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Citizens Bank of Northern Kentucky

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In Banks 65.52.110.xxx

I would, on the other hand, be interested in Joebhed, Ralph, or rhoets who believe their version of FR is “progressive” could spell out in some detail how they think the system would work in combination with government moneyI'll chime in. In my ideal world, here is the bank balance sheet:Have the liability side of banks to the private sector consist solely of bank capital (e.g. equity and possibly certain types of long term subordinated debt). Bank liabilities to the government are loanable funds lent from the CB at a government set rate. When a borrower wishes to borrow, the bank qualifies the borrower, sets aside risk capital according to some standard algorithm, and obtains all loanable funds form the CB. As the debtor repays the bank, the bank repays the CB with a regulated rate, earning money from the spread. There is no liquidity risk, only credit risk. Banks still can (and must) fail when loans are not repaid. No FDIC guarantees for any bank asset.Depositor services can be supplied by other institutions in exchange for fees or the government can supply a minimal set of these services in the same way as it funds book depositories Here are advantages as I see them:* eliminate dangerous and wasteful short-term funding markets for banks, as banks have only equity liabilities to the private sector.* makes it harder for banks to mislead regulators about loan performance and liabilities.* makes bank funding costs much less dependent on the business cycle and market sentiment. In this case bank leverage allows a sharp increase in bank capital costs to translate into an insignificant increase in interest rates charged, effectively shielding banks from the private credit market interest rates. * No need to pay interest on bank reserves, or to sell bonds to drain reserves, as there are no bank reserves. Allows the government to separate the issue of managing the size of bank loans from managing the size of the monetary base* Forces banks to earn money from credit analysis rather than form yield curve arbitrage this will add much more stability to the system over time, by changing banks' operational focus. * Private entities (banks) with their own money on the line (bank capital) still determine whether someone gets a loan or not you still have private credit creation.I would add:* LBOs, forex markets and the like can be handled by investment banks that should not be able to accept FDIC insured deposits.* Regulation should also shield the private credit markets from bank funding costs (e.g. only certain types of small business or consumer vanilla loans are allowed, with strict credit limits on the amount each entity can borrow). This is the main leakage (together with allowing banks to participate in the credit markets) that the bank regulation proposals that I've seen fail to address, so you still exacerbate the credit cycle by having banks earn arbitrage between government set funding costs and market set return expectations. As long as there is this arbitrage opportunity, you will have exaggerated business cycles and rentier profits in the banking industry. Of course these rentier profits are exacerbated if you pay banks interest on reserves.* The focus on credit-analysis, by removing yield curve arbitrage as a profit source, will advantage smaller banks and banks that lend to their own depositors, and this will in and of itself encourage banks to provide depositor services in an effort to datamine and then sell loans to depositors. posted on Monday, March 05, 2012

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