Journal Article

No. 2012-3 | January 13, 2012 (Version 2: November 12, 2012)
Release of the Kraken: A Novel Money Multiplier Equation’s Debut in 21st Century Banking PDF Icon

Abstract

Historically, the banking multiplier has been in a range of 4 to 100, with 25% to 1% reserve ratios at most layers of the banking system encompassing the majority of its range in recent centuries. Here it is shown that multipliers over 1 000 can occur from a new mechanism in banking. This new multiplier uses a default insurance note to insure an outstanding loan in order to return the value of the insured amount into capital. The economic impact of this invention is calculably greater than the original invention of reserve banking. The consequence of this lending invention is to render the existing money multiplier equations of reserve banking obsolete where it occurs. The equations describing this new multiplier do not converge. Each set of parameters for reserve percentage, nesting depth, etc. creates a unique logarithmic curve rather than approaching a limit. Thus it is necessary to show the behavior of this new equation by numerical methods. Understanding this new multiplier and associated issues is necessary for economic analyses of the Global Financial Crisis.

Data Set

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The data set for this article can be found at: http://hdl.handle.net/1902.1/16628

JEL Classification

E17 E20 E51 H56 H63

Versions

Citation

Brian P. Hanley (2012). Release of the Kraken: A Novel Money Multiplier Equation’s Debut in 21st Century Banking. Economics: The Open-Access, Open-Assessment E-Journal, 6 (2012-3): 1—25 (Version 2). http://dx.doi.org/10.5018/economics-ejournal.ja.2012-3

Assessment

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Comments and Questions


Brian Hanley - Federal Reserve Banking Examination Manual
August 09, 2012 - 16:56

A citation on the policy of the Federal Reserve evaluating capital. Courtesy of Tschaff Reisberg.

"Commercial Bank Examination Manual," Division of Banking Supervision and Regulation. Washington, DC: Board of Governors of the Federal Reserve System, 2000, pp. 531, 1068 pages.

Page 531: "For risk-based capital purposes, total-rate-ofreturn ...[more]

... swaps and credit-default swaps generally should be treated as off-balance-sheet direct credit substitutes.21 The notional amount of a contract should be converted at 100 percent to determine the credit-equivalent amount to be included in the risk-weighted assets of a guarantor.
22 A bank that provides a guarantee through a credit derivative transaction should assign its credit exposure to the risk category appropriate to the obligor of the reference asset or any collateral.
...
In some instances, the reference asset in the credit derivative transaction may not be identical to the underlying asset for which the beneficiary has acquired credit protection. For example, a credit derivative used to offset the credit exposure of a loan to a corporate customer may use as the reference asset a publicly traded corporate bond of that customer, with the credit quality of the bond serving as a proxy for the on-balance-sheet loan. In such a case, the underlying
asset would still generally be considered guaranteed for capital purposes as long as both the underlying asset and the reference asset are obligations of the same legal entity and have the same level of seniority in bankruptcy."


Brian Hanley - The URL from the Fed
August 09, 2012 - 17:31

http://www.federalreserve.gov/boarddocs/supmanual/cbem/0005cbem.pdf


Brian Hanley - Errata, pg 13, Line 4.
November 07, 2012 - 21:46

Since an insurer cannot trust that CRA ratings are necessarily accurate, then to rate risk properly, perhaps establishing that rating agencies for CDS use must be paid by the **/buyers/** of CDS instruments rather than providers of the underlying financial instrument may prove effective.


Anonymous - Fixed
March 20, 2013 - 23:32

Updates made to paper.


Anonymous - Please note the supplementary presentations for classes
March 20, 2013 - 23:30

The dataset for this article: http://hdl.handle.net/1902.1/16628 has two presentations under the documents tab intended to help instructors put lectures together. A few folks have asked me for that sort of thing.
There is also a Maple file. Attached is a direct link to the second presentation.