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Historical reference text: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