Issue Position: Transitioning to Limited Purpose Banking

Issue Position

Transitioning to Limited Purpose Banking

Moving to Limited Purpose Banking is very simple. We simply need to prohibit all borrowing by incorporated financial institutions and mandate that all such institutions reorganize as mutual fund holding companies. Banks will also need to convert their checking accounts to cash mutual funds. There are straightforward ways to do this, and plenty of excess reserves that banks can use to fully back their cash mutual funds, dollar for dollar, with cash. As for their existing loans, banks can continue to manage those assets. But their main task will be establishing and marketing open- and closed-end equity-financed mutual funds.

Summing Up -- Eight Steps to Implementing Limited Purpose Banking

Here's how Limited Purpose Banking (LPB) works in closer detail.

LPB applies to all incorporated financial companies, be they commercial banks, investment banks, insurance companies, hedge funds, credit unions or private equity funds.
All financial corporations (i.e., all financial intermediaries protected by limited liability) must operate exclusively as mutual fund holding companies that market open- or close-end mutual funds.
Mutual funds are not allowed to borrow. Stated differently, they have zero leverage. And, since they are 100 percent equity-financed, no mutual fund can ever fail. Hence, the banking system will never again experience a run and collapse.
Mutual fund holding companies are required to offer cash mutual funds, which hold only cash and are used for the payment system.
Cash mutual funds are naturally backed to the buck. But no other mutual fund, including money market funds, will be permitted to declare they are guaranteeing investment returns.
A single regulator -- the Federal Financial Authority (FFA) -- hires private companies that work only for it. Their job is to verify, appraise, custody and disclose in precise detail and in real time the assets held by the mutual funds.
Mutual funds buy and sell FFA-processed and disclosed securities at auction. This ensures that issuers of securities, be they households or firms, receive the highest price for their paper (borrow at the lowest rate).
All derivatives are marketed via closed-end mutual funds that operate just like a pari mutuel better at the race track, namely with all money on the table.

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