Safe accounts

Safe accounts
(Central-bank deposit money for everyone)

Monetary reformers have long been looking for a step-by-step approach to sovereign money, more precisely, an individual and bottom-up approach rather than introducing sovereign book money or digital currency (CBDC) top-down. Of course, whether top-down or bottom-up, matters of money tend to involve some central law-making and regulation, and often things also depend on a central bank's goodwill.

First ideas about safe bank accounts in 2010–12 drew on the approaches of 100%-reserve banking of the 1930s. This involves a requirement for banks to hold a 100%-reserve in cash and central-bank excess balances on a respective customer deposit. However, banks willing to do that would put themselves at a considerable cost disadvantage. The reserves for making bankmoney safe would need to be 100% financed and available at any time, whereas all other banks need only a very small fractional reserve of 1.5–3% of their liabilities to customers. As a result, banks that offer safe accounts are likely to lose out to the competition, or else customer account fees would have to bear the higher costs. In consequence, 100% reserve-secured accounts were pondered, but not put into practice.

Another obvious idea was, and still is, to make central-bank accounts available to everyone. However, central banks are nowadays fixated on the idea of the two-tier money and banking system, putting themselves in the role of 'bank of the banks', while reducing their historical role as 'bank of the state' to running transaction accounts for the treasury and some other state bodies. Such transactions accounts no longer include credit and refinancing functions, since the introduction of the euro not even minor ways and means advances. One is prompted to wonder who might have written the Lisbon Treaty Articles on money, banking and central banking, especially Art. 123 TFEU which strictly prohibits any direct contribution of the ECB to financing government expenditure.   

For the rest, central banks are unwilling to act as 'bank of the nation', at least in the way they are still 'bank of the state', that is, offering simple transaction accounts and acting as a public payment service provider for anyone who would be interested in making use of such a service. In most countries today, even large corporations and rich people are denied a central-bank account. In several cases this was even confirmed by court rulings. Of course, this need not be the last word in the mater…  

When Positive Money and other NGOs and political parties launched the campaign for QE4P in 2015 (Quantitative Easing for the people, i.e. for the real economy, rather than just QE for finance) the idea of introducing sovereign money accounts attracted interest again (accounts with central-bank deposit money, i.e. the 'reserves' that are presently reserved for the privileged use by banks). Under present conditions, the banks would be free riders of QE4P like any scheme of monetary financing, because only banks can receive non-cash central-bank money. The banks would thus get the central-bank money for free, while firms and people would still have to put up with the bankmoney surrogate. Things can only change if and to the degree to which firms and people are given the option of running central-bank accounts.

Meanwhile, a growing number of central banks are preparing to introduce central bank digital currency (CBDC) into public use [See submenu Sovereign Digital Currency on this website]. Among the motives behind is to compensate for the dwindling cash base, the possibility to impose negative interest (relevant during the low-interest 2010s until 2022), with both aspects aiming to regain greater effectiveness of conventional monetary policy.

CBDC in fact offers individual access to safe & secure sovereign money for everyone, be it in the form of central-bank money-on-account or digital tokens. This is certainly a step in the right direction, even though the question of money creation and control of the stock of money is not tackled. In other respects, too, the models discussed so far face a number of problems, partly real ones and partly just imagined, due to the co-existence of digital currency with still-existing bankmoney the creation of which would still precede and determine the entire stock of money.

In this situation, the question arises as to why individual banks and non-bank payment service providers (PSP) with a central-bank account and access to the central-bank payment system should not be given the possibility to offer safe accounts to their customers, for example in the form of fiduciary omnibus transaction accounts, as an additional or sub-account of those banks and other PSP with the central bank. The objection that central-bank RTGS payment systems would not have enough capacity for this appears to be questionable considering that offering such transaction accounts to the public would not include a higher number of payments to be carried out but just a somewhat higher number of central-bank accounts or sub-accounts.

Another question is whether EU laws on payment services and e-money allow for offering safe digital currency accounts to the non-bank public. As was to be expected, this is a rather controversial question. In Lithuania, however, the national parliament has decided Yes. According to Art. 25 of its law on e-money, customer money held in trust by e-money institutions can be safeguarded - among other, less convincing options - by holding it in an account with the Bank of Lithuania or another central bank within the Eurosystem.

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In the Netherlands, the monetary reform NGO Ons Geld, following a recommendation by The Netherlands Scientific Council for Government Policy, has now developed an additional bottom-up option of public depositories. The concept includes public transaction accounts containing central-bank digital currency. The accounts can be managed by private payment service providers on behalf of firms and individuals. The concept is tailor-made to the legal conditions within the EU and the euro area but can certainly be readapted to other currency areas.

Want to know more? Read the Ons Geld position paper written by Edgar Wortmann:
Public depository: safe-haven and level playing field for book money.
As a supplement:
Questions & Answers on money and debt

FED refuses cooperation for setting up safe and secure currency accounts for everyone

James McAndrews, a former US Federal Reserve (FED) employee, has founded TNB Bank (The Narrow Bank). Narrow banking means that a bank does not create bank money (i.e. does not expand the base of central bank money), but acts as an intermediary solely on the basis of central-bank reserves. Customer balances would be held directly on a reserve account of the TNB with the Fed (i.e. not as bank demand deposits). This means risk-free depositing of customer money, similar to central-bank "digital cash".

The FED has so far refused TNB access to its account and payment system. TNB then filed a lawsuit in a New York court. The court has dismissed the case:
The Narrow Bank Update: SDNY dismisses TNB suit

Some articles on the matter:
Bloomberg: "Fed Rejects Bank for Being Too Safe"
Bloomberg: “The Fed versus the Narrow Bank”
Economist: "The Fed stalls the creation of a bank with a novel business model"
Cobden Centre: "Why the Fed Denied the Narrow Bank"

The Talanx case: Application for secure central bank account rejected

Talanx AG, Germany's third-largest insurer, had applied to the Bundesbank for access to a transaction account in 2008, at the height of the then banking crisis. The Bundesbank rejected the application. It "in no way holds accounts for economic enterprises". (Accordingly, banks with a credit account at the Bundesbank would not be economic enterprises, nor would public institutions with a transaction account at the Bundesbank).

Talanx then appealed to the Administrative Court. The court ruled in favour of the Bundesbank in 2010. There was "no duty on the part of the state to protect companies against all dangers of capitalism". It was solely at the Bundesbank's discretion to whom it granted an account.

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With the planned introduction of Central Bank Digital Currency (CBDC), the demand for public access to central-bank book money or digital tokens will basically be fulfilled. However, this does not make the case for safe accounts irrelevant. That will only be the case once CBDC is available as a universal means of payment for literally everyone and everything. This may take some time...

In its newsletter of Apr 2020, the core group of the International Movement for Monetary Reform calls for the immediate launch of personal safe accounts on the basis of central bank money, in fact custodian or indirect CBDC, for example in the form of public depositories. This would help to efficiently implement current government covid-emergency subsidies and loans in combination with the new QE measures of the ECB which this time, by refinancing such government programs, primarily serve real economic purposes. At the same time, such personal safe accounts would be a forward-looking step of monetary reform towards regaining monetary control by the central banks.

Central-Bank Accounts for Everyone

• In accordance with the concept of sovereign money accounts, Ben Dyson and Graham Hodgson (Positive Money, London) have detailed a plan for Digital Cash. Why Central Banks Should Start Issuing Electronic Money > 

• In an article in the real-world economics review, no.68, 2014, Trond Andresen explained a concept of Electronic Sovereign Money Accounts (ESMA), a system of purely electronic payments that might help to make the transition from bankmoney to sovereign money >   

• Dirk Niepelt, Study Center Gerzensee of the Swiss National Bank, has repeatedly argued in favour of sovereign money-on-account side by side with bankmoney > Reserves for everyone. Keep cash, let the public hold central bank reserves, VOX Policy Portal, 21 Jan 2015. 

• The Economist also makes the case for offering central bank accounts to everyone, 26 May 2018, 70.

Safe deposits on the basis of a conventional
100%-reserve

• Among those who have made the case for individual bank deposits backed-up by a 100% voluntary central-bank reserve is Thomas Mayer, Senior Fellow at the Center for Financial Studies, Frankfurt, and former chief economist of Deutsche Bank
> A Copernican Turn in Banking Union Urgently Needed, CEPS Policy Brief, No. 297, July 2013.
Also cf. > Banish fractional reserve banking for real reform, Financial Times, 24 June 2013,
re-published at Thomas Attwood Blog, 24 June 2013
> Banish fractional reserve banking for real reform.