9.3.1
Key benefits
In the reformed system, bank lending will not expand the money supply and repayments of bank loans will not reduce the money
supply. The money supply will be stable regardless of the lending activities of banks.
The CBI will be in control of money creation directly rather than trying to influence the lending and money creation of commercial banks.
Money can be injected into the economy without the need for any household or business to take on more debt.
The potential for abusing the power of money creation for individual gain is greatly reduced.
The payment system will operate using sovereign money, rather than liabilities of banks.
Risk and reward in the banking sector will be better aligned. The state and taxpayer will not be obliged to bail out failing banks. A depositor insurance scheme will not be necessary.
The income from creating money will benefit the state and society as a whole rather than the banks.
A one-time reduction of public debt, amounting to ISK 3-400 bn, as bank created money is retired and replaced by sovereign money. With direct control of the money supply, the CBI will have a better chance of meeting its goals of monetary and financial stability.
9.3.2
Banks continue their most important roles
Post-reform, commercial banks will not be able to create money, but they will continue to provide important services:
Banks will continue to act as intermediaries between savers and borrowers.
Banks will allow small savers to participate in making large loans.
Banks will enable successive short-term investors to make long-term loans.
Although funds in Transaction Accounts will be stored at the CBI, commercial banks will continue to provide their customers with all services related to Transaction Accounts, such as debit cards, statements, internet or mobile banking, and so on.
9.3.3
Positive aspects for commercial banks
Banks will lose the ability to create money and gradually lose the income related to money creation. However, banks will also benefit from the reform.
As the failure of a bank would no longer threaten the payments system there is may be an opportunity to reduce or simplify banking regulation, allowing banks to reduce overhead costs.
Post-reform, banks will have much smaller maturity gap between their assets and liabilities. The Conversion Liability will have a maturity of several years, while the demand deposits that it replaced had a maturity of zero days, meaning they could be withdrawn without notice. Savings Accounts, many of which could be drawn on without notice, will become Investment Accounts with defined maturities and notice periods. This makes liquidity management easier for the banks, and banks will be safer.
As all Transaction Accounts will be kept at the CBI, there will be no need to fund a costly deposit insurance scheme for Transaction Accounts.
Banks will be able to collect transaction fees and account fees for providing various services to Transaction Account holders.
Lower debt levels across the economy will decrease levels of risk, financial instability, and reduce loan impairments. This safer long- term environment for banking should partly offset the loss of the subsidy from money creation.
9.3.4
Lower interest rates
Post-reform, the economy and the money supply will be able to grow in harmony and without increasing the overall level of debt to GDP. As the banks’ Conversion Liability is repaid over a number of years, both public and private debt will be reduced. The aggregated balance sheets of the economy will grow stronger which means that the financial position of borrowers will improve, both when negotiating with domestic and foreign lenders. This lower level of risk should tend to lower interest rates.
The government will need to borrow less than before, because it will receive considerable new income from the creation of money, especially while banks are paying down the Conversion Liability. As the government borrows substantially less than before, the effect on the market will be towards lower interest rates.
Deposit insurance will not be necessary so banks will not have to make allowances for an insurance premium in their interest rates. As the CBI will be able to control the money supply directly, interest rates will no longer have to be raised by the CBI to discourage money creation by commercial banks. This should result in more stable interest rates across the economy.
The stability of prices will be much improved when the money supply grows in harmony with the economy. Inflation premium in lending rates may become lower.
9.3.5
Impacts on the payment system
The payments system will no longer be dependent on the solvency and liquidity of individual banks. Instead of using bank liabilities for money, payments will be made with debt-free sovereign money, created and held in risk free Transaction Accounts at the CBI.
Although banks will charge their customers for handling Transaction Accounts such fees are likely to be modest. If the fees are too high at one bank, customers can easily transfer the handling of their Transaction Accounts to a bank that offers better fees.
There will be no change in the way banks handle notes and coin. Banks will offer exchange between cash and Transaction Accounts, for a modest handling fee.
Demand for bank notes as a safe storage of money may fall somewhat because Transaction Accounts at the CBI will offer a risk-free alternative that is more convenient than bank notes.