But what if we take banks as a whole? The answer is that banks create deposits when they extend loans to their customers. When a bank grants a loan, money that did not exist before is credited to the customer’s account. The bank does not have to find someone who wants to save before it can make a loan. The bank creates its own funding in the act of lending. Banks thereby also create the money we all use. No other financial firm can do that.5 Non-bank financial institutions must hold deposits in a bank for them to be able to pay another party. Almost all the money we spend daily is deposit money created by a bank. There is little likelihood that many customers will withdraw large amounts simultaneously. Banks can therefore create far more deposits than they can pay out at the same time.6 But a bank cannot extend loans and create deposits without limitations. First, it must assess the customer’s debt-servicing capacity, ie credit risk. Second, the bank must assess the degree of liquidity risk associated with lending long and creating deposits that customers can withdraw at any time. Third, it must comply with statutory rules. Banks’ willingness to assume some degree of liquidity risk is a public good. In its absence, we would have less access to long-term loans and money in the form of bank deposits. On the other hand, too much liquidity risk entails a risk of instability and crises like the one we experienced in 2008.
FinTech companies and tech giants can take market shares from established banks. This can result in sweeping changes in market structure. But this does not mean that banks will become obsolete. The services offered by the new participants and the new means of payment I have discussed so far are based on our current monetary system. What is lent and saved will still be Norwegian kroner created by regulated banks. Will cryptocurrencies give rise to a new financial system? Chart: Cryptocurrencies – another kind of money A more radical scenario is that cryptocurrencies not pegged to the krone gain a larger role in the monetary system. Cryptocurrencies are characterised by decentralised settlement, without the need for a central counterparty that must be trusted by all. Ownership of funds is determined by access to cryptographic keys and not title to a bank account. This technology can make money programmable so that it can be used in so-called “smart contracts”. In some cases, such as for Bitcoin, the system limits the total quantity of money that can be created. Bitcoin, is an example of a cryptocurrency without a fixed exchange rate against anything else, which could entail wide swings against other currencies. But a growing array of “stablecoins” are also being launched, which are intended to have a fixed exchange rate against a country’s bank money. An example is Diem, whose backers include Facebook and which will exist in several versions, each pegged to its main currency.