The fall of Silicon Valley Bank and the bailout of Credit Suisse has resurged the possibility of a wider banking crisis. This debate is forcing us to ask ourselves once again what is the purpose of banking and how it can best serve society. Once we recognise that money and payments infrastructure are public goods, it becomes clear that we should treat them as such by introducing a public digital euro.
With everything going on in the world, from the cost of living crisis to increasingly grave climate crisis warnings, why should we care about the latest banking chaos resulting from the collapse of Silicon Valley Bank and Credit Suisse?
The crisis that has emanated from the US banking system reveals once again the core tension between the two core functions of banks, and the inherent fragility that emerges from their combination.
First, banks provide a critical public service by processing payments. Unless you are willing to keep all of your money in cash, you are forced to lend your income to a private bank. This is because banks are the only institutions with access to central bank money, the publicly-issued money required for settling payments among themselves, in digital form. Meanwhile we the public are able to access central bank money through banknotes and coins.
The second core function of banks is to make profits by remunerating themselves against risky lending. By doing that, banks are supposed to play a critical role in financing the needs of households and companies to run their businesses and make investments.
Combining these functions makes banks inherently fragile, because of the mismatch between the deposits collected and the longer maturity of the loans they issued. As customers can theoretically withdraw their deposits at any time, the banks are always potentially on the verge of going bankrupt, if customers suddenly lose trust in their banks.
Too big to fail
Letting banks fail would be fine if only the consequences would not be dramatic for society. But money and payments are one of a number of key public goods that the very functioning of our society is dependent on, alongside utilities such as water, electricity and telecoms. If a bank fails, businesses will be unable to pay workers, and households would be unable to pay their bills or buy essentials like food. And if the bank failure is big enough it could drag the entire economy down with it, as we saw in 2008. No other industry, even those that have been privatised, has been given such free reign to enrich themselves through risk-taking and cause as much damage as banks have.
Banks’ power rests on their ability to create and take the money deposits that we rely on for making payments. Although risky bank deposits and non-risky central bank money (eg. banknotes) are not technically the same, in practice their value is kept equal through state support.
To prevent banks’ failure to result in the destruction of millions of people’s well-earned savings, governments have established deposit insurance schemes, which oblige governments to reimburse customers’ deposits (up to a certain amount) even when a bank fails. This protection sounds great in principle, but creates a moral hazard, as the public end up paying the cost of the private banks’ own failures.
The American economist Matthew C. Klein perhaps puts it better than anyone in a recent blog:
“Banks are speculative investment funds grafted on top of critical infrastructure. This structure is designed to extract subsidies from the rest of society by threatening civilians with crises if the banks’ bets are ever allowed to fail. The U.S. government’s response to the collapses of Silicon Valley Bank and Signature Bank—effectively removing the $250,000 cap on deposit insurance while letting lenders borrow relatively cheaply against fictitious asset values—is a reminder that those threats usually work”.
If one way or another, the public will have to pay for the failure of banks, this raises the question of why we let them get away with using their privileged positions as a basis for making bets where the rewards are privatised and losses socialised, as we saw with Silicon Valley Bank.
Digital euro: safe money without banks
Fortunately, there is a better solution than just bailout out banks whenever these private corporations screw up. The introduction of a digital euro has the potential to solve this problem once and for all. Almost 8 years after Positive Money started championing this idea, the project of a central bank digital currency is making big headways.
So what’s the big idea? Greek former finance minister Yanis Varoufakis explains it best:
“Imagine that the central bank provided everyone with a free digital wallet – effectively a free bank account […] Freed from the compulsion to keep their money in a private bank, and to pay through the nose in order to transact using its system, people will be free to choose if and when to use private financial institutions offering risk intermediation between savers and borrowers. Even in such cases, their money will continue to reside in perfect safety on the central bank’s ledger.”
The ECB is currently exploring the launch of a digital euro, and the European Commission is expected to put forward a proposal soon to be voted upon by the European Parliament and the Council.
Our director Vicky Van Eyck recently spoke to the European Parliament to explain our vision of how a digital euro can make our economic system more fair and democratic.
In short, a digital euro offers us the opportunity to finally treat money as the public good it is. In addition to improving the stability of the financial system, it would enable us to provide a universally accessible and safe electronic form of public money, in particular for those on the margins of the economy, who currently do not have access to financial services.
A digital euro would also simplify the system, rather than continuing to paper over the cracks with an increasingly complex tower of regulation very few can understand, as has been the response after every recent crisis.
However the exact details of how a digital euro will be introduced remain to be seen. Many citizens have already voiced serious concerns for privacy, and for the inclusiveness of this new system for all citizens including underprivileged ones. In fact, we’re very much concerned that the ECB will introduce a digital euro without questioning the powerful role of banks. Positive Money will fight tooth and nail to ensure the EU and ECB will prioritise the interest of citizens when deciding on how to implement it.