Loanable funds versus money creation in banking: a benchmark result

We establish a benchmark result for the relationship between the loanable-funds and the money-creation approach to banking. In particular, we show that both processes yield the same allocations when there is no uncertainty. In such cases, using the much simpler loanable-funds approach as a shortcut does not imply any loss of generality. When there is aggregate risk with complete contracts and complete markets, we indicate that a restricted equivalence result holds.

Developing a Shari’ah based FinTech money creation free [SFMCF] model for Islamic banking

Purpose The purpose of this study is to develop and thereafter validate a Sharīʿah-based FinTech Money Creation Free [SFMCF] model for Islamic banking. Design/methodology/approach The study has adopted a qualitative research methodology, using three approaches, namely, a survey of the literature to identify the research gap and the variables needed for developing the model, content analysis to construct the variables into a model and semi-structured interview with 10 experts in banking, Sharīʿah and Financial Technology (FinTech) to validate the SFMCF model. Findings The major findings of the study lie in developing the SFMCF model for Islamic banking, empirical validation of the model’s viability and acceptability and the implications for the main stakeholders of Islamic banks. Research limitations/implications The SFMCF model is specific to Islamic banking and its validation is based on the views of 10 experts. Practical implications The SFMCF would necessitate changes to the central bank regulatory framework, convince Islamic banks to forego their powers and advantages of creating money and enhance their abilities to fully adopt Sharīʿah-compliant FinTech. Social implications The proposed model if implemented would change positively the perception of the society particularly the stakeholders of Islamic banks and restore their trust and confidence about the direction of the institution toward achieving the Sharīʿah objectives. Originality/value The novelty of this work lies in developing and validating the viability and acceptability of the SFMCF model for Islamic banking.

On the money creation approach to banking

We study today’s two-tier money creation and destruction system: Commercial banks create bank deposits (privately created money) through loans to firms or asset purchases from the private sector. Bank deposits are destroyed when households buy bank equity or when firms repay loans. Central banks create electronic central bank money (publicly created money or reserves) through loans to commercial banks. In a simple general equilibrium setting, we show that symmetric equilibria yield the first-best level of money creation and lending when prices are flexible, regardless of monetary policy and capital regulation. When prices are rigid, we identify the circumstances in which money creation is excessive or breaks down and the ones in which an adequate combination of monetary policy and capital regulation can restore efficiency. Finally, we provide a series of extensions and generalizations of the results.

Money creation and banks’ interest rate setting

Purpose This study aims to examine a potential case of interdependence in loan and deposit interest rate setting. Design/methodology/approach The authors set up a theoretical microsimulation model with endogenous loan interest rate determination via a learning algorithm. Findings The authors show that in certain environments, it may be beneficial for large banks to incorporate information on retail funding costs into the lending rate setting decision. Originality/value The author’s model is based on the realistic money creation mechanism.

The Law of Monetary Finance under Unconventional Monetary Policy

Monetary finance (money creation by central banks to fund public expenditure) is a high-profile part of economic, political and policy debates concerning the legitimacy of central banks in liberal economies and democracies. This article makes a distinctively legal contribution to those debates by analysing the legal frameworks governing monetary finance in three prominent central banking systems between 2008 and 2020: the Federal Reserve System, the Eurosystem and the Bank of England. It begins by explaining the law governing central bank and national treasury relations in the United States, the EU and the UK. It then examines how that law operated under the unconventional monetary policies adopted by central banks in response to the financial crisis and the COVID-19 pandemic. The article concludes by reflecting on the challenges monetary finance presents to the sui generis position of central banks in the liberal constitutional order.

Money creation, debt, and justice

Theories of justice rely on a variety of criteria to determine what social arrangements should be considered just. For most theories, the distribution of financial resources matters. However, they take the existence of money as a given and tend to ignore the way in which the creation of money impacts distributive justice. Those with access to collateral are favoured in the creation of credit or debt, which represents the main form of money today. Appealing to the idea that access to credit confers freedom, and that inequalities in this freedom are morally arbitrary, this article shows how the advantage to those with collateral plays out in different ways in today’s economy. The article identifies several forms of bias inherent in money creation, and its subsequent destruction: loans from commercial banks to individuals and corporations, interbank lending, lending from central banks to commercial banks, and selective bail-outs by central banks. These are not mere inequalities: they are unjust since alternative designs of the financial architecture exist that would significantly reduce them. The paper focuses on one possible reform with the potential to address several of the types of bias identified, namely the separation of money creation from private bank credit.

Conventions, Money Creation and Public Debt to Face the Covid-19 Crisis and its Aftermath: A Post-Keynesian View

ABSTRACT The aim of this article is, on the one hand, to analyze, based on Keynes’s ideas, the relevance of money creation and public debt to mitigate the Covid-19 economic crisis, and, on the other hand, it analyses the role of conventions in this context.

Money creation and the revolution. Along the Path to Real Change

When you store your belongings in a private locker, does the owner of the locker pay you? On the contrary, you pay the owner, for he is providing you with a service called safe-keeping. In effect, the owner holds your belongings safe until you take them back. So, why is it that you accept money from a bank to hold your money for you? The obvious answer is that the bank is not holding your money; it is lending it out and rewarding you with a portion of what it collects in interest. If you are happy with this arrangement, you have likely sought out a bank in your neighborhood that provides you with the greatest return on your deposit. Unfor tunately, there are several things very wrong with this type of transaction. Most important is that you are engaging in a tran saction that is commercially unsound. You and your bank engage in a legally non-binding agreement when, on the one hand, your bank promises to return your deposit on demand, and on the other hand, loans a portion of it to others for a specified period of time. Contractually, these two acts are incompatible, as the same money cannot be both a de-mand deposit and a loan simultaneously. Either, you deposit your money, reserve the right to de-mand it back at any moment, and pay the bank for holding it on your behalf. This is called a demand deposit. Or, you surrender your right to your money for a specific period of time, permit your bank to lend it to others, and receive interest for your risk and sacrifice. This is called a time deposit. Commercially, treating your demand deposit as money that can be loaned to others is not an enforceable contract, for the law insists that there must be mutual assent when two parties enter into an agreement. You and the bank are simply at odds when you expect to retrieve your money at any moment on demand, and the bank lends a portion of it to others for a fixed period. Legally speaking, both parties to the transaction do not agree to the same contractual terms in the same sense.