Thursday, November 20, 2008

Two Banks

Imagine two banks.

Bank No 1 says,

We will store your money and keep it safe. We will not use your money as if it belonged to us. We will deliver it to any person, as you instruct us. To cover the cost of providing this service, we will charge a small monthly fee, but you can be sure that your money will be here when you want it.
Bank No 2 says,
We will look after your money for you and we will deliver it to anyone according to your instructions. However, if we see that you are not using your money, we will lend it to someone who can make use of it. The interest will compensate you for the risk.

The risk you run is that when you want your money, the person who borrowed it may not have returned the money back to us. We will have to borrow the money from some else to repay you, so you may have to wait to get your money. If for some reason a whole lot of people all decide to withdraw their money at the same time and there is a run on the bank, many of you could lose your money. This risk is unlikely and the benefit is that you will have no fees.
Which bank would people choose?

I do not care which bank people would choose. They can work out the risks and the benefits and do what is best for them. If they prefer the cheaper option, they are free to choose it, provide that they do not expect me to rescue them, if things go wrong.

The problem today is that we do not have a choice. Most people think that they are dealing with Bank No 1, whereas there bankers believe they are Bank No 2. There is a dangerous disconnect between the understanding of risks and expectations.


Anonymous said...

If you don't care which option they choose then we are in 100% agreement brother. One uses fractional reserve banking and the other does not and it sounds like both are OK with you as long as the customer knows what they are getting. That sounds good to me.

The issue for bank #2 then becomes are the banks telling them lies to get the deposits (fraud) or is the consumer not exercising due diligence?

RonMcK said...

Consumers should be doing more due diligence. However, banks are not very informative about their policies. The fine print is fairly fine. The banks are not intrested in customers understanding the contract they are entering.

Anonymous said...

Is it the other party's responsibility to insure that you understand the contract you are entering with them? Aren't YOU responsible for that?

I expect the bank to give it to me in writing, and to honestly answer any questions I have. It is not their responsibility to get inside my head and make sure I understand. However, I suspect most educated people DO understand that checking accounts are used to make loans.