This is part 4 of the multi-part series “Fixing Oz Banks”.     Earlier parts appear below:

• Part 1 – Fixing Oz Banks: Why is “taking deposits” so important to bank “lending”?
• Part 2 – Fixing Oz Banks: Banks ‘leaning’ on the public
• Part 3: The best way to create deposits? – The RBA v the private banks

Part 1 discusses how private banks use their legal privilege to ‘take deposits’ to create deposits ‘out of thin air’ and demand interest to make them available to the public.

Part 2 discusses how the private bank ‘deposit creation’ for profit model is dependent on and facilitated by the publicly owned Australian Central Bank – Reserve Bank of Australia (RBA)

Part 3 discusses how the relationship between the RBA and the Private Banks with regard to ‘deposit creation’ should be reversed and the RBA become the exclusive and interest free creator of the deposits required by the public monetary system.

Part 4:  One small step at a time

The objective of Parts 1 – 3 of the series was to give the reader a straightforward explanation of:

• how the bank business model works
• how that business model is heavily dependent on the support of the public
• how that support is provided by the Reserve Bank of Australia.

However doing something about the current banking / monetary model is a very different kettle of fish and great care must be taken.  We are talking about the public monetary system after all.

More importantly, slow and careful steps are required because there are many, many people with a vested interest in the status quo and they will fight tooth and nail to protect it.   So we must start with a very simple straightforward first step that they will struggle to oppose and run their predictable scare campaigns against.

One thing to make clear is that we are not talking about all the rottenness and decay, broken rules, bent regulations and outright theft discovered by the Royal Commission or confessed minutes to midnight before the Royal Commission came knocking.  That stuff should be stomped on as fast as possible with flashing disco lighting and high definition coverage on every TV channel.

The reforms we are talking about concern the way Australia’s national and publicly owned Central Bank, the Reserve Bank of Australia ‘RBA’, currently does little more than provide public support to highly profitably private bank business models.

If we want the RBA, OUR public central bank,  to start doing a bit more than just look after the interests of the private banks we need to proceed carefully and not ask the RBA to do too much too soon.    All organisations take time to adjust to change and it may be a rude shock to the RBA to start thinking about directly serving the Australian public……..rather than just the members of Club Banker.

The Glass Pyramid however has complete faith in the commitment of the staff of the RBA and expects that once the shock subsides, and the challenge is set before them, they will seize the day and make us all very proud of them.

As a growing number of Australians open MyRBA deposit accounts at the RBA and have a direct and personal connection with the nation’s central bank we are likely to start to have a real conversation about the appropriate relationship between the RBA and our democratic institutions and the relationship between freedom and responsibility in a modern society.

The first step

So what then is an appropriate first step in reforming the RBA?

What would deliver real value to Australian citizens and non-bank businesses and at relatively low cost?

What is it that the RBA are already providing to the private banks but not offering to the rest of us?

The answer is simple.

100% safe and risk free deposit accounts

Just like the ones that the RBA currently offers to the banks!

Previous posts discussed these accounts, that we call  “MyRBA” and some of the possible features and benefits.

• MyRBA: Banking without the banks
• Fixing Oz Banks: The critical Bank Royal Commission reform

To save you clicking to those posts the key features and advantages are as follows:

• 100% Risk free – MyRBA accounts are by definition 100% risk free.  There can never be a ‘run’ on the RBA as the RBA runs the money press!
• Voluntary – Whether you open a MyRBA account is entirely up to you.
• The banks already have them – It is very hard to argue that the average Australian should not have access to a risk free deposit account at the publicly owned RBA when private banks already have access to RBA deposit accounts.
• The RBA already runs them – The RBA already operates deposit accounts for the private banks, so while it may take some time to expand their accounting system to allow for more accounts, installing a bigger deposit accounting system in a bank should not be rocket science.  There should be plenty of banking IT / systems companies happy to do it for them.
• Initial low demand – As the accounts will not pay any interest they are only likely to appeal to ‘early adopters’, the very risk averse and people who object on principle to being forced to use risky and increasingly dodgy private bank for their deposits.  This means that the initial demand for MyRBA accounts may be limited and this will allow time to fine tune systems and methods of operating the accounts.  Despite the prudence of this approach, low initial demand will likely be a rock that the critics will throw from the op-ed columns of the very banker friendly Australian Financial Review.
• No middle men  – There is simply no reason for a transaction between the government and the public to be channelled through a private bank.  If you have a MyRBA account and you are receiving a payment from the government it is simply a matter of the RBA debiting the governments account and crediting yours.  Likewise if you are required to pay the government tax it can be transferred directly from your MyRBA account to the governments deposit account at the RBA.
• Your financial information is private – Anyone who has maintained an account with a private bank over the last few decades knows how much ‘mining’ of their transaction information is conducted by the banks.   All those prescient phone calls, emails and offers of services from your bank shortly after you complete distinctive transactions.   While banks will still be able to mine the transactions you enter into with their remaining customers, they will no longer be able to watch every single transaction you complete using your MyRBA deposit account.

OPERATING YOUR MyRBA ACCOUNT

Reform and change always attracts flocks of naysayers who insist that everything is just fine the way it is and changing anything is just too hard.   Naysayers will often argue that something else is the REAL problem and more important.  If we listened to the naysayers we wouldn’t get out of bed in the morning for fear that something unexpected will happen.

Fortunately the arguments in favour of allowing the general public the option of opening a MyRBA deposit account at the RBA are virtually naysayer proof.   But as the naysayers are a relentless lot, here are some pre-emptive answers to their more predictable moans.

How will I withdraw or transfer money from my MyRBA account?

Automatic Teller Machines (ATM) – Running an ATM machine is not rocket science. Many corner shops have them and they earn a fee when they are used.  Sometimes they even load them with the money that is dispensed.   Connecting the MyRBA accounts to the ATM network is not difficult, especially as the RBA regulates and supervises the payments system.  A few tweaks of a few regulations and a bit of software should be enough to connect them up.    Assuming that the RBA decides that it should pay the operators of the ATM a fee it will do so.   As MyRBA accounts should be considered an essential public utility service the government will compensate the RBA for the fees paid to ATM operators.

Australia Post – Australia post already provides a range of services for the private banks that allow account holders to complete basic transactions across the counter.  It will not be difficult for Australia post to extend those services to withdrawing/transferring from and depositing into MyRBA accounts.   Considering Australia Post has been complaining about the cheapskate private banks, a source of revenue from the RBA might be greatly appreciated.

Private Banks –  If Australia post can offer over the counter basic MyRBA account transaction services to customers so can the private banks.   If they are smart, they will do so for free in the hope that a MyRBA customer walking into the branch is an opportunity to flog them some investment product or service.

But won’t this starve the banks of cheap deposits?

It is certainly true that if an increasing number of people start to use their MyRBA deposit account for their savings that the banks will not be ‘taking’ those deposits and accordingly one cheap source of funding may be less available to them.

The answer to that is so what?

If the banks cannot attract a customer who is receiving 0% interest on their deposits at MyRBA there is something seriously wrong with them.

But before anyone starts to overheat at the thought of the banks losing their regulated monopoly over the deposits of the general public, please be assured that there will be teams of economists and statisticians poring over the data and monitoring very closely the impact of rising general public and non-bank deposit balances at the RBA on the financial system and wider economy.

How long will this take?

Considering how often we hear about the strength of the Australian financial sector and its profitability, and the eagerness of the corporate advisory sector to latch onto to complex projects, and the eagerness of our governments to hand out plumb gigs, making a start on the MyRBA project should not be difficult.

Delivering within 2 years the following should be a walk in the park for all the great brains in Australian banking, finance and fintech:

• An upgraded RBA accounting system able to support 1,000,000 MyRBA deposit accounts
• Website access
• ATM access
• Australian post over the counter transaction support.

WHY IS IT SO IMPORTANT?

• We own the RBA  – It is simply absurd that the average Australian is denied access to the safest deposit accounts in the Australian banking and monetary system.  Arguing that the public don’t need to have RBA accounts because the RBA guarantees their deposits (up to $250,000) in private banks is an odd argument.  Why not just allow those people, who want their deposits perfectly safe and guaranteed, to open a deposit account at the 100% safe RBA that is ultimately responsible for any guarantees offered for deposits held at private banks.    We note that the RBA itself does not offer any good reason on its website for not offering deposit accounts to the general public or non-bank organisations.

4. Can I open a bank account with the Reserve Bank?
The Reserve Bank is not a commercial bank and so does not provide banking facilities to the general public. It does, however, provide banking services to some government, commercial bank and other clients.

• We need to talk about the RBA – Central banks like the RBA are special and currently occupy a very important place in our economic system plumbing yet there is very little discussion of the ‘politics’ implicit in the current arrangements.   The RBA has the power to make decisions that affect the lives of millions of Australians.  Its decisions can make some people very wealthy and send others broke.   It is also responsible for the notes and coins circulating in our economy.   At the moment the RBA does little other than provide services to and support the business model of mostly private and significantly foreign owned banks.   We need to start talking about how appropriate it is for the national central bank to be limited to serving the interests of a mostly privately and significantly foreign owned industry.    Permitting and encouraging every Australian to maintain a personal stake in our national central bank is essential to a proper debate that includes more than just the bankers and the current crop of regulators …who may like things to stay just the way they are.
• Banker sense of entitlement   – If the Royal Commission has demonstrated anything it is that a sense of entitlement runs very deep in banks and other Australian financial institutions.  This is not surprising when they know that the Australian public are forced to use them for their deposits.    By allowing the public to maintain a deposit account at the RBA we are giving them a choice whether or not to use a bank.   Perhaps if enough people do this, for at least some of their savings, the banks will start to understand that they have NO entitlement to a business relationship with the Australian public.

WHAT ABOUT OTHER BANKING SERVICES?

Some other keen reformers of the role of the RBA like Nicholas Gruen and the Greens have suggested that the RBA should do more than just offer deposit accounts.

They have suggested that the RBA should also offer simple low risk loans (home loans limited to a conservative percentage of the value of the property) and possibly use some of the proceeds of this lending activity to pay interest on the RBA deposit accounts made available to the general public.

The Glass Pyramid is of the view that RBA lending is simply too much too soon. There is no need for the RBA to offer lending services as lending services always involve risk and the RBA is all about extremely low risk.

In addition there are already hundreds of organisations, private, not for profit and government that are perfectly capable of providing lending services to people who want them.

Plus recommending a RBA lending service would open the barn door to a herd of  naysayers who could argue, with a bit more substance, that we are biting off more than we can chew.

Running some computerised deposit account software and offering some transaction methods is very, very different to dealing with loan applications, late repayments, foreclosures etc.

The Keep It Simple Stupid “KISS” concept has application here.

Don’t bite off more than we can chew.

Let’s get the MyRBA accounts up and running and working right.

One small step at a time.