Tag Archives: Bank

David Graeber’s “Debt”

Goodreads rating 4.19.

Graeber’s book contains many interesting historical observations but lacks a concise argument to convince a brainwashed neoclassical economist looking for coherent arguments on money and debt. After 60 pages, 340 more seemed too much.

Chapter one:

… the central question of this book: What, precisely, does it man to say that our sense of morality and justice is reduced to the language of a business deal? What does it mean when we reduce moral obligations to debts? … debt, unlike any other form of obligation, can be precisely quantified. … to become simple, cold, and impersonal … transferable.

… money’s capacity to turn morality into a matter of impersonal arithmetic—and by doing so, to justify things that would otherwise seem outrageous or obscene. … the violence and the quantification—are intimately linked. … the threat of violence, turns human relations into mathematics.

…The United States was one of the last countries in the world to adopt a law of bankruptcy: despite the fact that in 1787, the Constitution specifically charged the new government with creating one, all attempts were rejected, or quickly reversed, on “moral grounds” until 1898.

… historically, credit money comes first [before bullion, coins]

… ages of virtual credit money almost invariably involve the creation of institutions designed to prevent everything going haywire—to stop the lenders from teaming up with bureaucrats and politicians to squeeze everybody dry … by the creation of institutions designed to protect debtors. The new age of credit money we are in seems to have started precisely backwards. It began with the creation of global institutions like the IMF designed to protect not debtors, but creditors.

… the book begins by attempting to puncture a series of myths—not only the Myth of Barter … but also rival myths about primordial debts to the gods, or to the state … Historical reality reveals [that the state and the market] have always been intertwined. … all these misconceptions … tend to reduce all human relations to exchange … [but] the very principle of exchange emerged largely as an effect of violence … the real origins of money are to be found in crime and recompense, war and slavery, honor, debt, and redemption. … an actual history of the last five thousand years of debt and credit, with its great alternations between ages of virtual and physical money …

… many of Adam Smith’s most famous arguments appear to have been cribbed from the works of free market theorists from medieval Persia …

Chapter two (“The Myth of Barter”) contains questionable claims about economics as well as interesting historical facts (or claims?):

When economists speak of the origins of money … debt is always something of an afterthought. First comes barter, then money; credit only develops later. …

Barter … was carried out between people who might otherwise be enemies …

… “truck and barter”’ [in many languages] literally meant ”to trick, bamboozle, or rip off.”

What we now call virtual money came first. Coins came much later, … never completely replacing credit systems. Barter, in turn, … has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency.

Chapter three (“Primordial Debts”) argues the the myth of barter is central to the discourse of economics, which according to Graeber downplays the state as opposed to markets, exchange, and individual choice. He tries to confront this view with Alfred Mitchell-Innes’ credit theory of money, Georg Friedrich Knapp’s state theory of money, the Wizard of Oz (i.e. “ounce”), and John Maynard Keynes (original?) claim that banks create money.

In all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt,” illustrating the links between religion, payment and the mediation of the sacred and profane realms by “money.” [money-Geld, sacrifice-Geild, tax-Gild, guilt]

Wikipedia article on the book:

A major argument of the book is that the imprecise, informal, community-building indebtedness of “human economies” is only replaced by mathematically precise, firmly enforced debts through the introduction of violence, usually state-sponsored violence in some form of military or police.

A second major argument of the book is that, contrary to standard accounts of the history of money, debt is probably the oldest means of trade, with cash and barter transactions being later developments.

Debt, the book argues, has typically retained its primacy, with cash and barter usually limited to situations of low trust involving strangers or those not considered credit-worthy. Graeber proposes that the second argument follows from the first; that, in his words, “markets are founded and usually maintained by systematic state violence”, though he goes on to show how “in the absence of such violence, they… can even come to be seen as the very basis of freedom and autonomy”.

Reception of the book was mixed, with praise for Graeber’s sweeping scope from earliest recorded history to the present; but others raised doubts about the accuracy of some statements in Debt, as outlined below in the section on “critical reception”.

 

“Digitales Notenbankgeld – und nun? (CBDC—What Next?),” FuW, 2021

Finanz und Wirtschaft, December 8, 2021. PDF.

  • I draw some conclusions from the CEPR eBook on CBDC, namely:
  • Banks will change, whatever happens to CBDC.
  • The main risk of retail CBDC is not bank disintermediation.
  • CBDC may not be the best option even if it has net benefits.
  • It should be for parliaments and voters, not central banks, to decide about the introduction of CBDC.

“Reserves for All: Political Rather Than Macroeconomic Risks,” CEPR, 2021

Chapter 5 in the CEPR eBook, November 24, 2021. HTML.

From the conclusion:

From a macroeconomic perspective, central banks can largely neutralise the consequences of CBDC. What is highly uncertain, however, is whether they would choose to do so – the political risks of ‘Reserves for All’ are first-order. The decision for or against CBDC thus should not only reflect the assessment of economic trade-offs, but also whether societies are confident in their ability to efficiently manage conflicts of interest. If not, and if they fear that the introduction of CBDC could further politicise banking and central banking, then the introduction of CBDC might constitute a risky regime change. It will be interesting to see how different [countries] judge this risk.

German Banks Send Mixed Signals on Digital Euro

In the FAZ, Christian Siedenbiedel reports that Deutsche Bank questions whether a digital Euro as envisioned by the ECB (i.e., with tight quantity restrictions) would be successful:

Die Argumentation geht so: Die EZB will den digitalen Euro einführen, um auf den verstärkten Währungswettbewerb zu antworten. … Um sich vor solchem Machtverlust sowohl durch Digitalgeld von anderen Notenbanken („Krypto-Dollars“) als auch durch privates Digitalgeld („Global Stable Coins“) zu schützen, treibe die EZB den Digitaleuro voran. Also aus längerfristigen politischen Motiven. Dabei sei unklar, ob der digitale Euro sich international am Markt durchsetzen könne und ob die Menschen in der Eurozone dafür überhaupt Bedarf hätten. “Das Design des digitalen Euros, soweit bisher bekannt, lässt erwarten, dass die potentiellen Nutzer kaum einen Unterschied zu bestehenden Bezahloptionen erkennen werden”.

Update: From the dbresearch document prepared by Heike Mai:

Lifting the limits on how much each user can hold would change the situation entirely, allowing a massive outflow of bank deposits into the digital euro. As a result, lending decisions and money creation would shift from the decentralised, privately owned banking sector to a central, state-run authority: the ECB. In this case, Europe would face the fundamental question of which type of monetary and financial system it wants. The answer to that would have to come from democratically elected representatives.

The German Banking Industry Committee sees a central role for the digital Euro, however, according to a new paper:

In a policy paper, the German Banking Industry Committee (GBIC) for the first time sets out detailed thoughts on the design of a “digital euro”. In this paper, experts from Germany’s five national banking associations draw up an ecosystem of innovative forms of money that extends far beyond the idea of digitalised central bank money, which is referred to as Central Bank Digital Currency (CBDC). The ECB will probably launch the project for a digital euro in mid-July 2021.

“To be successful, the digital euro must do three things: It must be as easy for consumers to handle as cash. It must be viable in the long term for business enterprises, e.g. for automated machine-to-machine payments. And the digital euro must be well embedded in our delicately balanced, carefully secured and highly regulated European financial system because this system guarantees safe and fair access to financial and banking services for everyone in Europe”, notes Dr Joachim Schmalzl, executive member of the Board of Management of the German Savings Bank Association (DSGV), which is currently the lead coordinator for the German Banking Industry Committee.

In the opinion of the experts from Germany’s five national banking associations, issuing money should remain the responsibility of credit institutions in the proven two-tier banking system [my emphasis], even if the digital euro becomes legal tender like cash. For this reason, the ecosystem of digital money which they propose is made up of three key elements:

  • retail CBDC for private use
  • wholesale CBDC for commercial and savings banks
  • tokenised commercial bank money for use in industry

Retail CBDC issued by the central bank is to be used by private individuals in the euro area in the same way as cash for everyday payments, e.g. to retailers or government agencies. It should be possible to use the digital euro like cash, anonymously and offline. For this purpose, credit institutions will provide consumers in Europe with “CBDC wallets”, i.e. electronic wallets.

Wholesale CBDC issued by the central bank is to be used for the capital markets and interbank transfers. The GBIC’s experts are calling for this special form of the digital euro partly because, by adopting this approach, the ECB would be able to include further digitalisation of central bank accounts in its project. The ultimate aim is to achieve improvements which can benefit consumers, enterprises and also the banking sector.

Tokenised commercial bank money, which will be made available by commercial and savings banks, is to complement the two forms of digital central bank money, in particular to meet corporate demand arising from Industry 4.0 and the Internet of Things. Tokenised commercial bank money could facilitate transactions based on “smart” – i.e. automated – contracts and thus increase process efficiency.

“Increasing process digitalisation and automation will provide completely new opportunities for Europe’s enterprises. The banking sector is ready to provide new solutions for its corporate customers by issuing innovative forms of money. The ECB must define the necessary framework that will enable Europe’s banking sector and real economy to make reasonable use of the new opportunities”, Joachim Schmalzl observed on behalf of the GBIC.

I share the skepticism of DB research. And I can understand that banks prefer to maintain the two-tiered system while pushing for broader and more efficient payment options for their business clients.

Swiss Bankers Association on CBDC

In a new working paper the Swiss Bankers Association identifies challenges for banks. Nevertheless it argues that

[a]ny conclusion that the status quo is the least risky option seems premature and shortsighted.

The introduction of digital currencies and design questions regarding payment methods and infrastructure represent strategic business as well as political challenges on which public authorities and business must take a productive position. An informed discussion on the design and implementation of digital currencies is essential. It is time for the general public to consider these issues and drive the opinion-forming process.

Banks’ Response to Reserve Tiering

In a CEPR discussion paper, Andreas Fuster, Tan Schelling, and Pascal Towbin analyze how banks respond to changes in the threshold level above which reserves held at the central bank are charged negative interest:

… exploiting an unexpected decision by the Swiss National Bank in September 2019 to change the threshold calculation without taking any other policy actions. This change led to a large increase in overall exemptions, but with variation across banks. Using a difference-in-differences approach, we find that banks that experience a larger increase in their exemption threshold tend to raise their SNB sight deposit holdings, funded through more interbank borrowing and more customer deposits. The interbank market is important for the funding choice: banks with low collateral holdings (a proxy for market access) use less interbank borrowing and instead grow their customer deposits; they also pass on negative rates on a smaller share of their deposits. Effects on bank lending behavior are moderate; if anything, banks that benefit from a larger increase in the exemption threshold tend to charge higher spreads and take less risk.

“Money Creation, Bank Profits, and CBDC,” VoxEU, 2021

VoxEU, February 5, 2021. HTML.

Based on CEPR DP 15457, I assess possible implications of the introduction of retail CBDC for bank profits. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.

“Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics,” CEPR, 2020

CEPR Discussion Paper 15457, November 2020. PDF (local copy).

We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with “pseudo wedges” and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.

“Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence,” IJCB, 2020

International Journal of Central Banking. PDF.

This paper offers a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public hold electronic central bank money and transact with it. I propose an equivalence result according to which a marginal substitution of outside money (e.g., RFA) for inside money (e.g., deposits) does not affect macroeconomic outcomes. I identify key conditions for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate the analysis to common arguments found in discussions on RFA and point to inconsistencies and open questions.

“Digital Finance,” FuW, 2020

Finanz und Wirtschaft, January 4, 2020. PDF.

  • Finance has been digital for decades. And both technology and preferences are only changing gradually. So, what triggers the abrupt changes in business models that we currently observe?
  • The interaction between industry on the one hand and legislators and regulators on the other has changed. New entrants exploit synergies across areas that have so far been regulated by independent authorities, or not at all. While entrants think and act outside the box, regulators and legislators have not yet been able to catch up.
  • Digital finance poses new challenges, including for financial stability, national security, and consumer protection (digital literacy).

“Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence,” IJCB

Accepted for publication in the International Journal of Central Banking. PDF.

This paper offers a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public hold electronic central bank money and transact with it. I propose an equivalence result according to which a marginal substitution of outside money (e.g., RFA) for inside money (e.g., deposits) does not affect macroeconomic outcomes. I identify key conditions for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate the analysis to common arguments found in discussions on RFA and point to inconsistencies and open questions.

Europe’s Response to the US-Iran Sanctions: Accounting Rather than Banking

On Spiegel online, Christoph Schult reports about “Instrument in Support of Trade Exchanges” (Instex), the new special purpose vehicle founded by France, Germany, and the UK with the task to facilitate legitimate trade with Iran. Instex is not meant to bust US sanctions, but to circumvent the banking sector which the the three countries perceive as “overcomplying.”

Eigentlich dürfen europäische Unternehmen alle Waren, die nicht den Sanktionen unterliegen, weiter in den Iran exportieren. Problem ist allerdings, dass fast alle Banken in Europa ablehnen, den Zahlungsverkehr für solche Geschäfte abzuwickeln. Die Geldinstitute haben Angst, sie könnten in den USA bestraft werden. “Overcompliance” von Sanktionen nennen das EU-Diplomaten – Übererfüllung.

Instex ist eine Art Tauschbörse, in der die Forderungen von iranischen und europäischen Unternehmen miteinander verrechnet werden. Geld, das Iran zum Beispiel für Öllieferungen nach Europa in Rechnung stellt, könnte direkt an europäische Firmen fließen, die Produkte nach Iran verkaufen.

Update (Feb 4): In the FT, Michael Peel discusses the SPV.

“Reserves For All? …” on Several SSRN Top Ten Lists

My July 2018 CEPR working paper “Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence” has made it on several SSRN top ten lists. PDF. (Personal copy.)

Abstract: I offer a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.

“Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-Equivalence,” CEPR, 2018

CEPR Discussion Paper 13065, July 2018. PDF. (Personal copy.)

I offer a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.

Cost Pressure Flattens Bank Hierarchies

In the NZZ, Daniel Imwinkelried reports about the effect of cost pressure on the organizational structure of banks: fewer layers of control.

So bestand das Schweizer Privatkundengeschäft der Credit Suisse (CS) bis vor kurzem aus drei Ebenen, nämlich zehn Regionen, den Marktgebieten und den Teams. Die mittlere Stufe wurde abgeschafft, die ehemaligen Chefs mussten die Bank verlassen oder erhielten eine neue Aufgabe. Im Schweizer Privatkundengeschäft der CS kamen einst im Durchschnitt auf einen Vorgesetzten 4,2 Mitarbeiter; nun strebt die Bank ein Verhältnis von 1 zu 7 an. Damit ziele man auf eine schlagkräftigere Führung, sagte jüngst Serge Fehr, der Leiter des Privatkundenbereichs, an einem Anlass.

 

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).

Money and Credit in Germany

In its April 2017 Quarterly Report, the Deutsche Bundesbank discusses the role of banks in the creation of money. Findings from a wavelet analysis indicate that in Germany, money and credit move in parallel in the long run.

In an appendix, the report mentions possible welfare costs of curbing maturity transformation, with reference to Diamond and Dybvig’s work. This is not convincing. Unlike in the typical (microeconomic) banking model, aggregate central bank provided money need not be scarce, so there is no a priori social need for the private sector to create money.

Macroeconomic Effects of Bank Solvency vs. Liquidity

In a CEPR discussion paper, Òscar Jordà, Björn Richter, Moritz Schularick, and Alan M. Taylor suggest that higher bank capital ratios help stabilize the financial system ex post but not ex ante, and that illiquidity breeds fragility.

Abstract of their paper:

Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies between 1870 and 2013 and for the post-WW2 period, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets in 17 countries. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.

`Brussels’ to Disrupt European Banking

The Economist reports that forthcoming European payments regulation has the potential to disrupt the industry.

Provided the customer has given explicit consent, banks will be forced to share customer-account information with licensed financial-services providers.

… payment services … could become more integrated into the internet-browsing experience …

With access to account data … fintech firms could offer customers budgeting advice, or guide them towards higher-interest savings accounts or cheaper mortgages. Those with limited credit histories may find it easier to borrow, too, since richer transaction data should mean more sophisticated credit checks.

On the Performance of Swiss Portfolio Managers

In the NZZ, Michael Schaefer reports on a study about the performance of Swiss portfolio managers in 2016.

  • The median portfolio returns in all investment strategies except those not investing in stocks fell short of the corresponding benchmark returns.
  • Only a fifth of the portfolios generated returns in excess of their benchmark.
  • These numbers do not yet account for management fees.
  • No portfolio manager generated high returns across all strategies.
  • But some managers consistently generate high returns in certain strategies.

“Vollgeld, the Blockchain, and the Future of the Monetary System”

Presentation at the Liechtenstein Institute about the Vollgeld initiative, the blockchain revolution, and their possible effects on banks and the monetary system.

Report in Liechtensteiner Vaterland, February 1, 2017. HTML.

Interview in Wirtschaft Regional, February 4, 2017. PDF.

The Early Bank of England and its Contemporaries

In the Journal of Economic Literature, William Roberds reviews Christine Desan’s “Making Money: Coin, Currency, and the Coming of Capitalism” and he provides his own perspective on European monetary history.

… the transition of the Bank of England’s notes from the status of experimental debt securities (in 1694) to “as good as gold” (1833) required more than a century of legal accommodation and business comfort with their use.

Desan emphasizes England’s traditions of nominalism (as opposed to metallism) and monetary restraint as well as early experiments in monetary substitution in laying the foundations for the Bank of England’s success. Lobbying played its role, too.

Roberds discusses the experience of note issuing institutions in other countries.

At the time of the Bank’s founding, there were about twenty-five publicly owned or sponsored banks operating in Europe. These institutions are largely forgotten today; most were dissolved by the early nineteenth century and only one continues in existence, Sweden’s Riksbank. …

These banks were run by and for the merchant communities in their respective cities [Amsterdam, Genoa, Hamburg, and Venice] … The existence of the early municipal banks depended on a form of nominalism more extreme than what prevailed in contemporary England. Merchants in these “banking cities” were required by law and by custom to settle all bills of exchange (the dominant form of commercial credit) with transfers of money on the ledgers of the local public bank. The practical advantage of such a restriction was that it reduced or eliminated the possibility of settlement in the debased coins … the municipal banks’ ledger money was often seen as more reliable than the typical coin in circulation …

Most of these banks failed after getting involved in speculative episodes, hyperinflation, or political turmoil. The Bank of England was lucky.