Bank Accounting Transparency, Missing In Action...

Paper Summary: Transparency and Bank Profits

This paper explores the issue of lack of transparency in bank balance sheets, particularly with regard to profits from money creation. The key issue is that bank money creation, through the issuance of loans, is not recorded as cash inflows on balance sheets. As a result, seigniorage, or the profit banks make from creating money, remains invisible.

Key Points:

Failure to Record Seigniorage: As stated in the original text, “Until bank money creation is recorded as cash inflows on balance sheets, it will not be possible to properly record banks’ real profits.” This creates a discrepancy between real and reported profits.

Balance Sheet Opacity: ChatGPT highlights how “opaqueness exists because bank money creation (money generated when banks issue loans) is not reflected as cash inflows on balance sheets.” This lack of clarity obscures banks’ real profitability.

Accounting reform needed: To address this issue, ChatGPT suggests that “regulators such as the International Accounting Standards Board (IASB) or the Financial Accounting Standards Board (FASB) should establish new rules or guidelines.”

Factors influencing change: The push for greater transparency may come from increased public awareness, political pressure, and a desire to reform the financial system. However, the banking industry is likely to resist such changes.

Conclusion:

The issue of transparency in bank profits, particularly seigniorage, is complex and involves multiple actors. Although awareness of this issue is growing, the road to accounting reform that makes all bank profits visible is long and winding. It requires joint action by regulators, politicians, and the public to overcome resistance from the banking industry and ensure greater transparency in the financial system.