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?
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?
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.
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.
Years ago when you first came up with this idea, I thought it would be a great advantage to have this choice.
However, in the intervening years, I’ve come to realise that the RBA is not really capable to do such a thing.They don’t appear to have much autonomy even in setting interest rates.All they do is copy everything that the US Federal Reserve does, which is understandable because they are the biggest economy and create the Reserve Currency, currently one of the biggest exports of the USA.
When Richard Nixon defaulted on the Bretton Woods Agreement(15 August 1971) by no longer having a redeemable US currency, he did mention that this would be a temporary measure and a fiat currency would be employed.This has proved to be a miserable failure after 49 years and hopefully we will return to a gold backed currency that provides more discipline to politicians and bankers.
When that happens, we could get rid of reserve banks and allow Treasury to take over its role.
Perhaps the best way for the public to protect themselves when banks are seen to be close to insolvency is to exchange their fiat for gold.
I appreciate your site which has educated many of us over the years and welcome any criticism of my comment.
Your scepticism regarding the capabilities of the RBA is understandable as it is particularly uninspiring and unimaginative when it comes to discussion of the potential role of a public central bank. Most of the interesting discussions about the role of public central banks is taking place offshore. Donald Horne’s criticism of Australian management in the 1960s remains apt.
I have no doubt that most of the senior staff of the RBA would resist fiercely any notion that the general public should be permitted to open deposit accounts at the RBA. As far as our RBA is concerned they believe their primary stakeholders are the private banks who dominant our monetary system. “What is good for the private banks is good for Australia” might be the RBA motto.
It is likely that there are more than a few junior officers at the RBA who can see the benefits of allowing the general public the same access to the RBA balance sheet that is now enjoyed by the private banks but we will never hear their views and if they want to rise through the ranks they best not express them.
So I don’t expect any imagination or discussion of the RBA role from the RBA even though I am not aware of any specific regulation or law that prohibits the RBA from allowing anyone it chooses to open an RBA deposit account. The reason given in the FAQ on the RBA website states that the reason you and I cannot open a deposit account at the RBA is because it is not a “commercial bank”. They don’t refer to a specific legislative prohibition. This has a whiff of weasel words. I suspect that there is no real legislative barrier to the RBA permitting the general public to open deposit accounts at the RBA.
In any event the RBA is a product of Commonwealth legislation so reforming the role of the RBA (and requiring them to offer deposit accounts to the general public) is possible. A sensible approach would be to hold a public inquiry …not necessarily a Royal Commission….that examines the current role of the RBA and the options for reforming that role. This should have been one of the terms of reference for the Hayne RC but it was explicitly and deliberately excluded. No real surprise as the Terms of Reference were largely dictated to Scott Morrison by the banks.
The major benefit of allowing the general public to open deposit accounts at the RBA is that it allows every Australia access to the RBA balance sheet rather than limiting access to private banks and the government. Surely it should be a fundamental right in a democratic state that the general public be permitted to use notes and coins issued by the public central bank AND operate a deposit account at the public central bank.
An RBA balance sheet that is larger due to demand from the public to maintain deposits at the RBA is nothing to be frightened of but the private bankers, their in-house economists, rent a shill journalists and the status quo hugging current senior management of the RBA will resist it tooth and nail.
I am not convinced that there are advantages in tying the value of public money to a commodity like gold. A better approach I think it is to encourage as monetary competition as possible and allow the public as much freedom as possible as to which monetary system they prefer to use. People are already free to buy gold and claims on gold, bitcoin and the vast array of foreign currencies that are issued around the planet.
Once the general public are free to open and operate RBA deposit accounts I can see the potential for private banks to compete by issuing their own money (backed by gold or some other commodity or simply the bankers promise) and if people want to use it they can. Though no shop keeper or the government or anyone else will be compelled to accept it just as they are not currently compelled to accept payment in Yen or bitcoin or gold nuggets.
We can allow more monetary flowers to bloom once we end the archaic and anti-democratic state of affairs where the public central bank does little more than provide a public guarantee and protect the business model and commercial interests of the private banking industry.