The European Tribune is a forum for thoughtful dialogue of European and international issues. You are invited to post comments and your own articles.
Please REGISTER to post.
The two functions were the deposit of capital (which is primary), and the ability to extend credit (which is secondary).
The deposit of capital financial assets is irrelevant, except as a regulatory measure. If push comes to shove, SertaBank can work perfectly fine for that.
The central, absolutely vital, cannot-be-missed function of the banking system in an industrial production economy is the clearing of payments.
Certainly, not being able to trust ordinary on-demand accounts is a problem. Partly it is a political problem of ordinary people's money going poof. But that part is easily solved by printing physical tokens to replace the virtual tokens (this would cause a bank run, but that's another story...). A far bigger problem is that on-demand accounts are used to clear retail transactions. If they break down overnight, ordinary people cease to be liquid. That Is Not Good.
Taking deposits, extending credit and all that jazz is only interesting on the medium term - you can survive without credit for a month or two. You cannot survive without liquidity for a month or two.
So the payment clearing system must be protected at almost any cost. The credit creation system, OTOH, can in principle be allowed to burn to the ground (although that is probably not desirable in most cases...).
Friends come and go. Enemies accumulate.
Effectively some of it is already - banks provide a public interface to CHAPS, SWIFT and other clearing systems.
But in the UK there's still paper cheque clearing, which is still done - get this - by letter post.
The 3-5 day clearing schedule is a massive drain on the economy. Payments are made late and debt defaults happen because of it.
So it would be to (almost) everyone's benefit to automate the system to the maximum possible extent, and to speed up transactions so that credits and transfers would be available instantly.
For that trust from bank to bank is necessary. The first bank needs to be sure the second bank it transfers the money to is solvent, lest the money disappear (?), and it gets sued by the depositor...
As you can see, I do not know the official linguo too well, and I think its overabundance is actually confusing. That is why I tried to stay close to the concept of deposit.
it seems to me that if a deposit (=account) disappear, the bank has failed in its most basic function. The clearing of payments is from account (=deposit) to account, so it requires the sanctity of accounts first. That is what I tried to say (certainly awkawdly).
Deposit taking institutions such as credit unions also exist, but these create no credit in the way that banks do, and have no role in the clearing system other than as clients.
So credit creation is a Bank's primary function, and deposit taking is ancillary to that purpose. The clearing of credit obligations is the same thing as the clearing of payments, and it is essential to the operation of a modern economy both in terms of the circulation of goods and services, and the creation of productive assets.
The matter of long term funding of productive assets is where secured loans and counter-balancing deposits come in. It is this part of the system which is imploding and draining credit out of the system, which adversely affects the flow of working capital as well.
"The future is already here -- it's just not very evenly distributed"
Nevertheless, that function could not exist without the capital (8%). Ancillary comes from anchor, no? The capital allows to resist to unexpected withdrawals, without borrowing in despair from the central bank.
Historically banks lent from what they had in capital. No more capital, no more lending. Applied to central banks, that was the idea of the gold standard.
It is obsolete, but as you point out, "long term funding of productive assets" is imploding because credit was given in a self feeding loop to the financial system, a bit like when an amp feeds a microphone, that makes the loudspeaker scream even louder, etc...
What has been missing is the notion of PRODUCTIVITY, indeed. Instead short term profits to "credit institutions"(whatever that means, $12 billion of TARP gift through AIG in the case of Goldman) have been confused with long term profits to society.
So society stopped being profitable, basically... Ethics is the way out.
No, it comes from ancilla which is Latin for handmaiden.
1667, "subservient, subordinate," from L. ancillaris "relating to maidservants," dim. of ancilla "handmaid," fem. dim. of anculus "servant," lit. "he who bustles about," from root of ambi- "about" + PIE *kwol-o-, from base *kwel- "move round, turn about, be much about" (see cycle).
Anyway, the initial point was whether deposits were still important or not. As a gentleman above pointed out, banks are in charge of CREATING credit nowadays, that means creating money outright. Most of the money coming out of banks is made that way, so some will view credit as the most important function of banks.
But that function cannot happen without banks having SOME capital. (The capital standards were developed by the international organization called the Bank for International Settlements, based in Basel, and famous, long ago for being kind to Nazis). Indeed if some loans fail, capital is needed.
Further, there is a distinction to be made between short-term credit secured by intrinsically valuable stuff (which essentially means the payment clearing system), short term credit that is either unsecured or secured with stuff that has no obvious intrinsic value (e.g. brokers' loans secured by stocks) and long-term credit (whether secured or unsecured).
The distinction between law and regulation is interesting in political philosophy. Regulation is mid way between law and interpretation.
by Frank Schnittger - May 31
by Oui - May 30 10 comments
by Frank Schnittger - May 23 3 comments
by Frank Schnittger - May 27 3 comments
by Frank Schnittger - May 5 22 comments
by Oui - May 13 65 comments
by Carrie - Apr 30 7 comments
by Oui - May 3113 comments
by Frank Schnittger - May 31
by Oui - May 3010 comments
by Frank Schnittger - May 273 comments
by Oui - May 2718 comments
by Oui - May 24
by Frank Schnittger - May 233 comments
by Oui - May 1365 comments
by Oui - May 910 comments
by Frank Schnittger - May 522 comments
by Oui - May 449 comments
by Oui - May 312 comments
by Oui - May 29 comments
by Oui - Apr 30273 comments
by Carrie - Apr 307 comments
by Oui - Apr 2644 comments
by Oui - Apr 889 comments
by Oui - Mar 19143 comments