Similarity of Bank and Non-bank Financial Intermediaries

[Joe Leote]

On another thread James asks me to link this paper by Richard A. Werner:

http://www.sciencedirect.com/science/article/pii/S1057521914001434

A problem with Werner's analysis is failure to present the debit and credit mechanics which show how a bank and non-bank financial intermediary (NBFI) have similiar balance sheet structures and engage in similar balance sheet operations.

In Table 1 Werner shows how an NBFI makes a loan on the asset side of its balance sheet:

NBFI Assets:

+ Loan (debit Loan account)

- Deposit (credit NBFI deposit account)

What Werner does not show is how does the NBFI obtain deposits prior to making the loan? The answer is it sells shares (raises paid-in equity) to take title to deposits from the shareholders or it borrows from a bank or non-bank (issues liabilities) to take deposits from a creditor.

NBFI Assets:

+ Deposit (debit NBFI deposit account)

NBFI Liabilities:

+ Borrowing (credit NBFI liability account)

+ Equity (or credit NBFI equity account)

So the NBFI expands its balance sheet before making a loan of deposits whereas Werner correctly shows that a bank expands its balance sheet when making the loan itself and creating a net new deposit account in the name of the debtor. 

I have not re-read the entire Werner paper, but if complete it would show that the bank may need to clear payment for the customer taking the loan. If the debtor spends to a person with another bank then the bank needs to spend reserves away to the other bank when it transfers the deposit. This means the bank must borrow or raise paid-in equity just like a non-bank intermediary to keep interbank payments flowing. To the extent a bank has many customers who spend loan funds to other customers of the same bank it would not be forced to make any interbank reserve payments.

Joe

[Joe Leote]

Here are some thoughts based on the analysis below and the recent thread on understanding debits and credits: 

1. Non-bank financial intermediaries appear to borrow first and then lend.

2. Banks (supported by liquidity from a central bank) appear to lend first and then borrow.

3. A Treasury without overdraft privileges at central bank must borrow first before deficit spending.

4. A Treasury with overdraft privileges at central bank can deficit spend first and then borrow.

5. A consolidated central bank and Treasury resembles a high powered bank that can tax and charge service fees.

6. The consolidated government can deficit spend first and then borrow by paying interest on central bank liabilities or by selling government securities.

Joe

[Jean Erick]

     Your sentence is a misdescription.  While Werner does not include what you say, he does show the books of non banks.

The essential layout is different from other analysis because he delays the payment to the borrower, in order to display

the exact booking at each stage.  And he does this for banks and non- banks to show they are the same at the first

booking.  And because the contract and payment are usually at the same time, but then differ when the money is paid to the

borrower, it is that second booking, that is normally not displayed, that reveals the difference.

 

    But, thank you for reposting.  I think this is new information and absolutely pivotal.

His article is in addition an earlier article describing a real world test in a German bank which demonstrated that only the Credit

Theory accurately explains the process.

 

    I think it is accurate to say that non-banks operate in an intermediary fashion while banks operate in a Credit Theory fashion.

At least it does affirm that banks are different from non banks.  They operate differently.

 

From Werner:

“Chapter 7 Client Money Rules
Credit Institutions and Approved Banks
7.1.8 R The clientmoney rules do not apply to a CRD credit institution in
relation to deposits within the meaning of the CRD held by that institution.
…
7.1.9. G If a credit institution that holdsmoney as a deposit with itself is
subject to the requirement to disclose information before providing services,
it should, in compliancewith that obligation, notify the client that:
(1) money held for that client in an account with the credit institution
will be held by the firm as banker and not as trustee (or in Scotland as
agent); and (2) as a result, the money will not be held in accordance
with the client money rules” (FCA, 2013).

 

     Werner further states that as banks are not trustee's (something we went over some time ago-COA)

and the money is their's, they can handle their books on their money as they please.

 

     With the coming passage of TTIP plus, the private may then operate the Fed and Treasury

as banks if they please.  Taxes belong to the gov.  They can do the books as they please.

Admittedly, the can make a killing at it is with spending but with the new corporate (fascist)

state, it's a possibility if not a probability.

 

 

James

[Joe Leote]

James,

I appreciate Werner's discussion of the Client Money Rules. And if you recall anything of my previous input on the subject then you recall that I generally agree with the credit theory of money. However the credit theory and financial intermediary theories are not necessarily mutually exclusive. If you insist on thinking that they are or must be then I think your models will not capture the causes of inflation and deflation in a modern economy. Therefore I must reject a theory that cannot account for certain facts of the financial system reality, namely, the dynamic causes of inflation and deflation based on the operating characteristics of financial intermediaries.

Joe

[Jean Erick]

----- Original Message -----

From: Joe Leote

To: Money Group

Sent: Wednesday, May 25, 2016 8:18 AM

Subject: Re: Similarity of Bank and Non-bank Financial Intermediaries

Here are some thoughts based on the analysis below and the recent thread on understanding debits and credits: 

1. Non-bank financial intermediaries appear to borrow first and then lend.

2. Banks (supported by liquidity from a central bank) appear to lend first and then borrow.

3. A Treasury without overdraft privileges at central bank must borrow first before deficit spending.

4. A Treasury with overdraft privileges at central bank can deficit spend first and then borrow.

5. A consolidated central bank and Treasury resembles a high powered bank that can tax and charge service fees.

 

     See other post.  This could change.  Perhaps they WILL become a high powered bank.

But again, it's best to illuminate the difference between a bank and other entities, not the similarities.

The similarites do not show the difference, which is the issue.

 

James

[Joe Leote]

James,

When it comes to managing cash flow here are some ways that banks, non-bank financial intermediaries, and governments are similar and different:

1. The non-bank financial intermediary has a treasury department which borrows or sells equity to raise cash. The cash is usually invested in making a new loan, purchasing a loan, or the purchase of securities. So the FI does not have much cash on hand at any given time. If the non-bank FI does not engage in borrowing or selling equity it will fail to make cash flow obligations which are due and payable. If there is a "run" on its liabilities it usually cannot make cash flow obligations and may go bankrupt. Non-banks may have overdraft privileges at banks in the form of lines of credit.

2. The bank financial intermediary has a treasury department which borrows or sells equity to raise cash. Only the cash is called "reserve balances". The cash is usually invested in making a new loan, purchasing a loan (rarely for a bank), or the purchase of securities. So the bank does not have much cash on hand at any given time. If the bank does not engage in borrowing or selling equity it will fail to make interbank payments that are due and payable. If there is a "run" on its liabilities the bank may be able to borrow from the central bank or it may be resolved under the rules for bank insolvency. Banks can borrow from the central bank at the discount window and can average required reserves over the reserve maintenance period.

3. The federal government has a Treasury department which borrows or taxes to raise cash. The cash can be invested in a loan made by other agencies of the federal government or spent for any other legitimate government purpose authorized by Congress in the United States. If the Treasury does not tax and borrow then the federal government will not make payment obligations due to lack of cash flow. Treasury does not currently have overdraft privileges at the central bank but does borrow from banks and non-banks that elect to purchase Treasuries.

This paper discusses inflation as caused by government spending and credit expansion:

Historical Analysis of the Credit Crunch of 1966:

https://research.stlouisfed.org/publications/review/69/09/Historical_Sep1969.pdf

It seems to me that inflation and deflation are caused by financial deal flows in the balance sheets of banks, non-banks, and governments. Since I want to understand the dynamic stability and instability created by such deal flows I am compelled to recognize both similarities and differences. Others can see it differently but probably are not concerned with the causes of inflation and deflation or have a model that I would not regard with much confidence on these issues.

Joe

On Thu, May 26, 2016 at 12:24 PM, Jean Erick <jean...@sbcglobal.net> wrote:

[Jean Erick]

     You disagree with Werners statement that the theories are mutually exclusive.  I have accepted Werners view.  I guess you didn't notice my previous

post where I said I have accepted Michael Hudson's real estate loan driver of inflation.

    Joe, your last sentence is nonsense.  You reject a theory that does not show how how financial intermdiaries show inflation/deflation when the

whole context is that the intermediary is mistaken and won't explain finances correctly.  That is Werner's point, that the intermediary and fractional

reserve theories are incorrect paradigms and will not provide the correct answers that the credit theory does.

 

     Again, for the third or forth time.  Whatever similarites that may be there, if they are there, do not matter.  It is the differences that display ..... the differences.

It is how they are different, how they are exclusive that is the point.

[Joe Leote]

James,

The similarities and differences both matter. In my experience each person is a unique individual (different from others) and a human being (similar to others). Therefore to experience self and others as human beings is a paradox of similarity and difference. Pattern recognition without BOTH similarity and difference is impossible.

You have not made any case for how inflation or deflation occur using the credit theory and abstracting away from the intermediary function of banks and non-banks. The burden of proof falls on you to do so if you are asserting that credit theory and intermediary theory are mutually exclusive and have no impact on inflation or deflation. I am not going to make your case for your position.

If my position is clear to you then stop attempting to contradict and discredit my views and we won't go over the same fruitless debate for another round.

Joe

[Jean Erick]

----- Original Message -----

From: Joe Leote

To: Money Group

Sent: Thursday, May 26, 2016 11:20 AM

Subject: Re: Similarity of Bank and Non-bank Financial Intermediaries

James,

When it comes to managing cash flow here are some ways that banks, non-bank financial intermediaries, and governments are similar and different:

1. The non-bank financial intermediary has a treasury department which borrows or sells equity to raise cash. The cash is usually invested in making a new loan, purchasing a loan, or the purchase of securities. So the FI does not have much cash on hand at any given time. If the non-bank FI does not engage in borrowing or selling equity it will fail to make cash flow obligations which are due and payable. If there is a "run" on its liabilities it usually cannot make cash flow obligations and may go bankrupt. Non-banks may have overdraft privileges at banks in the form of lines of credit.

 

    Looks good to me.  I don't see any point yet.

2. The bank financial intermediary has a treasury department which borrows or sells equity to raise cash. Only the cash is called "reserve balances". The cash is usually invested in making a new loan, purchasing a loan (rarely for a bank), or the purchase of securities. So the bank does not have much cash on hand at any given time. If the bank does not engage in borrowing or selling equity it will fail to make interbank payments that are due and payable. If there is a "run" on its liabilities the bank may be able to borrow from the central bank or it may be resolved under the rules for bank insolvency. Banks can borrow from the central bank at the discount window and can average required reserves over the reserve maintenance period.

 

     This seems very confused.  I am not sure what you are saying.  You start out with "bank financial intermediary".  Do you mean that some

of a banks activty is intermediary or that all banking activity is intermediary?  If the former, who cares?  The main loan activty of a bank is

not intermidiary, it is credit creation.  If the latter, no fruit from the poisoned tree is accepted.

3. The federal government has a Treasury department which borrows or taxes to raise cash. The cash can be invested in a loan made by other agencies of the federal government or spent for any other legitimate government purpose authorized by Congress in the United States. If the Treasury does not tax and borrow then the federal government will not make payment obligations due to lack of cash flow. Treasury does not currently have overdraft privileges at the central bank but does borrow from banks and non-banks that elect to purchase Treasuries.

 

     Seems fine to me.  All non banks operate in an intermediary fashion.

This paper discusses inflation as caused by government spending and credit expansion:

Historical Analysis of the Credit Crunch of 1966:

https://research.stlouisfed.org/publications/review/69/09/Historical_Sep1969.pdf

It seems to me that inflation and deflation are caused by financial deal flows in the balance sheets of banks, non-banks, and governments. Since I want to understand the dynamic stability and instability created by such deal flows I am compelled to recognize both similarities and differences. Others can see it differently but probably are not concerned with the causes of inflation and deflation or have a model that I would not regard with much confidence on these issues.

 

    I tend to accept the idea that inflation is caused by to much money at a time of full employment.  I don't recall well but I think it is derived

from the quanity theory of money.  But, again, Hudson's real estate loans as driver.

 

     BTW, did you know that Minsky is a commie?

 

James

[Joe Leote]

My comments in blue - Joe.

I took Money and Banking around 1985. The textbook is Money and Banking, Dudley G. Luckett, McGraw Hill (1984). In this course I learned that banks are a type of financial intermediary that create money according to the money multiplier model. Therefore I did not learn that financial intermediary model and bank money-creation models are mutually exclusive as you assert based on definitions provided by Werner.

Luckett page 105 "Nonbank financial institutions are frequently called financial intermediaries. By this is meant that they serve as intermediaries between two groups of people. They do this by selling a particular type of financial service to one group of people and then taking this money and selling another type of financial service to another group of people."

On Sat, May 28, 2016 at 11:36 AM, Jean Erick <jean...@sbcglobal.net> wrote:

----- Original Message -----

From: Joe Leote

To: Money Group

Sent: Thursday, May 26, 2016 11:20 AM

Subject: Re: Similarity of Bank and Non-bank Financial Intermediaries

James,

When it comes to managing cash flow here are some ways that banks, non-bank financial intermediaries, and governments are similar and different:

1. The non-bank financial intermediary has a treasury department which borrows or sells equity to raise cash. The cash is usually invested in making a new loan, purchasing a loan, or the purchase of securities. So the FI does not have much cash on hand at any given time. If the non-bank FI does not engage in borrowing or selling equity it will fail to make cash flow obligations which are due and payable. If there is a "run" on its liabilities it usually cannot make cash flow obligations and may go bankrupt. Non-banks may have overdraft privileges at banks in the form of lines of credit.

 

    Looks good to me.  I don't see any point yet.

Nonbank financial intermediary is selling a service on both sides of its balance sheet while conforming to the legal requirements of Client Money Rules. The investors on the liabilities side of the balance sheet face a risk of loss if the FI goes bankrupt. - Joe.

2. The bank financial intermediary has a treasury department which borrows or sells equity to raise cash. Only the cash is called "reserve balances". The cash is usually invested in making a new loan, purchasing a loan (rarely for a bank), or the purchase of securities. So the bank does not have much cash on hand at any given time. If the bank does not engage in borrowing or selling equity it will fail to make interbank payments that are due and payable. If there is a "run" on its liabilities the bank may be able to borrow from the central bank or it may be resolved under the rules for bank insolvency. Banks can borrow from the central bank at the discount window and can average required reserves over the reserve maintenance period.

 

     This seems very confused.  I am not sure what you are saying.  You start out with "bank financial intermediary".  Do you mean that some

of a banks activty is intermediary or that all banking activity is intermediary?  If the former, who cares?  The main loan activty of a bank is

not intermidiary, it is credit creation.  If the latter, no fruit from the poisoned tree is accepted.

Bank is selling a service on both sides of its balance sheet (financial intermediary) while operating with an exception from the legal requirements of Client Money Rules. The investors on the liabilities side of the balance sheet face a risk of loss if the bank becomes subject to resolution.  - Joe.

3. The federal government has a Treasury department which borrows or taxes to raise cash. The cash can be invested in a loan made by other agencies of the federal government or spent for any other legitimate government purpose authorized by Congress in the United States. If the Treasury does not tax and borrow then the federal government will not make payment obligations due to lack of cash flow. Treasury does not currently have overdraft privileges at the central bank but does borrow from banks and non-banks that elect to purchase Treasuries.

 

     Seems fine to me.  All non banks operate in an intermediary fashion.

This paper discusses inflation as caused by government spending and credit expansion:

Historical Analysis of the Credit Crunch of 1966:

https://research.stlouisfed.org/publications/review/69/09/Historical_Sep1969.pdf

It seems to me that inflation and deflation are caused by financial deal flows in the balance sheets of banks, non-banks, and governments. Since I want to understand the dynamic stability and instability created by such deal flows I am compelled to recognize both similarities and differences. Others can see it differently but probably are not concerned with the causes of inflation and deflation or have a model that I would not regard with much confidence on these issues.

 

    I tend to accept the idea that inflation is caused by to much money at a time of full employment.  I don't recall well but I think it is derived

from the quanity theory of money.  But, again, Hudson's real estate loans as driver.

 

The quantity of money and other financial instruments is recorded on balance sheets. During economic expansion the government deficit and balance sheet expansion of financial intermediaries drives consumer goods inflation and/or asset price inflation (e.g. housing price bubble). During severe economic contraction the balance sheets of financial intermediaries attempt to unwind because investors attempt to withdraw investments in the liabilities of financial intermediaries. This drives down asset prices sharply. Since equity prices are the residual of assets minus liabilities the plunging value of assets drives down the equity prices too. But this description based on balance sheet operations and deal flow does not conform to the so-called "quantity theory of money" which is a totally different concept. - Joe.

[Jean Erick]

     Well Joe, exactly.  You learned what you were taught.  You were taught how banking works during a period when the intermediary explanation

was believed by most to be the accurate description.  This mileau continues.  Which is fine.  But what is not fine is you refuse to consider new

information.  Werner describes the evolution  of thought on this.  He also describes how Keynes promoted, at different times, each of the different theories.

 

     What I don't think you can explain away is the accounting demonstration that Werner provided which shows that no money is

conveyed from another account to the borrower.  The credit is created by the bank.

     Any argument you provide has no credibility unless you apply to that and his real world demonstration of how the steps of the

loan a accounted for.

 

     I saw this some time ago when I described loan money as a draw on "real" money, that money created by the Fed.

 

James

[Joe Leote]

Well James,

I think you are conveniently ignoring the fact that I have described the debit and credit mechanics used by banks on these threads for several years. Since you have been reading these threads, and attempting to argue with me for years, I would assume you could recognize that I fully understand the debit and credit mechanics used by banks to operate their balance sheet. I did not learn these mechanics by studying Werner. I simply applied my knowledge of accounting practices and law.

His real world demonstration does not invalidate the fact that a bank makes financial deals with debtors (loans) and generates a deposit. When the deposit is spent it moves to a creditor to the bank. Therefore the bank operates as a financial intermediary. Each time you attempt to erase my position and substitute you false logic I will reject your efforts since this is a public forum and I think others should understand the complexity of the system. If this were a private thread I would simply ignore your efforts to contradict and discredit my view of how the system actually works.

Joe

[Joe Leote]

I wish to clarify in this thread that William F Hummel had significant influence on my understanding of bank balance sheet operations. However I discovered some advanced features of bank reserve management and bank liability management while researching two papers that I published on SSRN:

A. Sources and Sinks of M1 Money in a Four Sector Model of the U.S. Financial System

B. Financial Instrument Generation in the US Financial System

In a four sector model two features that can be recognized is that banks use "fractional reserves" to clear interbank payments while expanding the aggregate bank balance sheet and the non-banks use "fractional deposits" to clear payments while expanding the aggregate non-bank balance sheets. If the central bank or Treasury operate like a financial intermediary these units also express the feature of balance sheet expansion or contraction as the case may be.

I suggest anyone who is following this thread read this post by William Hummel:

Money as Credit

http://wfhummel.net/moneyandcredit.html 

In this post William describes "Banks as Intermediaries" and "Nonbanks as Intermediaries." This is done in the context of Money as Credit.

Joe

[Jean Erick]

     What you do Joe, is obfuscate.

1st, you are throwing in our direct disagreement on what credits and debts mean.  This is not arcane or complicated.   The general public think of credits and debts

as increases and decreases but in T accounting they are LOCATIONS.  The very link you posted a week or so ago started off by stating that in accounting

credits and debts refer to LOCATION.  In the face of your own postings, you take the alternative view.  You contradict yourself.  But, again, whatever is the

truth there, it is a provoction for you to throw it into the middle of an entirely different issue it has nothing to do wtih.

 

2nd, you refuse to meet the point.  The point is that Werner demonstrates that during loan creation, the act of creating the deposit is not the result

of converying funds from another account.  It is the result of a creation of a deposit out of thin air.  You are talking about everything perifieral.  Everything

EXCEPT the issue.  You statement is further confused by "When the deposit is spent it moves to a creditor to the bank."  Not only is it a confused

statement within itself, it has nothing to do with how the account the customer is spending out of was created in the first place, BEFORE any other

action.

 

     You have shown a habit of refusing to meet issues and it looks very suspicious when you do because all it does is to get across your

message without directly confronting the issue.  It serves to dissipate and negate the others position without directly doing so.  Because

a direct statement by you can be proved wrong.  As with the credit/debits.  It doesn't look like an honest discussion.

 

James

 

----- Original Message

From: Joe Leote

To: Money Group

Sent: Monday, May 30, 2016 9:31 AM

[Jean Erick]

     I agree that the intermediary is the generally accepted explanation for how banking works, including loan activity.

However, my reading of Werner convinces me that the Credit theory is the accurate description and the intermediary

and fractional reserve theories are not accurate descriptions of how banking works.

 

     While the Credit Theory was the original theory, it has been replaced by both the fractional reserve and now intermediary theories over time.

What is new is the real world testing and very discrete analysis of the loan process by Werner.  This demonstrates that no money is conveyed

from someplace else to create the deposit.  The deposit is created out of nothing through an accounting procedure that has not met the test

of a deeper legal investigation which might find it illegal.

 

     I suggest that those who still adhere to the intermediary theory have the problem of simply denying what the balance sheets,

which they hold as paramount, demonstrate.

 

 

James

 

----- Original Message -----

From: Joe Leote

To: Money Group

Sent: Monday, May 30, 2016 11:15 AM

Subject: Re: Similarity of Bank and Non-bank Financial Intermediaries

[Joe Leote]

James,

I reject your ad hominem arguments as an irrelevant distraction. I don't care what debits and credits mean to you. I care what they mean to people who use them in customary accounting practices. Anyone who wants to study the customary practices if free to do so. I use the terms according to the customary and conventional meaning to the best of my ability.

Joe

[Joe Leote]

http://wfhummel.net/moneyandcredit.html

Banks as Intermediaries

Like other intermediaries, banks borrow to lend at a profit.  However banks are a special kind of intermediary because of their role as depositories.  When a bank lends, it creates a new deposit to fund the loan and thus expands the money supply.  It may issue loans only up to a prescribed multiple of its capital, and it must hold reserves of base money sufficient to cover net daily withdrawals of its depositors.

Reserves refer to a bank's vault cash and its Fed funds.  Under present rules, a bank must hold 10% in reserves against its demand deposits, averaged over successive two-week periods.  Averaging allows a bank to run below its required reserves on any given day.  Interbank lending serves to redistribute reserves lost to other banks due to ordinary checking activities.

 

A bank can acquire Fed funds by borrowing in the money market, but it cannot increase its capital (assets minus liabilities) through borrowing.  Banks with sufficient capital sometimes create new deposits without adequate reserves, and count on borrowing to meet the reserve requirement.  That may leave the banking system short of reserves, and thus apply upward pressure on the interest rate in the Fed funds market.  In order to defend its target interest rate, the Fed will supply the required reserves on its own initiative.  Thus a net increase in credit issued by the banking system normally brings forth new base money.

[Joe Leote]

I now think the Client Money Rules (CRM), as discussed by Werner in the paper below, are irrelevant when answering the question he poses in the title of the paper: How do banks create money, and why can other firms not do the same?

Many nonbanks in the UK are not bound by the CRM. Yet these nonbanks cannot operate as a bank. Therefore the CRM are not relevant to answering the question: How do banks create money and why can they do so when nonbanks in general cannot do so?

Joe

On Tue, May 24, 2016 at 7:51 PM, Joe Leote <joel...@gmail.com> wrote:

[lante...@gmail.com]

Re: Joe Leote post about 'Banks are special' - consider including important fact that banks are not subject to the bankruptcy rules.

[Joe Leote]

Here are two links that discuss the technical insolvency of banks: 

http://positivemoney.org/how-money-works/advanced/introduction-to-balance-sheets/

http://positivemoney.org/how-money-works/advanced/how-do-banks-become-insolvent/

The accounting structure is very similar for certain non-bank financial intermediaries which have similar balance sheet operations and cash flow obligations but for clarity maybe one could study each type of intermediary (bank vs. nonbank) separately and then make a comparison for oneself.

Joe 

[Jean Erick]

     Well, I don't want to make hay out of your admission that you have not completely read the paper.  I understand that one tries to absorb

salient points and can miss something in the overwhelming amount of material out there.

 

     The Werner paper does show the accounting.  He goes the added step of creating a delay between the (1) contract being signed and the (2) conveyance

of the money to the lender, into the account. This seperation is not commonly done, if ever.  But it is this delay that shows the salient accounting step.

Step (1) shows the same for banks and non-banks.  It is step two where the difference appears, shows shows the bank has created its own deposit without

a conveyance of funds to it from another account.  As the steps are not usually seperated, it is not demonstrated then.

 

     I am not completely comfortable with the explanation myself.  I think the problem is that the operation (permission) is not explicit but is implicit.

If I convery money to you, as my broker, CMR's dictate that you put that in its own bank account, not on your books.  While you can spend in and out

of the account, you do not do the accounting for the account, the bank does.  But if I deposit my (what will soon be yours) money into your bank, you

now own the money and can carry it on your books and do your books as you please.  So, it does seem that CMR's work in reverse.  They do not

give the banks permission.  They deny all, the except the banks.  But, again, what about the fact that banks own the money?  They're exempt anyway.

That's what confuses me.  It could be that ownership is usually not spoken to.  Assets and liabilites is the nomenclature used.  Perhaps it is that

context which makes the CMR's relavant.  Werner did mention the possibility that the banks accounting proceedure might not stand up to a test

of legality.

 

James

 

----- Original Message -----

From: Joe Leote

To: Money Group

Sent: Thursday, June 02, 2016 1:54 PM

Subject: Re: Similarity of Bank and Non-bank Financial Intermediaries

[Joe Leote]

The paper I recently posted on Rehypothecation contains a description of Client Money Rules (CMR in UK) and Customer Protection Rule (CPR in US per the SEC) which apply to brokers and dealers. According to that paper the CMR do not apply under a number of exceptions. 

If Werner is asserting that the reason a nonbank cannot issue deposits in the UK are the CMR, then I suspect his legal reasoning is wrong, because there are many nonbanks which need not abide by the CMR but cannot issue deposits in the UK. Also there are broker-dealers and depositories operating with exceptions under the CMR. The nonbank broker-dealers still cannot issue deposits when operating under and exception and the depositories have a bank charter. 

I assume that a broker-dealer or bank operating within the rules would not be considered to be engaging in illegal behavior. One might challenge the validity of the rules. Banks have been creating deposits for a long time and courts have not yet decided that the custom is illegal so I don't know why jurisdictions would suddenly stop authorizing banks via bank charters.

Joe