NEF-Southampton-Positive-Money-ICB-Submission

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of bank lending and hence money supply." -‐ Bank of England Quarterly BulleGn 2007 Q3, p383 "The money-‐creaGng sector in the United Kingdom consists of resident banks (including the Bank of England) and building socieGes" – Bank of England Quarterly BulleGn 2007 Q3, p405 By failing to update the 1844 Bank Charter Act to cover the creaGon of ‘digital money’ in the form of bank deposits, control over the naGon’s money supply has shiped from the state to the private banking sector. An illusion of control is given via the Bank of England’s seung of interest rates, but as has been seen over the last decade, this is a very ineffecGve method of control. APPENDIX 2: How Full-‐Reserve Banking Increases Stability Within Each Bank Full-‐reserve banks would be significantly more stable than fracGonal reserve banks. Instability within fracGonal reserve banks comes from the fact that the majority of the bank’s customers can demand repayment at any Gme from any accounts that do not have maturity dates or noGce periods. This could result in the bank being required to pay back huge sums of money in a short period of Gme, making the bank effecGvely insolvent. The banks try to guard against this by keeping back reserves, but they conGnually walk a knife-‐edge between keeping reserves high enough to cover the maximum likely net withdrawals, and keeping them as low as possible in order to free money up for making further loans (to maximise profits). The post-‐reform situaGon is much more stable. The stability arises from the fact that the funds a bank uses to make loans are now ‘locked in’ – customers can no longer demand them back whenever they choose. As a result, the bank knows: 1.What it will need to repay to customers who have made investments, and when. 2.What it will receive from borrowers making repayments on their loans, and when. <strong>Money</strong> withdrawn from TransacGon Accounts does not affect the bank’s solvency in any way, as the money is stored in full at the Bank of England, and therefore doesn’t need to be ‘found’ from anywhere when it has to be repaid. Since all the investment funds that will be used by the bank come from Investment Accounts, and every Investment Account has a defined repayment date (or minimum noGce period), the amounts that the bank will need to repay on any one day will be staGsGcally many Gmes more predictable than under the current system. For Investment Accounts with maturity dates, a bank will know the exact amount that must be repaid on any parGcular date, and will also know, from experience, what percentage of customers with maturing accounts will ask for the investment to be rolled over for another period (in other words, what percentage of accounts will not need to be repaid on the maturity date). With regards to minimum noGce periods, a bank will know the staGsGcal likelihood of an account being redeemed within the next ‘x’ days, and so will be able to forecast the payments that will come due on any parGcular day for up to 6-‐12 months into the future. In addiGon, because a bank has, on its assets side of the balance sheet, a collecGon of contracts with specified monthly repayment dates and amounts, it knows almost exactly how much money it will receive on any parGcular date up to 6-‐12 months in the future 32
(allowing for a small degree of variaGon due to defaults and late payments). Consequently, the bank’s computer systems will be able to easily calculate how much money should be required on any parGcular day up to 12 months into the future. If it idenGfies any potenGal cashflow problems (such as a large number of Investment Accounts maturing in a short period of Gme and insufficient income from loan repayments to cover them all) the bank can rein in loan-‐making acGvity unGl it has built up a buffer to cover the upcoming shoryall. On the other hand, if the cashflow forecasts idenGfy a period when repayments from exisGng borrowers are in excess of the amounts required to repay Investment Account holders, it can increase loan making acGvity to ensure that it does not end up with a swelling Investment Pool Account full of ‘idle’ funds. This degree of forward planning and predictability is impossible within the current fracGonal reserve banking system. It should be noted that there are sGll risks of a ‘slow-‐moGon bank run’ with full-‐reserve banking. For instance, rumours of a bank’s insolvency may cause all customers with minimum noGce period Investment Accounts to serve their minimum noGce period and withdraw their funds at the earliest opportunity. However, considering that all demand liabiliGes are now held off the balance sheet and are not backed by risky assets, the impact of this slow-‐moGon bank run would be very manageable in contrast to a run on fracGonal reserve banks, and would be unlikely to pose any threat to the wider financial system, in contrast to a run (or ‘silent run’ 21 ) on any fracGonal reserve bank. APPENDIX 3: Investment Account Guarantees Under the exisGng system, if a bank fails due to bad investments, a third party (the taxpayer) will reimburse the savers who had money invested with that bank. This creates a few serious flaws or ‘distorGons’ in the economic system: 1. It means that the banks can gamble with their customers’ money in the knowledge that the government will step in to cover any serious losses. This creates ‘moral hazard’ and encourages the banks to take greater risks in their investments. 2. It means that one group stands to benefit if the bank is successful in its investments, while another group (taxpayers) stands to lose if the bank is unsuccessful. The government-‐backed guarantee on funds in any UK bank account means that bank account customers do not need to pay any aOenGon to the acGviGes of the bank that they choose to invest with. If customers bear at least some of the risk of the investment, it should encourage them to be more vocal in how the banks invest their money – maybe expressing concern that large sums of money go into risky proprietary trading, or requesGng accounts where the money is ring-‐fenced for certain types of investment. Our proposal contains a few simple rules that collecGvely ‘fix’ these fundamental problems in the current design of the banking system. PracGcally, it works as follows: 1. A bank has the opGon of offering Investment Account holders a guarantee that they will be repaid a 21 A ‘silent run’ occurs where, in contrast to a panicked a:empt of depositors to withdraw money as soon as possible, investors and lenders to the bank simply choose not to rollover or renew their lending to the bank. For a bank relying on short term wholesale funding, this can be fatal. 33
Page 1 and 2: TOWARDS A TWENTY-‐FIRST CENTURY
Page 3 and 4: Contents ExecuGve Summary..........
Page 5 and 6: Aper a few minor changes to the res
Page 7 and 8: Part I: Full-‐reserve banking -
Page 9 and 10: The Loan Making Process: Within the
Page 11 and 12: Making the Decision to Change the M
Page 13 and 14: In contrast, under full-‐reserv
Page 15 and 16: Minimum DisrupPon for Members of th
Page 17 and 18: Benefits of Full-‐Reserve Banki
Page 19 and 20: of the naGon, with a significant an
Page 21 and 22: which then encourages people to tak
Page 23 and 24: educing the income and purchasing p
Page 25 and 26: Part III: Addressing Common Misconc
Page 27 and 28: of 8.2% p.a. (a total increase over
Page 29 and 30: Those individuals (bank staff) and
Page 31: APPENDIX 1: How We Got Here - The 1
Page 35 and 36: effecGvely risk-‐free. These Gu
Page 37 and 38: This means that the ship to full-
Page 39: Werner R., A (2009) Can Credit Unio

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