Tag Archives: Inside money

SNB Rejects Vollgeld and Questions ‘Reserves for All’

In the NZZ, Peter Fischer reports that SNB president Thomas Jordan rejects the Vollgeld initiative and stops short of endorsing the ‘reserves for all’ proposal.

… wehrt sich die Nationalbank auch gegen Vorschläge aus akademischen Kreisen, die von der Nationalbank fordern, nicht mehr nur Banken, sondern auch direkt den Schweizer Bürgern elektronisches Zentralbankgeld zur Verfügung zu stellen. Am einfachsten ginge dies, wenn jedermann bei der SNB ein Konto halten könnte. Jordan warnt davor, dass in einem solchen Fall die bewährte Arbeitsteilung zwischen Privatsektor und Zentralbank zur Disposition stünde. Die Fähigkeit der Banken, Kredite zu vergeben und Fristentransformation zu betreiben, würde eingeschränkt. Das Finanzsystem würde als Ganzes nicht sicherer, sondern unter Umständen sogar stärker destabilisiert, wenn es allen Anlegern möglich wäre, nach Belieben plötzlich in Sichtguthaben bei der Zentralbank zu flüchten. Zudem müsste die SNB etwa bei der Überprüfung der Kunden und ihrer Gelder neu Funktionen übernehmen, die sie bei den Banken besser aufgehoben sieht.

Allerdings konzediert auch Jordan, dass sich die technologischen Möglichkeiten im Bereich des digitalen Geldes rasant weiterentwickeln. Das hat das Potenzial, Zahlungssysteme und die Art, wie die Zentralbank ihre Geldpolitik betreiben kann, zu verändern. Jordan hielt in seiner Rede dazu lediglich fest, die SNB verfolge die Entwicklungen aufmerksam. Noch sind Kryptowährungen zu wenig verbreitet, um aus Sicht der Nationalbank ein ernsthaftes Problem darzustellen. Der E-Franken muss warten.

It is correct that ‘reserves for all’ could increase the elasticity of demand for reserves; if unchecked, this could also increase the risk of bank runs. But the central bank would not have to interact with the general public. And the fact that monetary reform would change the banking business is no decisive argument against such a change.

For my columns on the topic, select the ‘reserves for all’ tag.

Update: The text of Thomas Jordan’s speech, with references to NZZ articles of mine (1, 2).

On 100%-Equity Financed Banks

On his blog, John Cochrane argues that banks could, and should be 100% equity financed. His points are:

(1) There are plenty of safe assets—government debt—out there and banks do not need to “create” additional safe assets—deposits.

I share this view partly. First, I don’t know what amount of safe assets are sufficient from a social point of view. Second, I don’t consider government debt to be a safe asset. Third, debt has safety and liquidity properties. The question is not only whether assets/liabilities provide sufficient safety but also whether they serve as means of payment in the same way that base money and deposits do. The key question then is: Do we need inside money? I don’t think that macroeconomics has a convincing answer to this question at this point. But I note that some preeminent macroeconomists (NK) argue that banks can create means of payment better than some governments. If this is true then John’s first argument partly misses the point (although he addresses a related point later).

In spite of these reservations, I share John’s view that in the aggregate, safety cannot be created by means of financial intermediation. Projects and claims to future tax revenue generate returns. The financial system can slice and distribute these returns in different ways (creating safer claims by rendering other claims less safe) but it cannot create safety in the aggregate.

(2) Households and firms no longer need assets (i.e., liabilities of financial institutions) with a fixed nominal value in order to make payments.

I agree. As John writes:

In the past, the only way that a security could be “liquid” is if it promised a fixed payment. You couldn’t walk in to a drugstore in 1935, or 1965, and trade an S&P500 index share for a candy bar. Now you can. (And as soon as it is cleared by blockchain, it will be even faster and cheaper than credit cards.) There is no reason your debit card cannot be linked to an asset whose value floats over time.

(3) If society really needs more “safe” claims such claims can be created on banks rather than in banks. As John writes:

Let the banks issue 100% equity. Then, let most of that equity be held by a mutual fund, ETF, or bank holding company, and let those issue deposits, long term debt, and a small amount of additional equity. Now I have “transformed” risky assets into riskfree debt via leverage. But the leverage is outside the bank.

I agree. In an article (2013) I have described a proposal by BIS economists that relies on equity financed banks and levered bank holding companies to help solve the too-big-to-fail problem.

(4) Why should less “safe” bank liabilities lead to a credit crunch?

I share John’s puzzlement with the often heard claim that fewer bank deposits would go hand in hand with less credit. I believe that this claim mostly reflects confusion about the interplay between national saving and investment on the one hand, and bank balance sheets on the other. There is no mechanical link between the two but of course, there are many indirect links.

All in all, I am as skeptical as John about the view that bank created money obviously is important. I think that bank created money has some useful roles to play but they are more subtle. At the same time, I believe that bank created money is likely to stay with us even if it is not socially useful. Proposals to ban inside money therefore are unlikely to succeed (see my writing on Vollgeld).