'Until specialists and society in general fully grasp the essential theoretical and legal principles associated with money, bank credit, and economic cycles, we may realistically expect further suffering in the world due to damaging economic recessions which will inevitably and perpetually reappear until central banks lose their power to issue paper money with legal tender and bankers lose their government-granted privilege of operating with a fractional reserve.'
- Jesús Huerta de Soto,
(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..''How many times do we have to go down the duration mismatch road with fractional reserve lending and nearly $9 trillion of Fed QE to prove the current banking doesn't work?
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Specifically, we need a bank that puts 100% of its assets in overnight treasuries and makes zero loans. The bank would not need any loan officers or many operational personnel for obvious reasons. There would be no need for FDIC guarantees because there would be zero risk of a run and zero risk of losses. We can still keep the FDIC term in place, but realistically it would not be needed. In essence, we would create a 100% reserve bank.
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To make loans, I propose banks would have to attract investment money instead of lending money into existence. They would do so by offering higher than market interest rates on term deposits, but those deposits would not be guaranteed.
As an added benefit, this setup would end fractional reserve lending. We would have a full reserve system, unfortunately one that is not backed by gold, but it would be a huge step in the right direction.'
- Mish,
The Perfect Solution to the Banking Crisis Is to Make a Truly Safe Bank, March 17, 2023
'Europe’s financial regulators are furious at the handling of the Silicon Valley Bank collapse, privately accusing US authorities of tearing up a rule book for failed banks that they had helped to write.
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A former senior UK policymaker who helped negotiate global standards for bank resolution described the SVB handling as a “disaster”.
The 2008 crisis triggered a sea change in how to handle the collapse of banks, with policymakers meeting often at the Basel-based headquarters of the Bank for International Settlements to create regimes designed to minimise the wider fallout from failures.
Central to those regimes was imposing losses on owners, bondholders and other unsecured creditors, including depositors with funds exceeding their country’s guarantee limit.
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The US has claimed SVB’s failure will not hit taxpayers because other banks will cover the cost of bailing out uninsured depositors — over and above what can be recouped from the lender’s assets.
However, a European regulator said that claim was a “joke”, as US banks were likely to pass the cost on to their customers. “At the end of the day, this is a bailout paid for by the ordinary people and it’s a bailout of the rich venture capitalists which is really wrong,” he said.'
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Critics label handling of Californian lender’s failure a ‘disaster’ and claim Washington is failing to adhere to global rules, March 16, 2023
The End of Market Discipline for BanksJanet Yellen essentially says all deposits are insured. From now on, moral hazard rules.By The Wall Street Journal Editorial Board
March 21, 2023
SourceFinancial regulators have ignored their post-2008 rule book to contain the latest banking panic. And on Tuesday Treasury Secretary Janet Yellen tore it up by announcing a de facto guarantee of all $17.6 trillion in U.S. bank deposits. Regional bank stocks rallied, but it’s important to understand what this moment means: the end of market discipline in U.S. banking.
“Our intervention was necessary to protect the broader U.S. banking system,” Ms. Yellen told the American Bankers Association convention. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
Translation: Depositors needn’t worry about the safety and soundness of banks. Uncle Sam will make sure you don’t lose money.
This isn’t an explicit guarantee, but it’s close enough for government work. Dodd-Frank lets the Federal Deposit Insurance Corp. guarantee uninsured deposits under its “systemic risk” exception.” But banks must fail for the exception to apply and the systemic risk is supposed to be genuine. Regulators stretched that exception with SVB and Signature, and the Treasury Secretary is now making clear that they will stretch it again to prevent more bank runs on her watch. Ms. Yellen would court criticism in Congress if she straight up declared a guarantee for all uninsured deposits, but it’s now clearly implied.
But why does she feel the need to provide this assurance if “the situation is stabilizing, and the U.S. banking system remains sound,” as she claimed? Perhaps because bank depositors and investors fear the trouble in banks is wider than she claims.
A stable financial system requires clear and transparent capital standards, sound regulation, and above all market discipline to punish reckless behavior. The current panic has shown that none of those exist in the U.S.
Risk-weighted capital standards have made banks look healthier than they are. The Dodd-Frank regulatory architecture failed to protect against the interest-rate risk that landed Silicon Valley (SVB), Signature and First Republic banks in trouble. Market discipline fell sharply with the creation of too-big-to-fail banks as part of Dodd-Frank. Now Ms. Yellen is throwing out residual discipline by telling even uninsured depositors that they needn’t worry.
The consequences will be far-reaching even if the damage isn’t immediately clear. Bank executives won’t have an incentive to manage conservatively if they know their deposits aren’t at risk of fleeing. Large depositors will be less likely to spread their cash across multiple banks. Deposits and risk could become more concentrated at poorly managed banks that offer more customer perks, as happened at SVB.
Sen. Elizabeth Warren says no one should expect small businesses with more than $250,000 in cash to be savvy enough to know the difference between a well and poorly run bank, so deposits should be guaranteed. “The one exception I might draw to that is the billion-dollar depositor,” she told Roll Call.
But most mom-and-pop businesses don’t have more than $250,000 sitting in the bank. The small businesses she’s referring to are hedge funds, venture and law firms and well-funded startups. Many VCs didn’t do due diligence before parking money at SVB, but it’s not unreasonable to expect that they should.
Letting uninsured depositors at SVB and Signature take a modest haircut would have provided useful market discipline. The Administration is doing the opposite. It’s creating moral hazard that will seed future trouble by encouraging more risky behavior by bank management and reducing caution among depositors, investors and creditors
The Administration is presenting its intervention as a one-off. But once regulators do something, they create the market expectation that they will do it again. And if they don’t, the ensuing market panic will invariably impel them. Biden officials are crossing a Rubicon here, and they’re doing it essentially by fiat without approval by Congress.
Regulators have become all too accustomed to doing anything they want during a market panic, reaching for extraordinary power even in non-emergencies. Ms. Yellen may have shored up confidence in midsize banks, but the cost of her guarantee will be a less sound and safe U.S. banking system.
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Appeared in the March 22, 2023, print edition.
Context '..a “monstrous” (according to Clemente de Diego) legal institution..'Fed Policy: It's Not Fractional Reserve Banking, It's ZERO Reserve Banking, March 21, 2023
'The "Manic-Depressive" Economy .. spirit becomes corrupted .. are of high human and personal cost..'Ethical Affective Ambiance in the Electric Universe – Production of Money, Prices and Market'Third, go well beyond business as usual in increasing the robustness of banks. One recommendation suggested a move to three-to-one leverage instead of the 10- or 20-to-one now common. An alternative proposal is to force banks to be funded by debt that converts automatically into equity as market valuations decline. The above ideas would go with strict marking of their accounts to market. A proposal from Mervyn King, former governor of the Bank of England, is for banks to match deposits to their liquid assets. The latter would include a pre-agreed value of collateral against lender-of-last-resort lending. This should guarantee liquidity at all times. Finally, penalties on management of failed banks should be imposed, reflecting the reality that these are utilities.
Fourth, abandon this attempt to combine the provision of money with risky loans in one sort of business. This would have two complementary elements.
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No one is yet ready for these last approaches. But the second and third must be on the agenda. Banking stands revealed as a part of the state masquerading as part of the private sector. At the least, it needs to be far more robust. Ideally, it would be radically transformed.'
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It is not clear how bad this crisis is going to be but reform is urgently needed, March 21, 2023
'..a process of transition toward the only world financial order..' - Jesús Huerta de Soto