Quantitative Balancing: A Nash Equilibrium Framework - Policy Brief and Paper

POLICY BRIEF

Reforming Bank Accounting for Stability and Transparency: The Quantitative Balancing Proposal

Prepared by:
Marco Saba
Italian Center for Monetary Studies

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The Challenge

Modern banks create most money in circulation through deposit issuance. Current accounting standards misclassify these deposits as private debts instead of delegated sovereign money. This inflates cash-flow statements, obscures risk, and fuels systemic instability.

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The Proposal

Quantitative Balancing (QB) reclassifies customer deposits as sovereign seigniorage liabilities owed to the State Treasury. Banks become custodians of sovereign money, paying a transparent seigniorage fee. Profits derive only from intermediation services — not opaque money creation.

Nash Equilibrium: Banks, the state, and depositors each optimize their roles:

• Banks: Earn stable margins from legitimate lending.

• Treasury: Recovers fair seigniorage revenue for the public.

• Depositors: Gain greater safety and clarity.

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Empirical Impact

Monte Carlo simulations using EU, US, UK, and Japan data show QB can:

• Reduce systemic default risk by 12–18 basis points.

• Leave bank profits largely intact.

• Increase transparency and public trust.

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Implementation Roadmap

1️⃣ Sandbox pilots — selected banks trial dual accounting.
2️⃣ Impact study — align with Basel guidelines.
3️⃣ Legal adaptation — update national GAAP/IFRS to classify deposits correctly.
4️⃣ Phase-in — clear rules for legacy deposits and international branches.

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Global Compatibility

QB aligns with:

• CBDC frameworks: clarifies boundaries with digital sovereign money.

• Ethical Finance: compatible with Islamic finance by removing hidden usury.

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Next Steps

Regulators and policymakers are encouraged to:

• Support pilot programs.

• Mandate clearer seigniorage disclosure.

• Start dialogue for legal harmonization.

Contact:
📧 Marco Saba
🔗 Italian Center for Monetary Studies

Quantitative Balancing: A Nash Equilibrium Framework for Transparent Bank Accounting and Financial Stability

By Marco Saba, Italian Center for Monetary Studies

Abstract 

This paper introduces Quantitative Balancing (QB), a novel framework for reforming bank accounting by reclassifying customer deposits as sovereign seigniorage liabilities rather than conventional bank debts. By treating bank-created money explicitly as a liability to the State Treasury, QB clarifies banks' custodial role in money creation and removes distortions in traditional cash flow reporting. The paper formalizes a unique three-player Nash Equilibrium among banks, the state, and depositors, demonstrating how aligned incentives can reduce moral hazard and enhance systemic stability. Empirical calibration using EU, US, UK, and Japanese banking data shows that introducing seigniorage charges under QB would marginally affect profitability but measurably lower systemic default probability by 12-18 basis points. The framework also aligns with Islamic finance principles by integrating an anti-usury variant based on transparent monetage fees instead of interest. Practical pathways for phased implementation, legal adaptation, and sandbox testing are discussed, highlighting how QB can be harmonized with international accounting standards (IFRS) and co-exist with emerging sovereign digital currencies (CBDCs). By bridging monetary theory, legal architecture, and practical accounting reform, QB offers a credible roadmap for restoring trust, improving transparency, and stabilizing the modern banking system.

JEL Classification: E42; E50; G21; G28 

Keywords: Bank Money Creation; Seigniorage; Nash Equilibrium; Bank Accounting Reform; Monetary Sovereignty; IFRS; Systemic Risk; CBDC; Islamic Finance.