Term Deposits (11) - Bankers Benefit

When Banks borrow short and lend long, depositors do not benefit. Borrowers do not benefit either. The benefits all go to the bankers. They are working for themselves, not for their clients.

However, this policy is also risky for the bankers. The practice works as long as the flow of withdrawals and deposits roughly match each other. In a time of uncertainty or panic, a large number of people may try to withdraw their deposits. As there is an advantage in getting in first, there may be a run on the bank. If the bank cannot call up all its loans it may run out of reserves. This could push the bank into bankruptcy and many people would lose their money. Panics and bank crashes have been common throughout the history of banking.

The full series can be viewed at Bank Deposits and Loans.