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Padster

There Is No Such Thing As "Dormant Funds" In Banking

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Hi all, as pretty much a Layman i am beginning to research and can see that some of you are light years ahead !

I have read many positive and plausible reports on Ripple and XRP,  today i have been following a full on twitter war with a forbes contributor author of the article below. No having a financial background I would appreciate your views.

https://www.forbes.com/sites/francescoppola/2019/02/10/there-is-no-such-thing-as-dormant-funds-in-banking/amp/?__twitter_impression=true

Comments please

 

Edited by karlos
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This was discussed earlier.  It’s worth looking at this post and further posts in that thread:

On 2/8/2019 at 3:30 PM, automatic said:

@Tinyaccount - I think that the entire nostro balance point is meaningless.

Suppose for a minute that in fact there were zero dollars locked up in nostro accounts.  Ripple's solution still bypasses the corresponding banking system, levels the playing field, and offers cheaper, faster, more transparent money transfers with greater reach to underserved corridors.  This alone is sufficient for Ripple to take over the market.

"Faster" => cheaper to the bank => cheaper to the sender;  "fees" => lower than Swift;  both combined offer better experience to clients while reducing costs to the bank.  Better experience drives additional client traffic, while lowered internal costs mean that the bank is actually capable of processing such traffic.  Paths of least-resistance tend to be self-reinforcing, and over time the system converges to the point of increased traffic through xRapid banks at the expense of decreased traffic through now less competitive correspondent banks.

Thus, even with ZERO monies locked up in nostro/vostros, Ripple can still take a bite out of the $5tn flow based on sound business alone.

Add Jevon's paradox on top of that (btw hardly a paradox once we realize that paths of least resistance are self-reinforcing), and the size of the pie that can be eaten likely grows to much more than just $5tn that it is today.

The entire discussion about monies locked up in nostro accounts is a red herring in my opinion.  The end state is the same regardless.

EDIT:

Here is another angle;  approximately 35% of world population makes less than $100 per month, and ~55% makes less than $200 per month.  SWIFT charges $45-65 for a transfer.  How much money is being left on the table by virtue of never being sent because the entire amount would have been eaten up by fees?

From an addressable market space perspective, I would venture a guess that the total addressable market is *at least* double of that being served by the current system. 

More importantly, I would guess that Swift's penetration of this lower segment of the market is borderline negligible as they have effectively priced themselves out of the market.  This also happens to be the exact segment of the market that Ripple is targeting at the moment ("high friction corridors" etc), and I have no doubt when Navin Gupta says that dozens of banks will be going live shortly.  Why?  Because Ripple is their best option, and Swift offers zero competition in this segment.

Twitter experts may laugh at the client list now, but once the solution starts taking hold I suspect that it is not them who will have the last laugh. 

Some people connect the dots, others nitpick statements and argue about POW/POS/consensus and (de)centralization.  All will have exactly the future they deserve.

 

 

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The article mentioned in the original post makes some good points about the true nature of nostro/vostro accounts.
It's not quite as simple as the standard Ripple explanation.

I agree with the point that no major bank has "Dormant Funds" locked up in these accounts.
Ripple and Ripple supporters should stop talking about the advantages of freeing up these non-existent dormant funds.

That being said, I disagree that "Banks would lose their ability to control their own FX exposure" if using a Ripple solution.

Using any non-Ripple solution, these transactions are exposed to FX market fluctuations for several days.
But with Ripple solutions, transactions are completely settled in 2 minutes or less
reducing the market exposure time and providing the efficiency and speed now being demanded of cross-boarder payments.

It's a win/win for both the banks and customers.

For the example in the article of US Dollars to Euros, Ripple knows and is open about
it not being advantageous to use xRapid at this time.
Their focus has been and continues to be in only the less efficient corridors like moving US Dollars to Mexico and the Philippines.

While Ripple solutions may not live up to ALL the hype that's out there,
they are already providing a revolutionary solution to this real problem.
A problem that the rest of the industry hasn't even proposed a viable solution to yet.

Good luck playing catch up!

 

 

 

 

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Totally agree with Tinyaccount's response above. xRapid is a near-term solution, designed to onboard organizations to XRP. From there they will transact on-ledger.

I also want to point out that the Forbes article is weirdly misleading in several places.

Quote

"[Nostro/Vostro] are transaction accounts – what you and I know as “checking” accounts – that banks hold with each other."

"Like other deposit accounts, vostro accounts are interest-bearing."

If you're satisfied by the interest rate on your checking account please raise your hand! Hello? Anybody?

This alone discredits the title of her article. The capital is certainly dormant. But it gets weirder.

Quote

"It’s worth remembering... that for each nostro there is a vostro which is its mirror image. Together, nostros and vostros worldwide total to zero."

That... what? Is that a real sentence from her article?

Quote

"[The funds] are indeed “locked up” ... ut that is because they are already committed to making payments that are coming due. Money that is due to be paid to someone else is not yours to use."

Her "checking account" analogy works great here. Imagine Bank A offers me 7% on my savings account but only 0.15% on my checking account. Then Bank B comes along and offers me 7% on my checking account too. Who do I go with?

Now imagine I'm a correspondent bank and I need a checking account in every country on the planet.

Quote

"Of course, international payments typically take 2-3 days, so funds are “locked up” during that time. But the final settlement element of this does not take 2-3 days: FX settlement is instant within the Continuous Linked Settlement (CLS) system’s 5-hour timezone window, and central bank Real Time Gross Settlement (RTGS) systems such as Fedwire likewise settle instantly."

Settlement is instant precisely because of the locked-up nostro/vostro accounts. Banks are required to settle as soon as the payment goes through, so they have to keep huge sums in nostro/vostro accounts.

As payments speed up from 3 days to 3 seconds (ahem, xCurrent, GPI, other services), the total need for nostro/vostro will be INCREASING. This is because banks need to instantly pay and settle any transfer that comes through -- even a spike they didn't predict. Back when there were 3 day payment delays, they could afford to send the money for this spikey payment some other way, because they had 3 days to do it. Now? Not-so-much.

Why is she making all these disingenuous points?

Edited by ADingoAteMyXRP

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2 minutes ago, ADingoAteMyXRP said:

Totally agree with Tinyaccount's response above. xRapid is a near-term solution, designed to onboard organizations to XRP. From there they will transact on-ledger.

I also want to point out that the Forbes article is weirdly misleading in several places.

If you're satisfied by the interest rate on your checking account please raise your hand! Hello? Anybody?

This alone discredits the title of her article. The capital is certainly dormant. But it gets weirder.

That... what? Is that a real sentence from her article?

Her "checking account" analogy works great here. Imagine Bank A offers me 7% on my savings account but only 0.15% on my checking account. Then Bank B comes along and offers me 7% on my checking account too. Who do I go with?

Now imagine I'm a correspondent bank and I need a checking account in every country on the planet.

Settlement is instant precisely because of the locked-up nostro/vostro accounts. Banks are required to settle as soon as the payment goes through, so they have to keep huge sums in nostro/vostro accounts.

As payments speed up from 3 days to 3 seconds (ahem, xCurrent, GPI, other services), the total need for nostro/vostro will be INCREASING. This is because banks need to instantly pay and settle any transfer that comes through -- even a spike they didn't predict. Back when there were 3 day payment delays, they could afford to send the money for this spikey payment some other way, because they had 3 days to do it. Now? Not-so-much.

Why is she making all these disingenuous points?

sounds like you should debate her on twitter :D unless you're blocked of course.

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Thanks Tiny,  I may be naive and as stated no background in finance but her whole argument is that Nostro/vostro accounts hold no locked  funds.  Then this :

Nonetheless, nostro/vostro balances are on average very high. This brings us to the role of XRP. If, instead of funding nostro/vostro accounts in the settlement currency before making payments, banks used XRP as a bridging currency, would this eliminate large balances in nostro/vostro accounts? 

If practically instant payment is available, wouldnt this negate the need to store the funds in N/V 

A simple obvious answer to her question would surely be yes. XRP (faster frictionless trans) would facilitate a more efficient system that required less stored fiat.

Edited by Padster

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9 minutes ago, Padster said:

A simple obvious annwer to her question would surely be yes. XRP (faster frictionless trans) would facilitate a more efficient system that required less stored fiat.

I'm not Tiny but I think this is the medium-term reality. Once xRapid / RTGS systems are enabled, banks will still have nostro/vostros, but they'll be a lot smaller (at least until XRP liquidity gets higher, or we have XRP <> XRP on-ledger banking relationships).

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1 hour ago, ADingoAteMyXRP said:

Why is she making all these disingenuous points?

Good question. What could possibly motivate someone to join forces with an anonymous blogger to save the billion dollar correspondent banking cashcow from Ripple by launching a classic coordinated campaign to spread Fear, Uncertainty and Doubt?

Could it be a big fat cheque?

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The whole point has to do with removing the inefficiencies in the system. Banks are acting as the middle-men in the system. In the current system, they have a role to play and they take the cut of the money for their. In the new model, they do not have a role to play and the money business/people are paying currently are actually going to be savings. 

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She states that nostro accounts are debt instruments, this is relevant becasue Ripple has never acknowledged (as far as I can recall) that nostro accounts are debt instruments. The public pitch for xRapid was that banks have "trillions" laying dormant in nostro accounts and that xRapid reduces/eliminates this dead capital cost. If this is not true it doesn't mean xRapid is useless but it does mean that Ripple has been knowingly untruthful. It seems unlikely that no one would have raised this point publicly (e.g. Swift) before. Also seems unlikely that this point would have been overlooked by all the bank-savy members of xrpchat. The truth may be somewhere in the middle but not being a banker I'd like some clarity. 

Edited by cmbartley

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I'm having trouble with the Nostro/ Vostro having a combined value of zero, while simple math says one minus one equals zero you first have to start with one and this is the value that is locked up. Sure the balance sheet comes out at zero in the end but only after X amount of time so reducing X is where savings can be made.

xRapid anyone?

Edited by Trickery
I've just exhausted my encyclopedic knowlege of mathematics and I'm feeling a little sleepy.

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"Using XRP for payment would simply encumber funds in the bank’s own currency instead of a foreign currency." -- Would simply?  That is a pretty big deal which she minimizes as if it has no import.

"Regulators would still require the bank to hold sufficient liquid assets to cover payments 30 days in advance. All that would disappear would be the up-front foreign currency exchange."-- Oh is that all?  She minimizes this as well as if it is not a problem especially with currencies in high friction corridors! It's a huge issue.  

And do you notice how she makes no mention about how sending cross-border payments today can take 7-10 days in the right countries?  Why mention any benefit for the consumer, right?  

This "author" is a huckleberry of the greatest sorts.  She is out to get XRP for some reason, well, being paid to do so, and writing pure and utter lies which promote  the legacy banking system which even many regional banks don't like!  Not to mention many countries loathe the swift system.

Disingenuous at best.

A slander suit at worst.

Funny how governments and banks across the globe disagree with this stringer hack.  THEY are adopting it, but nooooooo.  Her word is better than the Fi's absolutely.   She should tweet more about Trolly McTrollface forthcoming.  That's her real wheelhouse is being a nuisance.  A nub who should be out of work quite soon I imagine. Shame on Forbes for allowing such drivel to get past the editor....

Edited by xrphilosophy

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These accounts certainly have to be pre funded unless you can get a line of credit, the illiquidity of these accounts for up to 35% of the cost of international remittance according to swift, there was a report on global treasurer from awhile ago putting the lost opportunity of these accounts at up to 50million for a bank(big bank I would say). 

The accounts in credit are normally swept at end of each day to settle a different nostro account that might be in debit at another bank. 

While this is true in banking there is a large amount of corporates who have to hold foreign currency accounts these are nostro accounts as well to settle invoices and receive payments. This is dormant money.  That get screwed over by the banks to convert and transfer it back to home countries

 

Edited by kiwixrp

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