Rethinking Bank Accounting and its Impact on the State Budget

Accounting correction of bank balance sheets and implications on the state budget

By Marco Saba, November 29, 2024

Recta Ratio of Money Creation as a Liability

The direct logic of money creation as a liability

    1. Recording of Money Creation: When a bank creates money through lending, instead of recording the corresponding deposit as a liability to the customer, it would record it as a liability to the State Treasury. This reflects the recognition that monetary sovereignty belongs to the State.

    2. Accounting Changes in the Banks' Balance Sheet:

        ◦ Activity: Loans granted would remain unchanged.

        ◦ Liabilities: The item "Deposits" would be replaced by a new item "Liabilities to the State Treasury", which would represent the bank's debt to the State for the money created.

        ◦ Net Worth: There would be no change in net worth or profits, as interest income on loans would remain unchanged.

    3. Registration Example:

        ◦ Suppose a bank grants a loan of 100,000 euros.

        ◦ The accounting record would be:

            ▪ Activity: Loans to customers +100,000

            ▪ Liabilities: Liabilities to the State Treasury +100,000

Changes in the State Budget

    1. Asset Recording: The Treasury would record bank debt as an asset, thereby recognizing an increase in its potential revenue from the seigniorage generated by money creation.

    2. Accounting Changes in the State Budget:

        ◦ Activity: Add "Credit to banks" to the total amount of liabilities created by banks.

        ◦ Tax Revenue: Potential increase in tax revenue from money creation and interest paid by banks on liabilities.

    3. Registration Example:

        ◦ If the banks have 1,000,000 euros in liabilities towards the Treasury, the State would record:

            ▪ Activity: Credits to banks +1,000,000

Impact on the State Budget

    • This change would lead to a significant increase in assets in the state balance sheet, reflecting a new revenue stream from interest on banks' liabilities.

    • While bank profits would not change, the state would now have a clearer and more detailed view of its financial position and money creation.

If this adjustment had been applied in 2016, it would have generated over a trillion more assets for the state budget at the time.

Provisional and Transitional Measure

    • The idea is that this system is temporary until the State Treasury directly takes control of money creation by issuing money and lending it to banks.

    • In this scenario, banks would return to being true financial intermediaries, rather than entities that create money "out of thin air".

Considerations on the proposal

This accounting hypothesis proposes a radical change in the way banks and governments manage money creation and accountability. While it could lead to greater transparency and accountability in money management, it would also require significant regulatory and cultural change in the way financial and government institutions operate.

Implementation

To implement the accounting hypothesis where banks record money creation as a liability to the State Treasury, it is necessary to consider various regulatory, technical and operational aspects. The main steps and considerations for a possible implementation in the existing financial system are outlined below.

Implementation Phases

1. Regulatory and Normative Reform

    • Legislative Changes: It is essential to introduce legislative changes that officially recognize the new way of accounting for money creation. This would require approval from the relevant authorities, such as the Ministry of Finance and central banks.

    • Accounting Guidelines: Supervisory authorities, such as the Bank of Italy and the EBA (European Banking Authority), should develop specific guidelines for banks, establishing how to record liabilities to the Treasury and manage the related cash flows.

2. Changes to IT Systems

    • Accounting Systems Upgrade: Banks should upgrade their IT systems to support the new accounting structure. This may include implementing software that allows for more flexible management of liabilities and assets.

    • Staff Training: It is essential to train bank staff on new accounting principles and operating procedures, so that they can properly manage changes in financial statements.

3. Gradual Transition

    • Pilot Phase: Start with a pilot program in a few selected banks to test the effectiveness of the new accounting. This would allow any problems to be identified and necessary corrections to be made before a wider rollout.

    • Monitoring and Evaluation: During the pilot phase, it is important to monitor the effects on the balance sheets of banks and the State, assessing the impact on liquidity, profits and financial stability.

4. Collaboration with the State Treasury

    • Cooperation Agreements: Establish clear agreements between banks and the State Treasury to manage the flow of money created. This includes ways of reimbursing seigniorage on the sums created by banks.

    • Data Integration: Create an integrated system for monitoring banks' liabilities to the state, thus facilitating transparency and reporting.

Expected Impacts

Bank Balance Sheet

    • The accounting changes would not affect profits immediately, as interest on loans would remain unchanged. However, there would be greater clarity in the representation of liabilities.

State Budget

    • Including banks' liabilities in the state balance sheet would significantly increase recorded assets, improving visibility into future seigniorage revenues.

Further Considerations 

Implementing the proposed hypothesis requires a coordinated approach between government authorities, banks and supervisory bodies. It is essential to ensure that all parties involved understand the benefits and challenges associated with this accounting restructuring. With careful planning and gradual execution, it is possible to transform the financial system so that banks become true financial intermediaries, contributing to a more responsible management of money creation.

Online References:

[1]  Notes for a sector study on banking activity

[2]  The question of seigniorage and its management in Italy

[3]  Bill for the return to the State Treasury of the seigniorage of the Commercial Banks

[4] https://www.marcovigorelli.org/cose-rilevante-nel-controllo-di-gestion/

[5] https://www.bancaditalia.it/pubblicazioni/qef/2021-0644/QEF_644_21.pdf

[6] https://www.cooperationpuma.org/chi-siamo/Paper_PUMA.pdf

[7] https://innowise.com/it/blog/core-banking-system-implementation/

[8] https://www.rgs.mef.gov.it/_Documenti/VERSION-I/Comunicazione/Eventi/WORKSHOP--1/I-principali-saldi-di-finanza-pubblica-definizioni-uso-raccordi- .pdf

Historical reference text:

Giuliano Passalacqua: Il bilancio dello Stato. Un istituto in trasformazione / Public Finance - Franco Angeli, Milan, 1977.

MAGA: The Banking Seigniorage Restitution Act

The Banking Seigniorage Restitution Act: Restoring Wealth to the People

   In a world where financial institutions wield unparalleled power, the creation of money—once a sovereign right of governments—has shifted largely into the hands of private commercial banks. Every time a bank issues a loan, it generates money, not from existing reserves, but from thin air. This process, known as money creation through credit issuance, yields a hidden profit: banking seigniorage.

   This seigniorage is an unearned privilege that enriches private entities while the American people shoulder the burdens of debt, inflation, and economic inequality. Shouldn't the value generated by the creation of our nation's money belong to its citizens, rather than private shareholders? 

  The Banking Seigniorage Restitution Act proposes a bold but fair solution:

Transparency: For the first time, commercial banks will report and disclose the profits they derive from creating money.

Accountability: These profits will no longer remain in private coffers but will flow back to their rightful owner—the public treasury.

Public Benefit: The billions recovered will be allocated to reduce the national debt and invest in critical infrastructure, healthcare, and education, ensuring a brighter future for all Americans.

    This Act is not just a piece of legislation; it is a call to restore fairness and equity to the financial system. It is a challenge to reclaim public wealth from private exploitation. And it is a promise to the American people that their government serves them, not powerful financial interests.

   Let us seize this moment to ensure that the wealth generated by our nation's financial system benefits everyone—not just the privileged few.

___________________________

Draft Bill

"Banking Seigniorage Restitution Act"

Section 1 – Purpose

This Act establishes a framework to ensure that the economic value generated through the creation of bank money by commercial banks is transferred to the U.S. Treasury for the benefit of the American people.

Section 2 – Definition of Banking Seigniorage

For the purposes of this Act, "banking seigniorage" refers to the economic value derived by commercial banks from the issuance of bank-created money, primarily through credit creation, net of operational costs and mandatory reserves.

Section 3 – Restitution Obligation

1. All commercial banks operating within the United States are required to:

a) Calculate the banking seigniorage generated on a quarterly basis.

b) Transfer the full value of net seigniorage to the U.S. Treasury within thirty days of the end of each quarter.

2. The calculation must be based on methodologies prescribed by the Federal Reserve and audited by independent entities.

Section 4 – Oversight and Transparency

1. The Federal Reserve Board shall oversee the calculation and transfer process, ensuring compliance with the provisions of this Act.

2. Commercial banks must submit detailed quarterly reports on their credit issuance and reserve holdings, subject to public disclosure.

3. The U.S. Treasury shall publish an annual report detailing the amounts received and their allocation.

Section 5 – Penalties for Non-Compliance

In cases of partial or non-compliance, commercial banks will face:

a) A financial penalty equal to double the unpaid seigniorage amount.

b) Suspension of lending operations until full compliance is restored.

Section 6 – Allocation of Funds

The funds transferred to the U.S. Treasury under this Act shall be prioritized for:

a) Reducing the national debt.

b) Funding critical public investments in infrastructure, education, and healthcare.

Section 7 – Effective Date

This Act shall take effect six months following its enactment to allow for implementation.

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Steps to Introduce the Bill in the U.S. Congress

1. Sponsorship: Partner with a member of the House of Representatives or Senate willing to sponsor the bill. Outreach to progressive lawmakers or those focused on financial reform (e.g., advocates of public banking) could be effective.

2. Lobbying: Engage advocacy groups, think tanks, and public organizations to build awareness and support.

3. Public Campaigns: Use media campaigns to educate citizens about banking seigniorage and its potential public benefits.

4. Presentation: The bill can be formally introduced in either the House or Senate, followed by committee reviews and potential amendments.

The issue of seigniorage and its management in Italy

 

The question of seigniorage and its management in Italy

The issue of seigniorage and its management in Italy raises important legal and political questions, especially in relation to monetary sovereignty and the role of financial institutions. 

Analysis of the critical issues related to the decision of the Court of Cassation regarding seigniorage.

Critical Issues of the Court of Cassation's Decision 

You see:

• Cassation ruling pdf  54.3 KBPublication Date::May 09, 2007

Monetary Sovereignty: 

The Italian Constitution establishes that sovereignty belongs to the people, but the management of monetary creation is delegated to institutions such as the Bank of Italy and the European Central Bank (ECB). This raises questions about how the people can exercise their sovereign right in a system in which monetary decisions are taken by technical and not democratically elected bodies
1
3 .

Lack of Regulatory Clarity: 

Unlike the United States, where responsibility for money creation is explicitly attributed to Congress, in Italy there is no clear constitutional indication of who holds the power to issue money. This leads to a situation in which monetary choices can appear detached from popular will, creating frustration among citizens regarding the transparency and accountability of institutions
1
4 .

Limited Jurisdiction: 

The Court of Cassation has ruled that citizens' claims to obtain a share of seigniorage income are outside its jurisdiction, stating that such matters fall within the prerogatives of the State. This can be seen as a way of limiting democratic control over monetary policies, preventing citizens from challenging decisions that directly affect their economic life
2
3 .

Conflict of Interest: 

The management of seigniorage by the Bank of Italy, which operates under the umbrella of the Eurosystem, raises concerns about conflicts of interest. The Italian government must issue government bonds to obtain money from the Bank of Italy, creating a dependency that can lead to unsustainable fiscal policies and greater vulnerability to economic shocks
4 .

Social and Economic Impact: 

The centralization of monetary power in the hands of central banks can have negative effects on wealth distribution and social policies. If seigniorage income is not redistributed equitably, it can contribute to growing economic inequalities and a perception of alienation among citizens from financial institutions
1 3 .

Conclusions

The issue of seigniorage in Italy highlights tensions between popular sovereignty and banking technocracy. The decisions of the Court of Cassation reflect a limited vision of the role of citizens in monetary matters, underlining the need for greater transparency and accountability in economic policies. To address these critical issues, a broader public debate on the reform of monetary institutions and their relationship with popular sovereignty may be necessary.

Let us now establish how much this per capita share of seigniorage that is taken away from the citizen by commercial banks would be by establishing a simple formula such as: total annual creation of money by the banking system divided by the number of citizens equals the annual share to be distributed.

Using the figure of 1,000 billion euros as annual money creation by commercial banks in Italy in 2016 (Banca d'Italia, 2016), we can recalculate the per capita share of seigniorage.

Formula

The formula is:

Per capita rate = Total annual money creation / Number of citizens

Data used

Annual money creation: 1,000 billion euros (1,000,000,000,000 euros in 2016)

Population: 58,990,000 citizens (data updated to 1 January 2024)

Calculation 

Using the data provided:
Annual per capita quota = 1,000,000,000,000 / 58,990,000  ≈ 16,949.20 euros

Monthly per capita quota =  1,412.43 euros

Monthly quota for a family of three people consisting of a couple and a child:  € 4,237.30

Result

Thus, the annual share of seigniorage that could be distributed to each Italian citizen is approximately 16,949.20 euros. This amount highlights how, if redistributed equally, seigniorage income could have a significant impact on the economic well-being of citizens.