Saturday, September 15, 2007

Banks (2) - Clarity and Separation

Banks and their customers should be very clear about the service that is being offered. The problem is that most modern bank accounts operate their demand deposit accounts as if they were term deposits. Depositors have accepted this blurring, because they want interest on their money, even when it is stored for safe keeping. However, they are allowing banks to commit theft with their money, in return for an interest payment. Depositors should be much clearer about what they want from a bank. Do they want safe keeping or do they want interest?

Banks should keep these two types of transaction quite separate. Demand deposits should be kept separate from funds that that have been deposited as term deposits. In practice, it would be better if there were two types of bank. Some banks would provide a safe-keeping and payments service. They would do this for a fee. The money should always be available on demand, so they will not pay interest.

Other banks will become loan brokers. They would pay interest, so they would only accept term deposits. All those dealing with this type of bank would understand the risks involved in lending money to other people.

Distinguishing between true demand deposits term deposits would allow people to make explicit choices about which service they want. Some will choose to keep their money safe. Others will choose to put some of their money in time deposits, so they can earn interest.

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