Syndicate content

The “accounting view” of money: money as equity (Part III)

Biagio Bossone's picture

In part I of this blog, we discussed the implications of our proposed “Accounting View” of money as it applies to legal tender. In part II, we further elaborated on the implications of the new approach, with specific reference to commercial bank money. We conclude our treatment of commercial bank money in this part, starting from where we left, that is, the double (accounting) nature of commercial bank (sight) deposits as debt or equity.

Bank deposits: debt, equity, or both…?

This double nature is stochastic in as much as, at issuance, every deposit unit can be debt (if, with a certain probability, the issuing bank receives requests for cash conversion or interbank settlement) and equity (with complementary probability). Faced with such a stochastic double nature, a commercial bank finds it convenient to provision the deposit unit issued with an amount of reserves that equals only the expected value of the associated debt event, rather than the full value of the deposit unit issued.

The “accounting view” of money: money as equity (Part II)

Biagio Bossone's picture

In part I of this blog, we discussed the implications of our proposed “Accounting View” of money as it applies to legal tender. In this part and the next, we elaborate on the implications of the new approach, with specific reference to commercial bank money.

Bank deposits and central bank reserves

After long being a tenet of post-Keynesian theories of money,1 even mainstream economics has finally recognized that commercial banks are not simple intermediaries of already existing money; they create their own money by issuing liabilities in the form of sight deposits (McLeay, Radia, and Thomas 2014).2

If banks create money, they do not need to raise deposits to lend or sell (Werner 2014). Still, they must avail themselves of the cash and reserves necessary to guarantee cash withdrawals from clients and settle obligations to other banks emanating from client instructions to mobilize deposits to make payments and transfers.

The relevant payment orders are only those between clients of different banks, since the settlement of payments between clients of the same bank (“on us” payments) does not require the use of reserves and takes place simply by debiting and crediting accounts held on the books of the bank.

The “accounting view” of money: money as equity (Part I)

Biagio Bossone's picture

Coins circulating as legal tender in national jurisdictions worldwide are treated as debt liabilities of the issuing states and reported as a component of public debt under national accounting statistics (ESA 2010). Similarly, banknotes issued by central banks and central bank reserves are accounted for as central bank debt to their holders.

Although the law says that money is “debt,” a correct application of the general principles of accounting raises doubts about such a conception of money. Debt involves an obligation between lender and borrower as contracting parties. Yet, for the state, which obligation derives from the rights entertained by the holders of coins? Or, for a central bank, which obligation derives from the rights entertained by the holders of banknotes or the banks holding reserves?

The Fintech revolution: The end of banks as we know them?

Sergio Schmukler's picture

The retrenchment and intensified regulation of the traditional banking system after the global financial crisis, combined with greater access to information technology and wider use of mobile devices, have allowed a new generation of firms to flourish and deliver a wide array of financial services. What does this mean for the traditional banking system?

In the Global Financial Development Report 2017/18 and a new Research and Policy Brief, we argue that despite the rapid expansion of fintech companies, so far, the level of disruption seems to have been low. This is partly driven by the complementarity between the services provided by many fintech providers and traditional banks. That is, in many instances, the new fintech companies bring alternative sources of external finance to consumers and SMEs, without displacing banks. For example, online lending is an alternative for the type of borrower usually underserved by traditional banks. This is of special relevance not only for households and firms in the developing world (where the banking system is often underdeveloped), but also for underserved borrowers in high-income countries. Moreover, because a bank account is needed to perform many of the fintech services, it is hard now to imagine fintech companies overtaking banks completely and becoming involved in the current accounts niche. There will always be need for a highly regulated service that allows households and firms to keep their money safe and accessible. Banks seem to be the players best suited for that role.

Financial inclusion for Asia's unbanked

Manu Bhardwaj's picture

Asian economies are well positioned for robust growth — with GDPs expected to rise by an average of 6.3% in each of the next two years. Emerging markets in Asia are also the best performers in economic growth in recent years, especially when compared with emerging markets outside of Asia.

But to ensure this growth is equitable and inclusive, Asian business leaders, academics and policymakers need to confront a host of challenges, including significant “unbanked” and “underbanked” populations. More than 1 billion people within the region still have no access to formal financial services — meaning, no formal employment, no bank account, no meaningful ability to engage in commerce online or offline. By some estimates, only 27% percent of adults have a bank account, and only 33% of firms have a loan or line of credit. As was highlighted by the speakers at the recent Mastercard-SMU Forum in Singapore, greater financial inclusion must become an essential component of Asia’s economic development.

A call to Turkey to close the financial gender gap

Asli Demirgüç-Kunt's picture
Also available in: Español | Français 

Financial inclusion is on the rise globally. The third edition of the Global Findex data released last week shows that worldwide 1.2 billion adults have obtained a financial account since 2011, including 515 million since 2014. The proportion of adults who have an account with a financial institution or through a mobile money service rose globally from 62 to 69 percent.

Why do we care? Having a financial account is a crucial stepping stone to escape poverty. It makes it easier to invest in health and education or to start and grow a business. It can help a family withstand a financial setback. And research shows that account ownership can help reduce poverty and economically empower women in the household.

New Global Findex data shows big opportunities for digital payments

Asli Demirgüç-Kunt's picture

We're delighted to release the 2017 Global Findex, the third round of the world's most detailed dataset of how adults save, borrow, make payments, and manage risk.

Drawing on surveys with more than 150,000 adults in more than 140 economies worldwide, the latest Global Findex features new data on fintech transactions made through mobile phones and the internet. It also provides time series updates for benchmark financial inclusion indicators.

The data shows that financial inclusion is on the rise globally, with 1.2 billion adults opening accounts since 2011, including 515 million in the last three years alone. That means 69 percent of adults globally have an account, up from 62 percent in 2014 and 51 percent in 2011. We see that Fintech, or financial technology, plays a progressively greater role in countries like China, where 50% of account owners use a mobile phone to make a transaction from their account. Compared to 2014, twice as many adults in Brazil and Kenya are paying utility bills digitally.

Brick and mortar operations of international banks

Claudia Ruiz's picture

The existing evidence from both cross-country and country case studies on the determinants of foreign bank entry and on the impact of foreign banks on host economies suggests the brick-and-mortar operations of international banks have important implications for competition and efficiency of the local financial sectors and for financial stability and access to credit in the host country (World Bank, 2018). The Global Financial Development Report 2017/2018: Bankers without Borders contributes to the policy dialogue on international banks by summarizing what has been learned so far about: i) the risks and opportunities posed by foreign banks when entering developing countries and ii) under what circumstances host economies can reap most benefits from the entry of international banks.

Cross-border spillover effects of the G20 financial regulatory reforms: results from a pilot survey

Erik Feyen's picture

After the global financial crisis, the G20 set out on an ambitious financial regulatory reform agenda to strengthen the global financial system. With any type of regulatory framework, incentives are created. While these reforms will ultimately contribute to greater financial stability there is a risk that regulations will have unintended consequences and spillover effects by reducing the incentives to lend to countries with emerging markets and developing economies (EMDEs) where financing is critical to achieving the SGDs.

The Financial Stability Board (FSB) has been actively working to improve the evidence on any adverse effects of the post global crisis financial regulatory reforms. The World Bank works closely with the FSB to ensure the voice of developing countries are represented in these discussions. To complement the FSB’s efforts, our team conducted qualitative surveys in seven EMDEs that focused on the adverse impact of spillover effects that may take place in individual countries that are not required to implement the reforms themselves.

What does the global economic outlook tell the debt managers?

M. Coskun Cangoz's picture
Global Economic Growth

2018 started with the good news. The World Bank’s Global Economic Prospects and the IMF’s World Economic Outlook both show that the global economy is in a recovery. Furthermore, it is expected that the upturn is broad-based as the growth is increasing in more than half of the world economies. Global Economic Prospects report that in advanced economies, growth in 2017 is estimated to have rebounded to 2.3 percent while emerging and developing economies (EMDEs) were projected to have higher-than-expected growth of 4.3 percent. Overall, global growth is projected to edge up to 3.1 percent in 2018.

Over the last decade debt managers, like the central bankers, fiscal policy managers and regulators, had to deal with the global financial crisis. During this period, while debt levels were increasing in many countries, thanks to the unconventional monetary policies, interest rates went down, maturities lengthen up to 100 years, and portfolio capital flows moved across markets. In the end, those were very unusual times. Now the question is: Is this the end of the global crisis? Are we back to the “normal” times?

Indeed, it doesn’t look so.

Pages