A regular Bootcamp in the local park usually involves some basic fitness equipment including slam balls, kettle balls and battle ropes. Bootcamp for bankers is no different and the following is an outline of the special equipment required by the exercise routines outlined in Bank Watch: Bootcamp for bankers .
It is assumed that Day 1 of the Banker’s Bootcamp is 1 January 2021, although an earlier date is possible if the Bootcamp Drill Masters are able to set up the drill cones quickly.
The Bootcamp equipment has been designed to allow for maximum choice and flexibility as flexible strong joints are always a good objective of a fitness routine.
Equipment Item 1 – New Bank Investment (Fully Reserved) accounts
The first item of equipment is a new option for “Bank Deposit account” customers. On Day 1 of the Banker’s Bootcamp, bank customers will find that their existing bank deposit accounts (i.e. unsecured at call investment/loan) have been renamed as Bank Investment (Fully Reserved) accounts.
The new Bank Investment (Fully reserved) account will not pay any interest (and the bank may even charge bank fees to operate it) but it will be fully reserved and 100% risk free. It is in effect a MyRBA account operated by a private bank.
So how does this bit of Bootcamp equipment work?
Equipment Item 2 – New CBI accounts at the RBA for banks
The RBA will establish a new account for each bank / ADI that currently operates an ES account (deposit account) at the RBA. This new account will be called something along the lines of Customer Bank Investments (Fully Reserved) “CBI account” and will be credited with the total amount of deposit balances held by the bank as at Day 1 of Bootcamp.
The CBI account will be used to record transfers between bank customers of different banks. However, the RBA will not need to be provided with the specific details of each transaction as all that matters to the RBA is the change to the balance of the CBI account for each bank.
Each time a customer informs their bank that they wish to transfer some of the balance of their Bank Investment (Fully reserved) account to a customer at another bank, their bank will notify the RBA who will debit that amount to the banks CBI account with a corresponding credit to the recipient bank’s CBI account.
Naturally, regular audits will be conducted to ensure that the total balances of the Bank’s customer’s Bank Investment (Fully reserved) accounts matches the balance of the bank’s CBI account at the RBA.
In the event of bank failure, the bank customer will be able to withdraw or transfer a portion of the bank’s CBI account balance at the RBA equal to the amount in their Bank Investment (Fully reserved) account as at the date of the bank failure.
So why allow this new Bank Investment (Fully reserved) account / CBI account concept and not simply require a bank customer to open a MyRBA account if they wish to access a 100% risk / fully reserved savings?
The answer is choice.
While many people may like the option of 100% risk free savings some may prefer that the RBA (or the deep state, world government, aliens etc) do not have the ability to review how much they spent on the Aldi middle aisle specials last month. Some are more comfortable having the marketing/reward point department of a private bank mine that information instead.
So why might someone prefer to open and use a MyRBA account rather than simply transfer money into a new Bank Investment (Fully reserved) account at their bank?
As a fundamental utility service of a democratic state the MyRBA account will be free to use (within reasonable limits) whereas it is likely that a bank will charge bank / transaction fees to use the Bank Investment (Fully reserved) account as the bank will be earning no interest on the balances of the CBI account at the RBA.
In effect the CBI account is a consolidated MyRBA account for customers who prefer to continue to maintain an account at a private bank.
Equipment Item 3 – Refurbished Exchange Settlement Accounts at RBA
The changes to the ES accounts at the RBA for each bank/ADI will be minor however it is important to be clear what they are for once the Banker’s Bootcamp commences.
The ES account will now be the MyRBA account for the bank. In other words the bank will use the ES account for transactions on its own account. The balance of the ES account may include:
- The proceeds of borrowing by the bank
- The proceeds of selling assets
- The proceeds of selling bonds
- The proceeds of share issuance
- The profits of operations
The ES account balance will also be used by the bank to make loans. More on this below.
The ES account will have NO role with regard to the new Bank Investment (Fully reserved) accounts that have been introduced for bank customers. Any transactions, including interbank transactions, involving those accounts will only result in changes to the balance of the CBI account.
Equipment Item 4 – No more money creation by the banks
Once the Banker’s Bootcamp commences the Banker’s will instantly lose their privilege of money creation. In practice what this will mean is that from Day 1 of Bootcamp when a banker accepts a loan contract the resulting accounting entries will NO longer be the usual
DR Assets (loan contract)
CR Deposits (Customers name)
where the customer is free to transfer or withdraw the deposit as they see fit.
Instead a bank loan will require two separate transactions before the customer is able to use the proceeds of the loan
DR Assets (loan contract)
CR Accounts payable (Customers name)
DR Bank Reserves (ES account / Bank MyRBA account at the RBA)
CR Bank Investment (Fully Reserved) account (Customers Name)
This amount of this transaction will be communicated to the RBA who will make the following entries in its accounts.
DR Bank MyRBA account (old ES account)
CR CBI account
In other words, a bank can no longer simply “create” a deposit by making a loan. It is only permitted to create an Accounts Payable. The customer only receives the proceeds of the loan when the RBA debits / reduces the bamk’s MyRBA / ES account at the RBA by the amount of the loan and credits the CBI account and the bank credits the Bank Investment (Fully Reserved) account of the customer.
Equipment Item 6 – A bunch of new bank investment accounts
Once all the deposit accounts have been converted to Bank Investment (Fully Reserved) accounts it is likely risk loving folk will be looking for more exciting returns than simply 0% risk free.
Bootcamper Bankers will be quick to meet this need with a variety of exciting investment options for their customers. These options will be competing with all the other investment options offered in the economy including, shares, corporate bonds, real estate etc.
The accounting for the making of an investment will be very simple. The customer’s fully reserved investment account will be debited and the bank will credit its reserves.
DR Bank Investment (Fully Reserved) account (Customers Name)
CR Bank Reserves (i.e. ES account / Bank MyRBA account at the RBA)
The amount of this transaction will be communicated to the RBA who will make the following entries in its accounts.
DR CBI account
CR Bank MyRBA account (old ES account)
Naturally, those individuals with savings in a MyRBA account at the RBA will also be able to invest and take on some risk for a return and the RBA accounting entries will look like this.
DR MyRBA account (of person doing the investing)
CR MyRBA account (of the bank /other party offering the investment product)
Equipment Item 7 – MyRBA accounts
Naturally a critical item of equipment for the Banker’s Bootcamp will be MyRBA accounts. The general public and non-banks will be permitted to open a MyRBA account and transfer some or all of their deposit account balances from their new Bank Investment (Fully Reserved) account to their new MyRBA account.
Each bank will also have a MyRBA account (the old ES account) and each bank will also have a CBI account representing the balances of those customers who prefer to keep using a private bank account for routine transactions.
As a basic utility service of a democratic state, there will be no charges for reasonable use of the account and there will be strict privacy protections on who has access to account information including transaction data. No doubt this will not satisfy some and they will be free to continue to use their Bank Investment (Fully Reserved) account and allow their bank to peruse their transaction data for useful marketing opportunities.
Equipment Item 8 – The cash rate / target rate / overnight rate
The approach to the cash rate, that is currently reviewed by the RBA board each month and is intended to be the rate at which banks lend each other some of their balances in their ES accounts to “settle” transactions, will be affected by the Bootcamp changes as now the total non government deposits on the balance sheet of the reserve bank are likely to increase from the current level of approximately $90 billion to approximately $2 trillion.
This means that there is potentially a lot more people who may be interested in lending some of their MyRBA account balances or their Bank Investment (Fully Reserved) account balances to a bank who needs them and be paid interest for doing so.
While it seems unlikely that many banks will need to borrow over night for the purposes of settling interbank transactions, it is likely that they will pay relatively low rates to do so as there are now a lot of deposits on the RBA balance sheet and it should not take much reward to coax their owners to part with them for a while.
Whether the RBA wishes to regulate lending rates generally or just who the banks can borrow from and for what purposes and the rate at which they do so is another question. Considering that setting the cash rate is currently mostly about attempting to control the demand for credit, as the creation of loans is about the creation of money in the current monetary model, it is likely that setting the cash rate will become a largely defunct lever of economic control.