To maintain stability in the banking system, the objectives of the Royd Monetary Policy are to reduce the tax burden, control inflation in a manner that avoids increasing the burden on working families, and the vulnerable, whilst stimulating growth, by providing protections and incentives for small and medium sized businesses.

To achieve this, it will focus on the following

Reducing the Treasury’s burden of servicing the high level of National debt, by replacing the failed QE activities, with the Royd Cash Ratio Deposit Scheme to move the National debt, from high short-term interest to low long-term interest to lower the burden on the Treasury.

The Treasury is exposed to the underfunding of the Cash Ratio Deposit Scheme and its ‘Reserve to Loan ratio’. The Royd Cash Ratio Deposit Scheme will reduce the Treasury’s exposure by increasing the deposit amount and removing the interest paid on deposits.

The UK banks would be incentivised to lower mortgage interest rate for existing and new home and social housing mortgages.

The UK banks would be incentivised to boost growth and reduce unemployment, by providing discounted loans to key growth sectors of the economy, with support for business, skill training and regional investment support, to address the levelling up agenda.

The reliance on GDP, as a measure of economic success, will be replaced with Thriving Places Index.

TPI’s primary focuses are sustainability, equality, and local conditions, such as health, education, employment opportunities, housing affordability, and community engagement.

These three categories are then broken down into 60 indicators, emphasising local welfare.

TPI (developed in 2010) doesn’t do country-wide rankings – instead, it seeks to answer 3 questions about a given area:

• Is it a fair and equal place to live?
• Is it sustainable enough so that future generations can flourish?
• Are the conditions present for everyone to do well?

The dynamics between commercial banks, their reserves, and the creation of money form a crucial aspect of the modern economy.

The Royd Monetary Policy delves into the historical context of bank reserves, the current state of the UK banking system, in connection to the UK Monetary Policy and proposes a set of monetary policy measures to control the bank loans to bank reserves ratio and maintain stability in the banking system.

In 1960, London clearing banks maintained a conservative approach, with a significant portion of assets held in cash, Treasury bills, and discounted bills. Customer loans constituted only 30% of assets, highlighting a prudent allocation of resources. Contrastingly, today’s landscape shows a shift, with only 18% of UK bank deposits backed by reserves. The remaining 82% relies on banks’ illiquid and often risky assets, primarily mortgages and loans, safeguarded by state assurances.

In June 1998, the Bank of England became an independent public organisation, with a mandate to support the economic policies of the government of the day, but independence in maintaining price stability.

In the same year, the Cash Ratio Deposit scheme of holding deposits as non-remunerated reserves, was placed on a statutory footing by the Bank.

In May 2006 the Bank made a change to this and began paying interest on bank reserve deposits at its official Bank Rate.

QE activities were introduced in 2009, when it increased the level of interest-bearing reserves.

It was reviewed in 2013, when the scheme parameters set at that review were conditioned on a set of assumptions regarding gilt yields and the growth rate of eligible liabilities over the subsequent five years.  

A review of the 2018 to 2023 performance of the CRD scheme found that the Bank’s income has fallen below required levels over the last five years.

1st March 2024, the Bank replaced the Cash Ratio Deposit (CRD) scheme with a Bank Levy, as consequence of a 2021 Treasury consultation with banks and building societies on how to fund the Bank’s policy and financial stability functions.

The October 2023 figures show that the Bank now holds around £248.9 billion of public sector debt and the cost of servicing central government debt in October 2023 was £7.5 billion.

As a direct result of the Bank of England changing from remunerated Cash Reserves to a Bank Levy, there is a heightened dependence on non-allocated reserves, posing a threat to the Treasury’s guarantee deposit scheme. The accumulation of these reserves at elevated levels raises concerns about the stability of the financial system. This situation could potentially lead to a scenario of a zero interbank lending rate, exerting downward pressure on the pound. To avert a recurrence of challenges akin to the 2008 financial crisis, it is imperative to emphasize vigilant monitoring and prudent financial management.

The commercial risk associated with the Bank’s inability to meet interest payments or losses on its buying and selling of Guilts ultimately falls on the Treasury. The Treasury is obligated to fund these payments from tax receipts, thereby limiting its capacity to meet other obligations. This predicament underscores the urgency for careful financial consideration and strategic planning.

In the modern economy, a significant portion of money creation stems from commercial banks making loans. It becomes essential, therefore, to closely examine the ratio between bank loans and bank reserves. Under the CRD Scheme, commercial banks were mandated to place 18% of their assets as a reserve deposit with the Bank of England, receiving interest in return. This practice has been replaced by a Bank Levy, addressing financial challenges faced by the Bank and reducing the disparity between interest earned on bonds acquired through quantitative easing and interest paid out by the Bank of England.

Despite the Bank’s efforts to mitigate financial challenges, the surge in excess reserves held by commercial banks heightens vulnerability to the Treasury’s guarantee deposit scheme. This poses a significant challenge to the stability and integrity of the deposit protection framework and the overall stability of money markets. The Treasury’s responsibility is amplified when the Bank encounters difficulties in meeting interest payments or experiences losses in its financial transactions, requiring funding from tax receipts.

In essence, the bottom line is that banks generate substantial profits, especially with the Bank replacing the Cash Deposit Scheme with a Bank Levy, allowing for even more significant profits. However, these profits are underwritten by taxpayers through the Treasury. This dynamic limits the Treasury’s ability to fulfil its social and economic responsibilities, making the current situation arguably unacceptable.

The question arises: Is this an acceptable state of affairs, or is it a matter that warrants scrutiny and reconsideration, or Is It Me!

Royd Cash Ratio Deposit Scheme

The Royd CRD Scheme is an adaption of the USA’s Fed’s Discount Rate (DR) loans methods that boost their economy, as DR targets growth sectors of the economy, which when aligned with TPI’s objectives, so much more can be achieved, with greater benefits for all.
This is not a difficult concept to accept, as the Bank of England’s own analysis suggests that for £200billion of QE (3.8), only an average of 0.625% (inflation adjusted) is fed into the real economy (GDP) and an unequal absolute impact, in cash terms, of quantitative easing on households across the wealth distribution (3.15,16), those with wealth in property or savings benefit, whilst those without suffer the effects of inflation.

Revert the Bank Levy to Non-Remunerated Reserves and Increased Cash Ratio Deposits

Reverting the Bank Levy to non-remunerated reserves, in conjunction with increasing Cash Ratio Deposits, would ensure stability in the money markets, protect the value of the pound and mitigate risk inherent in the the Treasury’s guarantee deposit scheme and enhance the liquidity position of banks and encourage a more responsible approach to lending.

To encourage effective collaboration between the Bank, Treasury and UK banks, the Bank would reduce an equivalent amount of Non-Remunerated Reserves for UK banks that responded to its incentives. This would enable the UK banks to benefit from income generated by low interest loans targeted at Treasury identified categories, producing a Win – Win scenario.

Transfer of National Debt to Long-term Low-interest Guilts

The Bank of England should shift the National Debt from short-term high-interest guilts to long-term fixed low-interest guilts. This move aims to reduce the debt-servicing costs to Treasury that are affected by Bank Rate fluctuations, thus reducing interest rate pressures and creating a more stable financial environment.

Incentivising Clearing Banks to Hold Long-term Guilts

The Bank should incentivise clearing banks, by reducing the UK bank’s CRD in proportion to the banks investments in its short-term guilts and to hold them as long-term investments at a lower fixed rate set by the Bank.

This has an added incentive for the banks, because the guilts are a guaranteed loan that count towards a clearing bank’s reserves.

Furthermore, the interest from the guilts would be a better return, than deposits held as Non-Remunerated Reserves and it will also provide further stability to the financial system.

Relief for Home Mortgages and Social Housing Mortgages

However, when CRD is used to restrict monetary growth, it could also lead to a reduction in lending, which could negatively impact the housing market. To mitigate this risk, the Bank of England, would set a lower mortgage interest rate for existing home and social housing mortgages.

The UK banks would then be incentivised, by providing them relief from CRD, proportional to new and their existing home and social housing mortgages, contingent on reducing mortgage interest to affordable levels set by the Bank.

Ensuring a more stable and responsible banking environment

To promote responsible lending practices, the Bank would also set a cap for home and social housing mortgages and provide guidelines for maximum loan-to-value ratios and debt-to-income ratios.

This would help prevent Asset Appreciation and borrowers from taking on excessive debt, so reducing the risk of default and it also ensures that a minimum level of Cash Ratio Deposits are retained.

Implementation Challenges

Whilst, it is essential to acknowledge potential challenges in implementing these policies and that the success of these measures’ hinges on effective collaboration between financial institutions, regulatory bodies, and the Treasury.

Overall, while there may be some challenges associated with implementing such a policy, it is feasible for the Bank of England to increase the Cash Ratio Deposit while allowing relief proportionate to existing home mortgages and mortgages for social housing, on the condition that mortgage levels are reduced to affordable levels, to maintain stability in the banking system.

Creating Growth, Reducing Unemployment, Boosting the Thriving Places Index (TPI)

The UK economy is composed of several sectors, each with its unique contribution to the country’s economic growth.

To create growth, reduce unemployment and boost the Thriving Places Index (TPI), it is essential to target the Financial, Manufacturing, Technology and Tourism sectors, with support for business, skill training and regional investment support to address the levelling up agenda.

These sectors can help to channel investment to those sectors that can bolster the nation’s security, by making the UK resilient to fluctuations in the world economy and instability in the global order, such as Energy, Agriculture, Fisheries and modernising military and intelligence capabilities to maintain a technologically advanced and flexible defence force, which is imperative with the current increased instability in world order.

Relief for Business Loans in Targeted Sectors

Commercial banks could be given similar relief from CRD, for business loans and mortgages in TPI targeted sectors, with the condition of setting mortgage levels determined by the Bank in line with Treasury targets, to encourage investments in key sectors, as discussed above.

Unreserved Deposit Tax to Prevent Zero Interbank Lending Rates

The surge in excess reserves held by financial institutions has almost certainly ensured that UK banks have an excess reserves that will almost certainly lead to a zero interbank lending rate and downward pressure in the pound, as the Bank has not prepared a defence.

In contrast; under the Royd Monetary Policy the Bank would introduce an unreserved deposit tax, equivalent to the policy rate, to prevent interbank lending rates falling to zero, which has a wide range of negative outcomes, including the following (not exhaustive) risks.

If banks have more funds available for lending without the constraint of reserves, there might be a temptation to engage in riskier lending practices, which could pose systemic risks to the financial system.

Banks could also face challenges in maintaining profitability, potentially impacting their ability to lend and provide financial services.

The pound could be depreciated, as other countries would provide better interest rates in the money markets.

This measure aligns with the dual purpose of protecting the money markets and implementing monetary policy, with the added benefits to the public of enhancing the safety and soundness of commercial banks and the pound in their pockets.

Conclusion

The Royd Monetary Policy does present a realistic alternative to the Bank and Treasury, strategy of relying on a combination of a high Bank Interest Rate, in conjunction with Quantity Tightening, by addressing the following challenges.

Reduced Tax Burden

The Royd Cash Ratio Deposit (CRD) Scheme is introduced to replace Quantitative Easing (QE) activities. It aims to move the National debt from high short-term interest to low long-term interest, thereby reducing the Treasury’s burden of servicing the debt.

Reduce Treasury’s Exposure to ‘Reserve to Loan Ratio

The Royd CRD Scheme also addresses the Treasury’s exposure to underfunding by increasing deposit amounts and removing interest payments on deposits. This reduces the financial risk for the Treasury.

Reduce Mortgage Interest Levels

Incentives are provided for UK banks to lower mortgage interest rates for home and social housing mortgages. This not only benefits homeowners but also stimulates economic activity.

Boost Economic Growth

Incentives are given to UK banks to provide discounted loans to key growth sectors, supporting businesses, skill training, and regional investment. This contributes to economic growth and job creation.

Replace GDP with Thriving Places Index (TPI)

Shifting from GDP to TPI as a measure of economic success emphasises sustainability, equality, and local conditions. This change in focus aligns with the policy’s objective of promoting a fair and equal place to live, sustainability, and conditions for everyone to thrive.

Maintain Stability in the Banking System

The Royd Monetary Policy addresses historical shifts in banking dynamics and proposes measures to control the bank loans to bank reserves ratio. This includes reverting to non-remunerated reserves, protecting against excess reserves causing instability in the money markets and increasing Cash Ratio Deposits to enhance liquidity and encourage responsible lending.

Transfer National Debt to Long-term Low-interest Guilts

Shifting the National Debt to long-term low-interest guilts aims to reduce debt-servicing costs for the Treasury, providing financial stability and predictability.

Incentivise Clearing Banks to Hold Long-term Guilts 

Offering incentives for banks to invest in long-term guilts helps stabilize the financial system and provides better returns than holding non-remunerated reserves.

The Bank of England

Definition of Terms

Cash Ratio Deposit Scheme

Cash Ratio Deposit Scheme (CRD), is a requirement imposed by the Bank on commercial banks and building societies with eligible liabilities of more than £600 million, to keep a certain percentage of their deposits in the form of cash or deposits with the Bank, on a non-interest-bearing basis.

CRD – Percentage Requirement

The Bank sets a specific percentage of total deposits that commercial banks must hold in the form of cash or deposits with the Bank. This percentage is known as the cash reserve ratio.

CRD – Purpose

The purpose of this scheme is to ensure that banks have a certain level of liquidity (cash or easily convertible assets) to meet the demands of their customers and to stabilise the overall financial system.

CRD – Impact

By requiring banks to keep a portion of their deposits in a readily available and secure form, the central bank aims to prevent situations where banks may face a sudden rush of withdrawals, which could lead to a financial crisis. It also gives the central bank a tool to control the money supply in the economy and helps maintain stability in the banking system.

Asset Appreciation

Asset Appreciation, is caused by increased demand for home ownership due to government incentives, without increasing the supply of new homes. This has inflated the price of homes, both for sale and for rent.

Asset appreciation also exacerbates wealth inequality by benefiting those who already have significant assets.
The widening wealth gap has social and economic implications.

While asset appreciation contributes to overall economic growth (GDP), this is a false assertion, as the wealth created is an effect of inflation and not produced by economic activity.

Key Sectors for Growth

Financial

Employing 2.5 million individuals throughout the UK, with over 1.1 million in financial services (FS) and more than 1.3 million in related professional services, this industry generated £278 billion in economic output. This figure represents 12% of the entire economic output of the UK, contributing £100 billion in tax revenue.

The UK stands as a global leader in various aspects of the financial industry, including banking, insurance, and asset management. As of July 4, 2023, it is challenging to emphasize enough the sector’s impact on the UK, constituting approximately 12% of the GDP.

Calculating the overall growth rate is challenging, as the different services have varying levels of growth from 0.3% to 17%, so a conservative growth of 2% per year seems a prudent working estimate.

Manufacturing

This is a significant contributor to the UK economy accounting for approximately 10% of GDP, with a projected compound annual growth rate (CAGR) of 3.33% is expected for 2024–2028.  This sector includes industries such as aerospace, automotive, and pharmaceuticals. By investing in this sector, the UK can create more job opportunities, increase exports, and improve productivity.

Tourism

The tourism sector is a vital contributor to the UK economy, accounting for 8.9% of GDP at the end of 2022. This sector includes industries such as hospitality, travel agencies, and cultural attractions.

The World Travel & Tourism Council’s latest Economic Impact Report (EIR) reveals the Travel & Tourism sector in the UK is expected to create nearly 700,000 new jobs over the next decade.
According to the report, the UK’s Travel & Tourism’s contribution to GDP is forecasted to grow at an average rate of 3% annually between 2022-2032.
This is nearly twice the 1.7% growth rate of the overall economy and is set to reach more than £286 billion (10.1% of the total economy).
By investing in this sector, the UK can create more job opportunities, and improve regional development.

Technology

This is one of the fastest-growing sectors in the UK economy, with a growth rate of 17% in 2020 (Tech Nation’s Detailed Industry Report), approximately 8% of GDP.
According to Public First’s research, digital technology could create over £413 billion in additional value for the UK economy by 2030. That is the equivalent of around 19% of the entire UK economy
The Technology sector includes industries such as software development, telecommunications, and e-commerce.
By investing in this sector, the UK can create more high-skilled jobs, increase innovation, and improve productivity.

Thriving Places Index