Mkhwebane’s curious ideas on banking
Public Protector Busisiwe Mkhwebane’s notes of interviews conducted during her investigation of the Ciex/Bankorp saga are nothing short of alarming for the ideas they raise around the formation of a state bank.
The notes — which her spokesman has since denied are hers — surfaced in court on Monday after the Reserve Bank pushed for the veil of confidentiality over them to be pierced. They include a revealing conversation with former Bank independent nonexecutive director Stephen Mitford Goodson.
While Goodson is known for his crackpot banking theories and for being a Holocaust denialist, Mkhwebane thought him a good source to tap for her investigation. In their undated interview, Mkhwebane and Goodson discussed the benefits of a state bank — a hobby horse of Goodson’s, who has written that “private” central banks have condemned various nations to lifetimes of debt.
Mkhwebane said the benefits of a state bank — one assumes they meant the nationalisation of the Reserve Bank — would result in jobs and more money in circulation, and would complement the Freedom Charter.
Goodson responded that only 6% of real money was in circulation and the rest was credit based on simulated money. A state bank would lower credit, he said.
“Interest is holding people to ransom,” he said. “[There will be] no fractional reserves.”
Goodson then explained how banks evidently destroyed money when borrowers repaid their loans, “because you are balancing the loan”.
“[This] should not be, create more money.”
This conversation strayed far from the purpose of the investigation — which was instituted to examine the government’s failure to implement the Ciex “report” drafted by former British spy Michael Oatley — and seems to have missed key developments in the global banking system since the 2008 financial crisis.
To understand the developments, one first needs to appreciate just what “money supply” means and then look at “fractional reserve” lending.
The supply of money — including notes and coins, demand deposits and savings — in SA rose to nearly R3.2-trillion in the first quarter, an increase of R36.3bn. This money represents the percentage of customer deposits banks hold with the Bank through the minimum 2.5% cash reserve requirement. This cash reserve serves as a foundation of fractional reserve banking.
The supply includes other deposits recorded on banks’ balance sheets along with those of institutions such as the Corporation for Public Deposits and the Land Bank.
Goodson’s thesis assumes the R3.2-trillion, minus the 2.5% reserve requirement is available to on-lend. For example, depositors bank this amount, banks “reserve” R79.8bn of this and then lend the rest to clients.
This money does not belong to financial institutions; they borrow to make loans to customers.
In other words, banks leverage their customer deposits to make money in the form of extending credit, on which they make profits in the form of interest.
Goodson ignores measures taken by the Basel Committee on Banking Supervision to bolster the strength of the banking system since the global crisis. As the crisis peaked, financial markets forced banks to deleverage, worsening losses and shrinking bank capital and credit availability.
In response, the committee introduced the leverage ratio, a measure of a bank’s share capital and retained earnings or reserves relative to its assets — mainly comprising loans.
Now, the minimum leverage ratio is 3%. This means that for each loan a bank makes, it must have at least 3% more of its own money to cover the loan.
One would argue that Basel rules have rendered fractional reserve banking in its purest form useless and that Goodson’s advice to Mkhwebane to nationalise the Bank and get rid of it as a panacea to SA’s economic problems is obsolete.