Implications for Customers and banks
- Implications for Current Accounts (known as Transaction Accounts after being modernised)
- Implications for savings accounts (known as Investment Accounts after being modernised)
- Early redemption options
- Investment Account Guarantees
The first technical step of the modernised system is arguably one of the simplest. We simply require that banks keep safe the money which customers wish to keep safe, and invest only the money that customers wish to invest.
To the average person, banks will appear to operate very much as they do now. However, the necessary ‘behind the scenes’ changes required to prevent banks from creating money will mean that there a few subtle changes to the terms of service on current accounts and savings accounts.
More detail is contained in Solution - Detailed - Implications for customers and banks.
Implications for Current Accounts (known as Transaction Accounts after being modernised)
Post-reform, banks will not be permitted to lend the money held in Transaction Accounts (the equivalent of today’s current accounts). Instead, any money held in these accounts will be held in ‘fiduciary trust’ by the bank on behalf of the customers, and in practical terms will be considered to be held in a ‘Customers’ Funds Account’ at the Reserve Bank - the equivalent of putting the money into a safe-deposit box with the customer’s name written on it.
These Transaction Accounts would then be 100% safe - since the money is technically held at the Reserve Bank, the customers are guaranteed to be repaid, even if their bank was to become insolvent. This guarantee does not expose either the government or the Reserve Bank to any financial risk since Transaction Accounts are inherently risk-free for the customer.
The implications of this for the customer as are follows:
- Money in their Transaction Account is 100% secure and can never be ‘lost’.
- Transaction Accounts will not pay interest, because the banks are unable to lend this money. As the rates of interest on current accounts are rarely higher than 0.5%, this is not a significant loss.
- There will probably be monthly or annual fees for the use of a Transaction Account, since the bank needs to recoup the cost of providing payment services. However, competition for market share between the banks will keep those fees as low as possible, and many banks are likely to ‘swallow’ the costs and waive Transaction Account fees completely in order to attract customers who are then more likely to take out mortgages and other products with the bank (a loss-leader approach to marketing). These fees will in any case be outweighed by the significant financial benefits to every individual that arise from preventing the privatised creation of money as debt.
More detail is contained in Solution - Detailed - Transaction accounts.
Implications for savings accounts (known as Investment Accounts after being modernised)
In order to lend money after the reform is implemented, banks will need to find customers who are willing to give up access to their money for a certain period of time.
In practice, this means that the customer will need to invest their money for a defined time period (1 month, 6 months, 2 years, for example) or set a minimum notice period that must be given before the money can be withdrawn (e.g. 7 days, 30 days, 60 days, 6 months).
Banks will then operate in the way that most people think they currently do - by taking money from savers and lending it to borrowers (rather than creating new money (deposits) whenever they make a loan, and walking a tightrope between maximizing profit and becoming insolvent).
For customers of the bank, this means they will only be able to earn a rate of return (interest) if they are willing to give up access to their money for a certain period of time.
Note that this policy completely eliminates the risk of a bank run and gives banks much more stability, as they are able to plan their future outgoings up to 12 months into the future (a much greater degree of stability than they have right now).
We realise that the need to give up access to the money could dissuade some people from investing, which would unnecessarily reduce the total amount available for lending.
We have made detailed and well-considered provisions to allow customers to withdraw a portion (probably 20%) of their invested funds on demand, to allow for emergencies. These proposals strike a good balance between maximising flexibility for customers whilst limiting the amount of risk that this flexibility re-introduces to the banking system.
More detail is contained in Solution - Detailed - Investment Accounts.
Early redemption options
Some small investors/savers will want to keep a bit of money accessible for emergencies. But emergencies don't happen to everyone at the same time, so if everyone is keeping money available rather than investing it, that's a lot of money that could be put to better use. To get the best of both worlds, we can allow people to have instant access to a small percentage of their investments.
More detail is contained in Solution - Detailed - Early redemption options.
Investment Account Guarantees
Currently, banks take your money and lend it to others. If they lose money on those investments, then the taxpayer takes the risk and must bail out the bank. Our modernised system means that the banks can't pass on the risks to the taxpayer.
However, if we leave it at that, the banks might try to pass on all the risks to the savers, which would leave them free to gamble with savers' money without having any 'skin in the game'. Instead, the bank and the saver will end up sharing the risks.
More detail is contained in Solution - Detailed - Investment Account Grarantees.