Warren Mosler’s proposals for the banking system

Editor

Warren Mosler wrote an article in 2011 titled “Proposals for the Banking System” [1] which are well worth scrutiny. His basic premise is that U.S. banks are, or should be, public/private partnerships whose role is to provide for a payment system and to fund loans based only on credit analysis. The following is a list of the specific rules that he proposes:

1. 1. Banks should only be allowed to lend directly to borrowers, and then service and keep those loans on their own balance sheets. No public purpose is served by selling loans or other financial assets to third parties.
   2. U.S. banks should not be allowed to contract on the

basis of LIBOR which is an interest rate set in a foreign country with a large subjective component. That widespread practice gave rise to serious problems during the financial crisis.

3, Banks should not be allowed to have subsidiaries of any kind. No public purpose is served by holding assets off the balance sheet.

1. Banks should not be allowed to accept financial assets as collateral for loans. No public purpose is served by financial leverage.
2. U.S. banks should not be allowed to lend off-shore. No public purpose is served in that sort of lending.
3. Banks should not be allowed to buy or sell credit default insurance. The public purpose of banking is to allow the non-bank sector to price risk.
4. Banks should not be allowed to engage in proprietary trading or any profit-making ventures beyond basic lending.
5. FDIC-approved credit models should be used for evaluating bank assets. If there is a valid reason for marking a particular bank asset to market prices, that likely means the asset should not be a permissible bank asset in the first place.

Further details are available from the source.

Source: The Huffington Post – Huffpost Business blog, 25 May 2011

1. http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_ 432105.

Warren Mosler is an American fixed income fund manager who specializes in monetary policy, and is a co-founder of Modern Monetary Theory.