Englund

 That central traditional trick of banks — that they fund themselves with safe short-term demand deposits, and use depositors’ money to invest in risky longer-term loans, with all of the run risk and regulatory supervision and It’s a Wonderful Life-ness that that involves — would you recreate that if you were starting over? Plenty of people — insurance companies, retirement savers — want to earn a return on their money and don’t need it anytime soon; their money can be locked up in long-term loans.  The money that people keep in the bank just to pay rent and buy sandwiches doesn’t need to be pooled and invested in risky loans; it should just sit in the vault. This idea — that bank deposits should just sit in the vault (or, realistically, in electronic money at the Federal Reserve), while risky loans should be funded by long-term investors who intend to take those risks — is sometimes called “narrow banking.”  All those crises! The traditional business of banking is necess...

There’s a better way to ensure lenders can always pay their depositors. Such events can and should be a thing of the past, but this will require significant changes in the way the Federal Reserve backstops the banking system. Some of the weaknesses revealed in last year’s demise of Silicon Valley Bank can be addressed within the existing regulatory regime.   The threat of bank runs, however, remains a big problem.  The SVB debacle demonstrated that in the age of banking apps and social media, uninsured deposits can flee at an extremely fast pace — far faster that what’s assumed in the prevailing liquidity rules, which are supposed to ensure that banks have enough cash on hand to survive 30 days of worst-case withdrawals. There’s a better way.  The Fed already backstops banks, standing ready to provide emergency loans against good collateral. To improve this “lender of last resort” function, it should require banks to pledge in advance enough collateral to cover all o...

 FRANCES COPPOLA 29 MAJ 2023 https://coppolacomment.substack.com/p/why-full-reserve-banking-isnt-a-solution So when a bank whose liabilities consist mainly of deposits withdrawable on demand suffers a bank run, it can literally run out of money. Its ability to “create money” doesn’t help it. It can’t bootstrap its own liquidity. This is what happened to Signature Bank NY. On Friday 10th March, $18.6 billion in deposits fled from the bank Coppola Comment 9 May 2023 https://englundmacro.blogspot.com/2023/05/the-job-of-banks-is-to-make-illiquid.html

Waiting until there is a crisis and then deploying ad hoc measures is not good enough Fifteen years ago, the collapse of the western banking system led to the adoption of thousands of pages of complex regulations. Yet here we are in the middle of another crisis of confidence in banks. Banks are inherently fragile — they transform short-term and safe funding into long-term and risky lending. This is the alchemy of the banking system.  The provision of free insurance after the fact is also an incentive to take excessive risks, which leads to ever larger fires. Governments and central banks must answer two questions. First, which institutions should have access to liquidity from central banks?  Second, how can we limit the scale of central bank provision of liquidity in a crisis to avoid taxpayer-financed bailouts?  The basic principle is that banks should always have a contingent credit line from the central bank to cover runnable liabilities. Each bank would decide how muc...

 When a bank lends, it creates new liquidity for the borrower, accepting in return an illiquid asset such as real estate or an intangible asset such as a credit score. This process of making illiquid things liquid is what we mean when we say “banks create deposits when they lend”. The deposit created as a result of lending is real money as far as the borrower is concerned: it can be drawn in the form of banknotes, transferred to another account, or paid out in return for goods and services. It is indistinguishable from money the borrower deposits in their account. But as far as the bank is concerned, deposits are merely an accounting record, not a means of settlement. Banks create deposits, but they can’t create the liquidity needed to enable those deposits to be drawn.  So when a bank whose liabilities consist mainly of deposits withdrawable on demand suffers a bank run, it can literally run out of money. Its ability to “create money” doesn’t help it. It can’t bootstrap its o...

 Mervyn King vågar inte bara säga att kejsaren är naken – han visar dessutom hur och varför Att driva bank är att vifta med ett trollspö. Illusionstricket är att bankens kunder kan ta ut sina pengar när de vill. Det kan de inte När allt brakade samman 2008 hade de ledande internationella bankerna fördubblats i storlek på fem år och finansierade 98 procent av sina delvis värdelösa tillgångar genom lån. Bankernas kontantinsats – huvudsakligen aktieägarpengar – heter kapitaltäckning men fungerar likadant. Det är den som ska täcka förlusterna om tillgångarna sjunker i värde. Regeringar och centralbanker tvingades ingripa i exempellös omfattning. ”Västvärlden byggde helt enkelt ett extremt osäkert banksystem”, skriver King. Han vet. Han var chefsekonom på Storbritanniens centralbank under 1990-talet samt dess chef mellan 2003 och 2013. Det är dessa realiteter Financial Times mångårige ekonomikommentator Martin Wolf syftar på när han skriver att det internationella banksystemet är ”byggt...

 It has been one of the ideas often proposed since the 2008 financial crisis, under the name of narrow banking. It’s a idea I don’t buy, as I’ll explain. Under the international Basel standards, a bank must be able to pay out at least 3% of retail deposits if they are fully insured Different countries’ regulators often impose higher outflow expectations than these minimums. Maybe they could lift them a touch further, but this is all shifting proverbial deckchairs / https://en.wiktionary.org/wiki/rearrange_the_deck_chairs_on_the_Titanic / Liquidity rules only protect banks against fluctuations in customers’ needs for liquidity caused by economic or financial stresses outside a bank. Bank runs are totally different beasts: A run is a panic that — whether or not it had a rational cause — will almost certainly be ruinous. And typically happens much faster than 30 days! The only way to guarantee no run is to force banks to match all deposits with assets that have cash-like qualities: Fo...