Bank Operations

Model for Bank Operations: JAK Membership Bank- a non for profit, full reserve interest free bank based in Sweden.

THE JAK MEMBERS BANK, SWEDEN: An Assessment of Sweden’s No-Interest Bank by Mark Anielski. Published by Anielski Management Inc., January 16, 2004.

TOWARDS A TWENTY FIRST CENTURY BANK AND MONETARY SYSTEM, SUBMISSION TO THE INDEPENDENT COMMISSION ON BANKING by Ben Dyson, Tony Greenham, Josh Ryan-Collins and Richard A. Werner. Available under a Creative Commons Attribution-NonCommericial-NoDerivs 3.0 Unported License. For more information see http://www.neweconomics.org/publications/entry/towards-a-21st-century-banking-and-monetary-system.

Note JAK Membership Bank is an online bank that doesn’t deal with cash.

I think banks are beautiful and I like the green stuff.

So I redesigned JAK’s bank operations with the New Economics Foundation ‘Submission To The Independent Commission On Banking’ (as above) to make Rich Soil a for profit brick-and-mortar bank that deals with cash.


BANK OPERATIONS

Accounts
Accounts used by customers fall into one of two types: Transaction Accounts and Investments Accounts.

Transaction Accounts (Checking Accounts)
At Rich Soil Bank Transaction Accounts are not accessible to the bank for lending purposes or funding its own investments. Transaction Accounts are held off the balance sheet in an aggregated account.

Labeled ‘Customer Funds Account’ this aggregated account contains monies wholly owned by the customer and therefore fully accessible by the customer.

In the event Rich Soil were to become delinquent and subsequently go bankrupt, Rich Soil would be able to repay all Transaction Account holders in full.

Investment Accounts (Saving Accounts)
At the point of investment (opening of account) customers lose access to their monies for a pre-agreed period of time. Unlike the Transaction Account, Investment Accounts are accessible to the bank for lending purposes.

As a legal requirement, Rich Soil does not provide ‘Instant Access Saving Accounts’.

Upon opening an Investment Account customers agree on a Maturity Date. The Maturity Date acknowledged and agreed upon by both Bank and customer sets a specific date in which customers will again have full access to their monies.

As a full reserve bank all loans are made through Investment Accounts via customer deposits.

Held on the balance sheet, monies placed in Investment Accounts are aggregated in a central account. Labeled ‘Investment Pool’ this central account provides Rich Soil monies for loaning purposes.

In addition to the Maturity Date customers also establish a Notice Period when opening an Investment Account. The Notice Period is an agreed number of days that the customer must give the bank before demanding repayment. Similar yet different to the maturity date, the Notice Period provides the customer a safeguard to access Investment Account monies without penalty in the event of emergency in which savings are needed.

Additionally, the Notice Period provides the bank adequate time to adjust the balance sheet- its own accounts without disruption to the over health of the bank, most notably, liquidity- on going security.

Rich Soil Bank’s Bank Accounts
As a State Member Bank, Rich Soil’s reserve account is held at the Federal Reserve Bank of San Francisco. Adapted slightly this account was replaced.

To accommodate Rich Soil’s charter- full reserve practices – Rich Soil‘s reserve account at the Federal Reserve is now composed of three accounts: Customer Funds, Investment Pool and Bank Operations.

Customer Funds Account
This account holds all aggregated Transactions Accounts. Although this account is managed by Rich Soil and held at the Federal Reserve all funds legally belong to Transaction Account holders.

As the Customer Funds Account at the Federal Reserve maintains only the aggregated total of Transaction Accounts, Rich Soil is responsible for keeping the balance of individual Transaction Accounts.

If a payment is made to a Transaction Account by another customer (Transaction Account holder) the Customer Funds Account remains the same. If a payment is made to or from someone at another bank, the Customer Funds Account increases or decreases accordingly.

Investment Pool
This account holds all aggregated Investment Accounts. The funds in this account legally belong to Rich Soil Bank.

The Investment Pool is used to receive investments from customers to make no interest loans to borrowers, receive loan payments and reimburse Investment Accounts holders.

Bank Operations Account
This account is for the banks own purposes (investments, retained earnings, operating costs, expansion etc.).

Filling the Investment Pool
When a customer opens an Investment Account monies are transferred from the customers Investment Account into the banks Investment Pool.

If a Transaction Account holder wishes to open an Investment Account, monies are transferred from the banks Customer Funds Account to the banks Investment Pool. The Customer Funds Account decreases while the Investment Pool increases accordingly.

Granting (fulfilling) a Loan
When fulfilling a loan monies are transferred to the customers Transaction Account from the banks Investment Pool.

To update records monies are moved from the banks Investment Pool into the Customer Funds Account.

Loan Repayment
When a borrower makes a payment (on part or all of a loan) monies are transferred from the borrowers Transaction Account back into the Investment Pool. Back in the Investment Pool these monies are recycled to make new loans or to repay maturing Investment Accounts.

Repaying Maturing Investment Accounts
When an Investment Account reaches maturity or a notice date is given, Rich Soil fulfills its obligations: monies it owes to its customers are transferred from the banks Investment Pool into Customer Funds then to individual Transaction Accounts.

The Loan Making Process
With the framework of accounts outlined above, the process of making a loan becomes mechanical: monies are provided by and transferred from one person (the investor/ savor) to another (the borrower).

As such loans are made from one of the following sources:

I. Monies Rich Soil customers have given the bank for the purpose of investments, namely, monies bank customers use to open Investment Accounts; and,
II. Rich Soil’s own funds (retained profits, shareholder equity).

Contrary to other banks, core deposits are exclusively composted of Investment Accounts; all monies in Transaction Accounts are off limits for loaning purposes. Additionally, as a full reserve institution Rich Soil does not participate in the inter-bank market.

The Saving and Loan System
As a full reserve institution the most unique feature of Rich Soil is the saving and loan system: a reciprocal system in which customers provide- share their savings to make no interest loans available to other customers.

How it works: The capital pool from which loans are offered to customers are formed- provided by other Investment Accounts. However, instead of accruing interest like a saving account the Investment Account accrues Saving Points. These accrued Saving Points in turn reciprocate allowing a customer to borrow, receive a no-interest loan when needed.

Getting Started
A customer begins participating in the saving and loan system (point system) when an Investment Account is opened.

Customers receive saving points for saving efforts. Instead of interest, for example, one dollar saved for one month yields one savings point; one dollar borrowed for one month consumes one savings point.

The point system is dependent on Pre-saving Points and After-saving Points; points received prior to receiving a loan and points received while repaying a loan.

Loans
A customers right to borrow is conditioned on regular savings during the repayment period of the loan.

When a loan is granted the customer by requirement (loan agreement) makes regular, monthly payments: the principle amortized over the loan period. When the principle has been fully repaid not only is the customer free of debt but he or she has also accrued savings; savings he or she otherwise would have allocated to interest.

The decision to issue a loan is based on liquidity in the system; the relationship between outstanding loans and Investment Accounts as well as the stock of securities and other liquid assets held by the bank. Liquidity between outstanding loans and Investment Accounts is based on a predetermined stream of payments in and out of the bank.

How much a customer is entitled to depends on three factors:

I. Supply of liquid assets; monies available in the Investment Pool;
II. The customers financial security, and
III. The customers projected financial security (the customers ability to repay the loan while contributing to savings).

Sources of Income
Sources of income include Loan Fees, Annual Account Fees and interest bearing securities (government bonds and treasury bills).

Loan Fees
Every loan generates a loan fee. Similar to an effective interest rate the loan fee is a charge to cover costs with respect to loan services provided. Specifically, loan fees cover the operating, development and administration costs of the saving and loan system.

Annual Account Fees
Every customer pays an Annual Account Fee. This fee (a maximum of $60) goes towards Rich Soil’s equity and is paid upon opening an account and every year there after.

Similar to the Loan Fee, the Annual Account Fee is charge to cover cost with respect to account services provided by the bank.

Interest Bearing Securities
Capital reserves and retained equity aggregated in the Bank Operations Account are invested in the interest bearing government bonds and treasury bills. Additionally, twelve percent of deposited savings (Investment Accounts) aggregated in the Investment Pool are invested in short-term government bonds and treasury bills.

Interest income generated from these accounts- Bank Operations and the Investment Pool are used to cover operating costs and keep loan fees down.

Liquidity
Scrap F
New and current customers have the option to pre-save prior to requesting a loan. Pre-savings are no longer a requirement.

Pressing the Importance of Pre-saving
While no longer a condition to receive a loan, pre-saving remains an important part of the saving and loan system; pre-saving provides an advantage to loan recipients by reducing their loan repayment and after saving requirements. Customers who choose to pre-save earn pre-saving points to reduce the need- requirement to save during the loan repayment period. Simply, the bigger the accumulation of saving points before the loan the lower the monthly payments will be during the loan repayment period.

Customers who choose to pre-save have entire disposal of their pre-saving points. Customers decide if their pre-saving points should be used to reduce their monthly loan payment, be gifted to another customer or saved for future use.

Liquidity Risk
The primary concern of Scrap F is that a large risk could present itself if all customers chose not to pre-save or, dramatically reduced pre-savings and at the same time begin to apply for loans on a large scale.

As customers have proven, however, the motives and benefits to pre-saving and Rich Soils control leavers (requirements to receive a loan) mitigate and absorb these risks.

Reversely, savings outgrowing demands for loans also presents area of concern: idle deposits. In this event the savings factor (factor of distribution) is decrease to maintain saving to loan requirements and extendedly, the system as a whole.

Loans: Pre-savers to After-savers
Despite most customers’ efforts to pre-save, seldom is it enough to balance a loan. In compensation the customer commits to larger after-savings during the repayment period.

Supplementary to the pre-saving group (customers who pre-save 100% before applying for a loan) the after saving group (customers who do not pre-save but after-save 100%) fulfill the saving requirements during the repayment period. In turn, each group offsets the other.

Loans granted without pre-savings are driven by customer in specific economic situations; customer who in conventional loan situations are denied access to credit.

Supply of Loanable Funds
All loans are internally financed by customers through Investment Accounts and equity of the bank.

Loanable funds are increase by pre-savings, after-savings, loan payments, interest income and loan fees. Reversely, supply of loanable funds are decreased by Investment Account withdrawals as well as the repayment of loan equity deposits.

Loanable funds are restricted by a minimal level of liquidity; twenty percent of total pre-savings. To ensure payment readiness, these monies are kept in the Investment Pool Account at the Federal Reserve and invested the short-term government securities.

Forecast for Liquidity and Supply of Loanable Funds
Liquidity and the supply of loanable funds are projected based on the stream of payments in and out of the bank. The primary concern- main uncertainties of the forecasts stem from projections tied to pre-savings. Specifically, anticipated amounts of pre-savings as pre-savings are no longer a prerequisite to receive a loan.

While pre-savings are no longer a prerequisite, contracted to receive a loan, the projection is based on historical experiences of pre-savings, standard CAMELS and current market factors: interest rates, employment and other areas concerning the saving behaviors of customers.

Granting a Loan
Three requirements are considered when granting a loan: 1) the customers financial security, 2) the customers ability to repay the loan and 3) core liquidity (supply of loanable funds i.e. Investment Accounts).

Loan Fee
Each loans requires an equity deposit and carries a loan fee. Once received the loan fee booked as equity and aggregated to the Bank Operations Account.

Each loan fee is based on a formula that considers the loan sum and repayment period. Worked out as a fixed charge, the fee is divided over the repayment period and paid together with the principle payment installments.

Because of the fixed fee, payment plans are agreed from the outset. No gotcha fees, customers agree- know from the outset the payments they’re committed to make.

Equity Deposit
Each loan requires a 10% refundable equity deposit.

As security against the loan, nonperforming and potential loan default the equity deposit is booked as equity in the bank. The deposit is repaid to the customer six to eight months after the last installment on loan.

The six to eight month period to refund the equity deposit provides the Rich Soil cushion for regulatory requirements, most notably, to adjust accounts while maintaining on going security.

Loan Repayment
Loans are repaid on an amortized basis. Akin to paying the principle on a conventional bank loan, the principle- original loan plus the loan fee is equally divided over the months of the loan period and paid in installments.

End of a Loan
Four months after the final installment the customer is granted access to their accumulated pool of savings. Further more, as the sum of savings (after-saving points) accumulated during the period of the loan is equal to saving points consumed during the loan the customer has the option to withdraw the total amount of savings or keep the money in the bank to be used as a basis for future lending.

Investment and Loan Maturity
When a loan is repaid or an Investment Account reaches maturity a customer can maintain or, if they wish, close their account.

If a customer wishes to again participate in the saving and loan system, the deposited sum of after-savings is rolled over and contributed to pre-savings. All accounts are maintained.

If a customer wishes to borrow again a new loan application must be filled out.

Closing Accounts
If a customer no longer wishes to participate the saving and loan system or maintain an Investment Account, the account is closed.

Upon closing the Investment Account the customer’s monies are withdrawn from the aggregated Investment Pool. At this point the customer’s monies maybe withdrawn or transferred to a Transaction Account.

If transferred, the monies are withdrawn from Investment Pool and transferred to the aggregated Customer Funds Account at the Federal Reserve. Held in the Customer Funds Account these monies are removed from the Investment Pool- banks balance sheet and once again held in full reserve.

If a customer wishes to close a Transaction Account all monies are withdrawn. Once withdrawn the Customer Funds Account at the Federal Reserve decreases accordingly.

In the event a customer withdrawals all monies or closes an account provided that one still reminds a customer via Transaction Account, all saving points are retained.

Period of Amortization
Period of amortization is guided by the purpose of the loan.

Compared to a conventional a loan, the amortization of Rich Soil loans are relatively short. A loan to finance a car, for example, is no longer then 5 years while a loan for housing purposes such as a mortgage, is no longer than 12 years.

The goal is to maintain a steady turn over rate. Long periods of amortization are limited as the short periods of amortization are used to control the banks liquidity, specifically, core deposits: Investment Accounts to loans, the saving and loan system as a whole.

Bank policies notwithstanding, the short period of amortization can be explained by the following:

I. Accumulated savings: pre-savings affecting the loan, loan fee, equity deposit and period amortization;
II. Period of amortization: the longer the period of amortization the longer the customer has to wait for after-savings to be available for withdrawal and the equity deposit to be refunded, and
III. Debt: most customers, people want to be free of debt as soon as possible.

Liquidity Influence
The period of amortization is also influenced by the banks portfolio, liquidity and asset quality. In situations where there are insufficient funds to ensure a robust degree of liquidity more stringent control measures are employed.

Monies available for loaning purposes are determined one customer at a time based on demand. Loans are then stratified according to both the amount of the loan requested (the amortization period_ and the maturity profile of the Investment Pool by directing liquidity flow to the period forecasted for higher liquidity risks.

When a period of lower liquidity is expected, for example, loans with shorter periods of amortization are implemented. Reversely, when a period of growth (core deposits, Investment Accounts) is expected (i.e. potential periods of idle deposits) periods of amortization are extended.

How the Size of a Loan is Determined
As Investment Accounts form the larger capital pool in which loans are offered, the amount of deposited savings ultimately determines the amount that may be borrowed by individual customers.

Based on careful and regular assessment of Investment Pool, the size and duration of a loan- the amount of lending that can be sustained is considered on an individual basis between loan officers and the customer.

Each loan is customized according to desired length of the loan: the desired (principle) repayment amount while contributing to savings and, the customers capacity- actual ability to both repay the loan while saving.

Borrowing Procedures
Historically, before Scrap F, any customer who fulfilled the pre-saving obligations and had satisfactory collateral was entitled to borrow. Today, however, all customers are entitled to apply for a loan. New customers can still contribute to savings in advance of a loan but this is no longer a requirement.

The loan application process proceeds as follows:

Upon request an application form is sent whereupon a customer receives a loan offer with information on saving points. With that as a basis (a number of loan alternatives with different loan amounts, repayment times and distribution numbers) a desired loan is chosen.

Once decided, the customer signs the promissory note and provides collateral for the loan. Once received the loan is granted and the period of amortization begins. Processing time on average takes four to six months.

When the loan is repaid, the promissory note and papers that provided the collateral are returned to the customer. After-savings are available four months after the final installment and the equity deposit six to eight months.

Currently Rich Soil does not offer education or financial counseling.

Deposit Protection and Security
As an state member bank our insurance program covers Transaction and Investment Accounts up to $250,000 per account.

The 10% refundable equity deposit is not covered by insurance. Used as collateral and, by means of equity share, the borrower covers possible losses in proportion to the size of his or her own loan which reflects the risk he or she themselves present to the system.

Additionally, 12% of the Investment Pool as well as the Bank Operation funds are invested in Treasury Bills, among other liquid investments, providing security against a potential run on the bank or liquidity crisis.

Transfer of Borrowing Rights
Earned as borrowing rights saving points can be freely transferred.

Customers can support each other by gifting- giving away their borrowing rights or loaning out them out by means of the Seed Loan.

The buying and selling- profiteering- of saving points is against Rich Soil policies and not allowed.

Seed Loan (S-Loan)
Through the Seed Loan customers can sponsor projects- similar to Kickstarter or Crowdfunding- but without the bothers of administration; Rich Soil handles the transaction making proper book entries in regards to the individual accounts (savings and saving points as well as the larger Investment Pool).

Once the original savor and recipient (the appointed individual receiving the saving points) has consulted with management and the proper paperwork has been filed, the saving points are deposited.

Placed in a blocked- new Investment Account, the S-Loan recipient may then access the account or apply- through a standard loan application- for additional funds.

The blocked account is opened for withdrawal from the original saver– individual who gifted the points and after half of the repayment time has passed.

Extension, Non Performing and Delinquency

Winding Down Rich Soil
In the event of delinquency normal liquidation proceeding procedures- the following would take place to wind down Rich Soil Bank:

Off the balance sheet and held in full reserve, Transaction Accounts would be returned to customer or transferred to another bank with the customer nominating the new bank that they want to move to. Transaction Account holders would not experience more than a few hours in which they unable to access their monies.

As creditors of the bank, Investment Account holders would recover as much as their investment as possible. At no point would taxpayers money be needed covering liabilities of the bank nor, spent on compensation.

Purchase and Assumption, FDIC Payout (?)

Dealing with Cash
Rich Soil has two means- reasons for which it deals with cash: (1) customer withdrawals and deposits and (2) the exchange of digital money for cash from the Federal Reserve.

As Rich Soil owns the physical cash in its ATM, tills and vaults the cash is recorded as an asset on the balance sheet for bank operations. When a customer withdrawals cash from an ATM, for example, the customers individual Transaction Account decreases while the banks operations account increases. Rich Soil’s cash holdings will have fallen by the amount withdrawn while the customer’s physical cash holdings will have increased.

Rich Soil buys physical cash from the Federal Reserve by exchanging it for digital money held in the banks Operations Account. When Rich Soil receives the physical delivery of the cash the Federal Reserve decreases Rich Soil Banks Operations Account by the corresponding amount.

The supply, amount of money circulating outside the Federal Reserve increases while the amount of digital money owned by Rich Soil decreases accordingly. Like the Saving and Loan system no new money is created nor destroyed. 

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