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The essence of banking is that risks are assumed in order to generate a return, which can be split between depositors and shareholders. The demands that banks have less risk on their balance sheets have caused banks to shrink their risk assets and hence their deposit liabilities. But nowadays deposits are the principal means of payment and dominate the quantity of money. So a reduction in banks’ risk assets destroys money. Monetarism may or may not be fashionable, but that is beside the point. Just as in 1929, ahead of the US’s Great Depression, it was true in 2008 and 2009 that a fall in the quantity of money would lead to a fall in spending, output and employment. The implementation of the Basel banking rule-book was one reason — perhaps the main reason — that macro-economic conditions deteriorated in early 2009 and stayed sluggish for the next few years.

The BIS’s insistence that banks become less risky has also infuriated their shareholders, and indeed the managements, who must answer to shareholders. Donald Trump — who as a property developer had to be chummy with bankers — found it harder to finance new hotels after the crash than before. Whatever they say in public about Basel and the BIS, bankers’ remarks in private are wholly unprintable; they could indeed be characterised as “locker-room talk”, to recall one of the memorable phrases of 2016. Still, public denunciations have come from some top bankers. Perhaps the most notable was in January 2015 from Jamie Dimon, chief executive of JP Morgan, the biggest bank in America. Noting that his business was “under assault” from regulatory officialdom, he branded the Basel rules “un-American”. It was widely reported that Dimon was Trump’s first choice for Treasury Secretary. Trump and Dimon have undoubtedly had locker-room talk about the BIS. So now the Basel rules are themselves under assault. The key macroeconomic implication is that bank credit to the private sector and the quantity of money will grow faster in the next few years than in the doldrum period since the Great Recession.

Will this be one sphere of international policy-making where the counter-attack on acronymia has benign results?
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March 4th, 2017
9:03 AM
"The BIS’s insistence that banks become less risky has also infuriated their shareholders, and indeed the managements, who must answer to shareholders." I'm sure that is true. However, the 'creation of money for 'any purpose' is too important to the wider macroeconomy to be left to 'unelected' bankers? Prof. R. A. Werner believes that the 'man-made problem' was the issuing of the 'wrong' type of credit. There is 'productive' and 'unproductive' credit. “Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power - something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”

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