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Since the financial crisis of 2008, there has been a lot of discussion about the sustainability of our money system and the role of banks in it. The current system of fractional reserve banking gives banks a lot of room to extend credit, but that sometimes leads to mishaps in the financial system. That is why it would be good to think again about how we can better manage the risks in our financial system. That's what economist Teunis Brosens of ING says in conversation with Paul Buitink of Holland Gold.
According to the banker, in a fractional money system, there is always a tension between repayable savings and long-term loans. Savers want their money to always be on demand and preferably without any risk, while people who borrow money from a bank usually cannot pay it back immediately. In a scenario where many people want to withdraw their money from the bank, this can lead to a bank run, with all the consequences that entails. That tension is always there within the banking system and always has to find a place somewhere, we have to learn to live with it.
In recent decades, savers have become accustomed to receiving interest on their savings and that their savings are always safe. The former is no longer the case, but savers still feel protected by the deposit guarantee scheme. According to Brosens, this means that we actually place all the risks with banks, because they guarantee the compensation of savers. Even if the central bank has to step in to compensate savers, banks still have to pay that money back. We could therefore ask ourselves whether we could not distribute these risks in a different way.
One of the possible solutions is to re-establish a distinction between deposit banks and investment banks. In a deposit bank, people can safely store their savings, but they do not receive interest. If savers take their money to an investment bank, they will receive interest but they also run the risk of losing part of their money. By giving savers that choice, they become more aware of the difference between saving and investing. Savers will then bear part of the risk that is currently placed with banks. In that sense, Brosens also thought it was a pity that the deposit bank, of which Paul Buitink was the initiator together with Richard van der Linden, was stopped by the Dutch Central Bank. According to ING's economist, this initiative could have provided insight into how much enthusiasm there is for such a safe savings bank.
Buitink notes that there are also other ways to alleviate the tension of banks, for example by financing more long-term liabilities, for example from pension money or investment capital. These parties have to invest money for the long term, while mortgages, for example, are also for the long term. That would be much less risky than financing long-term loans from demand savings. Brosens notes that this is indeed a possibility, but that the European economy still relies heavily on bank loans. There is insufficient investment capital available to finance this from the market.
In recent years, according to Brosens, central banks have been able to use the same tool to boost inflation and keep interest rate differentials between countries small, namely keeping policy rates low and buying government bonds. But that gets complicated, because achieving those objectives currently requires different policies. Rising interest rates bring inflation down, but at the same time put pressure on the economy. According to the ING economist, we may be facing a recession in Europe, partly due to skyrocketing energy prices.
And then there are political problems in Italy that could lead to turmoil in the financial markets. Nevertheless, Brosens is hopeful that we will also get through this phase. If necessary, with new interventions by central banks and governments. We came out of it in 2012, even though we postponed problems to the future. According to him, leaving the euro is not an attractive alternative. It would mean that we would have a stronger currency and that our assets would be worth less in euros. Consider, for example, our pension assets, but also the value of assets on bank balance sheets.
