Neualtenburg Banking Law Draft - Request for feedback and completion

Neualtenburg Banking Law

1.
The Neualtenburg Banking Commission (NBC) is responsible for issuing banking licenses, enforcing banking laws and regulating banks.
The NBC consists of 5 (or 3) commissioners appointed by the Guild for a mandatory period of 6 months. To ensure NBC is acting arbitrarily, none of the commissioners may take up banking business in Neualtenburg or/and Second Life.

2.
Any Neualtenburg registered company can request a banking license for a fee of 2’000 L$ (non-refundable, paid in advance) – as long as they can prove funds of at least 250’000 L$.
The applicant should provide a consolidated 6-months business plan.

3.
The banking license grants the holder the full right to lend money, issue corporate bonds, broker shares or real estate, manage and hold 3rd party assets.

The use of the names “Bank”, “Trust”, “Finance” or “Fund” for corporations in Neualtenburg is restricted to holders of banking licenses.

4.
The reserve ratio for the bank’s own capital is 2.5% - but at least 20’000 L$ and not more than 500’000 L$.
Client’s cash deposits (including savings or current accounts, however excluding managed capital) are subject to a reserve ratio of 5%.

5.
Banks should report following documents (non-modify, but transfer and copy permissions) every 6(six) months to the NBC:
- Consolidated Business plan for the next 6 months (including expected revenues)
- Balance sheet
- Account of receipts and expenditures for each investment fund
- Account of receipts and expenditures for 3rd party capital investments
- Real Estate Assets Portfolio including private islands, sims, land or real estate.

6.
Banks should guarantee bank secrecy and agree to not disclose client information.

Hey Lee - good to see you'gotten the ball rolling on the discussion of banking in Neualtenburg with a concrete legislative proposal.

Personally I am of a very conservative nature in relation to the liberalisation of banking business in Neualtenburg. I will certainly want for us to flesh out a detailed bill for the Neualtenburger Bank first and get it up and working as an institution before starting to look at how we would define its interface to a fledgling banking industry. I also feel this is an absolutely necessary prerequisite for a secure and reliant financial industry to develop.

One thing we need to keep in mind is that our 'Central Bank' most likely will not have the ability to issue its own currency and we are therefore not in possession of the full portfolio of instruments that a proper Central Bank has at its disposal in order to act as a safety cushion against risks mitigating throughout the economy. The question stands for example on the extent to which our bank would be able to bail out failing banks with guarantees when we are not able to perform seignorage (i.e. print our own money).

I think it is maybe a bit too early to go into detailed discussions on the technicalities of a banking code, one thing however that I've noticed is that you've based your banking regulation on the premise that we will follow the fractional reserve paradigm, which of course is the pervasive one in RL. This should in my view be one of the issues we need to discuss as a matter of policy.

Even so I feel that a reserve ratio of 2.5% and 5% respectively is not unlikely to be far too low considering for example that the Basel Capital Accords, with which I assume you are familiar recommend a tier 1 capital ratio of at least 4% and a tier II capital ratio of 8% - remembering once again that these recommendations have been set out with the premise of a RL world where Central Banks are able to provide a staunch guarantee with their integration into the global system of monetary supply, their ability to control interest rates and to perform seignorage. In contrast, a Neualtenburger Bank will - at least in the beginning - be a small, vulnerable entity relying solely on the reserves it holds from the city savings and any deposits held in escrow by companies.

The Basel accord suggests Tier 1 reserve ratio of 4% - however e.g. in my country,Switzerland, the minimal reserve ratio is 2.5%.

My main concerns are the $L250k requirement and the low fractional reserve rate. Requiring proof of access/escrow of $900USD seems like an awfully high barrier to entry. I can understand it if the fractional reserve rate is less than 8%.

Having said that, I think full or 50% reserve, incorporation and bank charter with a $L10k escrow in the Neualtenburg would be sufficient. All deposit obligations must be met by the private bank reserve. The escrow must cover, say, a declared amount of deposit in each savings account (like the FDIC $60k). Normally such an "excess reserve rate" would be seen as wasteful. The very conservative reserve is for 2 reasons. First is that absolute confidence, stability and liquidity is required for the city to gain reputation as a viable financial center. This is a first, as many other financial institutions have failed and confidence is at an all time low. We're at the 11th century crusader stage of banking here. People don't trust it, the institutions SC, laws and codes etc. that make it possible are in their infancy and are untested.

The second more abstract reason is that a low reserve rate in a sense injects $L into the economy when multiple private banks compete. We don't want to be accused of accelerating deflation.

Frankly, solid small scale conservative banks which build consumer confidence are more important than giant fly-by-night profitable banks ifor the good of the city. I do like many aspects of the proposed banking code though.

A quick question about these and other bills is "grandfathering". I notice that Ginko's sign says, Neualtenburg Bank. I also am not sure that the proprietor is a citizen or guild member. As they don't yet exist, I'm also sure he doesn't have a registered NRC or a bank charter. So are these proposals to regulate existing business or are they grandfathered?

The Ginko machine is a vendor only, and will be removed as part of the re-parceling. The building and the land are City owned, like the rest of the strip of buildings it is part of.


Sudane

However, managed 3rd party capital (shares, funds,...) shouldnt be hold as escrow - because its unattractive for investing capital.

250k L$ are peanuts for a private bank. And of those 250k L$ only a fraction should be hold as escrow (proposed 2.5% - as this is own capital and not 3rd party).

The NBurg Bank could simply rate private banks using their 3rd party savings account reserve ratio:
more than 8% reserve ratio: A
6-8%: B
4-6%: C
2-4%: D

I dont understand what the bank's purpose would be if they had to hold full or 50% reserve at the NBurg Bank.

This is a draft for a roadmap on how we can approach the evolvement of a financial sector in Neualtenburg:

1) Incorporation bill approved
2) Neualtenburger Bank established - mandate: hold city reserves and accept escrow deposits
3) Companies begin to incorporate and deposit escrow sums
4) City gets experience with rate of attrition on deposits + City builds reserve accounts
5) Guidelines are drawn up for the certification and financial reporting of "Class A" organisations to which the Neualtenburger Bank can lend money
6) Neualtenburger Bank is allowed to "invest" (i.e. lend) risk-willing part of city reserves to a very limited "Class A" group of licensed organisations (certified investors / money-lenders presumably)
7) City gets experience with rate of return on Neualtenburger Bank investements + ratio of defaults
Escrow deposit sums continue to grow + City begins to get revenue from transaction fees
9) Neualtenburger Bank is allowed to "invest" risk-willing parts of city reserves to yet another class of borrowers: "Class B" (big companies, individuals with business plans) and may "invest" portion of escrow deposits to Class A organisations
10) City builds further experience with rate of return on investments
11) Neualtenburger Bank fine-tunes reserve policy to possibly invest further amounts in Class A and B organisations
12) City builds further experience with rate of return on investments
13) Escrow deposit sums continue to grow
14) Private citizens are allowed to buy bonds in Neualtenburg / Neualtenburger Bank as a "guaranteed" form of savings for individuals
15) A portion of funds from citizens purchase of Neualtenburger Bonds are invested in "Class A" organisations
16) City builds further experience with rate of return and credit ranking of individual Class A organisations
17) Guidelines are developed for the oversight and financial reporting of Class A+ organisations
1 Certain Class A organisations are promoted to Class A+ meaning that they are allowed to accept savings from individuals and re-invest them without the intermediary role of the Neualtenburger bank

I think we owe it to the various parties interested in running banking operations from Neualtenburg to provide some clarity and a vision to the direction that Neualtenburg financial policy is going to take. The above is a first step in trying to provide such a "road map" and can hopefully serve as a base on which to discuss and draft further Neualtenburger Bank legislation and policy.

As you can see from the above I do not envision licensing private banks to be allowed to take investments from private individuals for the foreseeable future. This is something of which the interested parties should take notice and that we will need to discuss in the RA. The timeframe for the above roadmap to reach completion is likely to lie in the 6 - 9 months range but this is all very dependent on the development of our reserves and escrow deposits.

Furthermore, I think it would be reasonable to discuss in the RA a policy on the future permissibility of unlicensed banking operations in Neualtenburg - especially those catering to individuals and citizens. I think that since Ginko has been around for so long and since Neualtenburg is seemingly their most voluminous cash point we owe it to them to at least have a debate on the issue before just shutting them down. Who knows the owner might even wish to be represented at the RA meeting, which would enable us to have a productive discussion with him on the possibility of him drawing up plans to become a licensed banking operation in Neualtenburg in the future.

Questions and comments are hereby invited - I hope that the discussion can start in earnest from the above roadmap.

Diderot, great! This is a clear roadmap, and it makes a great deal of sense to a non-banker like myself. The first steps are crystal clear, and it takes the form of a process whereby each following step is informed by the experience of the proceeding ones.


Sudane

Could you clarify this? The future of the Ginko machine as simply another foreign vendor has been in considerable jeopardy since the plans have been developed for the re-parceling of the Platz. Except for dwell, the City receives absolutely no benefit from its presence.

If there is more information we need to know about this, and any reason at all we should preserve a relationship with Ginko, please tell .


Sudane

Lee: I think you misunderstood my proposal. It was to escrow a minimum reserve of $10k (adjustable by guild) for the purpose of repaying creditors after bankruptcy/dissolution of the private bank. The 50% (or greater) fractional reserve should be held by the private bank itself. This is verifyable by monthly/quarterly guild fianacial reporting and by audit. The purpose of the NBank is to act as the Federal Reserve. The NB holds the city treasury, regulates monetary policy, oversees banking regulation and may do some very conservative short terms funds management. Nbank as I see it does not offer mortgages, personal loans, escrow accounts or savings accounts to private avatars. This is typically the domain of private banks. As far as $L250k goes, how do I prove access to $L250k without holding it in SL escrow? I'm not sure I want to start a bank by escrowing $900USD in SL. I seems like an awfully high barrier. Don't get me wrong, I have access to $900USD, but how do I prove that without an SL escrow?

Diderot: I like the planning that is going into the roadmap, but it does seem 6-9 months away, and a great many hoops to jump through before a private bank can accept savings deposits (step 1. I fear we're creating too much red tape here before anything has actually happened. Does your vision of the Nbank take escrow from private avatars? If so, you might be competing with private banks.

In analogy to the notarization, we could install a "proof of capital" machine in the NBurg bank.
How does it work? You want to get a proof of capital for 250k L$. You pay 250k L$ to the machine, the machine pays 250k L$ back to you, and takes a record of the capital.

EDIT: There are RL banks for proving USD amounts

Lee: That's a fantastic idea, you should code one of those up. Even charge a small transaction fee for it. It could also be used to screen personal loan applicants, etc. This device would work in NB if the vendor was bound by the laws of NB. Now, if the device somehow screws up, are you prepared, as the vendor, to be on the hook for $900USD? In all honesty, it's a great idea.

How about access to $L10k, I mean, there is virtually no biz whatsoever in NB. Why not let it go ahead as long as owners follow existing NB law (we already prohibit some types of biz)? As problems/reforms come up, the RA can pass laws and further regulate *as needed*. I don't think we want a fully planned economy per se, right?

BTW, any chance we could talk Nota Bene into a smaller transaction fee, or possbily reverse engineer the device? Has anyone used Nota Bene's 3rd party conflict resolution mediators?

Ok, I'll shuttup now and look at the wiki RA transcript.

Unfortunately it is not possible to create/modify notecards using script.
However we may rely on XML-RPC, storing the proofs of capitals in a database and making them viewable on a website for example.

Lee: I like your "asset verifier". This combined with a tour of owned land gives a pretty good idea of net worth, given that there aren't currently too many debt instruments in SL.

What did you think of those fairland rent2own prices? It's very tough to compete with those who own a whole sim. Is there anyway to compete with this?

I dont know their price. Could you inform me?

Here are the Fairland Rates. Notice they seem quite a bit under the Linden tier rates.

512 sqm (117 prims) -> $2.5/month or L$200/week
1024 sqm (234 prims) -> $5/month or L$400/week
1536 sqm (351 prims) -> $7.5/month or L$600/week
2048 sqm (468 prims) -> $10/month or L$800/week
2560 sqm (585 prims) -> $12.5/month or L$1000/week
3072 sqm (703 prims) -> $15/month or L$1200/week
3584 sqm (820 prims) -> $17.5/month or L$1400/week
4096 sqm (937 prims) -> $20/month or L$1600/week
5120 sqm (1171 prims) -> $24/month or L$1970/week
6144 sqm (1406 prims) -> $27.5/month or L$2320/week
7168 sqm (1640 prims) -> $31/month or L$2665/week
8192 sqm (1875 prims) -> $34.0/month or L$3000/week
9216 sqm (2109 prims) -> $38/month or L$3290/week
10240 sqm (2343 prims) -> $42/month or L$3570/week
11264 sqm (2578 prims) -> $46/month or L$3835/week
12288 sqm (2812 prims) -> $49.8/month or L$4090/week
13312 sqm (3046 prims) -> $53.7/month or L$4330/week
14336 sqm (3281 prims) -> $57.5/month or L$4565/week
15360 sqm (3515 prims) -> $61.3/month or L$4780/week
16384 sqm (3750 prims) -> $65,0/month or L$5000/week

Firstly my apologies for being so late in replying to this: I've been a bit stressed out as of late and have only been able to accumulate the energy in SL to do playful stuff.

I fully acknowledge that it was our choice to put the Ginko vendor here and that it is therefore also our choice to have it removed. I do not think the Ginko owners have any formal claims to compensation or similar in relation to our decision to remove it. In fact should they wish to continue operating in Neualtenburg it would depend on the future legitimacy of their operation irt our legislation and of course upon them establishing the necessary prerequisites (i.e. citizenship, incorporation, compliance with banking legislation or something to that effect) to conduct their business here.

However, in relation to the roadmap I laid out in a previous post I sense that some entrepreneurs wishing to set up banking using Neualtenburg as a base may consider a 6 - 9 month waiting period before they're able to accept private citizens as customers too long a period to wait and seeing as Ginko has been allowed to operate without restriction for a good deal of time in the history of Neualtenburg they may easily and understandably make the assumption that it's perfectly legitimate to set up an unlicensed retail banking operation in Neualtenburg.

Whether this is a right or a wrong assumption is not for me to say: However, if we were suddenly to prohibit someone from going ahead and doing the same thing that Ginko has been doing for a long time we need to be able to point to a specific decision having been taken by the RA to reverse past practice. This is why I think it is necessary to bring up the topic of unlicensed retail banking at the next suitable opportunity.

Considering the possibility without prejudice I can see both advantages and drawbacks of such an approach. On the one hand it may allow for a period of time through which prospective entrepreneurs can operate, gain experience and reputation for use by the Neualtenburger Bank in evaluating institutions for class A credit ranking. On the other hand we may prefer that this experiene be acquired through a more managed process.

Finally, on the issue of Ginko: Since the owner of this business has to a certain extent demonstrated his viability by way of being able to stay in business and pay everyone his/her dues and having also developed a fairly convincing logistical support system I think it would be nice if by inviting the Ginko operation to an informal negotiation with RA authorities we could reach a compromise whereby they agree to work toward operating as a legal, transparent business within the framework of a future Neualtenburg banking regulation. Such a feat would both give our authorities tremendeous experience in regulating a banking outlet and could potentially also become a success story for the idea of Neualtenburg as a transparent, democratic and fair platform for the facilitation of legitimate business. Of course this may also be achieved by pursuing other means .. I just think it makes sense to have a principal discussion on the issue and considering the opportunities available to us.

What do you think?

I feel this makes a great deal of sense.

And, perhaps as usual, the question is in the details. Where do we go from here with them?

We have absolutely no idea whether Ginko management is interested in any relationship with NBurg. Ginko, GOM and the InfoNet terminal were placed in the "Bank" building purely for the convenience of those visiting the sim, and, to assist with the accumulation of dwell. There is nothing in the current arrangement which gives a hint regarding Ginko interest with what we have to offer.

Also, the presence of the terminal on one of the "to-be-auctioned" parcels lowers its *perceived* value, since the owner will have a question in their mind regarding what they need to do about the terminal.

I suggest that the owner of the terminal be presented with the option of either removing it or re-locating it to a *temporary* location in the middle of the Platz. That temporary location would expire on May first, without exception. In the intervening time, discussions can be held regarding whether the owner wishes to participate in the NBurg community, in the context of the "doing-business-as" systems being discussed now. If, indeed, they are interested, and if, in fact, they're even interested in participating in the development process... my!, that might be a great boost to what we're doing.


Sudane

While I appreciate Sudane's position, I think the fair and equitable approach would be to remove the terminal from the Platz and let Ginko bid on auctioned Platz property like everyone else. They've had ample warning, as the RA transcripts have been posted. Or they can get a microplot and put the ATM in the vendor shop.

I personally would love to have my ATM in the middle of the platz, right in front of the telehub. In fact, that's where every entrepreneur would want their (and only their) vendor. I think that's a non-starter even for a period of 2 months; it's an unfair advantage. I'd like to see a level playing field.

As far as licensing goes, I'm happy to work within any reasonable framework the RA passes. As it stands, without anything passed, I am able to run an unlicensed bank from my home in NB. Naturally I won't do that and will wait until the platz opens and the banking code is at least discussed by the RA. I balk a bit at 6-9 months for accepting private deposits. I think with a 100% reserve and transparent financial reporting to guild we should be looking at a 3 month timeframe as long as the bank in question demonstrates viability. If the 6-9 month period is imposed, I'd like to see Ginko forbidden from accepting deposits from within the sim during that time frame. If Ginko is "grandfathered", there could be a Dawson City rush to open unlicensed banks before regulation. There's also the question of citizenship, you can't regulate a business in NB unless the owner is a citizen and bound by the law, TOS and covenant, can you? I'm still a bit unclear on that.

In terms of demonstrated viability, logistics etc, I'd like to see some hard quantifyable financial facts and criteria. Bankers need to report finances to the Guild and to know what the criteria for viability and creditworthiness are.

Of course the alternative is to set up shop, in say, Shermerville, escrow the money with Nota Bene and use their conflict resolution mechanism as the SC equivalent. None of us wants that, we want an environment that attracts business and treats business with an equal hand under the law.

PS: Didn't mean to sound negative, just looking out for my business.

-A concerned citizen.

This is a perfectly reasonable position. I'm interested to hear any other process which might be just as fair. Does anyone have any contact with Ginko regarding their interest here? Do we know the actual owner?


Sudane

It's not as if someone who wants to use a Ginko ATM can't find one in another sim, especially with P2P teleportation. Since there is no contract or agreement regarding the existing ATM (AFAIK), we could just return it and declare the sim a bank free zone until all the appropriate regulatory frameworks are in place. That would certainly level the field and I don't think it would inconvenience people all that much.

Maybe something like this? If you do a find on Ginko or look at the ATM they give a website address. Within that site there is a contact email address. I'll see if I can't dig that up. I like a little healthy competition.
------------------------------------------------------------------------------------------------------
<date>
Dear <Ginko Proprietor>,

As you may be aware, Neualtenburg will be renovating the Marketplatz on <date>. Unfortunatly this will result in removal of your ATM vendor from it's current location <xx,yy,zz> on said date.

The government of Neualtenburg values your business highly and would like you to consider keeping your business in the city. Purchase of NB land grants you citizenship and allows your ATM vendor to be placed (much as it is now) in a vendor house on the platz. Alternatively your vendor can be placed on any NB land which you own.

To encourage citizenship, the NB RA has proposed a microplot bill which would allow you to purchase 16m2 for <price> and place your ATM in the vendor house <x m2> on the Marketplatz nearest the telehub. Larger commercially zoned Marketplatz plots will be auctioned on <date2>. Here is a map of the new platz layout <map URL>. General information concerning NB can be found here: <web,wiki,forums>.

If you have any questions, comments or feedback, please don't hesitate to contact me at <email addy> or post in our forums. The city thanks you for your past contributions, welcomes your business and looks forward to working in partnership with you in the future.

Sincerely,

Sudane Erato
Guildemeister, Neualtenburg

This is a good letter which I wouldn't hesitate to use. It does however assume that unlicensed retail banking will permitted in the future in Neualtenburg, which is a thing, I 'd expect the RA to want to discuss before taking a principled stand on the matter.. ?

It might kinda imply that, but a closer look shows that you need to be a citizen and thus follow the NB laws, convenant and ToS. A careful reader will note that he/she would be bound by future passed laws regulating the industry. Now I don't spell it out like that, because it's not exactly good marketing.

Bank free zone might work, but I think you want to keep that period to a minimum. "Bank Free Zone" doesn't say, "We are the future financial capital of SL. Businesses are welcome, come to NB." If you catch my drift.

Let's put a pragmatic basic framework in place that enables contractual enforcement, is pro-business (low overhead/red tape) and is good for the city. Step one, bring in the business, step two, regulate it. I fear we're over regulating before we have anyone to regulate.

Kinda looks that way.... : )

I mentioned the advantages of being associated with Neualt to a new client who has a successful business. She didn't see much advantage to it. Normally I don't mention it, because I already know the person well enough to realize that they'd have that reaction.

Over time the commercial sector you're looking for will probably get built by people who are already interested in Neualt for the political activity.

If you'd like a low risk expansion strategy, think about partnering with a business person who has alread bought a sim, and has a good track record. Think of this person as analogous to an anchor tenant in a RL mall. You'd have to give the person a good deal -- make it genuinely advantageous to be a partner -- but once they've joined that would show other businesspeople that there's something worth investigating here.