mercoledì 5 febbraio 2025

Implementation of Quantitative Balancing in Canada


Implementation of Quantitative Balancing in Canada



1. Overview

Quantitative Balancing (QB) introduces a novel framework that can significantly impact how banks report deposits and seigniorage payments by:

  • Segregating deposits from bank balance sheets.
  • Recognizing deposits as liabilities to the State Treasury.
  • Explicitly recording seigniorage payments as operating expenses for banks.

This framework enhances transparency, reduces systemic risk, and aligns incentives among banks, the government (Treasury), and depositors.

2. Key Legislative Changes

2.1 Amendment to the Bank Act (Canada)

The Bank Act governs the operations of banks in Canada. To implement QB, specific amendments are required:

Proposed Amendments:

  1. Segregation of Deposits:

    • Introduce provisions stating that deposits created through lending remain the property of depositors and are recorded as liabilities to the Treasury rather than direct liabilities of banks.
    • Example: "Deposits created through lending shall be classified as liabilities to the Treasury, with banks acting as custodians on behalf of the State."

  2. Seigniorage Payments:

    • Require banks to remit seigniorage payments to the Treasury based on the nominal value of newly created deposits.
    • Example: "Banks must record and remit seigniorage payments equivalent to X% of the value of deposits created through lending activities."

  3. Transparency Requirements:

    • Mandate explicit reporting of seigniorage payments in financial statements under operating expenses.
    • Ensure banks provide detailed disclosures about their money creation activities and corresponding liabilities to the Treasury.

  4. Guarantee of Depositor Funds:

    • Strengthen depositor protection by explicitly stating that all deposits are backed by the Treasury's credit, reducing reliance on fractional reserve banking or deposit insurance schemes.

2.2 Updates to Accounting Standards

Canada follows International Financial Reporting Standards (IFRS) and Canadian Generally Accepted Accounting Principles (GAAP) . These standards must be updated to reflect QB principles:

  1. Reclassification of Deposits:

    • Under IFRS-IAS 7.6 and US-GAAP ASC 942-230-20 equivalents, deposits should no longer be treated as direct liabilities of banks but as liabilities to the Treasury.
    • Example: "Deposits shall be classified as liabilities to the Treasury, ensuring consistency with international accounting standards."

  2. Explicit Seigniorage Reporting:

    • Banks must explicitly record seigniorage payments as operating expenses in cash flow statements.
    • Example: "Cash outflows related to seigniorage payments shall be disclosed under operating activities in the cash flow statement."

  3. Balance Sheet Adjustments:

    • Loans remain as assets, while deposits shift to liabilities to the Treasury.
    • Example: "Liabilities section of the balance sheet shall include a line item for 'Due to Treasury' representing seigniorage obligations."

2.3 Modifications to the Financial Consumer Agency of Canada (FCAC) Regulations

The FCAC regulates consumer protection in financial services. QB requires updates to these regulations:

  1. Depositor Ownership Rights:

    • Confirm that depositors retain full ownership of their funds, even when deposited in banks.
    • Example: "Depositors maintain ownership rights over their funds, which are safeguarded by the Treasury through its credit guarantees."

  2. Enhanced Disclosure:

    • Require banks to disclose the segregation of deposits and their role as custodians in customer agreements and financial reports.

3. Implementation Framework

3.1 Phased Rollout Plan

To minimize disruption, QB can be implemented in phases:

  1. Phase 1: Pilot Program (Year 1):

    • Select a few major banks to test QB principles.
    • Monitor outcomes and refine implementation details.

  2. Phase 2: Regulatory Alignment (Year 2):

    • Update accounting standards, Bank Act provisions, and FCAC regulations to fully incorporate QB principles.

  3. Phase 3: Full Implementation (Year 3):

    • Extend QB to all federally regulated banks and credit unions.
    • Harmonize practices across provinces to ensure consistency.

4. Specific Law Changes

4.1 Bank Act (R.S.C., 1985, c. B-1)

  • Section 408 (Lending Powers):

    • Amend Section 408 to require banks to register liabilities to the Treasury upon creating deposits through lending.
    • Example: "When a bank creates a deposit through lending, it shall simultaneously record a liability to the Treasury equal to the nominal value of the deposit."

  • Section 421 (Reporting Requirements):

    • Add provisions requiring banks to report seigniorage payments and segregated deposits to the Department of Finance.
    • Example: "Banks must submit quarterly reports detailing their money creation activities and corresponding seigniorage contributions."

4.2 Department of Finance Regulations

  • Create a new regulation establishing a "Credito da Signoraggio Monetario" account within the federal budget to record seigniorage revenues.
  • Example: "The Treasury shall maintain an asset-side account titled 'Monetary Seigniorage Revenue,' reflecting claims against banks for deposits created through lending."

4.3 Central Bank of Canada Act

  • Update the Central Bank of Canada Act to harmonize its practices with QB principles.
  • Example: "The Bank of Canada shall explicitly record euro-equivalent creation in its cash flow statements, promoting transparency and consistency across monetary authorities."

5. Benefits of QB for Canada

5.1 Enhanced Transparency

By explicitly recognizing seigniorage payments and segregating deposits, QB provides clearer insights into banks' true financial health and their contribution to the money supply.

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5.2 Reduced Systemic Risk

Depositor funds guaranteed by the Treasury reduce the likelihood of bank runs, enhancing financial stability.

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5.3 Redistribution of Seigniorage

Redirecting seigniorage benefits to the public sector supports social welfare programs and strengthens fiscal positions.

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5.4 Alignment with International Standards

Adoption of QB ensures compliance with global accounting frameworks like IFRS-IAS 7.6 and US-GAAP ASC 942-230-20, fostering consistency and comparability across jurisdictions.

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6. Hypothetical Example

Consider a scenario where a Canadian bank grants a loan of CAD 1 million:

Traditional Accounting
Quantitative Balancing (QB)
Balance Sheet:
Balance Sheet:
Assets: Loan → CAD 1M
Assets: Loan → CAD 1M
Liabilities: Deposits → CAD 1M
Liabilities: Due to Treasury → CAD 1M
Cash Flow Statement:
Cash Flow Statement:
Operating Activities: Net Cash from Operations → CAD 100K
Operating Activities: Net Cash from Operations → CAD 100K – Seigniorage Payment (CAD 10K) = CAD 90K
Investing Activities: Loan Disbursements → CAD 1M
Investing Activities: Loan Disbursements → CAD 1M
Financing Activities: Increase in Deposits → CAD 1M
Financing Activities: Change in Due to Treasury → CAD 1M

Under QB, the transaction clearly separates monetary policy effects from commercial banking activities, offering stakeholders a more accurate view of the bank's performance.

7. Comparison with U.S. Implementation

The referenced article discusses a similar implementation in the United States


. While both countries share common objectives, Canadian adaptations must consider unique aspects such as:

  • The role of the Bank of Canada in monetary policy.
  • Provincial jurisdiction over certain financial institutions.
  • Existing deposit insurance mechanisms managed by the Canada Deposit Insurance Corporation (CDIC) .

8. Conclusion

Implementing Quantitative Balancing in Canada represents a transformative approach to modernizing the financial system. By segregating deposits, recognizing seigniorage payments, and fostering a stable Nash Equilibrium among banks, the Treasury, and depositors, QB promotes transparency, accountability, and financial stability. Legislative reforms outlined above provide a roadmap for achieving these goals while maintaining alignment with international best practices.

References

  1. Buiter, W. H. (2007). Seigniorage . Economics: The Open-Access, Open-Assessment E-Journal (Vol. 1, 2007-10), Kiel Institute for the World Economy (IfW Kiel), 1-49.
  2. Costa, M. (2009). Sulla natura contabile delle "passività monetarie" nei bilanci bancari . RIREA.
  3. Bossone, B., & Costa, M. (2021). Money for the Issuer: Liability or Equity? Economics, 15(1), 43-59.
  4. Bezemer, D. J. (2016). Towards an ‘accounting view’ on money, banking and the macroeconomy: history, empirics, theory . Cambridge Journal of Economics, 40(5), 1275-1295.
  5. Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence . International Review of Financial Analysis, 46, 361-379.
  6. Schemmann, M. (2012). Accounting Perversion in Bank Financial Statements: Root Cause of the Ongoing Global Financial Crisis .
  7. Gao, Z., Li, W., & O’Hanlon, J. (2019). The informativeness of U.S. banks’ statements of cash flows . Journal of Accounting Literature, 43, 1-18.
  8. Torfason, A. B. (2014). Cash flow accounting in banks – a study of practice . University of Gothenburg.
  9. Saba, M. (2025). Quantitative Balancing: Financial Statements become reflective of bank's actual performance .

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