank’s portfolio. So really, we are talking about a crucial set of dynamic prices in that system that will be impossible to get right in a bureaucratic manner. Yet, how else would they be set than via some set of rules at the central bank? It is like asking the central bank to guess the correct stock market value each day for all banks.

    Corruption and insider take-over. We know this is how Australia works: pretty much everything of value has been corrupted now to a high degree. Pretending that honest bureaucrats are in charge is living in cloud cookoo land. Your system though depends on very honest bureaucrats able to withstand the political machinations that would orient themselves on the price level of the guarantees since those are a direct transfer from private to public, like taxes. Corruption would also orient itself to other control variables, like the fractional reserve requirement, the level of lending possible, and other such things. Many of these elements of course are already set in a hugely corrupt way in Australia, but you are proposing to add another decision to that same arena worth tens of billions.

    Hmmmm. I find Nick’s basic proposal to have the central bank create money, instead of commercial banks create money, less corruption-sensitive and easier to administrate.

    But maybe I misunderstand what you have in mind.

    • Paul, I apologize for the length. As Nicholas knows, I am never short of words!

      One nagging unease I have is the fractional lending system. At the moment the big banks can effectively print money at a certain ratio to particular parts of their assets, like cash and treasury bonds. So if the government gives out 1 billion in treasury bonds, the commercial banks can lend out another 10 billion or so in other loans with those bonds as collateral. It works similarly almost everywhere. Now, banks make a lot of profits from that lending and I understand it also allows them to allocate a portion of the extra money located to themselves (such as via their own salaries). As I understand your proposal and your answer to Cameron’s question on the deposit system, that fractional reserve system would continue. So much of the source of financial instability and the profitability of the big banks would continue.

      This proposal is not intended to constrain bank profits. It is intended only to eliminate ‘systemic risk’ due to ‘moral hazard’, forcing the Central Bank to rescue the sector when it gets in trouble.

      Is that the way you indeed see it, ie that the banks keep reserves they can use to make loans, which are then subsequently bought up by the central bank?

      The banks would not be making loans that are sold to the Reserve Bank.

      The loans would be made by the Reserve Bank as principal. The private banks would simply write the loans that they approve onto the Central Bank register under their control… as Agent for the Central Bank

      Each bank would have their own ‘Central Bank subsidiary ledger’. The loans would never appear on the books of the private banks once the switch to an Agency system was made.

      The fractional reserve system would then cease to exist.

      In its place would be a simple formula that permitted the banks to issue loans on behalf of the Central Bank – up to a set multiple of the private bank’s capital.

      The limits could mirror the current ratios in terms of the total amount of loans to capital, which I understand range from around 12 times to 30 times. Though it is a few years since I looked. Whatever the ratios are now, we could just continue them.

      So the incentives of the banks become to ‘cheat’ on their guarantee to the central bank by giving out more risky loans than the current guarantee fee to the central bank reflects.

      This then brings me to my main worry.

      Those guarantees of banks are a bit of a ‘deus ex machina’ in your proposal. Someone has to set their level and agree to them. If the guarantee fee is too low, banks lend far too much making the system extremely volatile, but giving the banks higher profits too. If the guarantee is too high, banks lend very little and their role as investment judges comes under pressure. Moreover, the guarantee has to be specific to each bank’s portfolio. So really, we are talking about a crucial set of dynamic prices in that system that will be impossible to get right in a bureaucratic manner. Yet, how else would they be set than via some set of rules at the central bank? It is like asking the central bank to guess the correct stock market value each day for all banks.

      There would be no guarantee fee as such.

      The private banks would be given a licence to write loans onto the books of the Central Bank – up to a set multiple of their capital (similar to their existing ratios)

      Under this licence, they would not have to pay the Central Bank anything for the money they create. They would just write it onto the Central Bank’s ledger that they manage. (They may have to pay a fee to cover the actual costs of the Reserve Bank and Mint, but that is all).

      In consideration for this licence, the private bank would be required to undertake to repay any and all loans not repaid by the borrower.

      This is eminently fair, as they are earning ALL the interest and fees payable on the loans they write, and they are the ones deciding who to lend to, and how much, on what security, over what period, on what terms. That is their business, no different than if they were making the loans as principal.

      If they are derelict in their assessments, the loans will turn bad, and they will have to cough up the repayment to the Central Bank under their guarantee.

      There is no limit on this guarantee. It covers all their loans.

      In making the loans, the banks would accrue a ‘contingent liability’.

      Say one bank has $100 capital and writes loans totaling $3000 (on a multiple of 30).

      If just 3.4% of the loans go bad, the bank’s contingent liability would crystalize as an actual $102 debt, making the bank insolvent. At that point, the directors would be duty bound to stop trading and call in an Administrator.

      The Central Bank would have no role in that decision.

      It places the private banks in the same position as any business.

      The banks would operate like any business, choosing their own markets and risk profile.

      Say the maximum allowed capital ratio is 30. Different banks may decide to have lower ratios to reduce the risk.

      A bank whose shareholders were risk averse may choose to limit the amount of loans they write to 12 times. In this case, over 8.3% of loans would need to turn bad before the bank became insolvent.

      The higher the capital ratio the higher the risk, the higher the returns. Which is as it should be.

      Taking this approach lets the market decide which banks to invest in given the quality of management, their capital ratios and the markets they operate in.

      The only concern that the government should have is that there is sufficient ‘capital at risk’ that any prudent shareholder/director would want to make sure that the bank’s lending practice were prudent. If 30 it too high, we can drop it. If it is too low, we can increase it.

      Corruption and insider take-over. We know this is how Australia works: pretty much everything of value has been corrupted now to a high degree. Pretending that honest bureaucrats are in charge is living in cloud cookoo land.

      Your system though depends on very honest bureaucrats able to withstand the political machinations that would orient themselves on the price level of the guarantees since those are a direct transfer from private to public, like taxes. Corruption would also orient itself to other control variables, like the fractional reserve requirement, the level of lending possible, and other such things. Many of these elements of course are already set in a hugely corrupt way in Australia, but you are proposing to add another decision to that same arena worth tens of billions.

      Paul, it is quite the opposite. The Agency model takes bureaucrats out of the loop entirely, except for setting the maximum capital ratio, which to start could mirror the existing ratio.

      It places sole responsibility on directors under normal corporate law to stop trading if they believe the bank is insolvent.

      The upside for the banks to come on board with the Agency model is that they are under pressure from new fintechs and crypto. It gives them a way of taking the high ground:

      They could offer risk-free deposits with instant electronic settlement, and also loans that would have the lowest rate in the market (not having any ‘cost of funds’, the interest would only need to cover operating costs, a provision for default and profit), and also the assurance that no loan (which is not in default) would be called in early, even if the bank went belly up. The last two would be attractive to borrowers.

      If you take away deposits from the banks, they have nothing to gain from the change. They would lose access to depositors and the payments system.

      While the Agency model takes deposits off their balance sheets, they maintain their relationships with their customers – as they would be the one administering their deposit account, and the payments system.

      Hmmmm. I find Nick’s basic proposal to have the central bank create money, instead of commercial banks create money, less corruption-sensitive and easier to administrate.

      I would be happy with Nicholas’ proposal. As it would certainly improve stability by having our deposit accounts with the Central Bank

      I’ve not discussed it with him, but I presume this could only happen if, when we withdrew our money at the changeover of the system, the Central Bank provided funds to the private banks to pay out the existing depositors?

      Otherwise, how would the banks pay out the deposits?

      This would leave the Central Bank holding deposits in its own accounts, while also holding loans in the private banks equal to the deposits paid out.

      I’m not sure how it is intended to change the way in which banks make loans once they no longer have depositors, as they are a major source of customers for their loan facilities.

      With the Agency model, the banks maintain their role as the retail face for their own customers deposits and loans. They also retain access to the data on their customers that they would lose if all deposits went to the Central Bank.

      As for funding, under Nich’s model, I presume, the banks would simply ask the Central Bank to make additional loans to them, as and when the private bank approves a loan to a new borrower?

      I can see this working, though I would imagine that if the bank got into trouble, the first action would be to call in loans to maintain liquidity, which would penalise borrowers who are not in default.

      This would not be possible under the Agency model.

      My concern with continuing to have the Central Bank make loans to the private banks, is that there could still be a lot of pressure to keep funding the banks if they get into trouble… just like now.

      With the Agency model, the agreement to issue new loans on behalf of the Central Bank would have to start with a clean sheet.

      From the outset it would be clear under the new arrangements that there was no need for rescue, and no rescue would be forthcoming.

      It would be entirely up to directors, auditors and company regulators to ensure the bank complied with its trading responsibilities

      By divorcing the Central Bank from having any role in the viability of the private banks, we can avoid any moral hazard.

      All that said, I would not die in a ditch if everyone went with another model that greatly improved system stability vs what we have now!

      But maybe I misunderstand what you have in mind.

      More likely I’ve not explained it well 😊

      Hopefully, I’ve made it clearer… but if its still cloudy: ask away.

      • paul frijters says:

        Hi Michael,

        thanks for that full reply. I see I indeed did have the wrong interpretation of what you had in mind. You have allayed one set of worries, but of course in doing so created another set of worries.

        Let’s for now leave Nick’s proposal (which is basically similar to one I have been advocating for well over 10 years now) and concentrate on yours.

        Effectively you are saying that the fractional reserve system will remain but then labelled slightly differently, namely with banks being the intermediaries between the central bank and loans. Banks remain the guarantors of liquidity to the ones they borrow from. The main point of having loans with the central bank is then that bank bankruptcy is less disruptive: deposits and loans remain unaffected. So banks are then no longer too big to fail. At least, that is the idea.

        Yet banks still do create money in your system. That then puts the spotlight on how new banks get created and what happens if one goes bankrupt. After all, considering their ability in your system to print money in a direct ratio depending on their assets, the ‘new’ moral hazard is for small groups of investors to create a new bank, print 50 times the money they put in, hide that money and declare themselves bankrupt. The central bank then supposedly has to chase up those loans. So the central bank all of a sudden has a very different role when a bank goes bankrupt: it truly becomes in charge of deposits and loans, needing to deal with potentially millions of people and their problems.

        Now, if you make it easy to have new banks, you get those new moral hazard problems. If you make it tough, you are essentially just making life easier for the existing banks who remain in the cartel that allows them to claim the supposed gains from your proposal.

        Indeed, the existing banks have an incentive to lobby to ensure no new banks arise with loan-access to the central bank. Worse, the loan-access becomes a means of keeping foreign banks out. Access to the central bank loan scheme is thus similar to the government guarantee to deposit holders, with differentiated fees for different banks. We know that did not work well in the GFC.

        So what do you have in mind when it comes to access of foreign and new banks to your central bank loan scheme?

        • Hi Paul. Another long missive… as you raise a number of valid concerns that require a proper response.

          In answering these questions, I don’t mean to imply that you don’t understand what I am saying. I’m simply setting out my own understanding and thinking, so you know better ‘where I am coming from’… and happy to be corrected if I have it wrong

          Effectively you are saying that the fractional reserve system will remain but then labelled slightly differently, namely with banks being the intermediaries between the central bank and loans.

          As I understand, Australia does not have a fractional reserve banking system as such. The Statutory Reserve Deposit (legally mandated reserve ratio) was abolished in 1988.

          Banks are no longer required to keep any specific fraction of their outstanding deposit balance in the form of currency reserves (national banknotes, national treasury bonds and deposits) at the Reserve Bank of Australia.

          Instead of a “fractional reserve” requirement, they have a ‘capital adequacy requirement’.

          Specifically, the bank’s “Tier 1” capital assets (assets which the bank can liquidate if required) have to be above a set fraction, currently 8%, of its risk-weighted credit exposures (ie. loan assets which might not be repaid). There are additional requirements for other “Tier 2” assets (aka junk bonds which, while they might not be readily convertible, can at least absorb the bank’s losses ahead of depositors in the case of a liquidity crisis.

          The “risk-weighted credit exposures” are the bank’s outstanding loans and bonds, each multiplied by a risk factor that is specified by the regulator for each class of loan or security.

          As you know these regulations are guided by the Basel III Accords.

          With the Agency model, these requirements would be simplified so that the total amount of money permitted to be created would by a straight multiple of their net assets.

          The 8% for Tier one converts to about a 12 times ‘capital ratio’ under the Agency model. That is the bank can write up to 12 times its net assets. It can increase its capital by retaining earning earnings or issuing new equity, enabling it to expand its lending.

          Banks remain the guarantors of liquidity to the ones they borrow from.

          I’m not sure what you mean by this.

          Technically, the banks would not be borrowing from the Central Bank. The loans would be made directly by the Central Bank. The process would be managed by the banks.

          This allows the banks to retain their existing business model: hold deposits, run the payments system and make loans – for fees and interest.

          Importantly, it allows them to retain their relations with their existing customers, maintain their current net asset positions, and profits (subject to enhanced competition as processes become more automated)

          The main point of having loans with the central bank is then that bank bankruptcy is less disruptive: deposits and loans remain unaffected. So banks are then no longer too big to fail. At least, that is the idea.

          Yes

          What was not explained in the article is that under the proposal, the banks would need to separate out their ‘traditional bank lending’ from their ‘investment banking’ business, as once was the case!

          This would involve setting up two subsidiaries.

          One whose sole purpose would be to manage the loans and deposits made and held on behalf of the Central Bank (traditional bank), with a separate subsidiary operating their investment arm (investment bank).

          The traditional bank would manage the creation of new money, and record deposits and payments… as Agent for the Central Bank. Which is to say all the loans and deposits would be on the Central Banks books, not on the books of the traditional bank.

          It is as though all our money was cash held in safety deposit boxes at the bank (except in electronic form). The bank would have no legal interest in the money… they would just keep it safe, taking it out of our ‘safety deposit box’ and paying it to any other ‘safety deposit box’ (managed by them or another bank), as we direct.

          They would also issue newly created ‘electronic’ cash to approved borrowers. Again, the cash would not belong to the bank. They would just be the entity doing the due diligence to issue it, on behalf of the Central Bank.

          The traditional banking subsidiary would have its own capital and could even borrow, as with any company. It would be this equity and corporate debt that would be at risk if the bank failed.

          At changeover to the Agency model, the ‘at risk capital’ would be equal to its Net Assets at the time.

          These banking arrangements would form the foundation of our financial system

          As a society, we should be concerned to know that when new money is issued, the ‘portfolio of loans’ should have an ‘overall prudent risk profile’. Otherwise, we would be just ‘throwing money away’ that got spent into the economy in a way that destroyed value, rather than created it.

          Of course, nothing much changes without taking risks.

          Risky ventures would be financed by people who have their own money on the line.

          To satisfy this need, the ‘investment’ arm (in a separate subsidiary) would have to borrow funds in the market for on-lending and investment. All the money would be on its own books. Anyone lending to, or investing in, the ‘investment bank’ would know that their investment was ‘at risk’.

          Most importantly, it would mean that no matter what happens to the investment bank OR the traditional bank, no person, business or government could lose the money they had on deposit, as neither the traditional nor the investment subsidiary would have any legal interest in ‘our money’.

          Yet banks still do create money in your system. That then puts the spotlight on how new banks get created and what happens if one goes bankrupt. After all, considering their ability in your system to print money in a direct ratio depending on their assets, the ‘new’ moral hazard is for small groups of investors to create a new bank, print 50 times the money they put in, hide that money and declare themselves bankrupt.

          As you know, Australian banks are quite heavily regulated by the Australian Prudential Regulatory Authority (which has taken over many of the former regulatory duties of the Reserve Bank of Australia).

          APRA would continue to regulate and monitor (among other things) that the traditional banks were not lending to any parties on inappropriate terms, and to ensure the total of their loans did not exceed the set capital ratio.

          The same oversight would be required even if the Central Bank was making loans direct to citizens, as we would need to be certain that individual bank officers were not ‘making loans to related parties that were not on market terms, with reasonable security and expectation of repayment’.

          The central bank then supposedly has to chase up those loans. So the central bank all of a sudden has a very different role when a bank goes bankrupt: it truly becomes in charge of deposits and loans, needing to deal with potentially millions of people and their problems.

          You’ve picked up another facet I haven’t covered in the article.

          The Central Bank would not chase any defaulting loans.

          While a bank remained viable, ‘chasing defaulters’ would be the bank’s job. If the bank folded, an Administrator would be appointed to do that job, as in any insolvency.

          In any liquidation, the Central Bank would have primary right of recovery – even ahead of the tax dept – for repayment of any principal.

          Any recoveries in excess of the total of the principal of all loans outstanding would be disbursed by the Trustee in accord with normal bankruptcy law.

          Now, if you make it easy to have new banks, you get those new moral hazard problems. If you make it tough, you are essentially just making life easier for the existing banks who remain in the cartel that allows them to claim the supposed gains from your proposal.

          It should be no easier to set up a bank than now.

          The same prudential controls would exist, except there would be no need for a bank to meet specific ‘risk weights’. They would only have to meet the capital ratio. But as earlier noted, all the prudential controls and protections that now exist to protect against bank fraud would remain, with the banks bound by range of laws under Central Bank, APRA and ASIC jurisdiction.

          Indeed, the existing banks have an incentive to lobby to ensure no new banks arise with loan-access to the central bank.

          True, but new fintech are already seeking banking licences. The stable door is open.

          By being proactive and switching to an Agency model, they can gain a (short term) competitive advantage by offering: no deposits at risk, no loans called in early due to bank failure, and the lowest interest rate, as there would be no ‘cost of funds’.

          Access to the central bank loan scheme is thus similar to the government guarantee to deposit holders, with differentiated fees for different banks. We know that did not work well in the GFC.

          I’m not sure where this idea of ‘differentiated fees’ comes from.

          Worse, the loan-access becomes a means of keeping foreign banks out.

          So what do you have in mind when it comes to access of foreign and new banks to your central bank loan scheme?

          Foreign banks would be free to set up an Australian subsidiary which would have to meet the Central Bank, APRA and ASIC regulations, including holding sufficient capital/assets to meet the capital ratio requirements. As with any other licenced bank, the Australian subsidiary would have authority to write loans and hold deposits on behalf of the Central Bank.

          This would be a key benefit for the system compared to now.

          While loans and deposits remain on the books of the banks themselves, due to international inter-bank lending and the forest of regulations in every country, unwinding the failure of any large bank is a nightmare, that can take years, if not decades to complete.

          With the Agency model, the failure of the Australian subsidiary would have zero impact on depositors, or borrowers whose loans were not in default.

          It would also have zero impact on other banks

          The worst that could happen is that an international bank could lose the capital invested in its Australian subsidiary.

          Transactions made in foreign currency would be converted to Central Bank money at the exchange rate when they were made.

          • paul frijters says:

            Hi Michael,

            thanks for that. Yes, I think I get it. I do hear you on the difference between Fractional Reserve and capital adequacy requirements, but its a minimal difference in my view. My comment on the differentiated fees was pertaining to what happened during the GFC, namely that the government asked different fees of different banks in exchange for its deposit guarantee. What you are proposing is effectively a free deposit/loan guarantee to all accredited banks.

            I do think that bankrupt banks would be more of a problem than you seem to think. It would not be like a normal insolvency, because those loans are then not with the commercial banks, but already with the central bank. The day a commercial bank stops operating, all the sh*t of deposits and loans falls on the central bank who will then need a system and a large organisation to deal with those. After all, they are then the custodians of the loans and deposits. It is not about loan ‘recovery’ then, but simply that the bankrupt commercial bank no longer is able to look after the loans and deposits.

            The issue of new banks let into the system also strikes me as even more thorny than it is now, for instance because many more loans are then made to foreign entities. You seem to have faith in the current regulatory financial agencies whilst I have none and regard them as a big part of the problem.

            Anyhow, certainly an interesting proposal. I can see why the current commercial banks might like it. They’d basically get a free deposit guarantee whilst having the existing regulatory system in their clutches to prevent others from benefiting from that opportunity. The supposed systemic benefit seems clearer to me in the UK, where the proposal comes from, then in Australia because the banks here are far richer and have less real competition.

            • I do hear you on the difference between Fractional Reserve and capital adequacy requirements, but its a minimal difference in my view.

              I agree, there is little practical difference.

              My comment on the differentiated fees was pertaining to what happened during the GFC, namely that the government asked different fees of different banks in exchange for its deposit guarantee. What you are proposing is effectively a free deposit/loan guarantee to all accredited banks.

              It is actually the opposite. It removes the guarantee from the banks. The guarantee is instead applied directly to the deposits – because the deposits would not on the bank’s books

              It means that the deposits are protected – NOT the banks

              The banks must guarantee repayment of the loans that they approve TO the Central Bank.

              There would be no obligation on the Central Bank to forgive the loans or fund the bank, nor any need. (see below)

              I do think that bankrupt banks would be more of a problem than you seem to think. It would not be like a normal insolvency, because those loans are then not with the commercial banks, but already with the central bank.

              The fact that the loans are not on the books of the bank actually makes it easier.

              It is like a Real Estate Agent managing a Trust Fund. If the agent goes bust, the Trust continues on under new Administration.

              The day a commercial bank stops operating, all the sh*t of deposits and loans falls on the central bank who will then need a system and a large organisation to deal with those. After all, they are then the custodians of the loans and deposits. It is not about loan ‘recovery’ then, but simply that the bankrupt commercial bank no longer is able to look after the loans and deposits.

              The day the bank goes into formal Administration, there would be no change to the operations of the bank. The Administrator would take control, replacing management. The bank would still have its staff and equipment and systems and depositors, and the borrowers who are making good on their loans. The bank itself would be insolvent, but the Administrator would have access to the whole operation to keep the viable parts of the business going. This is standard practice when any business becomes insolvent but has viable bits that can be sold as a ‘going concern’.

              The issue of new banks let into the system also strikes me as even more thorny than it is now, for instance because many more loans are then made to foreign entities. You seem to have faith in the current regulatory financial agencies whilst I have none and regard them as a big part of the problem.

              Could you be a bit more specific regarding the problems that you see?

              Anyhow, certainly an interesting proposal.

              Thank you. It has been a long time coming. Apart from my full-time job as CEO of a public company, I spent time in the early 1980’s working through many of the ideas. It started when I began digging into the detailed operation of banks and trusts, as the company was at the time the only public company using trusts to shift profits around, and I needed to know how things really worked. Unfortunately, I never got far as the prevailing paradigm seemed to be that banks were merely intermediaries between savers and borrowers. I specifically remember a private meeting where I was savaged by a well-known economist when I suggested that the banks create money when they make loans 😊

              So, I particularly appreciate your engagement, along with Nicholas and Cameron.

              I can see why the current commercial banks might like it. They’d basically get a free deposit guarantee whilst having the existing regulatory system in their clutches to prevent others from benefiting from that opportunity.

              While the banks would get some benefits, I see this as valuable in gaining their support.

              I agree too that there are regulatory barriers that could continue to offer the banks protection from new entrants. Though these are not new, and are coming down as fintechs apply for banking licences.

              As you probably know, a fintech (Xing) recently got a licence. Though they could not make a go of it.,their entry into the market is just the start.

              The banks are going to come under great pressure over coming years from both fintechs and crypto, and just plain old ‘automation’ by competitors.

              T

              he supposed systemic benefit seems clearer to me in the UK, where the proposal comes from, then in Australia because the banks here are far richer and have less real competition.

              Yes, in Australia, there may be less ‘risk’ driving the change than in other jurisdictions. But the proposal is not just for Australia. It could work anywhere.

              For Australian Banks, the best lever to encourage their support for the switch is: ‘improved competitive advantage’ (albeit temporary as more fintechs improve their offerings).

              As you recognise, there is great advantage in being able to offer a product that absolutely protects deposits, not simply ‘guarantees’ them.

              While ‘guarantees’ are good, people know that when things do go bad, there are always those that fall through the cracks. As well, there can be huge delays before you get access to (all) your money in any collapse.

              As noted, being able to offer lower rates (because they would have no ‘cost of funds’), and to be able to assure borrowers that their loans would not be called in early due to any bank failure would be added advantages.

              While I am sure that you are right about the majors, I imagine that the small banks, credit unions and other smaller ‘deposit-taking’ institutions could jump at the chance to get ahead of the competition… which would likely force the majors to come to the party 😊

  6. I am and will always be Not Trampis says:

    If Banks do not make loans to ‘risky’ customers then the economy stalls. Start ups have few places to get funding from other than banks. they can only pursue equity after making it and having a history of sorts.
    Indeed I would argue lending to ‘risky’ ventures is part of their social responsibility.

  7. Do you have data on that? My experience is that it is hard enough to get an extension on an overdraft for an existing business!

    What was not explained in the article is that under the proposal, the banks would need to separate out their ‘traditional bank lending’ from their ‘investment banking’ business, as once was the case! This would involve setting up two subsidiaries. One whose sole purpose would be to manage the loans and deposits made and held on behalf of the Central Bank (traditional bank), with a separate subsidiary operating their investment arm (investment bank).

    The traditional bank would manage the creation of new money, and record deposits and payments… as Agent for the Central Bank. Which is to say all the loans and deposits would be on the Central Banks books, not on the books of the traditional bank.

    It is as though all our money was cash held in safety deposit boxes at the bank. The bank has no legal interest in the money… they just keep it safe and manage it. They also issue newly created cash to approved borrowers. Again, the cash does not belong to the bank. They are just the entity doing the due diligence to issue it.

    As a society, we should be concerned to know that when new money is issued, the ‘portfolio of loans’ should have an overall ‘prudent risk profile’. Otherwise we would be just ‘throwing money away’ that got spent into the economy in a way that destroyed value, rather than created it.

    Of course, nothing changes without taking risks

    Risky ventures would be financed by people who have their own money at risk.

    To satisfy this need, the ‘investment’ arm of would have to borrow funds in the market for on-lending and investment. All the money would be on its own books. Anyone lending to, or investing in, the ‘investment bank’ would know that their investment was ‘at risk’, while any money they had on deposit with the banks ‘traditional arm’ would not be at risk.

    It would mean that no matter what happens to the investment bank OR the traditional bank, no person, business or government could lose the money they had on deposit.

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