Term Deposits (8) - Matched Loans

Most depositors would prefer to deposit their money with a bank that only makes loans with a term that matches the term of their deposits. Every loan issued by the bank would be matched by a deposit or group of deposits with the same term. All loans would be for a fixed term and the bank could only make loans with a term matching the terms deposits already received by the bank. This is a much safer policy, as the bank would know that borrowers would be repaying their loan when the term deposits come to maturity. The bank would know where the money that belongs to the depositors has gone and it would know when it would be coming back. This would be a much safer way to operate, as much of the risk is eliminated.

This policy of matching loans would have the effect of raising interest rates on longer term deposits. This is reasonable, as the longer the term of the loan, the greater is the risk of loss. Very long term loans would probably disappear altogether. This might also be a good thing. The Bible suggests that Christians should not take loans with a term of more than seven years. The reason is that we do not know what the future holds. Making commitments to do things in twenty or thirty years time is very unwise, as we simply do not know what our situation will be that far into future. Limiting loans to a maximum of seven years would be a sensible policy for a bank.

Depositors need greater choice. A bank that only made loans for terms that are matched by the terms of deposits they have received from depositors would be much safer. A bank that is serious about providing services to their customers should provide this service. People choose bank term deposits, because they prefer security to high returns. I expect they would prefer a bank that matches the terms of loans and with the terms of deposits.

The interest rate for deposits with matched loans might be lower, but the risk would be lower as well. If more people demanded this service, some banks might start offering it. They would essentially become loan brokers. They would be pooling deposits and matching these up with borrowers wanting funds for the same term. They might charge a fee for this service, or they might take add a margin on to the interest rate paid to the depositors.