A letter to the ECB new President Mrs Lagarde

Banks: the problem of accounting for money creation

Dear President Mme Christine Lagarde,

First of all, congratulations on your appointment as ECB President !

I am writing to you to point out an outstanding inconsistency in the Statement of Cash Flows in the financial institutions. This problem is recognized by the academy and the World Bank advisors, see a short bibliography here: https://centralerischibanche.blogspot.com/2018/11/bibliografia-sulla-questione-contabile.html

In short, when a bank creates new money that is entered as a client deposit, an outflow is recorded in the cash flow account as if the bank were intermediating pre-existing funds. But no matching entry exist of a previous inflow in the cash flows account due to the same bank decision of new money creation. This inconsistency was confirmed to me by ECB in an email dated December 3, 2018: https://view.publitas.com/p222-14223/third-ecb-answer-terza-risposta-bce/page/1
"...an extension of a loan would have an impact on “Cash flows from operating activities”. “Funds advanced to customers” would show an outflow reflecting a loan extension, while “Deposits from customers” would show an opposite inflow due to increase in customer deposits. Therefore initially there would be no net impact on the bank’s cash position."  
I.e.: creating new cash don't affect the net cash position ! The ECB has the same problem when creating new money: negative cash flows are netted with future repayment of loans as if money creation didn't happened anytime. The ECB solution was to not publish his own Statement of Cash Flows - as if hiding a problem could solve the problem...

This banking practice of not accounting for a cash inflow at the moment of cash creation - deposits are defined as cash BOTH under GAAP and IAS/IFRS accounting standards - creates the false appearance of a continuous need for new cash inflows to net an unreal negative position on the cash account, thus putting an enormous stress on the whole economy at large and on the same banks' books.

This practice and policy may subject the bank itself - the ECB - to two kind of liabilities - in the trillions - for future claims at ECJ (European Court of Justice) for damages pursuant to article 340 of the TFUE, second paragraph: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A12016E340

The first ground of liability is the wrongly accounted activity of money creation effected by ECB itself. (Time ago I wrote to your German ECB auditor Ernst&Young on that matter, but received no answer in return... See the attachment below );

The second ground of liability lies in the supervisory activity over member states commercial banks by the ECB; in fact, the latter omitted to halt and correct this accounting perversion that is causing enormous damages both to the member states finances and directly to the involved banks themselves, as it manifest when we consider, e.g., the current situation of the Italian Bank CARIGE under ECB "special" administration.

I hope that you will take some time to examine this accounting situation that was also the subject of an EFRAG Project - unfortunately aborted before reaching any significant result: https://www.efrag.org/Activities/335/Statement-of-Cash-Flows-issues-for-Financial-Institutions

In the mean time, there are pending Court cases in Italy about linked matters.

Kind regards,

Marco Saba
Forensic accountant
Rome - Italy


Attached:

Questions about true and fair view of the financial position of the ECB

sab 13 ott 2018, 10:15

To: Claus-Peter Wagner (E&Y)

 

Dear Herr Wagner,

I have read your ECB's Independent auditor's report as of page 173 of the ECB English annual report, here:
https://www.ecb.europa.eu/pub/pdf/annrep/ecb.ar2017.en.pdf?8887833fa471f64f8293868ae8260877

My email to you is about the accounting view of money creation as it is reported in this paper on the World Bank website:

The “accounting view” of money: money as equity

http://blogs.worldbank.org/allaboutfinance/node/916

My questions are as following:

1) Are you sure that the Central Bank Annual report without a 'Cash Flow statement' is a true and fair view of the ECB' financial position ?

2) Are you sure that the Central Bank liabilities regarding euro money creation must be exposed for the full capital nominal value of the money created and not just only for the cost of production ? I.e. seigniorage on capital creation is actually not considered and/or disregarded.

3) Have you been subjected to any kind of pressures or other ways of influencing for disregarding such obvious accounting matters ?

Thank you for your answer,

Marco Saba

Forensic accountant

c/o Studio Legale Orlandi - 28, Via Alfieri Vittorio – Firenze – ITALIA