As the COVID-19 pandemic drags on and Victoria enters a new period of stage 3 restrictions the penny is starting to drop that the economic implications are likely to be profound. Now is a good time for some banking reform and a great place to start is to unwind the unwarranted and unnecessary monopoly of the Reserve Bank of Australia “RBA” by the private banking industry.

What is the private bank monopoly of the RBA?

While the public is permitted to freely use coins and notes issued by the RBA they are not permitted to open an account at the RBA. This means that while the public are permitted to acquire notes and coins and use them for transactions, they are prohibited from depositing those notes and coins at the RBA into an account in their name and enjoying the convenience of using that account to complete transactions.

Why allow the public to use central bank liabilities in the form of notes and coins but prohibit them from using central liabilities in form of a personal account at the RBA?

Clearly, the reason cannot be “technical” as the software to operate simple on-line accounts has been around for decades and most members of the general public are now completely comfortable with operating bank accounts on their desktops, tablets and mobile phones. For those who like to use a physical “branch” Australia Post could easily offer RBA account services alongside the various other financial transaction services that Australia Post offers.

Don’t expect to easily find an explanation of “why” the general public are not permitted to operate RBA accounts. The RBA certainly does not to like to talk about it beyond the following which amounts to “…sorry, computer says NO…”

“..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. ….

The real reason for denying the public the ability to open a deposit account at the RBA is to protect the private banks by forcing the general public to use private bank accounts to conduct transactions.

In other words the reason for preventing the general public and others from operating RBA accounts is simply to force them to use private banks. Once they are forced to use one bank service they are then ready to be sold a bunch of other profitable debt peddler services. Protection of the interests of private banks is baked into the very core of our public monetary system.

What could be simpler than allowing the general public to deposit notes and coins issued by the RBA into an account at the RBA and use transfers from that account to complete transactions?

Why force the Australian public to “invest” their money into a private bank by opening an account at a private bank and then using that private bank account to complete financial transactions? Naturally the private banks love the public being forced to invest in their business model but why on earth do we tolerate it when using a RBA account would be a simple “bank free” alternative?

But do we really want to re-create a public version of the Commonwealth Bank?

Some people believe there should be a publicly owned option offering banking services to the public. However, the issue of whether we need to have publicly owned banks competing with privately owned banks is a different issue to whether the RBA should allow the general public to operate deposit accounts at the RBA.

To appreciate the difference it is important to understand that the RBA is very different to a “normal” bank (either public or privately owned). The RBA and its balance sheet is the very foundation of our public monetary system. It issues the notes and the coins and its accounts can be used to settle transactions (at least those between banks and between banks and the government). The RBA is really more like a Public Money Authority than a “normal” bank as its key responsibility is (or should be) operating the public monetary system in the interests of the public and not bankers.

So regardless of whether you support the idea of a public option competing with private banks to provide bank services, the ability to operate an account at the RBA is a separate issue. Operating an account at the RBA is about having the freedom to save and transact in public money without being forced to open, maintain and use a private bank account.

Would we get paid interest on the balances in our RBA account?

No.

The reason why you would not get paid interest on your RBA account balance is the same reason why you do not get paid interest on that pile of notes and coins in your desk drawer. A return is paid when money is lent or invested.

You are not lending money to the RBA when you deposit notes and coins into your RBA account or someone transfers money into your RBA account. You are simply depositing the money. As the RBA is not a lending bank and will make no loans it will not earn interest and therefore cannot pay interest.

If you wish to earn a return you will need to withdraw money from your RBA account and either lend it to someone or invest it so that a return is earned. One option might be to withdraw some of your RBA account balance or just transfer it to the RBA account / bank account of a company by buying a bond issued by the company or by buying a share issued by the company.

Your RBA account is 100% safe and is backed by the Commonwealth of Australia but it pays no interest. If you want a return you need to take some risk.

One of the best reasons for allowing the general public to operate 100% safe RBA accounts is that it draw a clears distinction between risk free saving and lending / investing for a return. If people want to save some money without any risk they will use their RBA account and be paid no interest, if they want to earn a return they will need to withdraw some of their RBA account funds and lend or invest the money and accept some risk that they will lose some or all of their money.

What about the government guarantee of private bank deposits?

Deposits at private banks are not really “deposits” in the sense that most people understand that word. Most people think that when they “deposit” something with someone they are entitled to get back the thing they deposited. When a customer deposits notes or coins at a bank they lose any claim over those notes and coins and effectively have become just an unsecured creditor/investor of the bank who hopes that the bank will repay them when they ask for their ‘money’ back.

The customer is paid “interest” by the bank as a reward for making this unsecured investment but banking is risky and if enough bad loans are made by the bank it may be unable to repay the customers investments (deposit) and they will lose their investment (deposit).

Which is exactly what happens with every other dud investment that a person makes. If the investment goes bad they might lose some or all of their investment. So why should a private bank be any different? If you pick a badly run bank and invest some of the contents of your RBA account in the hope of making a return, you should expect to lose some or all of your investment.

Once the general public are allowed to open 100% safe accounts at the RBA that pay no interest on their balances, there will be no need for the government to “guarantee” that your investment in a private bank will be safe.

Naturally, this does not mean that private banks, like most forms of investment opportunities, will not be subject to regulation to reduce fraud, incompetence and criminal behaviour but if they are badly run they will be allowed to fail …..just like every other private business.

Will this result in a run on the banks?

No.

If the banks or any of the many other forms of investment that are available are unable to compete with an RBA account that pays no interest, they should not be in business.

Making 100% risk free accounts available at the RBA to the general public is likely to generate, initially, only limited interest because the government guarantee of bank deposits means that the public can still earn interest on their private bank investment (deposit) without risk.

Interest in RBA accounts is likely to increase as the government reduces (and ultimately completely removes) the guarantee of private bank deposits and more risk averse members of the public decide to shift at least a portion of their bank investments (deposits) into the safety of an RBA account.

As more people move at least some of their savings into a 100% safe RBA account some banks may find they need to work harder to convince people to continue to “invest” in them. Working harder may mean offering more of a return on the investment. But so what? The banks have always had to compete with notes and coins that pay no interest, the only difference now is that they are also competing with RBA accounts that pay no interest.

Will there still be a role for Private Banks?

Of course. Allowing the public access to deposit accounts at the RBA is not about denying them access to any other form of account or form of unsecured or secured investment.

People will still be free to transfer some of their RBA account balances to any private bank they choose and take their chance that the bank is competent at making loans and earning a return on the amount advanced. They can even continue to use their private bank account for settling transactions.

However, it would be a good idea to:

Prohibit banks from continuing to call these unsecured investments by the public “deposits”. The word deposit will in future be reserved for the contents of RBA accounts which are true ‘deposits’ as the RBA is always able to return them as the deposits stay right where they are….in the customers account. Unsecured investments in private banks can be called something else…. “Unsecured Bank flutter account” might be an appropriate name.

Prohibit banks from making the fraudulent promise that they will repay these unsecured investments at call” as that is simply misleading if not outright fraudulent. Banks are never able to repay all of the “Bank Flutters” invested with them “at call” because having all of the funds available at call would make it impossible for the bank to earn interest by lending those funds. They must at all times make it very clear to their customers that their “Bank Flutter” is unsecured, is not guaranteed by the government and may not be repaid in full.

Summary

If we want to start fixing our broken and corrupt private banking system we need to start with ending the private bank monopoly over deposit accounts at the RBA and the implicit subsidy and protection this monopoly provides to their debt peddling business model. Not to mention the incredible distortions and moral hazard that has arisen as the government was forced after the GFC to offer a public guarantee for unsecured investments “deposits” in private banks badly run by bonus chasing senior executives.

Every member of the Australian public should be allowed to open a 100% risk free account at the RBA and thus given the choice whether to do business with private bank debt peddlers.

It is our public monetary system not theirs and it is time the general public was allowed to use it without interference by the private banks.

If the private banks cannot offer an investment opportunity that can compete with an RBA account that pays no interest they should not be in business anyway.