[ON HOLD] Convention on Retail-Investment Separation

[The New Sicilian State]

Currently on hold while I do a bit more research on the matter! Will be coming back soon!

Convention on Retail-Investment Separation

Category: Free Trade | Strength: Significant

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The World Assembly,

Acknowledging that privately owned banks are critical to the economic stability of member states
Realizing that many of these financial institutions operate simultaneously in several nations
Concerned for the stability of a multinational economy due to fallacious and risky lending between investment and retail institutions
Striving to avoid catastrophic economic collapse

hereby,

I. Defines "Investment Banks" for the purpose of this convention as as privately owned financial institutions operating as intermediaries for corporate mergers, stock and security exchange, and hosts of hedge funds with the intent on protecting, growing, and capitalizing on the investments of corporations or individuals,

II. Defines "Retail Banks" for the purpose of this convention as privately owned financial institutions operating as monetary lockboxes for private citizens, offering commodities such as checking accounts, savings accounts, and the opportunities for domestic loans, withdrawls, and deposits of capital.

III. Separates the operation of Investment Banks and Retail Banks, requiring that each institution be staffed by different individuals, even if they share a corporate owner.

IV. Forbids Retail Banks from using capital deposited by patrons as investments for hedge funds to avoid high risk scenarios involving mass loss of Retail Bank capital

V. Forbids Investment Banks from drawing loans from Retail Banks to stimulate returns for investors

VI. Forbids larger financial institutions that host both Investment and Retail branches from liquidating and transferring assets between banks

VII. Clarifies that Investment Bank owned hedge funds must be dependent on the investment of individual patrons, privately owned businesses, and presently acquired capital.

OOC: Whoops, when I first posted this, I used my proposal template and accidentally submitted it under the category "Education and Creativity". This is fixed now.

[Araraukar]

Convention on Retail-Investment Separation

Category: Free Trade | Strength: Significant

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The World Assembly,

Acknowledging that privately owned banks are critical to the economic stability of member states
Realizing that many of these financial institutions operate simultaneously in several nations
Concerned for the stability of a multinational economy due to fallacious and risky lending between investment and retail institutions
Striving to avoid catastrophic economic collapse

hereby,

I. Defines "Investment Banks" for the purpose of this convention as as privately owned financial institutions operating as intermediaries for corporate mergers, stock and security exchange, and hosts of hedge funds with the intent on protecting, growing, and capitalizing on the investments of corporations or individuals,

II. Defines "Retail Banks" for the purpose of this convention as privately owned financial institutions operating as monetary lockboxes for private citizens, offering commodities such as checking accounts, savings accounts, and the opportunities for domestic loans, withdrawls, and deposits of capital.

III. Separates the operation of Investment Banks and Retail Banks, requiring that each institution be staffed by different individuals, even if they share a corporate owner.

IV. Forbids Retail Banks from using capital deposited by patrons as investments for hedge funds to avoid high risk scenarios involving mass loss of Retail Bank capital

V. Forbids Investment Banks from drawing loans from Retail Banks to stimulate returns for investors

VI. Forbids larger financial institutions that host both Investment and Retail branches from liquidating and transferring assets between banks

VII. Clarifies that Investment Bank owned hedge funds must be dependent on the investment of individual patrons, privately owned businesses, and presently acquired capital.

OOC: Wasn't this already tried before, by you or someone else? And I mean by remembering a draft with this kind of silly idea being floated around this forum before, and IA pretty much demolishing it single-handedly.

If this isn't your own text but you have instead stolen the text from someone else, do be aware that plagiarism can be punishable by getting kicked out of the WA for a year.

[The New Sicilian State]

Convention on Retail-Investment Separation

Category: Free Trade | Strength: Significant

---

The World Assembly,

Acknowledging that privately owned banks are critical to the economic stability of member states
Realizing that many of these financial institutions operate simultaneously in several nations
Concerned for the stability of a multinational economy due to fallacious and risky lending between investment and retail institutions
Striving to avoid catastrophic economic collapse

hereby,

I. Defines "Investment Banks" for the purpose of this convention as as privately owned financial institutions operating as intermediaries for corporate mergers, stock and security exchange, and hosts of hedge funds with the intent on protecting, growing, and capitalizing on the investments of corporations or individuals,

II. Defines "Retail Banks" for the purpose of this convention as privately owned financial institutions operating as monetary lockboxes for private citizens, offering commodities such as checking accounts, savings accounts, and the opportunities for domestic loans, withdrawls, and deposits of capital.

III. Separates the operation of Investment Banks and Retail Banks, requiring that each institution be staffed by different individuals, even if they share a corporate owner.

IV. Forbids Retail Banks from using capital deposited by patrons as investments for hedge funds to avoid high risk scenarios involving mass loss of Retail Bank capital

V. Forbids Investment Banks from drawing loans from Retail Banks to stimulate returns for investors

VI. Forbids larger financial institutions that host both Investment and Retail branches from liquidating and transferring assets between banks

VII. Clarifies that Investment Bank owned hedge funds must be dependent on the investment of individual patrons, privately owned businesses, and presently acquired capital.

OOC: Wasn't this already tried before, by you or someone else? And I mean by remembering a draft with this kind of silly idea being floated around this forum before, and IA pretty much demolishing it single-handedly.

If this isn't your own text but you have instead stolen the text from someone else, do be aware that plagiarism can be punishable by getting kicked out of the WA for a year.

OOC: I haven't been here long enough to know if this has been attempted before. I haven't tried this before, I'm looking for policy ideas and I noticed a lack of legislature on the banks. This is my text, no one else's, I can assure you of that, but if someone has tried this before, I promise that this has been independently developed without knowledge of the other attempt. As for the draft itself, I won't abandon it simply because IA destroyed some other draft that may have tried to regulate the same thing. If they want to pick apart this one, I'll be glad to stick around until they do.

[The New Sicilian State]

Convention on Retail-Investment Separation

Category: Free Trade | Strength: Significant

---

The World Assembly,

Acknowledging that privately owned banks are critical to the economic stability of member states
Realizing that many of these financial institutions operate simultaneously in several nations
Concerned for the stability of a multinational economy due to fallacious and risky lending between investment and retail institutions
Striving to avoid catastrophic economic collapse

hereby,

I. Defines "Investment Banks" for the purpose of this convention as as privately owned financial institutions operating as intermediaries for corporate mergers, stock and security exchange, and hosts of hedge funds with the intent on protecting, growing, and capitalizing on the investments of corporations or individuals,

II. Defines "Retail Banks" for the purpose of this convention as privately owned financial institutions operating as monetary lockboxes for private citizens, offering commodities such as checking accounts, savings accounts, and the opportunities for domestic loans, withdrawls, and deposits of capital.

III. Separates the operation of Investment Banks and Retail Banks, requiring that each institution be staffed by different individuals, even if they share a corporate owner.

IV. Forbids Retail Banks from using capital deposited by patrons as investments for hedge funds to avoid high risk scenarios involving mass loss of Retail Bank capital

V. Forbids Investment Banks from drawing loans from Retail Banks to stimulate returns for investors

VI. Forbids larger financial institutions that host both Investment and Retail branches from liquidating and transferring assets between banks

VII. Clarifies that Investment Bank owned hedge funds must be dependent on the investment of individual patrons, privately owned businesses, and presently acquired capital.

OOC: Wasn't this already tried before, by you or someone else? And I mean by remembering a draft with this kind of silly idea being floated around this forum before, and IA pretty much demolishing it single-handedly.

If this isn't your own text but you have instead stolen the text from someone else, do be aware that plagiarism can be punishable by getting kicked out of the WA for a year.

I've read over the thread you mention, and I can assure you that these are very different, both in execution and principle. This prior idea sought to restrict functions of financial institutions that were more than necessary for the security of individuals. He sought to ban hedge funds altogether, a hilariously awful idea (as pointed out by IA immediately) among other things, including barring several functions of investment banks that allow consumers to fall back if their stocks turn for the worse. I don't wish to cut off any of these functions, I just wish to divide investment and retail banks so that the faulty borrowing from retail banks doesn't end in economic catastrophe.

[Araraukar]

OOC: If you're serious about this, you need to define what a hedge fund is. As a semi-random segue, I never knew I always wanted these bushes as my hedge...

But still, if you think that unwise loans/investments are the problem, why are you not tackling those, instead of going after the actual banks. And what use is mandating that different people work for different sides of the operation? Isn't that likely the case in RL as well, regardless of how reliable and responsible the banks are?

[The New Sicilian State]

OOC: If you're serious about this, you need to define what a hedge fund is. As a semi-random segue, I never knew I always wanted these bushes as my hedge...

But still, if you think that unwise loans/investments are the problem, why are you not tackling those, instead of going after the actual banks. And what use is mandating that different people work for different sides of the operation? Isn't that likely the case in RL as well, regardless of how reliable and responsible the banks are?

OOC: you’re entirely right, I’ll define hedge funds. Nice hedges lol. But also, I don’t know enough about predatory lending, but I plan on doing some research. Would it be an overstep to include that within this proposal? The separation of retail and investment banks would be greatly helpful in the regulation of loans themselves

[Araraukar]

OOC: The separation of retail and investment banks would be greatly helpful in the regulation of loans themselves

OOC: If you want to regaulate the loans themselves, regulate the loans themselves. Leave the banks be.

[Separatist Peoples]

"If savings are appropriately insured, what does it matter?"

[Yohannes]

Hi The New Sicilian State, this is a lovely proposal.

But it’s a matter of common sense. If you are running a bank, and you don't know the difference between “retail banks” and “investment banks,” then your country is probably a third world “hellhole” (something President Donald Trump would say). Someone running a bank would also know to separate departments for commercial, retail, investment and wealth management/private, etc. it’s like a maths teacher not knowing that 1 + 1 = 2. Opposed.

[Edit: And this is just my opinion, but I believe the World Assembly and its IC organisations don’t need to interfere to tell you the difference between “retail banks” and “investment banks” (and how they operate differently or how there should be separate departments for them), it’s like having your school principal interfering to help your maths teacher and tell him/her, “Okay, 1 + 1 = 2” in front of the students.]

Best wishes

[The New Sicilian State]

"If savings are appropriately insured, what does it matter?"

"are they appropriately insured? Assuming that member states have this sort of system in place already could be dangerous."

OOC: The separation of retail and investment banks would be greatly helpful in the regulation of loans themselves

OOC: If you want to regulate the loans themselves, regulate the loans themselves. Leave the banks be.

OOC: Wait, I apologize, I appear to be getting away from myself. It's not so much the risky loans that are the issue, it's the fact that the investment banks are using retail bank capital, and therefore the potentially uninsured capital of private citizens. I've looked about the RexisQuexis categories a little bit and I can't seem to find anything that universally insures individual capital in case of market crashes. Could this be a responsibility of the WA General Fund? In that case, I should be working on something entirely different, but it seems too obvious of an issue not to have been covered in at least something. Thanks for your help in walking me through this, I'm eager to become more literate.

*Snip*

"Good evening sir, I suspect that you might be mistaken in the purpose of the convention. It doesn't exist simply to define the difference, my definitions merely fill in any gaps of knowledge. I'm more than aware that retail and investment banks know their own particular place in the financial world, I am more concerned with investment banks' tendencies to draw capital from retail banks for use in high risk financial operations that without legitimate payout could lead to horrific bank runs, and economic catastrophe. I am also concerned with retail banks' tendencies to bet on these same risky operations, putting their own capital, and therefore the capital of citizens like you or I, in grave danger. I hope I can clarify a bit, but if this wasn't what you were referring to, do explain more!"

[Separatist Peoples]

"If savings are appropriately insured, what does it matter?"

"are they appropriately insured? Assuming that member states have this sort of system in place already could be dangerous."

"Your response to the possibility of a lack of some insurance is to ban investing...and you do not see the less invasive alternative available?"

[Yohannes]

"Good evening sir, I suspect that you might be mistaken in the purpose of the convention. It doesn't exist simply to define the difference, my definitions merely fill in any gaps of knowledge. I'm more than aware that retail and investment banks know their own particular place in the financial world, I am more concerned with investment banks' tendencies to draw capital from retail banks for use in high risk financial operations that without legitimate payout could lead to horrific bank runs, and economic catastrophe. I am also concerned with retail banks' tendencies to bet on these same risky operations, putting their own capital, and therefore the capital of citizens like you or I, in grave danger. I hope I can clarify a bit, but if this wasn't what you were referring to, do explain more!"

"I run a bank, a multinational one. We love our profit margin. Opposed."

Ambassador of Yohannes

[Separatist Peoples]

"Good evening sir, I suspect that you might be mistaken in the purpose of the convention. It doesn't exist simply to define the difference, my definitions merely fill in any gaps of knowledge. I'm more than aware that retail and investment banks know their own particular place in the financial world, I am more concerned with investment banks' tendencies to draw capital from retail banks for use in high risk financial operations that without legitimate payout could lead to horrific bank runs, and economic catastrophe. I am also concerned with retail banks' tendencies to bet on these same risky operations, putting their own capital, and therefore the capital of citizens like you or I, in grave danger. I hope I can clarify a bit, but if this wasn't what you were referring to, do explain more!"

"I run a bank, a multinational one. We love our profit margin. Opposed."

Ambassador of Yohannes

"What is this, your hobby?"

[Yohannes]

"I run a bank, a multinational one. We love our profit margin. Opposed."

Ambassador of Yohannes

"What is this, your hobby?"

"When I was young I applied for law school, but they rejected my application because I used to skip many high school classes.

"So I went for the next best alternative: ripping people off their pension funds."

-Ambassador of Yohannes to Ambassador Bell

[The New Sicilian State]

"are they appropriately insured? Assuming that member states have this sort of system in place already could be dangerous."

"Your response to the possibility of a lack of some insurance is to ban investing...and you do not see the less invasive alternative available?"

"Pardon my wording, I meant that as a genuine question. I've looked about the passed resolutions and I can't seem to find anything insuring individual savings in case of crashes. I mentioned in an earlier post that if there was nothing established that I should certainly be writing something entirely different."

[The New Sicilian State]

"When I was young I applied for law school, but they rejected my application because I used to skip many high school classes.

"So I went for the next best alternative: ripping people off their pension funds."

-Ambassador of Yohannes to Ambassador Bell

"Brilliant."

[Imperium Anglorum]

capital deposited

A preliminary note (I'll read more of this later)—capital is not deposited. A deposit generally conceived of as a demandable liability, not equity capital. The accounting terminology is very specific. It is best to get it right.

[The New Sicilian State]

capital deposited

A preliminary note (I'll read more of this later)—capital is not deposited. A deposit generally conceived of as a demandable liability, not equity capital. The accounting terminology is very specific. It is best to get it right.

OOC: Thank you for that, I'm not acquainted with accounting terminology. I had assumed that capital was simply money. I'll set about fixing it in the morning.

[Imperium Anglorum]

I think the proposal misuses terminology related to finance and accounting. That should be corrected in later versions. I'll attempt to give a generous interpretation of what the words are meant to mean. My understanding is that the author wants to re-enact some kind of separation between retail and investment banks that was written in the United States' 1933 Banking Act.

I. Defines "Investment Banks" for the purpose of this convention as as privately owned financial institutions operating as intermediaries for corporate mergers, stock and security exchange, and hosts of hedge funds with the intent on protecting, growing, and capitalizing on the investments of corporations or individuals,

II. Defines "Retail Banks" for the purpose of this convention as privately owned financial institutions operating as monetary lockboxes for private citizens, offering commodities such as checking accounts, savings accounts, and the opportunities for domestic loans, withdrawls, and deposits of capital.

A number of questions.

1. Privately-owned means the stock is not available for sale on a stock market that anyone can engage in. Do you intend that your regulations apply to private institutions only? If so, every institution will just do an IPO and exit the regulations.
2. If you mean instead that it is not owned by the state, then why subject the state to less stringent regulation? A state enterprise can suffer the exact same kinds of problems that private ones have. In fact, in India, a lot of state-owned banks have issues with political lending leading to high rates of non-performing loans.
3. Security exchange includes the purchase of government debt, which is one of the main things in which banks hold their capital. See Basel III and risk-based capital rules. (It's also why European bonds can be sold for negative rates; banks are required to purchase them to meet capital requirements.)
4. Existing non-commercial banks like the ones regulated by the FDIC do things beyond home mortgages. They also lend to build commercial property, to developers, to small business. They also lend in syndicates to larger institutions and sometimes to the government. These definitions don't capture the divide that it seems meant to capture.
5. Checking accounts, etc. are not commodities. They are services.

III. Separates the operation of Investment Banks and Retail Banks, requiring that each institution be staffed by different individuals, even if they share a corporate owner.

Under the Gramm-Leach-Bliley Act, banks are still separate from investment banks. They are different legal charters with different responsibilities and different obligations (banks e.g. are required to pay federal deposit insurance premiums). They are owned, however, by an overarching "Financial Holding Company". One should also note that the large investment banks which failed (or almost failed) at the start of the 2008 financial crisis, like Goldman Sachs, Lehman Brothers, Bear Sterns, etc. were not held in financial holding companies. In fact, these institutions did not participate at all in the Fed's FHC regulatory structure until they needed capital infusions—which the government conditioned on their becoming so regulated.

IV. Forbids Retail Banks from using capital deposited by patrons as investments for hedge funds to avoid high risk scenarios involving mass loss of Retail Bank capital

As noted above, capital isn't deposited. Deposits are demandable. Capital is not. I cannot purchase equity from Apple and demand they give me the value of the share (unless there exists some nominal—usually extremely low—"par" value which is assigned, either way, it isn't reflective of the fair value of the share). This section also conveys a fundamental misunderstanding of the financial crisis' origin. It wasn't created by hedge funds.

It was created by the financialisation of housing assets and the overvaluation of those assets under imperfect information. One ought also note that the greater transparency afforded by the ABX index's introduction both allowed people to actually observe that overvaluation and act on it. FDIC, Crisis and Response (2018) 20 (available at https://www.fdic.gov/bank/historical/cr ... mplete.pdf). The issue with the 2008 crisis was an asset bubble. It was not fundamentally caused by a shortage of bank capital. It was greatly exacerbated by such a shortage, but did not cause it.

V. Forbids Investment Banks from drawing loans from Retail Banks to stimulate returns for investors

Under a normal conception of how corporate funding works, one would also have to concede that such a prohibition would also reduce retail bank depositor rates or increase interest rates for retail bank borrowers who are unable to access the generally higher returns available in investment markets. It also isn't particularly enforceable: investment banks draw loans from retail banks to get more cash to purchase more assets.

VI. Forbids larger financial institutions that host both Investment and Retail branches from liquidating and transferring assets between banks

This is a terrible idea: cross-subsidisation is an important part of preventing bail-outs and imposing discipline. A bank being able to move money from a weaker portion to a larger portion smooths over shocks that the subsidiary by itself would be unable to hold.

VII. Clarifies that Investment Bank owned hedge funds must be dependent on the investment of individual patrons, privately owned businesses, and presently acquired capital.

I don't understand the last portion: do you intended to prohibit hedge funds from expanding their capital?

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On the Financial Services Modernisation Act 1999.

People constantly argue that the passage of the above act somehow caused the subprime crisis or something similar. I disagree: there is no link between allowing retail and commercial banks to engage and the causes of the crisis. Before the FSM Act 1999, subprime lending was allowed, securitisation was allowed, borrowing to lend was allowed, monoline origination was allowed, C&D loans were a thing, mortgaged-backed securities already existed, Fannie Mae and Freddie Mac existed, etc. The FSM Act did not prohibit people from overvaluing loans. All the things that actually coincided or contributed to the boom in asset values were already there before the passage of the FSM Act. It also does not seem to make sense prima facie that the most diversified institutions that also were mixed in FHCs survived while less diversified institutions outside of such a structure were the ones that fared worst.

The argument that mergers created larger too-big-to-fail subsidies also does not support breaking them apart. Breaking apart the existing banks would reduce their ability to handle idiosyncratic shocks. Before the FSM Act there were also too-big-to-fail banks. The first use of the word comes from testimony before Congress in 1984 related to Cont'l Illinois' failure during the savings and loan crisis. (It was also a poor choice of wording, a better and more accurate phrasing would be 'too-interconnected-to-fail'. If a large bank touching nobody failed in the middle of a forest, it does not matter in the same way that Cont'l Illinois' failure would have also with it brought down banks across the entire Midwest.) Moreover, it seems the less disruptive way to solve the problem of a too-big-to-fail subsidy—a very well discussed section of the banking literature—would be more stringent capital regulations for such institutions.

The fundamental idea of the policy, to me, also has always seemed overly focused on risk. Allowing institutions to trade among themselves also gives them more room to create value and use funds in a manner that is more productive than otherwise. There is a risk-return trade-off, and given there exist much less disruptive (or damaging, after transition costs) ways to managing that risk-return trade-off, to me it seems unwise enact sub-optimal policies.

The arguments that emerge from banks betting against their own clients too seem insufficient to justify something of this disruption. Would not the solution to that be enacting a policy to stop them from doing that? Or make file disclosures on bank derivative positions? Or stop banks from trading on such information? These are all alternative policies that solve the problem identified without as much disruption.

[The New Sicilian State]

*snip*

OOC: Thank you for your time, I've been eagerly awaiting your opinion on this draft. As for now I'm putting this on hold to do some edits and reworking on a platform outside of the clunky(ish) NS forum, I will be coming back to this. As for now I intend to shift my focus to my road freight regulatory piece. I'll take your advice to heart and start studying up on my accounting terminology and work a bit on my understanding of the economy, I'm enthusiastic to learn, but I'm merely a high school student who doesn't plan to take micro or macroeconomics until my freshman year in college next year. Again, thanks for your help.

[Imperium Anglorum]

*snip*

OOC: Thank you for your time, I've been eagerly awaiting your opinion on this draft. As for now I'm putting this on hold to do some edits and reworking on a platform outside of the clunky(ish) NS forum, I will be coming back to this. As for now I intend to shift my focus to my road freight regulatory piece. I'll take your advice to heart and start studying up on my accounting terminology and work a bit on my understanding of the economy, I'm enthusiastic to learn, but I'm merely a high school student who doesn't plan to take micro or macroeconomics until my freshman year in college next year. Again, thanks for your help.

Until the recent pandemic disease, I would have recommended, if you are really interested in this topic, to sign up in the summer for some community (or local) college introductory classes on the topics. I don't recommend HS econ classes: they trend towards political hackery because it's usually the blind leading the blind.

AP econ trends towards 'the curriculum'. That curriculum usually isn't subject to too much political hackery because it is externally validated. There is even feedback to teachers because they can (could maybe, I know can under IB's superior system) view how well their students do on the AP examinations. But if you're looking for credits, just get them directly instead of in a roundabout fashion via an examination. It will also show up on a college application if you also send your transcripts.

Taking classes like this at a university does, however, unlike a high school, usually cost money. Depending on the university, this can cost a lot of money. Eg Penn's LPS programme (which includes high school students) costs multiple thousands of dollars if you live outside the City of Philadelphia. https://www.sas.upenn.edu/lps/hs-young-scholars/tuition.

[The New Sicilian State]

*another snip*.

I can imagine AP econ not being the move, thankfully I never garnered enough interest to take it until it was too late. Thanks for pointing me in a right direction though! I plan on taking a few classes at Towson in the fall, I live in Maryland. I’ve considered auditing a few online classes through Coursera, but I’m already auditing a philosophy class and I’m a little pressed for time these days.

[Araraukar]

OOC: If you're currently not working on the proposal, change the "EDITING" to read "ON HOLD", so people know not to reply to it further.

[The New Sicilian State]

OOC: If you're currently not working on the proposal, change the "EDITING" to read "ON HOLD", so people know not to reply to it further.

OOC: Gotcha, thanks for the tip