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Quantitative Balancing (QB) in Austria: A Proposal for Transparent and Stable Banking

1. Introduction

1.1 The Problem with Traditional Bank Cash Flow Statements

Banks in Austria, like elsewhere, face challenges in accurately representing cash flows due to the nature of money creation through credit. Current accounting practices conflate operational, investing, and financing activities, obscuring true performance

. This paper proposes Quantitative Balancing (QB), reclassifying deposits as liabilities to the State Treasury, leading to more transparent and accurate financial reporting. QB clarifies the role of banks as custodians of depositor funds while recognizing seigniorage payments, offering a clearer reflection of a bank's financial health.

1.2 Why Transparency Matters

Clear financial statements are crucial for maintaining trust in the banking system. Misleading information can lead to misinformed investment decisions, regulatory oversight failures, and systemic instability

. Quantitative Balancing offers a solution by providing a more transparent view of a bank's operations and its relationship with the monetary system. Furthermore, it aims to establish a stable Nash Equilibrium among banks, the State (Treasury), and depositors, aligning their incentives to promote financial stability.

2. Understanding the Current System

2.1 How Banks Create Money

When a bank grants a loan, it simultaneously creates a new deposit. This process expands the money supply. While the loan appears as an asset on the bank’s balance sheet, the corresponding deposit is treated as a liability. However, this "liability" is not a traditional debt but represents the bank’s obligation to honor the depositor’s claim

2.2 Challenges in Reporting Cash Flows

Current accounting standards struggle to capture the nuances of money creation. Deposits, while increasing the bank's liabilities, do not represent actual cash inflows. This distorts the cash flow statement, making it difficult to distinguish between genuine cash flows from operations and those resulting from money creation. Furthermore, the seigniorage benefit accruing to private banks is not explicitly recognized, masking underlying profitability or risk

2.3 Limitations of Current Accounting Standards

Existing frameworks like IFRS and US GAAP fail to adequately address the unique nature of banking. They treat deposits as traditional liabilities, failing to recognize the role of banks in the money creation process. This lack of transparency hinders effective oversight and informed decision-making, contributing to systemic instability

3. Introducing Quantitative Balancing

3.1 Core Principles of Quantitative Balancing

QB reclassifies deposits as liabilities to the State Treasury, reflecting the state’s ultimate control over the money supply. Banks act as custodians of these funds, managing them on behalf of the Treasury while recognizing seigniorage payments as an expense. This segregation clarifies the relationship between banks and the monetary authority

3.2 Impact on Financial Statements

QB transforms cash flow reporting by eliminating misleading entries related to deposit creation. Seigniorage payments are explicitly recorded as operating expenses, providing a clearer picture of a bank’s profitability. Financing activities are simplified as deposits are no longer treated as a direct source of funding

3.3 Benefits of QB for Transparency

QB separates monetary policy effects from commercial banking activities, offering a more accurate view of a bank’s performance. It highlights the bank’s role as a financial intermediary rather than a creator of its own funding

3.4 A Nash Equilibrium for Financial Stability

Quantitative Balancing aims to create a stable Nash Equilibrium among banks, the State (Treasury), and depositors. This equilibrium fosters trust and predictability, reducing the likelihood of systemic crises.

4. Analyzing the Effects of Quantitative Balancing

4.1 Changes in Balance Sheet Dynamics

Under QB, loans remain as assets, but deposits shift to liabilities to the Treasury. This clarifies the distinction between core banking activities and monetary policy implications. The balance sheet reflects the bank’s role as a manager of state-backed currency

4.2 Transformation of Cash Flow Statements

Operating Activities : Seigniorage payments become explicit cash outflows, reflecting the cost of money creation.
Investing Activities : Loan disbursements continue to be recorded as cash outflows.
Financing Activities : The focus shifts away from deposits as a source of funding. Changes in Treasury liabilities due to deposit fluctuations would be reflected here .

4.3 Improved Decision-Making

Stakeholders benefit from clearer insights into a bank’s performance and risks. Investors can better assess the bank’s true profitability and financial health. Regulators gain a more accurate view of systemic risk. Depositors have greater confidence in the safety of their funds

5. Case Studies and Examples

5.1 Hypothetical Example of a Bank Under QB

Scenario: Beta Bank

Traditional Accounting :
- Balance Sheet: Loans (€1,000,000); Liabilities: Deposits (€1,000,000).
- Cash Flow Statement: Increase in deposits treated as a financing activity.
Quantitative Balancing :
- Balance Sheet: Loans (€1,000,000); Liabilities: Due to State Treasury (€1,000,000).
- Cash Flow Statement: Seigniorage payment (€10,000) recorded as an operating expense.

Analysis :

QB provides greater transparency by explicitly showing the cost of money creation and ensuring depositor funds remain secure.

6. Addressing Potential Concerns

6.1 Regulatory and Implementation Challenges

Implementing QB in Austria would require amendments to national and EU-level accounting standards. International cooperation and transitional arrangements are crucial to minimize disruptions

6.2 Economic and Social Considerations

QB could redistribute seigniorage benefits from private banks to the public sector, impacting government revenue and fiscal policy. Enhanced depositor protection contributes to greater financial stability.

6.3 Maintaining the Nash Equilibrium

Successful implementation depends on coordination among banks, the State, and depositors. Robust regulatory enforcement and transparency are essential to maintain equilibrium.

7. Conclusion

7.1 Summary of Key Points

Quantitative Balancing offers a transformative approach to financial reporting by:

Reclassifying deposits as liabilities to the Treasury.
Explicitly recognizing seigniorage payments.
Establishing a stable Nash Equilibrium among key stakeholders.

7.2 Call to Action

Further research, pilot programs, and international collaboration are needed to explore the feasibility and implications of QB in Austria.

7.3 Future Directions

Future studies should focus on the long-term economic impacts of QB, its integration into global financial systems, and the development of practical implementation guidelines.

References

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Schemmann, M. (2023). Bank Money in Crisis: Mock Deposit Lending & Accounting Fraud .
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Bossone, B., & Costa, M. (2021). Money for the Issuer: Liability or Equity? Economics .
Mayer, T., & Huber, R. (2014). Vollgeld: Das Geldsystem der Zukunft .
Bezemer, D. J. (2016). Towards an ‘accounting view’ on money, banking and the macroeconomy .
Saba, M. (2024). Rettifica contabile dei bilanci delle banche e riflessi sul bilancio dello Stato .
Webb, D. R. (2023). The Great Taking .
European Central Bank. Regulation (EU) No 575/2013 .
Mulford, C. W., & Comiskey, E. E. (2009). Cash Flow Reporting by Financial Companies .
Gao, Z., Li, W., & O’Hanlon, J. (2019). The informativeness of U.S. banks’ statements of cash flows .
Bateman, W., & Allen, J. (2022). The Law of Central Bank Reserve Creation .

Centrale Rischi Banche

martedì 18 febbraio 2025

Austria: a Quantitative Balancing (QB) for Transparent and Stable Banking