Banking Faces Seismic Changes
The role of commercial banks in the global economy is changing, with lending to governments and their agencies now more important than lending to goods and services industries. It is a trend which is due to continue.
The new Basel 3 regulations seem set to encourage this trend, despite retail depositors being accorded a stable funding status. Central bank digital currencies are anticipated to augment and perhaps replace non-financial business credit over the next five to ten years.
But the increasing financialisation of commercial banking brings the risk of tying its future firmly to a financial bubble. And with price inflation on the increase, it is only a matter of very little time before that bubble bursts.
This article looks at some of the implications for commercial banking of Basel 3, CBDCs and the changing economic role of commercial banks.
The introduction of both Basel 3 banking regulations and central bank plans for digital currencies will affect commercial banks’ priorities and their role in the overall financial system. Basel 3, particularly with regard to the application of the net stable funding ratio (NSFR), will change banking priorities by imposing standardised risk factors across the industry, and central bank digital currencies (CBDCs) threaten to cut the banks out of their intermediary role between central banks and non-financial users of money and credit.
Few members of the public think positively about the banks and their cartel, so popular opinion is unlikely to shed many tears if CBDCs displace them. Ever since the goldsmiths in London began in the seventeenth century to take in deposits upon which they paid six percent, with the agreement that they were not trustees of the money but proprietors of it, banking has contravened the spirit of Roman law by taking in deposits and using them as they please, without depositors fully realising the arrangement. This breach of “natural” law was originally a ruling by the Roman juror, Ulpian (170—228 AD), later codified by the Emperor Justinian (527—565 AD).
Ulpian had a point. If a depositor is unaware that his property is to be possessed by another without a banking licence, even today it would be ruled in the courts as fraudulent behaviour. But in 1848 English Judge Lord Cottenham in Foley v. Hill and others ruled otherwise in the case of banking relationships, that a deposit becomes the property of the bank, despite the majority of depositors unaware they no longer possess it. Ever since, the practice of a bank taking into its possession someone else’s property and disposing of it as it sees fit has been indisputably accepted in banking law.
For classical economists, banks are responsible for a credit cycle, first accelerating progress unsustainably and then halting it as the negative consequences of credit expansion manifest themselves. Keynesians, who fail to associate periodic banking crises with an earlier credit expansion, believe that money and credit should be guided by the state, blaming free market shortcomings for economic failures. Then there is the public perception of bankers being too ready to deny honest folk credit while paying themselves massive bonuses —a malevolent combination which particularly fuelled the political narrative following the Lehman failure. From every angle, banks appear to be always under attack.
From a banker’s perspective, the political narrative in particular has to be controlled, which is why banks are such large contributors to campaign funds in America. Their political influence in other jurisdictions is on similar lines as those of other businesses, mainly through lobbying, which might be less obvious to the public but is just as effective. Politicians, central banks and regulators all consult the banks before introducing regulatory changes and it is the lawyers employed by large banks who often end up setting the regulatory agenda.
The introduction of Basel 3 NSFR regulations has followed a different course from national regulatory evolution, broadly independent from these influences. Framing supranational regulations at the behest of the G20, the Basel Committee is broadly unaffected by bank lobbying and the lobbying of national politicians and their regulatory bodies. In the wake of the Lehman failure, both the brief and the objective were simple: to ensure that the risk of one bank failure leading to others was to be prevented. After much delay (the final NSFR regulations were published in October 2014) this aspect of Basel 3 is now being implemented.
Whether they succeed in their objective remains to be seen. It has always been possible for national regulators to soften some aspects of Basel regulations in minor ways. But it appears to be a reasonable attempt at ensuring that the financing of illiquid, or risky assets is not overly dependent on liquid deposits.
Contrasting with the imposition of a global regulatory standard under Basel 3, central bank digital currencies (CBDCs) are still at the concept stage. The possibility of central banks issuing a new form of fiat currency directly to the general public, or sections of it, is being discussed by central banks in the context of directing the application of extra currency to stimulate those parts the expansion of commercial bank credit do not appear to reach. Alternatively, the issuance of a CBDC might be available to promote specific economic and political objectives, such as for the benefit of businesses and activities associated with climate change. It is certainly less controversial than paying for costly political projects with additional taxes.
The production and dissemination of CBDCs are massive projects, requiring all businesses and consumers to have accounts with an agency under the direct control of the central bank. The coordination of tax, welfare and other state records will be required to ensure all accounts created for CBDCs are genuine and eligible for whatever the central bank dictates from time to time. It will require consumers and businesses alike to cede control over their activiti
Article from LewRockwell