In the last episode of PODCAST “The Turning Point”, we come back to the recent banking crisis which took away the Silicon Valley Bank in the United States and Credit Suisse. The opportunity to also ask deeper questions about our banking system. Especially with Eric Dor, professor of macroeconomics at IESEG Lille which questions the issue of monetary creation.
A little reminder first of all, today most of the money in circulation is created by commercial banks, with the help of loans. When a customer borrows money from his bank, the bank credits his bank account with the amount borrowed. This sum then appears as money available to the customer, but it is also recorded as a debt on the part of the customer towards his bank. The bank can then use this debt to grant new loans and thus create additional money.
Banks cannot do this just anyhow and are bound by a whole series of rules to limit risks and ensure a cushion of capital deemed sufficient. Nevertheless – we have just experienced it again – in the event of a crisis, confidence in a banking institution can evaporate very quickly and then it is the States and the Central Banks which must intervene in disaster like firefighters to save the banks and the deposits. of their customers.
As a result, some economists wonder whether in the future we should not limit the creation of money to central banks alone. Economist Eric Dor explains that this is an idea that is gaining more and more followers over time: “One could imagine that unlike what happens today, where only banks have an account with the National Bank… tomorrow you and I, everyone… can have an account with the National Bank. And the fact that today all the national banks are thinking about developing electronic money makes this idea much less improbable than yesterday”.
An idea that inevitably worries the banks since they fear suddenly become useless tomorrow, if this idea were to materialize. But Eric Dor adds that “Commercial banks could still keep their lender function. They would borrow from the central bank and then make loans to customers because they are the ones who have the expertise to be able to best scan which are the good and the bad customers. Banks would no longer be financed by customer deposits but would be financed by central banks and would make loans to the economy”.
If you want to dig into this idea, but also the other big questions that the recent crisis poses for our banking system, take the time to listen to the 50 minutes of this week’s PODCAST “Déclic – Le Tournant”. Available on audio and on your download platforms.