There has been an intense academic and policy debate on what monetary architecture is the most appropriate recently, but many issues are still unresolved. This column looks at the circumstances under which the current system and the sovereign money system yield the same outcomes, the core arguments in favour of the current system, and what advantages a sovereign money architecture might offer....Vox.eu
Sovereign money: A challenge for science
Hans Gersbach | Professor at CER-ETH - Center of Economic Research at ETH Zurich and CEPR Research Fellow
28 comments:
“The current system in a nutshell .....To outline the main issues, it is important to recall that the current monetary architecture is built on four pillars (e.g. Faure and Gersbach 2016 ....... Commercial banks face a set of rules such as capital requirements or deposit insurance schemes. However, they are not (or only to a small extent) required to hold central bank money as reserves for their deposits.”
Wrong.
Currently the majors have policy such that reserves are above 1/3 of deposits and 50% of bank loans....
Matt,
Those are the numbers obtained from the 2017 financial report from the 4 major US banks:
- JPMorgan Chase: $ 25,827 in "Cash and due from banks" (bank reserves and other things are included),$ 930,697 in loan assets and $ 1,443,982 in deposit liabilities
- Bank of America: $ 157,434 in "Cash and cash equivalents", $ 936,749 in loan and leases assets, $ 1,309,545 in deposits
- Citigroup (Global Consumer Banking): $ 11,446 in "Cash and deposits with banks", $ 301,729 in loan assets, $ 307,244 in deposits
- Wells Fargo: $ 23,367 in "Cash and due from banks", $ 956,770 in loan assets, and $ 1,335,991 in deposits
Even if you consider that "Cash and due from banks" is fully invested in central bank reserves (which is not the case), the biggest amount of cash relative to loans is in Bank of America (16.8%). The others have less than 5%.
I cannot understand when you claim that bank reserves are maintained at 33% of deposits or 50% of loans...
Total factors are over 4T and deposits are around 9t Iirc.... loans also around 9...
Even just look at the “Cash Assets” portion of total factors of the Fed...
That maxed out at 3t in late 2014 and deposits were at 9 and bank loans were at around 8...
“Cash Assets” have been coming down as Fed reverses the QE policy...
What is it in Europe?
The ECB have been adding 40b per month seems like forever...
“that "Cash and due from banks" is fully invested in central bank reserves ”
It’s not an “investment” it’s set by govt policy...
I don't know what those "total factors" are and what drive them.
But the fact is that major banks hold much less bank reserves than you claim, and are not even required to hold much (either through reserve requirements or Basel LCR and NSFR ratios). So I don't see why Hans Gersbach is wrong in those issues
"It’s not an “investment” it’s set by govt policy..."
Well, I guess that "deposited" would have been a better word. But if reserves are remunerated, it is a kind of investment, compulsory or not...
Well if you look pre GFC they were around 300b then they ran them up to 3t in some months when they caused the GFC and then the following years of malaise... ... and it’s not optional for banks to position them as assets on their balance sheets so it’s required...
And they are regulated via the total Leverage Ratio so banks have to allocate capital against them or the regulators will shut them down...
“But the fact is that major banks hold much less bank reserves than you claim,”
No.... THIS GUY says the % is negligible and I just showed you it can run from 30 to 50% which is NOT negligible...
By “major” I meant the systems of the major economies.... US EZ Japan China U.K. etc...
Asset prices “only “ fell by 40% in the GFC.... would you understand better if they went completely to zero????
I don't have a clue about what you are saying, or those numbers you are throwing. I may be wrong, but they do not seem related to the topic of the discussion.
The guy just said that banks are not required to hold (and do not hold) a big amount of central bank reserves, which is true in US, Japan, China and many other jurisdictions. I guess that less than 5% of loans or deposits can be considered small. 16% (the case of Bank of America) seems big, but probably most of it is not composed of bank reserves.
"And they are regulated via the total Leverage Ratio so banks have to allocate capital against them or the regulators will shut them down..."
You seem to be confusing equity requirements with reserves requirements, if I could understand it right. Because the Leverage Rate is not sensitive to risk, banks need to keep the same % amount of equity for each $ of bank reserves or risky loans. If the Leverage Ratio incentives something, it is to reduce low risk exposures like bank reserves...
I really couldn't understand anything you said about the GFC or those trillions you are talking about...
https://mikenormaneconomics.blogspot.com/2017/08/william-nelson-setting-record-straight.html
We use TWO regulatory ratios...
Whichever one is HIGHER becomes operative... which depends on asset composition .... which is not under the complete control of the depositories...
Here from the link:
"Bank capital requirements come in two basic types. Risk-based capital requirements require banks to hold more capital for riskier assets and less capital for low-risk assets. Leverage ratio requirements require banks to hold the same amount of capital for any type of asset, regardless of its risk. Commercial banks in the United States have been required to satisfy a leverage ratio requirement since 1981"
Run the numbers...
Checkmate:
https://mikenormaneconomics.blogspot.com/2017/04/deposit-effects-on-bank-leverage-ratio.html
"We use TWO regulatory ratios..."
Never say we didn't. Actually, there are 4 equity ratios based on risk weighted or non-risk weighted assets (Core Capital, Tier I, Basel Ratio and Leverage Ratio), 2 liquidity ratios (LCR and NSFR) and the reserve requirements. Don't know what those informations add to the discussion.
Usually central bank reserves and local gov bonds receive a zero risk weighted equity requirement. So banks could deposit/invest any amount without concerns about equity requirements - they have to consider only proftability aspects. With the introduciton of the Leverage Ratio, however, even bank reserves and local gov bonds require equity, so either banks REDUCE the amount of bank reserves and local gov bonds or RISE equity if they are not already compliant. However, it is a much smaller equity requirement than the risk-weighted ones.
"Checkmate: https://mikenormaneconomics.blogspot.com/2017/04/deposit-effects-on-bank-leverage-ratio.html"
"Most banks simply manage this volatility by staying well above the current leverage ratio requirements. That is, they are generally over-capitalized."
Over-capitalized in terms of capital (equity), not liquidity or bank reserves. Banks do not hold much bank reserves, as I showed you with some balancesheets, the most direct way of doing it. I guess you are confusing equity with bank reserves. Banks do hold a lot of equity because of equity requirement ratios, but that doesn't mean that they hold a lot of liquidity or bank reserves.
Bank reserves (an asset), liquidity levels (liquid assets) and equity are all distinct concepts. A bank may have a lot of one while holding a little of the others.
"However, it is a much smaller equity requirement than the risk-weighted ones."
What is it?
Give me the number...
"so either banks REDUCE the amount of bank reserves"
Yo, the CBs ADD to the amount of bank reserves as policy... ever hear of "QE"?
How can banks REDUCE the amount of bank reserves, if the CB has a policy to INCREASE them????
The CB controls the amount of Reserves in the system...
MMT: "to do a reserve drain you first have to do a reserve add..."
So you are saying MMT is FOS in this here???
Govt cant add reserves FIRST?????
Here:
https://www.bnymellon.com/_global-assets/pdf/our-thinking/arriving-at-new-capital-ratios.pdf
" As part of the “enhanced” SLR, the 8 US G-SIBs must meet a 5% SLR at the holding company level and a 6% SLR at the bank level. Banks also must hold a cushion above this 6% to account for volatility."
So SLR is somewhere ABOVE 6%...
Here:
https://en.wikipedia.org/wiki/Basel_III
"The original Basel III rule from 2010 required banks to fund themselves with 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets (RWAs)."
Basel 3 was never implemented ... So the risk weighted ratio is 2%...
So you are saying 2% is higher than 6% ?????
SLR is 6%.... OF TOTAL assets...
RWA is 2% of just risk assets...
So somehow you are coming up with 0.02x > 0.06y where y > x
You better check your math brother....
"Give me the number..."
In US, the Leverage Ratio requires banks to hold equity of at least 4% of non-risk weighted assets, and the Basel Ratio requires banks to hold equity of at least 10.5% of risk-weighted assets. For many banks, the Basel Ratio is the binding requiriment, but I'm not from US and I don't know whether this is a general situation or not. If a bank is a GSIB, both requirements are higher.
Matt, I'm sorry, but you clearly don't know what you are talking about capital ratios. I mean, this is very basic, elementary stuff, you just need to search it anywhere and you will find quickly all the answers...
And worse, you are making the rookie mistake of confusing capital (equity) with liquidity. Holding capital is not the same thing as holding liquid assets. They are very distinct concepts.
Actually, I'm really surprised, because you are a person that is following MMT for a long time, many years at least, and you are the one who always claim that art majors are the ones who don't pay attention to this stuff and make this sort of mistake...
Find me the reference where RWA is 10%... just post the link here this should not be hard for you...
Ive posted references you've posted none... I suspect somebody probably told you this and you are simply memorizing it and repeating it... you have no references here...
Basel Accords have never been adopted... stop referring to them they are not in force... what is in force? Cite your reference...
The SLR of in excess of 6% is in force Ive cited the reference above...
Here is from JPMs 3rd quarter report:
"Basel III common equity Tier 1 capital of $185 billion and ratio of 12.0%
Firm SLR of 6.5%"
https://www.jpmorganchase.com/corporate/investor-relations/document/e453a609-15bd-819d-fcfac560994d.pdf
What are the numerators and denominators? capital is in the numerator and is 185b...
Based on JPMs stated capital of 185b and 12% risk weighting, this puts their total risk assets at 1.54T...
Same capital of 185b is 6.5% of total assets via the SLR...
so total assets is 2.85T... which means total assets - risk assets is 2.85T - 1.54T = 1.31T
They have 1.31T of non risk assets including probably $100Bs of USD reserves... this amount is not negligible..
Total US system currently has about 2T of reserve assets at the depositories this is down from 3T...
Here is the latest H.8
https://www.federalreserve.gov/releases/h8/current/
total assets in the system are 14.6T ... line item 32 is "Cash Assets" or deposits at the Central Bank and it is at 2T... down from 3T. ... at present 2 of 14.6 it is 13.7% ..
From here back in 2014:
https://www.federalreserve.gov/releases/h8/20141031/
Cash assets were at 3T while total assets were 15T so 20% back then...
Take your pick, 13% today or 20% back then, these % of non-risk reserve assets are not negligible percentages...
Lets look at start of 2008:
https://www.federalreserve.gov/releases/h8/20080104/
Cash Assets of 314b with total assets of 11T
so 2.8% which might be considered negligible for back then...but policy changed starting in Sept 2008 and $trillions of reserve assets were added to bank balance sheets...
Its not a choice for banks...
Reserves and more broadly non-risk assets are set by the government and are currently the asset category that is controlling/regulating bank behavior and have been for quite a while...
Once they fully reverse this policy and they perhaps drop back down to 2% then this guys assertion that these non-risk assets are negligible might be an accurate statement...
But it is not now...
"you are the one who always claim that art majors are the ones who don't pay attention to this stuff and make this sort of mistake..."
An Art major might probably think 20% of total assets (having quickly moved up from 2%) was negligible... or might not really understand percentages in general...
Never trained...
"Ive posted references you've posted none... I suspect somebody probably told you this and you are simply memorizing it and repeating it... you have no references here..."
No, I currently work in a bank with that. (but not in US)
"Basel Accords have never been adopted... stop referring to them they are not in force... what is in force? Cite your reference..."
Of course they are in force. Look at the reference you gave me (JPMorgan):
"The Basel III regulatory capital, risk-weighted assets and capital ratios (which become fully phased-in effective January 1, 2019), and the Basel III supplementary leverage ratio (“SLR”) (which was fully phased-in effective January 1, 2018), are all considered key regulatory capital measures. The capital adequacy of the Firm is evaluated against the Basel III approach (Standardized or Advanced) that results, for each quarter, in the lower ratio (...) For additional information on these measures, including the Collins Floor, see Capital Risk Management on pages
82-91 of the Firm’s Annual Report on Form 10-K for the year ended December 31, 2017"
Then, if you follow the instructions and go to the 2017 Annual Report, you see, in page 85, a graph with the CET1 Ratio (one of the four equity ratios), and you also have a table in page 86. It is not a well organized report, but you see the four equity ratio requirements in the table: CET1: 6.5%, Tier I: 8.0%, Basel Ratio: 10.0%, Leverage Ratio: 6.0%.
There are the regulatory requirements, that are not clear in the report (don't know why), and JPMorgan is a GSIB, so they are higher. Just the CET1 is made clear in the report, and it is currently 9% for CET1.
However, ALL this talk about equity ratio is completely unrelated to the claim you made about central bank reserves. I don't even know why we are discussing it. And I will not waste my time discussing it anymore, you seem to be creating some distraction to avoid the main issue.
Central bank reserves are (liquid) assets in a bank balance sheet, and they are at the left side (assets) of the balance sheet statement. Equity, on the other hand, is, by definition, the residual claim on bank assets after liabilities were paid, or equity = assets - liabilities, and it is shown on the bottom of the right side of the balance sheet statement. You are confusing one with the other. All those things we are discussing are about equity requirements, and not about bank reserves requirements or anything. A bank can have its equity invested in anything, including loans. It doesn't need to (and do not) invest all its equity in bank reserves.
You claimed that "Currently the majors have policy such that reserves are above 1/3 of deposits and 50% of bank loans...."
This is clearly wrong. JP Morgan itself holds way less reserves than that. It has a lot of EQUITY, but just a few BANK RESERVES, can you see? You are obviously thinking that those things are the same, but they are not.
You should take some accounting 101 classes, that would help
Just an observation: there are a few, rare times when the data is extremely straightforward and with zero noise, and it can be immediately used to support or reject some claim.
We are discussing one of those rare cases. The balance sheet data is what proves whether the claim "major banks hold 30% or more of central bank reserves to loans ratio" is correct or not.
You just need to go to the financial statements of major banks (like I did), go to the balance sheet statement page and see with your own eyes that central bank reserves holdings (which is in the asset side, usually grouped in "cash") are much less than loans or deposits.
There is no use in getting any other numbers, like some sort of consolidate monetary amount. You would just be distracting yourself.
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