tag:blogger.com,1999:blog-6704573462403312459.post5619943067505870671..comments2024-03-29T02:53:03.321-04:00Comments on Moneyness: Central banks deposits for you and meJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger23125tag:blogger.com,1999:blog-6704573462403312459.post-76707513887991328912016-08-19T18:18:37.224-04:002016-08-19T18:18:37.224-04:00New Zealand financial journalism & politicians...New Zealand financial journalism & politicians have been bamboozled by nonsense talk about the moral hazard of deposit guarantees & we now a sort of discretionary bail-in operated by the Reserve Bank of New Zealand (that may be internationally favoured amongst bankers?). I think the Green Party has in the past included deposit guarantee in its policy manifesto. The underlying problem is that finanancial/fiscal literacy is discouraged (politically expensive since for example the talk is all about 'sound money' govt surpluses). And this is further complicated by the neocon revolution in the 1980/90s that dominates the way regulation & govt spending is now discussed in media & political channels. There is still fiscal common sense amongst some but the big media herd is still lead by loud voices that can be relied upon to shout 'Zimbabwe' at the right time. Anonymoushttps://www.blogger.com/profile/12072111230113935984noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2809490449455040512016-08-17T07:27:52.964-04:002016-08-17T07:27:52.964-04:00Canada is a perfect example - OSFI has reviewed an...Canada is a perfect example - OSFI has reviewed and where necessary guided the liquidity management practices of the Canadian banks very closely for decades - including quantitative limits on the "gapping" of duration profiles as between assets and liabilities. The Chicago Plan proposals just extract one piece of that puzzle, essentially removing it from what is already an active management process across the continuum of all liability and asset categories.<br /><br />By "arrangement", I was referring to a situation where depositors have a choice as between commercial bank accounts and central bank accounts. I'm not quite sure how that would work, including deposit insurance arrangements. <br /><br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-30266447601019422952016-08-15T09:21:22.669-04:002016-08-15T09:21:22.669-04:00Odd. Definitely sounds like Freddie and Fannie.
M...Odd. Definitely sounds like Freddie and Fannie.<br /><br />My understanding is that New Zealand doesn't have deposit insurance for regular banks, although it did during the crisis? How do New Zealanders deal with this?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-33750097746607305362016-08-15T00:52:12.735-04:002016-08-15T00:52:12.735-04:00Thanks for pointing this out, I had missed this. ...Thanks for pointing this out, I had missed this. Right now Kiwibank is 100% owned by NZ Post but the plan is to sell 20% to the state superannuation fund and another 40% to the state insurance collective. Hard to believe that the NZ government wouldn't stand behind any of these 3 institutions in a crisis - kind of like the Fannie and Freddie here. But you are right the guarantee is now implicit rather than explicit.Kevin Coldironhttps://www.blogger.com/profile/06775802737390923866noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-77382461937913030782016-08-14T22:32:45.256-04:002016-08-14T22:32:45.256-04:00Aha, I see.
So in essence, if you get a Chicago ...Aha, I see. <br /><br />So in essence, if you get a Chicago plan, potential bank runs will simply shift to the next longest duration, say 2-days. Interesting.<br /><br />"Chicago Plan type proposals are oblivious to the existence already of regulatory regimes, which while they may be imperfect and evolving, look fairly closely at this issue of asset liability matching for liquidity purposes."<br /><br />Any examples?<br /><br />"Although I'm not sure what such an arrangement achieves."<br /><br />The rough idea is that if everyone can keep an account at the central bank, then the state can do away with deposit insurance and all the moral hazard that comes with it. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-19530270809175326072016-08-13T18:13:07.763-04:002016-08-13T18:13:07.763-04:00If commercial banks continue to issue demand depos...If commercial banks continue to issue demand deposits in parallel with a central bank facility, my observation/objection is somewhat moot. Although I'm not sure what such an arrangement achieves.<br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-18099201060929954512016-08-13T18:06:18.288-04:002016-08-13T18:06:18.288-04:00I mean the problem with an assumption that prohibi...I mean the problem with an assumption that prohibiting commercial banks from issuing demand deposits is an efficient or effective solution to the problem of bank runs.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-69918246738716942012016-08-13T17:59:33.552-04:002016-08-13T17:59:33.552-04:00I see what you mean. I agree about your point abou...I see what you mean. I agree about your point about bank runs.<br /><br />A 0% rate on deposits would act a bit like a hurdle (like the BoE of old use to implement), since non-interest bearing liabilities aren't as good as interest-bearing ones.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-30215710078724579272016-08-13T17:56:55.727-04:002016-08-13T17:56:55.727-04:00"The problem with all this..."
Can you ..."The problem with all this..."<br /><br />Can you be more specific? Do you mean, the problem with giving regular people access to the central bank balance sheet?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-4677060093678125152016-08-13T17:11:01.028-04:002016-08-13T17:11:01.028-04:00Requesting forgiveness in advance for this hastily...Requesting forgiveness in advance for this hastily conceived abstraction:<br /><br />The problem with all this is the general assumption that the problem with bank runs is binary with respect to demand deposit liquidity. It is not. The range of liquidity characteristics across bank balance sheets is too complex – including that of bank assets. The assumption that migrating demand deposits to the central bank clears away the potential problem must assume for example that there will never be a liquidity problem with a fixed (i.e. non-demand) deposit with either an original or remaining term of 2 days. And that assumption means that there can never be a fixed deposit with an original or remaining term of 2 days that isn’t perfectly matched by cash flow to the same sized asset with an original or remaining term of 2 days. And so on. This is hopelessly naïve with respect to the general issue of bank asset-liability management, since it assumes that the liquidity characteristics of assets will be made predictable in the most simplistic and archaic sense. That is not the world we live in. This sort of thinking virtually outlaws the existence of optionality on asset liquidity, which is quite ridiculous in the sense of the kind of flexibility borrowers generally desire with respect to accelerating or extending the terms on which they can repay their debt. Chicago Plan type proposals are oblivious to the existence already of regulatory regimes, which while they may be imperfect and evolving, look fairly closely at this issue of asset liability matching for liquidity purposes. The problem of demand deposits is part of a continuum that includes 2 day fixed, 3 day fixed, ... bond, and equity liquidity characteristics. It is a mistake to conclude that this challenge can be resolved by outlawing in a binary way the existence of demand deposits on commercial bank balance sheets.<br /><br />JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-51529727059763124102016-08-13T15:45:58.855-04:002016-08-13T15:45:58.855-04:00Kevin, are you sure they are guaranteed?
http://w...Kevin, are you sure they are guaranteed?<br /><br />http://www.interest.co.nz/opinion/80951/bernard-hickey-says-quiet-removal-guarantee-kiwibank-savers-should-remind-all-saversJP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-53046103839365032292016-08-13T15:43:48.856-04:002016-08-13T15:43:48.856-04:00Hi Torgeir,
What I meant by that is only that the...Hi Torgeir,<br /><br />What I meant by that is only that the practice of funding themselves with demand deposits could come to an end, or at least be curtailed. My usage of 'fractional banking' may have been imprecise.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-19142284509690478872016-08-12T15:32:07.334-04:002016-08-12T15:32:07.334-04:00Kiwibank in New Zealand is an interesting example....Kiwibank in New Zealand is an interesting example. Its deposits are 100% guaranteed by NZ Post Ltd, which in turn is 100% owned by the NZ government. It does offer other products that are not guaranteed, so it's kind of a hybrid. But then again - aren't all banks that have some sort of deposit insurance similar? Kevin Coldironhttps://www.blogger.com/profile/06775802737390923866noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-34083006670528670852016-08-12T12:12:21.444-04:002016-08-12T12:12:21.444-04:00Sorry, maybe 'hurdle' is a Germanism in th...Sorry, maybe 'hurdle' is a Germanism in this context. I meant that if you have say 100'000 in an account it's unlikely you'll literally cash out unless you know something really bad is about to happen. If all it takes is a login to an online banking account, then that could be easily done. One could do it every evening before going to bed. Volatility between bank and CB money would be much higher (unless credibly backstopped by 100% deposit insurance - but then that's what the full reserves folks don't want, iirc). Olivernoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-5743878010298380702016-08-12T10:29:31.391-04:002016-08-12T10:29:31.391-04:00What do you mean by hurdle? As in, people would fa...What do you mean by hurdle? As in, people would face limitations in the quantity of central bank deposits they would be allowed to hold?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-1828983571439971442016-08-12T09:40:43.339-04:002016-08-12T09:40:43.339-04:00Just opened it. Very pertinent. Will give it a ful...Just opened it. Very pertinent. Will give it a full read this week, thanks.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-57496039148558816442016-08-12T09:27:21.510-04:002016-08-12T09:27:21.510-04:00Thanks for another interesting post. Your knowledg...Thanks for another interesting post. Your knowledge of the nuts and bolts of banking and money are impressive. You mention that an open central bank balance sheet is the end of “fractional banking”. The ability to demand deposits with the central bank, would surely severely curtail commercial banks` ability to raise funds through. Hence, as you say, they will have to rely on equity and other debt instruments than demand deposits. So their business model would change. But do you mean when you say that this is the end of “fractional banking”? Do you refer to, what I though was long discredited, theories about how a single commercial bank or the commercial banking system as a whole can create purchasing power “out of thin air” by creating demand deposits as a multiple of the banks demand deposits in the central bank? I know that such theories of banking thrive on the fringes of mainstream monetary theory, and I also am aware of that some economists at the Bank of England have begun to subscribe to a variant of them The Bank of England Quarterly Bulletin 2014 Q1. Is it “fractionally” in this sense you refer to? Anonymoushttps://www.blogger.com/profile/06879218265946459754noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-33717650295027052282016-08-12T09:18:24.148-04:002016-08-12T09:18:24.148-04:00Interesting. What happens to the price level throu...Interesting. What happens to the price level through all of this?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-5648864604367099242016-08-12T09:11:51.361-04:002016-08-12T09:11:51.361-04:00It's an interesting point. As you point out th...It's an interesting point. As you point out there's a lot of duplication among banks in terms of payments, and having all transactions done on the books of the central bank might cut costs from a society-wide perspective.<br /><br />I suppose we could also say the same for the grocery business; every grocer has their own redundant systems like distribution and wholesale buying, so why not just have the state take care of it. The decline in food choice and competition among grocers would be worrisome, and I wonder how much of these worries would translate into turning payments into a government-run monopoly. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-62901009540695135722016-08-12T05:05:01.255-04:002016-08-12T05:05:01.255-04:00Good post! I think if I had to devise a strategy, ...Good post! I think if I had to devise a strategy, I'd probably hold 2 accounts but keep my money mainly at a commercial bank until there was a reason not to. In aggregate that would translate into a greater risk of bank runs. So maybe from a stability point if view a higher hurdle between commercial bank and CB liabilities is a good thing?Olivernoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27335003272918672752016-08-11T08:20:05.609-04:002016-08-11T08:20:05.609-04:00I offered a fairly comprehensive model based on th...I offered a fairly comprehensive model based on this idea of competitive neutrality between banks and their customers in accessing the facilities of the central bank <a href="http://www.nesta.org.uk/publications/central-banking-all-modest-case-radical-reform" rel="nofollow">here</a>.Nicholas Gruenhttps://www.blogger.com/profile/08979019731787830666noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-62422233772819952912016-08-11T05:56:42.303-04:002016-08-11T05:56:42.303-04:00"Demand for bank deposits falling to zero, ba..."Demand for bank deposits falling to zero, banks will have to fund their loans to the public with regular bonds or equity, even as payments are re-routed through the books of the central bank."<br /><br />Again the problem can be solved, as my linked post shows:<br /><br />"The lending banks we need are the ones that can lend development capital effectively and stick to doing just that. If we are to have private lending banks, then they need to be able to make a decent profit doing development capital lending.<br /><br />The way I would narrow banks is to offer them an incentive - an unlimited cost free overdraft at the Bank of England. 0% funding costs. In return they must drop all the side businesses and just do capital development lending on an uncollateralised basis - probably in the form of simple overdrafts. In other words they become an agency businesses delivering state money to those that require it.<br /><br />I'm not even sure a capital buffer is required here. Losing your lending licence if your underwriting isn't that good should be sufficient incentive to run a tight ship. Backing off the entire thing to the central bank reduces the barriers to entry in lending - making self-employed, highly dispersed and, importantly, locally focussed underwriters a possibility (the 'Provi Model').<br /><br />Any lending businesses that doesn't want to take the oath, then has to fully fund their lending on a maturity matched basis Zopa style. No deposit insurance, no access to the Bank of England, and losses absorbed by those doing the lending. This then becomes the fate of the shadow banking system - the building societies and money funds.<br /><br />So that sets state funded lending against fully match-funded lending in competitive tension. State funding will likely be conservative but actually injects extra net financial assets into the non-government sector economy. Fully funded lending is just patient man helping impatient man for a fee in return for the risk.<br /><br />Now narrowing banking in any way will put the cost of lending up markedly - particularly if you de-collateralise to get away from asset bubble spirals. With the current level of loans that is likely to cause fun and games. So you have to get the total amount of lending down at the same time as the narrowing is put in place.<br /><br />Probably the quickest way to do that is via a debt jubilee, where everybody gets a set amount of money from the state to set against a loan. That way loan amounts, property values and the level of lending all go down at the same time, and those currently without loans get the cash as compensation for loss of asset value."<br /><br />Personally IMV Helicopter Money/Basic Income is preferable to a debt jubilee, so there I disagree with the author.Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-4775814516385275412016-08-11T05:45:00.741-04:002016-08-11T05:45:00.741-04:00Good post JPK. What is your view on this post:
ht...Good post JPK. What is your view on this post:<br /><br />http://www.3spoken.co.uk/2013/05/making-banks-work.html<br /><br />One thing it mentions is that the transaction system is a massive cost overhead to banks:<br /><br />"Every bank has a unique system, they are fundamental incompatible and that means the duplication between banks is colossal. I've done quite a bit of work on bank transaction systems over the years and the scale dis-economies are quite spectacular. And so they follow management fads - like outsourcing and offshoring - that do little more that shuffle the costs around the business. The failure of the RBS transaction system is a case in point": (links to here)<br /><br />http://www.theregister.co.uk/2012/06/25/rbs_natwest_what_went_wrong/<br /><br />Goes on to say:<br /><br />"There are lots of ways of designing a mutual transaction system. But at its core is one concept - that transactions operate on the balance sheet of the central bank, not the individual banks. So you would have a Transaction Department at the Bank of England (alongside the Issue and Banking Departments) and current and savings account ultimately represent liabilities on that balance sheet.<br /><br />The functional aspects are less important - existing bank accounts could be held in trust by the current banks, run as separate subsidiaries companies and a myriad of different other options. But the key point is that the operational entity is acting as agent and the legal ownership and responsibility is always at the central bank. That makes anything recorded in the transaction system exactly the same as holding cash. You have a receipt for liabilities at the central bank."Randomhttps://www.blogger.com/profile/04445772572707818311noreply@blogger.com