Proposal for Volcker Rule Alternative (Draft 12/7/2017)

The Parziale Proposal

The call to split up the commercial banks from the investment banks as occurred in the Glass-Steagall Act of 1933 or at least to limit proprietary trading by banks and their affiliates is the spirit behind The Volcker Rule: to end systemic financial risk and the mentality of “Too big to fail“. Fundamental to this charge is to ensure regulatory solvency in credit markets via sound policy.

Although the repeal of Glass-Steagall in the 1990s allowed for banks to increase profits thus promoting American prosperity, legacy systematic solvency issues persisted which contributed to the financial crisis of 2007–2010. Roughly a decade later both banks and regulators understandably disagree on specifics of Dodd-Frank financial reform legislation.

Capital requirements are imposed by regulators on banks which reign in proprietary trading by banks thus limiting the amount of the banks own money [stock supply] it can use to make profits for itself. In a traditional commercial bank, not combined with an investment bank, capital requirements were proportional to the amount of Federal Reserves depositors kept safe in the bank.

Without fundamentally modifying the way [collectivized] credit is currently conceived it is proposed that a bank’s capital requirements be reduced proportionally as a function of the number of chartered banking institutions it’s US Citizen deposit customers’ do business with as follows: for each citizen-day of an active deposit contract the bank may access (0.25/365) of it’s own funds [denominated in Federal Reserve Notes] while the balance of depositor reserves may be used for typical bank business. This ensures a predictable system-wide rate of capital creation by banks as regulated by the Federal Reserve Bank of New York and authorized under the Federal Reserve Act.

This new requirement frees a bank to lend up to it’s daily deposit-contract-based limit allowing it to invest in higher yielding instruments thus allowing a tremendous increase in future earnings. Further, it increases potential lending in the community and spurs economic conditions. Currently, a bank limited by deposit-centric capital requirements is negatively influenced by a regulatory enforcement decision to increase the Tier 1 Capital Ratio(%). As a result of this proposal the ability for the bank to expand and the value of the bank will be greatly affected by the bank’s popularity as a provider of deposit accounting and transaction services.

In addition to improving the system-wide predictability of bank capital production this proposal recognizes the need for a solvency enforcement standard that both implements equal opportunity to banks’ competitive profitability and policy which is efficient with respect to implementation and maintenance burdens. This proposal recognizes both the need of the FOMC (which represents the coalition of commercially chartered banks) to maintain stable prices and the risk of governmental capital creation such as TARP in solvency crisises.

Without the extreme requirement that borrowers have the necessary net-worth wealth to collateralize a individual issuance of debit from the bank upon borrowing, this proposal allows banks to collectivize borrowers wealth collateral throughout the entire dollar-denominated Federal Reserve System of member banks. So, in the event that one borrower cannot maintain solvency via on-time principle repayments the system as a whole is called upon to cover any losses due to haircutting. Understand that as the banks create capital at the required [supply] rate, the stock of money is subject to predictable exponential growth. Thus a substantial diminishment risk to the Dollar-standard is experienced as asset prices inflate. And, since many consumers siphon consumer spending from asset holdings, consumer price inflation trickles down from bank capital creation.

This proposal thus insures haircutting losses are covered via a bookbox policy that, if automatically enforced, greatly mitigates the long-term risk of a plummeting Dollar as a so-called “store of value.” Essentially, the bookbox is the Federal Reserve’s generalized liabilities owed to commercial banks based on the following new reserve requirements: for each citizen-day of an active deposit contract [with a US Citizen consumer] the bank must deposit (0.25/365) of it’s own or depositors funds [denominated in Federal Reserve Notes] as reserves. This ensures that, in the event a bank in the system becomes insolvent, a crisis is averted via bailout from the Fed’s bookbox reserves.

The other benefit of this type of capital creation is that it is ostensibly merit-based. Rather than a zero-sum system of profit reduction, banking services are continually rewarded as competition in transaction facilitation business units continues to drive much needed innovation and efficient simplification of financial services. While simultaneously funding growth via phased-in reductions in corporate income taxation rather than higher fees for banking services such as checking, insured card transactions, and investment management.

Budget Anticipation Trigger

Given the Treasury’s utilization of it’s deposit account at the Federal Reserve to defund  government spending (partially from income taxation and partially from public sale of debt) it is imperative that a trigger, such as a fiscal crisis, reigns in any confiscation of bank funds (by the treasury of depository institution reserve funds) given the banks capital requirements hard limit on any emergency deficit limit increase. The essential maintenance of the Treasury balances maintained in the Federal Reserve’s Supplementary Financing Program shall remain at zero.

Such a budget anticipation trigger ensures a fiscal crisis is averted because the statute-stated rate of capital created banks are limited to is the establishment of a clearly defined yearly-fiscal-deficit of 0.25 of the total number of participating US Citizens in depository institution contraction. Given that a US Citizen remains, in perpetuity, defined as the current deposits of the US Treasury and of all Depository Institutions for which the Federal Reserve has liabilities apportioned by the total number of participating US Citizens in depository institution contraction.

Capital limits are to be set by the new fed funds rate replacement which then determine the citizen-day rate which may not be (0.25/365). The issue is that the rate is paid upon reserves that the bank has on deposit in the old sense; such reserves ought to be proportional to the number of depositors doing business with the deposit institution divided by the total number of depositors in the system. That way the new funds rate is paid on that and it is a true citizen-day rate. The resulting problem is that the reserves on deposit then grow [exponentially] wrongly modifying the citizen-day rate of each bank. The solution is to require the reserves of each bank to be kept constant at the depositor contract proportion and that all coupon payments not be as coupon-payable Fed reserves. 

Really, a distinction must be made between the reserves that are used to determine the citizen-day new-funds-rate paid and reserves that are [newly created capital] transferred to or from the Treasury account at the Fed that is used for government receipts and expenditures. The issue comes as a result of revenue receipts in the form of income taxation or public sale of debt because this either increases government spending or increases capital available for banks to bid asset prices higher. The point is that both bank capital creation and government revenue receipts will either increase GDP if the government spends it or increase asset prices if banks invest it.

In the recent absence of government spending in a equal-compensation-for-all manner (that included consumer spending capability and retirement-focused asset acquisition) supplemented by individual (and aggregating) market (unhindered, public) activity, exuberant investment has utilized the available capital to such excess that capitol is self-destructing to the point that interest rate have gone so low that they are sometimes negative. This lack-of-balance between investment in the non-violence of labor services and future financial security has lead to families benefiting relative to the proportion of total asset capitalization owned rather than any fundamental republic law.

In practice this means that the issue with most Large C Corporations is not that they have the value of their capital boosted in asset markets by bank investment, but that they lack guaranteed GSE status at the Federal Reserve which allows then to convert that capital to growth in employment compensations (and therefore productive domestic product) without involving Congressional Statue obtainment via so-called crony lobbing. Corporate leaders may directly decide to devote capital to Keynesian Flow rather than Asset Bubbles thus fulfilling the Federal Reserves second mandate to give individuals a plethora of job opportunities (while maintaining the first mandate of a stable measure-of-value.)

Any W-2 employment corporation should be making those compensation payments from GSE reserve accounts at the Fed thus preventing the capital from being twice-lent. This is why we distinguish between capital investment (and the resulting gains or losses) and regular income. The transfer of capital happens thru the transfer of regular income from one debit-tracking account at the Fed to another whereas the Fed’s capital requirements say that capital may be invested in one capital asset or another. Thus, taxation was probably devised to ensure the proper data was gathered for system level reconciliation. Not to mention the ability to punish in specific ways while contributing to collectivized debit reserves.


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