Banking Reflux in Light of Quantitative Rebalancing
- by QWEN 2.5 MAX
Banking reflux is a fundamental concept in understanding the cycle of creation and destruction of bank money. It refers to the phenomenon whereby money created by banks through lending returns to the banks in the form of deposits, generating a continuous cycle of expansion and contraction of money. This process is central to understanding monetary dynamics and the accounting implications that derive from it.
In the context of Quantitative Balancing (QB) , the bank flow can be managed in order to solve some of the accounting problems that currently plague the banking system. Let's see how QB can operationally address this issue, integrating the cited article [[ https://www.geocities.ws/pierre_parisien_cea/pp_eng.htm]] .
1. The Banking Reflux Problem
Banking reflux occurs when money created by banks through loans is returned to the banks in the form of deposits. This creates a number of accounting challenges:
- Deposit Creation : When a bank makes a loan, it creates an equivalent deposit in the customer's account. This deposit is recorded as a liability of the bank.
- Backflow : The customer uses the money to pay for goods or services, and the recipient of these payments deposits the money in another bank (or in the same one). This generates a "backflow" of money in the banking system.
- Accounting Distortions : Currently, deposits created through reflux are treated as traditional liabilities, even though they represent funds that did not exist before the loan was created. This obscures the true nature of bank money and complicates the assessment of banks' financial soundness.
2. How Quantitative Balancing Handles Banking Reflux
QB introduces an innovative approach to managing banking reflux, ensuring greater transparency and alignment with economic reality. Here's how it works:
2.1 Segregation of Deposits
In the QB framework, deposits created through banking reflux are no longer considered direct liabilities of banks, but are reclassified as liabilities to the State Treasury . This means that:
- Banks act as custodians of depositors' funds, rather than incorporating them into their own balance sheets as a source of funding.
- The State Treasury assumes the ultimate responsibility for guaranteeing deposits, eliminating the systemic risk associated with the commingling of funds.
2.2 Periodic Cash Transfers
The QB provides that banks make periodic cash transfers to the State Treasury to cover the seigniorage resulting from the creation of new money. These transfers can be synchronized with the banking reflux:
- Operating Mechanism : Every time a bank creates new money through loans, it simultaneously records a liability towards the State Treasury. This liability represents the value of the seigniorage generated.
- Reflux and Clearing : When the created money returns to the banks in the form of deposits, the banks can partially clear these liabilities with the cash flows generated by the reflux. In other words, the reflux becomes a mechanism to return the seigniorage to the State Treasury.
2.3 Numerical Example
Suppose a bank grants a loan of €100,000 to a customer:
- Money Creation : The bank creates a deposit of €100,000 in the customer's account and records a liability to the Treasury of €100,000.
- Reflow : The customer uses the money to purchase goods or services, and the recipient deposits €100,000 in another bank.
- Transfer to Treasury : The originating bank transfers €100,000 to the State Treasury to cover the seigniorage, using funds generated by the reflux.
This process ensures that money creation is always accompanied by a transfer of value to the State Treasury, eliminating accounting distortions associated with banking reflux.
3. Advantages of QB in Managing Banking Reflux
The QB approach offers several advantages for managing banking reflux:
3.1 Greater Transparency
- Deposits created through the reflux are clearly identified as liabilities to the State Treasury, separating the commercial activities of the banks from their monetary policy functions.
- Stakeholders (investors, regulators, depositors) have a more accurate view of the financial health of banks.
3.2 Reducing Systemic Risk
- Segregation of deposits eliminates the risk that depositors' funds will be used for speculative or risky activities.
- State deposit guarantees reduce the risk of bank panics and bank runs.
3.3 Equitable Distribution of Seigniorage
- The seigniorage generated by money creation is transferred to the State Treasury, allowing the government to use these resources for public purposes (e.g., debt reduction or funding social programs).
3.4 Alignment with International Standards
- The QB harmonizes accounting practices with international standards such as IFRS-IAS 7.6 and US-GAAP ASC 942-230-20, improving the comparability and transparency of bank financial statements..
4. Comparison with the Traditional Approach
5. Conclusions
Quantitative Balancing offers an elegant solution to banking reflux, solving many of the accounting problems that plague the current banking system. Through the segregation of deposits, the periodic transfer of cash to the State Treasury and the explicit recording of seigniorage, QB ensures greater transparency, stability and fairness in the distribution of monetary benefits.
Furthermore, the QB approach aligns with the principles of a Nash equilibrium , in which banks, government and depositors work together to maintain a stable and transparent financial system. This not only improves confidence in the banking system, but also helps reduce the risk of future financial crises.
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6. Open Questions and Future Developments
- Transfer Mechanisms : What are the best mechanisms to synchronize cash transfers between banks and the State Treasury?
- Macroeconomic Impact : How does QB affect monetary and fiscal policy at the national and international level?
- Global Adoption : Is it possible to extend QB to other banking and monetary systems? Answer: Currently, 24 adoptions have been simulated in 24 countries. The implementation instructions are at the bottom of the article here: https://centralerischibanche.blogspot.com/2025/01/quantitative-balancing-summary-and.html
Further research and experimentation are needed to explore these questions and assess the impact of QB on a global scale.
Sources
- Article on banking reflux: [[ https://www.geocities.ws/pierre_parisien_cea/pp_eng.htm]]
- Accounting harmonization:
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