Fractional Reserve Banking with an ever increasing fraction. My final year of economic is going to be very interesting
My reading is that the Central Bank is worried that customers might default on loans / overdrafts. And therefore banks need to keep more in reserves to cover those losses and still maintain adequate capitalisation.
I imagine it’s happening to most banks - high street ones would, I imagine, have to cough up much more than that.
I’m not an expert, but my understanding is that this is standard practice: the buffer amount varies according to economic situation.
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So with this logic surely it would make sense for banks and other institutions to invest in diagnostic and other technologies to improve the economic environment and prevent defaulting.
They literally do this, that’s why they have decided to increase the reserve requirement
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I mean, sure. But I think they can be forgiven for neither leading the charge on predicting nor curing a pandemic.
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I mean my thought on this is:
“is developing or even just investing in testing infrastructure going to save a bank(s) from in some cases massive loss and further economic problems”.
The answer is in the longer run that probably leading the charge through allowing capital to be available to ones (companies and startups) will actually beneficial.
I’m not sure I follow. Could you explain? What do you mean by “testing infrastructure”?
What I mean is given the issues surrounding COVID19 testing in the UK (and elsewhere), the economy is a in a state of somewhat limbo( 
) The bottom line really is that depending on a banks balance sheet they could be completed screwed if not this year but next (Who knows what is going to happen with Furloughed staff etc.). If a bank has the capital they could work with startups to offer cheap business loans and other such financial instruments to specific areas of the economy that will get the economy to an extent back on track especially as they could deploy this help faster and quicker than the government could and maybe make a profit. My logic is that banks if they’re so worried about their bottom line/finances should take proactive steps to bring themselves out of the the hole. Especially as they can talk with their wallets. With relevance to Monzo, That could be as simple as partnering with a COVID testing facility and offering discounted tests(QPCR,antibody etc) for people and their families who hold a Plus card for example. Yes this probably quite a financial burden but if it stops the bank from going under then thats a benefit + USP for new customers.
I’m not sure what testing has to do with it, it’s people losing their jobs that is the issue
Very true, but are people losing their jobs because the economy is “closed” because of the spread of COVID19. If so the way to open the economy is to test everyone, or right-off the losses, or do nothing and let the virus burnout . The latter is terrible on a personal and societal view. Leaving righting off the losses(Could Monzo afford to right off all those predicted losses) probably not without significant problems.Leaving testing as the last viable strategy. I suppose the other route to tread is down the payment holiday idea but I suppose the question with that is “how long will they last?” and the law has to be in place to back them.
This is already happening backed by the government.
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More interesting question why isn’t Monzo on the list?
Source:
They probably don’t have the capital and/or the capacity to handle the applications.
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I think the money is provided by the government though
Monzo don’t provide business loans at all so they didn’t sign up
Afaik the money isn’t supplied by the gov, they just say they’ll reimburse the banks in the case of default
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Ah interesting, I found the process for becoming a lender if anyone is interested:
Edit thought this was very interesting:
If the applicant’s business is loss-making, BBB will wish to see adequate cash
resources, a clear strategy of how the applicant plans to reach profitable status over time and how a
BBLS portfolio could be safeguarded in the event of the applicant ceasing trading, for example, via
the establishment of an arrangement with a back-up service provider.
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And the government won’t reimburse the bank until they have made a reasonable effort to reclaim the debt themselves first
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Not sure if change in required reserves is material. I thought that monzo’s reserves have been multiples of what required. Thus a change of what is mandatory Vs what their reserves are, doesn’t matter much.
From the Pilar 3 2020 report (https://monzo.com/documents/pillar_3_2020.pdf)
Monzo’s prescribed TCR was updated to 13.65% of RWAs plus a static add on of £21m in May 2020.
13.65% of RWAs + £21m is roughly £50m. At year-end 2020 Monzo had CET1 capital of £142m. Assuming a loss of £10m a month they would have lost £50m to date leaving only four months of additional runway.
I think Monzo did exactly the right thing raising money before it got precarious which likely would have led to a raise on much worse terms.
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I love Monzo. There business account has changed my life. So so much easier than the dinosaur that is BOS
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