Cash is the money of the citizens! Report from the 4th Cash Symposium of the Deutsche Bundesbank - by Thomas Seidel

The Hilton Hotel at Frankfurt am Main
(Source: Thomas Seidel)

This year's Deutsche Bundesbank's cash symposium at Frankfurt's Hilton Hotel became a passionate constitutional appeal for keeping cash. A whole series of top-class speakers from various social areas provided fundamental insights into the topic. Nevertheless, strong opponents of classical cash are forming, partly for unfair political motives, partly for pure profit-oriented opportunism.

It seems strange that just on an Ash Wednesday, a cash Symposium of the German Federal Bank takes place. True cash ist the king and in German language also being called „ash“ or „cole“, as Karl Ludwig Thiele, on the board of the Deutsche Bundesbank, responsible for the cash, expressed it very appropriately. At the same time, this February 14 was also a Valentine's Day. Is this calendrical coincidence, the last time in 1945, so just on the day when Dresden was unfairly reduced to rubble, first come about again, a hint to the love of the Germans for cash? While Ash Wednesday in Germany is traditionally used for vigorously and sometimes indecent public political statements adressed to political opponents, the participants of the cash symposium make clear what freedom and democracy are in reality.

Jens Weismann President of the Deutsche Bundesbank
(Source: Thomas Seidel)

In contrary to the crypo tokens

The first challenge was made immediately by the President of the German Bundesbank Jens Weidmann. He opposes the application of the concept of money on any crypto currency, such as the Bitcoin, and speaks from now on only pejoratively but true of crypto tokens. A term consistently used by every speaker in the event. Weidmann rejects the crypto token, completely rightly, every typical feature and function of the money. First and foremost, there would be confidence in a currency behind which ultimately stands a central bank. The volatility of crypto token is currently six times higher than that of equities and thirteen times higher than of gold. Weidmann sees the reason for this in the missing value basis. Crypto token would have no intrinsic value, such as gold or by the reputation of a guarantor. Weidmann does not see crypo token as a suitable alternative to state money. Therefore, he advocates strong regulatory intervention. There should be no link between the financial sector and crypto tokens. Cash is the only way for individuals to hold central bank money. Weidmann also expresses concerns about the introduction of digital central bank money. Such would even be interest-bearing, albeit with negative interest rates. But if anyone could convert his bank deposits at any time into digital central bank money, the biggest risk would be a bankruptcy in case of imminent bank failure. This could then lead to the collapse of a whole banking system. For cash to continue to be attractive, central banks should strive to keep payments up to date. In the future, immediate payments with central bank money should be possible.

Karl-Ludwig Thiele executive director of Deutsche Bundesbank
(Source: Thomas Seidel)

Practical cash handling

Karl Ludwig Thiele certifies the Germans already a certain love for the cash. In their use, they are not the world champion. Amounts up to 5 €uro are still paid for 96 per cent in cash. Only with amounts of about 50 €uro and above one go in this country more about electronic payment methods. Cash is easy and quick to handle. It allows every social group access to business and eludes digital control. Cash is defined freedom and it serves the informational self-determination. Thiele rejects criticism of coins, even with small denominations. The German federal government has earned recently 250 million €uro with the disbursal of coins and a large part of the citizens wanted to retain even the smallest coins. As is well known, the experiment to abolish coins in the city of Kleve has failed. Not least because consumers felt constantly ripped of by merchants.

Fritz Zurgrügg vice-president Swiss National Bank
(Source: Thomas Seidel)

Criticism of digital central bank money

The vice-president of the Swiss National Bank (SNB) Fritz Zurbrügg also immediately appropriates the term crypo token. He confirms a still large demand for cash in Switzerland. Since the popularity for cash in Austria is even greater, could one speak here of a German-cultural phenomenon? Rather not. The more southern and eastern countries in Europe, have even a greater love for cash. Despite the broader access of the population to bank accounts and electronic payments, cash use has for many years remained at a stable level of between 5 and 10 per cent, in relation to gross domestic product. That applies, according to investigations by the SNB, for most countries with a liberal economic character. An exception, however, is Japan, where the cash share with 15 to 20 percent is significantly higher. It is known that the use of cash enables more effective budget control, especially for private individuals. Cash is visible and tangible and thus offers a greater sensual experience than book money. Cash is reliable. You can pay at any time and be independent of any technical infrastructure. Cash protects against data misuse and thus possesses a property as a data protection instrument. Of course, the existence of the cash depends on the credibility of the issuer. Therefore, the quality of banknotes should always be at a high technical level. Not least because of the security against counterfeiting. Zurbrügg sees no further benefit in digital central bank money. Instead, there could be undesirable effects during use. For example, the functions of liquidity and maturity transformation could be in trouble, especially in times of crisis, when people shift their bank deposits into digital central bank money. Digital means of payment are at most incomplete substitutes of cash.

Yves Mersch ececutive director of European Central Bank
(Source: Thomas Seidel)

A plea for freedom through cash

Not only the Deutsche Bundesbank is responsible for cash in Germany. As is well known, there is a higher authority in the Eurosystem with the European Central Bank (ECB). Represented here by central bank director Yves Mersch from Luxembourg, where he is responsible, among other things in the ECB for cash. Five European countries, which Mersch classifies politically as the "law & order camp", have in the past approached the ECB and argued against cash. Mersch counters that: A protected legal tender is money only if there is an obligation to accept; it has debt-discharging effect; must be accepted at face value and no further fees may be charged. Individual Member States could restrict the use of €uro but not the currency as such. Banknotes exists for constitutional reasons. They only granted the real implementation of fundamental rights in the first place. Only with cash could the citizen exercise his fundamental rights in a way that is not immediately comprehensible to the state. Cash protects against a surveillance state and ultimately against a dictatorship. Cash enables equality and the participation for social underpriviledged and children. There are no hurdles to its use and make one independent of electronic infrastructures. This applies especially in critical phases. Restrictive measures may serve only comprehensible purposes, such as the fight against terrorism or money laundering. There would be no full alternative to cash. Even if its physical form may change, it still remains cash.

Udo Di Fabio German constitutional judge
(Source: Thomas Seidel)

Cash means concrete freedom

After so much cash enthusiasm of the occupational central bankers, comes with Udo Di Fabio a former German constitutional judge to speak. He goes even further. Cash and freedom legally formed an indissoluble bond. Cash has an intrinsic value that can be replaced on paper by a guarantee power. The legislature has a task to protect the cash. There must be a stable currency, at least in a world structured by private law. A current negative example is Venezuela. The anonymity guaranteed by cash is part of what we understand by privacy. The retention function of cash in its importance to the freedom of individuals would generally be underestimated. Here, not only the grandma is rehabilitated, who keeps the money under the mattress. Especially persecuted people can report at any time how cash helped them to get into freedom again. Freedom and security must be in a balance. The totally secure state would also be the totalitarian state. In our western world, the state is derived from the will of the citizens. Here the state is only a trustee of the economic subjects. In China, for example, this is exactly the other way around. There, the state legitimizes from within itself and the citizens played only a subordinate role. A cash abolition must not be dispossessive to property regarding to Di Fabio. Therefore, negative interest rates could be qualified as a fundamental rights intervention. The state is obliged to preserve its constitutional values ​​and that includes the right to property. In the digital domain something would emerge beyond the state, which would gladly be used for anarchic purposes. But the supporters of the cash abolition pursued only certain interests of digital companies, so not necessarily the interests of citizens.

Discussion panel of the participants
(Source: Thomas Seidel)

During a panel discussion, it has been mentioned: Cash is not the money of the central banks, it is the money of the citizens, with which the central banks would have to handle carefully!

Martin Hellwig University Bonn
(Source: Thomas Seidel)

Only cash is deleveraging

An academic view at the cash is provided by Marin Hellwig from the University of Bonn. Cash is simply the basis of the monetary system. Ultimately, a debtor would have to pay cash. Hellwig asks, what is the content of a claim if there will be no cash? Our economic system is based on the law of obligations. What could replace the cash there? Payments in cash are debt-discharging and thus final. But it must be accepted. Every normal business transaction has two participants, the supplier and the payer. But if there were digital money, one would be dependent on a third party for the whole transaction, namely the operator of the payment system. Is that what one want? The importance of cash Hellwig works out at another example. Emigrants, for example, could not take digital money with them unhindered. Claims against the state could not be enforced under private law. Book money is a legal debt, but cash is not a debt. An essential reason for trust in the central banks today is their independence. Therefore, Hellwig sees discussions about a democratization of central banks as problematic.

Hans-Walter Peters German Bankers Association
(Source: Thomas Seidel)

Watch out for the digital powers

Finally, with Hans-Walter Peters, in his role as President of the Association of German Banks, again a banker comes to speak. He opens his talk with a brief report of a visit to Silicon Valley, California, where he met representatives of leading American digital companies. There one live in another world. The digital world knows no state, only a totally networked society.

As a result, in a digital world, cash will be the loser. Money is and remains first and foremost a matter of trust. So far, this trust has been related to the question of whether one can pay with it anywhere and at any time. For digital payment systems, the question arises as to how a payment process leaves no digital traces. For all the gladness of the freedom through cash, cash supply would be increasingly expensive, especially when compared to digital systems. Although the love of Germans for cash is already legendary. But as the cost of cash continues to shift to customers, affection is likely to change.

Ongoing discussions while coffee break
(Source: Thomas Seidel)

Summary

Many institutions today have a concrete interest in monitoring citizens as comprehensive as possible. Among other things, states emphasize security and protection interests, for example because of terrorism. That the state wants to monitor every financial transaction, not least because of the tax duties, is not even mentioned. This is all the more true, for the already quasi sovereign acting guardians of social systems, the health insurance. First and foremost, digital companies have a commercial interest in spying on citizens' living and paying habits as customers. In the background, however, the omnipotence fantasies of a global, denationalized society certainly play a role. One seeks, so to speak, an „investorcracy“. There, under certain circumstances, every monitored citizen would be simultaneously, at least indirectly, a supervising investor.

Against this background, it was good and important to hear at this event from various speakers how concrete and practical the cash is being used as an direct democratic instrument every day a million of times. Yes, it even seems to be the actual flame of freedom. But like any other form of freedom, you have to fight for it every day. One can only hope that more people, than the central bankers alone, effectively counteract the abolition of cash.

Even for lunch the Hilton Hotel offers a nice atmosphere
(Source: Thomas Seidel)

Qualification becomes the key to survival - A talk with Robert S. Kaplan- Report by Thomas Seidel

Volker Wieland (l.) in discussion with Robert S. Kaplan (r.)
(Source: Thomas Seidel)

One year after the start of the new administration in the US, with Robert S. Kaplan again visited a regional president of the Federal Reserve System (FED) from Dallas Frankfurt. Here Kaplan is well known. The IMFS Institute hosted a discussion on macroeconomic trends and their impact on US monetary policy. Kaplan spoke more about future challenges for a modern economy.

The hall on the upper floor of the Old Casino of the Goethe University is crowded up to the last seat. That's an estimate of about two hundred listeners in the audience. But the discussion inevitably takes place as a radio play. The organizers of the event simply forgot to set up a stage. For the second time within four weeks, they are thus outing themselves as real "event professionals". So only the participants in the first two rows can experience the guest in persona. After all, this increases the idea of ​​exclusivity.

Yet Robert S. Kaplan wasen't spoiled in his mood from that. He made a little whistle blowing from the inside of the FED in a good temper. But he always remains very focused. This one can't say about his discussion partner Volker Wieland. Wieland did not seem well prepared and let the conversation rather floating by.

The IMFS resides in the House of Finance
(Source: Thomas Seidel)

Kaplan's core theme is change. But nothing was mentioned by him about the conditions in the federal administration of the US. No word also about the forced replacement of FED President Janet Yellen. Instead, Kaplan focuses on the economic and social changes that are already taking place.

The sign of change is technology. Hardly any industry in which no technological changes take place today. These changes, often referred to as "disruption" in English, are nothing other than the "creative destruction" known by Josef Schumpeter. But the strong driving force behind these upheavals is due to the fact that everyone has access to technology and, most importantly, that it is cheap. Much changes are fundamentally. So today's consumers are able to put pressure on prices simply by using the Internet.

In the meantime, soft factors in the economy are often more important than hard ones like capital or an organization. First, there is a passion for developing and producing something. Only then does capital join. The growth and competitiveness of a society will require more than ever before a high level of education. For example, in the US, there are 46 million people with a high school diploma or even less. These people would have to be given priority. Otherwise, they are threatened with being victims of the upheavals and losing their jobs due to underqualification, keyword: digitalization. Germany is traditionally far ahead of the USA in vocational training.

Demographic change is leading to less job growth. Already half of the growth of workers in recent years has come from immigration. Therefore, the immigration should be urgently regulated. Nevertheless, productivity is already suffering from underqualification, especially in middle-sized jobs. But the US budget deficit is hindering necessary investments. Such are expected by the corporate tax reform. This should give the private sector a boost in the direction of sustainable development.

The FED building in Washington D.C.
(Source: AFP Saul Loeb)

Globalization is not a threat! Rather, it must be seen as an opportunity. Unlike in the US, there is a high savings rate in China among the population. This would allow the state to go into debt internally to its own citizens. That is similar to Japan. The result is, that these two Asian countries have little or no foreign debt.

Central bankers could no longer think in isolation only within the framework of their own economy and their own currency area. They need to know what is going on in other countries and what impact decisions in other countries have on their own economy. Meanwhile, the traditional mechanisms of price and wage determination would work differently. That also has an impact on inflation. But how it works, must first be examined exactly.

Overall, Kaplan is optimistic for the future. He does not hide the weaknesses of the American system. He is concerned with the competitiveness of the United States. He sees the challenge of the future above all in the qualification of the working population. The goal is to survive in a multi-polar world. What he meant, but didn't mentioned in words, backwardness and isolation are not the means of choice.

Report on ILF conference: -Basel III Are we done now?- by Thomas Seidel

The headquarter of the Bank of International Settlement in Basel
The place of the regulations name
(Copyright: wikipedia, licence Freie Kunst)

Only last December, after nearly ten years of tough negotiations, has it come to pass the new global regulations Basel III for the financial industry. We had already reported about it. (Insert here the left). Essentially, Basel III is designed to help reduce the potential for another devastating global financial crisis. Now is the time to discuss with experts what the agreement on Basel III has brought. The Institute for Law and Finance (ILF) did it these days in Frankfurt am Main.

To cope with this complex matter, the event was divided into several discussion groups, each dealing with sub-aspects. The introductory lecture was given by Stefan Ingves from the Swedish Riksbank, who headed the Basel Committee until the end of the negotiations. Ingves immediately starts his remarks with a core problem. The long, over five-year, implementation period for Basel III. Of course, it could come in this period to new conditions, which then lead to renegotiations of Basel III. However, Ingves warns against questioning what was achieved. Ingves also gives an example, such as the accelerating cyber risks. What could not be implemented was an adequate consideration of public debt. On this and another topic, such as the Floor, which is known to have be traded down by the German representatives from 80 down to 72.5 percent, it becomes clear under what political pressure such talks take place.

A milestone achievment?

The first panel dealt with the question of whether one would have reached a milestone now? Participants were amoung others: William Coen, Secretary General of the Basel Committee, Andreas Dombret, Board of the Deutsche Bundesbank, moderated by Nicolas Veron, Senoir Fellow at Bruegel.

Panel I: f.l.t.r. William Coen, Stefan Ingves, Andreas Dombret,
Michael S. Gibson, Nicola Veron
(Copyright: Thomas Seidel)

The possibilities presented by Basel II for the first time, with which banks were able to calculate their risks according to internal risk models, have probably caused problems especially for financial supervision. But internal models would also benefit as long as the banks and a financial regulator have agreed on the approach. In addition, they would have to fit into the respective national systems. Regarding the effort of regulation under Basel III, the rules were never meant for small banks. Now is the time for a regulatory break. The rules have to be implemented first of all. It is to be regretted that the topic of public debt could not already be included in the new regulations. But the view of the US on the question of sovereign debt is clearly different from that of the Europeans.

Sence and Sensitivity

The second panel dealt with the proper handling of the rules and regulations, with participants such as Sabine Lautenschläger, Vice-President of the SSM, Olivier Guersent, Director-General of the European Commission and there, among other tasks, responsible for financial stability, Paul Hilbers, De Nederlandsche Bank; moderated by Patrick Kanadjian of Davis Polk & Wardwell London.

Panel II: f.l.t.r. Olivier Guersent, Sabine Lautenschläger, Paul Hilbers,
Patrick Kanafjian
(Copyright: Thomas Seidel)

Assessing risks is very difficult. It also needs the right financial supervision capacity, which in turn needs time to qualify for the application of Basel III. Basel III provided a framework and set the right incentives for the banks. Having a global standard is more important than discussing the height of a floor. The consequences of the new capital requirements are bearable for the financial sector. The EU Commission estimates the extended capital requirements on average at 30 percent. However, this is justifiable because of the long transitional period. But the banks should not only deal with Basel III. There are also other challenges, such as the changing markets and cyber risks. Nor should one let oneself drift of the markets. The conversion period is now nine years and there would be (formal) no reason to be finished before. New risks, such as Operational risks are currently difficult to model because there simply is not enough data available.

Have we gone far enough?

Whether one went far enough with Basel III, the participants of the third panel talked about. With Isabel Schnabel from the University of Bonn, who also is a member in the German Council of Economic Experts and Charles Goodhart from the London School of Economics, two well-known critics spoke. 

Panel III: f.l.t.r. Charles Goodhart, Isabel Schnabel, Douglas Elliott
(Copyright: Thomas Seidel)

Ten years after the financial crisis, do we even know what the objection of the new rules were good for? The rules on capital adequacy are in favour of the financial industry. In this respect Basel III went not far enough. Banks are actually legal entities. They have no feelings, no intelligence, no ethics and no risk awareness. It's more about the bankers, who make up a bank. The managers have the wrong incentives to make more and more profit quarter after quarter. Big bonuses are the wrong incentives. Financial supervision would have to relate much more to the bankers than to the banks themselves. But the supervisors are still not qualified, i.e. when it comes to the complexity of a mortgage loan. Another mistake is, to focus on the capital resources of the banks, rather than to pay attention to their liquidity.

What Basel III means to Investors

In a fourth panel representatives of investors will speak and discuss what Basel III means for them. Contributions came from Laury Meyers of the rating agency Moody's Europe, Stuart Graham of Banks Strategy and Philippe Borderau of Pimco Europe. 

Panel IV: f.l.t.r. Philippe Borderau, Stuart Graham, Laury Meyers, Levin Holle
(Copyright: Thomas Seidel)

The substantive essence of the statements of these participants, however, reflects a different attitude. Ultimately, investors don't care under wich conditions banks have to make their business, and even the investors don't care about the banks themselves. They simply calculate how much profit and what profit maximization they expect from corporations and direct their capital to where they think is most profitable.

Conclusion

The disagreement in the sovereign debt issue makes it clear how politically the whole subject of banking regulation is handled. The eternal haggling over the smallest compromises happens not only in government formations. But ten years is too long a period, even to achieve anything on a global scale.

The weaknesses of financial supervision were made quite clear by this event. After a quite advanced approach to risk calculation was formulated in Basel II with the internal models, the regulators in particular have proved to be overburdened. This is partly due to the lack of economics prerequisites of the supervisors, but also because the supervisors have overseen the banks confrontational rather than cooperative for too long. It gives hope that it is the representatives of the supervisors themselves who have recognized and named these deficiencies. One can therefore expect that Basel III lead to a reorganization and qualitatively orientation by the supervisiors itself.

The audiance was part of an intensive discussion
(Copyright: Thomas Seidel)

Having focused too long on capital- and less on liquidity requirements are true words. There is a drastic need for action in the liquidity topic. This is mainly addressed to the central banks, which have the means and the ability to ask the banks for sufficient liquidity, for example, through the minimum reserve, in the short term.

Regarding the missing data base for the assessment of operational risks, the supervisor should let the internal error reports of the banks be disclosed for evaluation of the last ten years. It will be astonishing how inadequate the processes, how IT is perforatet and how unqualified the acting staff of today is, at all levels in the banks. Charles Goodhart says it as clearly as necessary: ​​Not so much the anonymous banking company, but the bankers themselves should be the focus of supervision. This is especially true for top management. Goodhart has also made an accurate statement. People do not want the banks to be closed, they want the bankers to be punished for their misconduct.

The whole system of bonuses, quarterly reporting and transparency obligations leads to completely wrong incentives. Instead of stable long-term growth and sustainable investments, only short-term profit maximization is in the foreground. No participant described the profit-driven obesity of the current system as emotionless as Stuart Graham for stock investors. Only the here and now counts. A future, for whomever, does not matter.