A Note on Capital in a Functional Analysis of the Traditional Banking Industry

ABSTRACTA functional analysis of the traditional banking industry is developed in this paper. Following a reflection on the possibility of conceiving a ‘banking production cycle’, its fundamental output is identified in credit and the input in deposit. The study then continues with an analysis of capital: the anticipated capital required for banking is solely equity capital and is mainly dependent on economic-institutional aspects. This paper then studies how regulation, rules and laws can define a ‘regulatory banking production technique’. Starting from the assumption of economies of scale in the banking sector, the scheme developed by the Basel Accords imposes a level of equity capital proportional to the level of risk-weighted banking assets. Therefore, a relationship between capital and output defined by these rules is conceivable, and the idea of ‘normal capacity utilisation’ in the banking sector becomes possible. Through the latter idea, the possible limitation of money supply by capital requirements can be overcome, thus validating the endogenous money approach.KEYWORDS: Bank capital; banking regulation; endogenous money; capacity utilisationfinancial innovationsJEL CODES: E51; E12; G21 AcknowledgementsThe author wishes to thank Roberto Ciccone for his valuable advice and suggestions, and two anonymous referees. A previous version of this paper was presented at the ‘19th STOREP Annual Conference’ 28/05/2022; the author wishes to thank all the participants of the conference and in particular Louis-Philippe Rochon and the discussant Paolo Paesani. Any errors or omissions are of course the sole responsibility of the author.Disclosure StatementNo potential conflict of interest was reported by the author(s).Notes1 Obviously, this scheme is highly simplified and splits activities that often take place simultaneously in reality. Logically, however, these phases can be distinguished.2 Excluding the phase of purchasing material bank inputs (office, desks, computers, safe, etc.) and finding the necessary financial resources for this.3 The bank does not sell money but lends it; however, one could say that it 'sells’ loans.4 Irrespective of other non-normal eventualities, such as the use of undistributed profits in previous years to repay the loans by firms, or loan guarantees (e.g., a mortgage), etc.5 In this regard, it is noted that legal limits to the use of cash are increasingly common. On the other hand, however, alternative payment systems to the banking system are possible nowadays, although their use is not yet very practical, for example in the case of cryptocurrencies based on blockchain technology.6 With the exception of the actual physical means of production such as desks, computers and telephones, etc.7 However, it is reasonable to assume that the capital needed for materials necessity should be rather small compared to the equity capital requirements of the Basel Accords.8 For example, in the EU deposits are guaranteed up to the amount of €100,000 (Directives 2009/14/EC and 2014/49/EC) and in the US up to $250,000 (Glass-Steagall Act, 1933).9 Considering costs, the profit rate would even be lower than the interest rate.10 Following Marx, organised borrowing in the form of enterprise is typical of the capitalist mode of production, while non-organised borrowing in the form of enterprise, or usury, is typical of earlier modes of production. See Marx (Citation1905–Citation1910 [Citation1971]).11 As Zolea (Citation2023) points out, bank bonds should be considered as inputs as deposits and not as part of the capital needed to start a ‘banking production cycle’. Therefore, the profit rate in the banking sector should only be calculated on the basis of equity capital.12 And Italian laws.13 Note that Missaglia and Botta (Citation2022) also do not consider deposits or bank bonds as capital.14 It should be noted that there are various methods of calculating and weighting asset risk, which can be decided by the central bank and supervisory authorities, or even by individual banks themselves, respecting certain parameters (https://www.bis.org/basel_framework/).15 Both equity and output in this case are more or less liquid forms of money, which makes it possible to say that output is 10 times the equity (otherwise we could measure the two aggregates only in value).16 Obviously, if there is demand for loans.17 Available at the following link: https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200312~45417d8643.en.html .18 It should be noted that Marx ([Citation1932] Citation1988) — long before today's electronic and digital systems — already spoke of this phenomenon: ‘It is clear from the outset that the relation of fixed capital and circulating capital is much more favourable to the big capitalist than to the smaller capitalist. The extra fixed capital required by a very big banker as against a very small one is insignificant. Their fixed capital amounts to nothing more than the office.’ (Marx, [Citation1932] Citation1988, p. 45).19 If, for example, the demand for credit increased 100 times in one day, there would probably not be enough bank staff.20 And provided that this demand is at an acceptable level of risk for the bank (see Deleidi Citation2020).21 As rightly pointed out by one of the referees.