Thank you for your thoughtful articule! I would bring some points into the potential risks associated with central bank-controlled deposit systems and alternatives to addressing current banking inefficiencies. Let me briefly engage with your arguments:
1. Public Debt and Reckless Fiscal Policies:
There risk of moral hazard. If the ECB (or any central bank) is forced to absorb public debt, countries might indeed feel less constrained in pursuing fiscal discipline. This could amplify political pressures on the central bank, jeopardizing its independence. While current banking regulations already expose us to some of this risk, centralizing deposits could indeed magnify the issue.
2.Liquidity and Concentration Risks:
The point about systemic vulnerabilities in the event of a public debt crisis is crucial. Concentration at the central bank during a panic might intensify inflationary pressures or cause liquidity crunches. These cascading effects could undermine economic stability rather than bolster it.
The lack of liquidity to support adequate market operations by the ECB in such scenarios is a sobering thought. Without a functioning market to absorb public debt at reasonable prices, the fallout could be severe, affecting bond markets and broader financial stability.
Proposal of a Dual Banking System
I would propose a two-tier banking solution:
1) Custodian Banks: These could focus on payment systems and short-term money market investments, resembling a safer intermediary role akin to brokers today.
2)Long-term Investment Institutions: Encouraging individuals to consider higher-yield, long-term investments while promoting financial education is a proactive approach. This could reduce reliance on traditional banks and foster a more informed and resilient population.
Final Thought
While centralizing deposits at the ECB may address some legacy issues of private banks, this could introduce new risks and moral hazards. A dual banking system, offers a hybrid solution that might strike a balance between stability, efficiency, and market discipline.
Thanks again for your detailed critique of the current banking system! Your insights add depth to the ongoing conversation about the future of banking!
It is a wonderful post to give some thought to the nature of money and the strange business model of commercial banking.
Years ago I was a director of the Caja de Ahorros de Gipuzkoa - San Sebastián and I understood the "feet of clay" of the business perfectly summarized by its President: "If Gipuzkoa goes well, Kutxa will go well" which is nothing more than confirming that if the assets (of Gipuzkoa) do not deteriorate, the balance sheet of the bank will be healthy and so will its business. In line with your reflections, I think that commercial banking does an additional job that you do not mention that is "risk redistribution". Let me explain: if there were only the ECB, all the risk (at least banking) would be concentrated there. With multiple banks (and if they are not systemic, even better), the risks are redistributed and the system does not collapse. If the ECB collapses, the whole system collapses. It is true that the ECB can print whatever it wants. If it collapses, we would go to a hyperinflation like the German one of the last century. Good post to keep thinking.
Thank you for your thoughtful articule! I would bring some points into the potential risks associated with central bank-controlled deposit systems and alternatives to addressing current banking inefficiencies. Let me briefly engage with your arguments:
1. Public Debt and Reckless Fiscal Policies:
There risk of moral hazard. If the ECB (or any central bank) is forced to absorb public debt, countries might indeed feel less constrained in pursuing fiscal discipline. This could amplify political pressures on the central bank, jeopardizing its independence. While current banking regulations already expose us to some of this risk, centralizing deposits could indeed magnify the issue.
2.Liquidity and Concentration Risks:
The point about systemic vulnerabilities in the event of a public debt crisis is crucial. Concentration at the central bank during a panic might intensify inflationary pressures or cause liquidity crunches. These cascading effects could undermine economic stability rather than bolster it.
3.Market Liquidity for Public Debt:
The lack of liquidity to support adequate market operations by the ECB in such scenarios is a sobering thought. Without a functioning market to absorb public debt at reasonable prices, the fallout could be severe, affecting bond markets and broader financial stability.
Proposal of a Dual Banking System
I would propose a two-tier banking solution:
1) Custodian Banks: These could focus on payment systems and short-term money market investments, resembling a safer intermediary role akin to brokers today.
2)Long-term Investment Institutions: Encouraging individuals to consider higher-yield, long-term investments while promoting financial education is a proactive approach. This could reduce reliance on traditional banks and foster a more informed and resilient population.
Final Thought
While centralizing deposits at the ECB may address some legacy issues of private banks, this could introduce new risks and moral hazards. A dual banking system, offers a hybrid solution that might strike a balance between stability, efficiency, and market discipline.
Thanks again for your detailed critique of the current banking system! Your insights add depth to the ongoing conversation about the future of banking!
Thank you very much, Luis.
It is a wonderful post to give some thought to the nature of money and the strange business model of commercial banking.
Years ago I was a director of the Caja de Ahorros de Gipuzkoa - San Sebastián and I understood the "feet of clay" of the business perfectly summarized by its President: "If Gipuzkoa goes well, Kutxa will go well" which is nothing more than confirming that if the assets (of Gipuzkoa) do not deteriorate, the balance sheet of the bank will be healthy and so will its business. In line with your reflections, I think that commercial banking does an additional job that you do not mention that is "risk redistribution". Let me explain: if there were only the ECB, all the risk (at least banking) would be concentrated there. With multiple banks (and if they are not systemic, even better), the risks are redistributed and the system does not collapse. If the ECB collapses, the whole system collapses. It is true that the ECB can print whatever it wants. If it collapses, we would go to a hyperinflation like the German one of the last century. Good post to keep thinking.