Tim Wallace — Core of banking could be destroyed by blockchain, says Barclays’ former boss

New technology such as artificial intelligence and blockchain will utterly shake up the fundamental principles of banking, challenging the entire industry according to former Barclays chief Antony Jenkins.

He believes the innovation in finance could eliminate the need for maturity transformation – the process by which short-term deposits, such as current accounts and instant access savings, fund long-term loans including mortgages.

That is a fundamental principle of the industry as banks can offer a low interest rate to savers while charging more to borrowers, profiting from the gap between the two rates. Yet in 10 to 20 years’ time, he believes the need for banks to perform the function might no longer exist – already some investors are sidestepping banks by using websites to match borrowers and savers directly.…

The Telegraph
Core of banking could be destroyed by blockchain, says Barclays’ former boss
Tim Wallace

circuit — Stiglitz on credit creation by banks

For those who think that Joseph Stiglitz doesn't know that banks actually create credit…. 

Fictional Reserve Barking

Stiglitz on credit creation by banks
circuit

Steve Keen — Note To Joe Stiglitz: Banks Originate, Not Intermediate, And That’s Why Aggregate Demand Is Stuffed

Steve Keen schools Joe Stiglitz on how banks work.

Joe correctly notes that “the world faces a deficiency of aggregate demand”, and attributes this to both “growing inequality and a mindless wave of fiscal austerity”, neither of which I dispute. But then he adds that part of the problem is that “our banks … are not fit to fulfill their purpose” because “they have failed in their essential function of intermediation”….

I’m the last one to defend banks, but here Joe is quite wrong: the banks have very good reasons not to “fulfil their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”, and they have every reason not to originate right now.

In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.…

Not all economists are operating under wrong model bias, however.

For decades now, a handful of rebel economists have been disputing this—including me of course, but going back to Irving Fisher and even earlier, and including modern non-mainstream economists like Stephanie Kelton (who now advises Bernie Sanders), and University of Southampton Professor Richard Werner. Oh, and a guy named Hyman Minsky too, whom the mainstream ignored until the 2008 crisis. But the mainstream ignored us before the crisis, and continues to ignore us after it, because their “banks as intermediaries” model tells them that we are just spouting nonsense.

We’re not, of course: the ordinary public tends to get that, and even The Bank of England has come out and said that it’s the mainstream that is spouting nonsense, not the rebels. But the mainstream rejects our analysis out of hand, because their model tells them that it’s OK to do so.

This wouldn’t matter if we could ignore the mainstream of the economics profession, but we can’t, because they are the key individuals who influence the economic policies that are actually put in place by politicians.

Forbes
Note To Joe Stiglitz: Banks Originate, Not Intermediate, And That’s Why Aggregate Demand Is Stuffed
Steve Keen | Professor and Head Of School Of Economics, History & Politics, Kingston University, London

Leonid Bershidsky — What If Banks Didn't Create Money?

What passes for analysis at Bloomberg View.

Bloomberg View
What If Banks Didn't Create Money?
Leonid Bershidsky

Zoltan Jakab and Michael Kumhof — Banks are not loanable-funds intermediaries: Macroeconomic implications

Problems in the banking sector played a seriously damaging role in the Great Recession. In fact, they continue to. This column argues that macroeconomic models were unable to explain the interaction between banks and the macro economy. The problem lies with thinking that banks create loans out of existing resources. Instead, they create new money in the form of loans. Macroeconomists need to reflect this in their models.

VoxEU
Banks are not loanable-funds intermediaries: Macroeconomic implications

Zoltan Jakab, Senior Economist at the Research Department, IMF, and Michael Kumhof, Senior Research Advisor at the Research Hub, Bank of England

Ralph Musgrave — Loans create deposits? Not in one sense of the word “loan”

Ralph makes an important point here. Krugman's claim has been the banks don't create new money when they make loans. They just intermediate old money among savers and borrowers. The endogenous money view, embraced by the BOE paper, is that bank lending creates new money "out of nothing" in the sense that old money is not transferred from saver to borrower. The loan as new bank asset creates a customer deposit as a new bank liability. The aggregate assets and liabilities of the banking system rise in total. This is reflecting in an increase in broad money, that is, M1, independently of base money. If more base money is needed to meet reserve requirements, then the central bank accommodates by buying government securities. This should be a simple and obvious point but apparently some smart people have missed it.

Ralphonomics

Loans create deposits? Not in one sense of the word “loan”
Ralph Musgrave

Winterspeak — A Bank is still not a financial intermediary: redux

Winterspeak responds to JKH's recent elaboration of a previous discussion of Paul Krugman's assertion that banks are not special based on his reading of Tobin-Brainard 1963. That reading is contested by some.It is significant in that it reveals how Krugman's idea of endogenous money compares to heterodox views that he contests. However, in the course of it a lot of information is coming out about bank operations that is of interest, especially in the discussion in the comments.


A Bank is still not a financial intermediary: redux

Winterspeak

The question hangs on the interpretation of "intermediary." In the broad sense, an intermediary is an agent that facilitates a relationship between principles, usually for a professional fee, like a matchmaker. But this is not the only use of intermediary and banks are usually considered financial intermediaries even though they do not lend out deposit but rather fund their loans with a combination of capital and borrowing from various sources only part of which includes deposits.

The difference with banks is that their primary function is risk management rather than intermediation in the sense of savings and loan institutions and credit unions, for instance, that actually lend out deposits that they take in. The argument is not so much about this kind of intermediation, since banks are clearly special cases in that they have access to borrowing in the interbank payment system not only from other banks but also from the central bank.

Banks lend against capital and fund their assets resulting from loans by borrowing from a variety of sources, other banks, depositors and the money market. In extending credit, banks don't just receive interest as a fee for matching borrower and lender. Banks actively participate in the creation of flow, not only by arranging for existing funds to be lent, but also by adding to deposits, thereby generating a flow that increases the money stock through expansion of M1. As Neil Wilson notes in a comment at Winterspeak's, this necessitates dynamic analysis of flow rather than static analysis of stock. Other intermediaries free up existing funds to generate flow while banks create flow "out of thin air" by creating deposits and only afterward obtaining matching funding in order to balance accounts.

The question is whether this makes a difference that makes the special case of banks special economically. The fact that banks lent imprudently to borrowers who were not creditworthy based on dodgy collateral would argue that banks are indeed specially economically in generating financial instability, as Minsky hypothesized. Yet, shadow banking was also heavily involved in the crisis, which would argue against banks alone being special in this sense. However, many of the shadow banking institutions were owned and controlled by banks and were used to by banks to increase leverage beyond that which regulation allowed.

Randy Wray — Krugman Rediscovers the Wheel: Commercial Banks As Creators of Money

I hope Paul Krugman will move on to a 21st century understanding of banking. 

Economonitor — Great Leap Forward
Krugman Rediscovers the Wheel: Commercial Banks As Creators of Money
L. Randall Wray | Professor of Economics, UMKC