Sunday, 11 November 2012

Positive Money 2

Positive Money 2

"Do we need a Clarity in Banking commission (CBC)?"

A major flaw in our British (and American) financial systems is that credit has been offered recklessly to "sub-prime" borrowers. Bankers do this because it brings them reward without penalty (from the consequent debt default). Three remedies suggest themselves: (1) Control or limit the ability of banks to offer credit; (2) restore the penalties for bad lending by allowing bank crashes; (3) decrease or remove the incentive for excessive lending. Most of the talk in the media has been about the Vickers Report's "Ring Fencing", or separating (somehow) what they call the "High Street" side of the business from the "Casino" or Investment banking. (Vince Cable is said to favour ring fencing.) However, not enough detail and no clear mechanism has yet emerged [Lovegrove, Out-law.com]. (What assets are inside, what outside the fence? To whom do the assets belong? What ratio  of capital/assets is suggested — 10% or 20%? How high is the fence? How can a "high street" bank be legally and financially independent from its "parent bank"? We cannot even stop "independent" banks from mutual back-scratching!)  Positive Money (PM) is a pressure group advocating a reform of the banking system in this country. Together, Richard Werner, the New Economics Foundation, and Positive Money have prepared a lucid and comprehensive submission [Ref.1] to the Independent Commission on Banking that would meet two of these three remedies. Their submission advocates a clear separation of the two types of banking; considerably more drastic and more clearly thought through than the Vickers white paper.

Two aspects of the Positive Money case against the present banking system cause considerable surprise: (1) the fact that 97% of our purchasing power (M4 or broad money) is virtual money not backed by real deposits and is created out of nothing, at the whim of the commercial banks, and (2) that the money we deposit in our bank is not our money, it becomes the banks' money and its product belongs to the bank. Of course, the banks are contracted to give it back on demand (with or without a notice period); but, while they have it, they can choose where they invest it. In the scheme developed in the Submission, the money in a customer's 'Transaction' (c.f. current) account remains the customer's money, it is 100% backed by real Bank of England deposits, it cannot be lent out, and it bears no interest.

The money that a customer wishes to bear interest they transfer to an 'Investment' account, whereupon it ceases to be their money, for a period. If customers wished all their spare money to bear interest, this system would not differ greatly from the present system. However, should a commercial bank find itself in difficulties with assets less than liabilities, it does not need (on this reformed scheme) interbank lending in order to honour cheques drawn on the Transaction accounts for they are all 100% backed. It is true that it might not be able to pay back all its customers' "invested" money, but investors would soon learn what fraction of their money to keep safe, and what fraction to lend out at interest. Such a 'bad' bank would lose customers, but could be allowed to fail; the day-to-day operations of the transaction account (shopping and receiving wages) could continue. The bank would not need a bailout. If a bank did go bust, it cannot lose the assets in the Transaction accounts, because they were never in the hands of the bank but were deposited with the Bank of England; in 24 hours these assets could be made available via an alternative bank.

This seems to me to be a real ring fence that separates high-street from casino banking. The Vickers' ring fence seems partial, the change in reserve ratio from 3% to 10% (or 20%) should certainly add some stability, while reducing 3-fold (or 7-fold) the amount of assets the bank could play with; but it is a half measure, and it leave the deposited money in the hands of the bank — as at present.

The remaining approach to reforming the banking system would be to tackle the question of the motivation of the commercial banks. Banks exist to take deposits, to make loans and to employ staff, not solely to maximise profit on shareholder capital. The customer wants a bank that can offer throughout the country the full range of online, telephone, and counter services and hole-in-the-wall dispensers. If a 'better' bank were to emerge on the high street that offered 100% reserve banking, would customers flock to join? Only (I suspect) if it offered all the rest as well, which means either a very big bank or some (enforced) co-operation between banks.

Also, but separate, there is a demand for small domestic loans, mortgage loans for house-purchase, and advice on investment and insurance. It is unfortunately clear that banking staff are not morally equipped to give impartial advice, any more than doctors are when their income depends on their advice; we have scandal after scandal about mis-selling of insurance, hidden commission, etc. We learnt on a recent Radio 4 "Bottom Line" [2] that Danish banks are better than ours at clarity, and that Dutch pensions yield 50% more than British pensions because of the lower commissions taken in the Netherlands.

Perhaps the country needs a Clarity in Banking Commission (CBC), something easily accessible like OFCOM, where complaints and queries are pooled and advice give. A better informed public would then force down fees, and force up quality.

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References:

[1] http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

[2] http://www.bbc.co.uk/programmes/b006sz6t

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