I ask, who doesn’t know that banks lend deposited money? I have asked some of my acquaintances about banks and everybody seems to agree that banks lend the money that people deposit. They start looking perplexed when you point out that now there’s a “deposit” of, say $100, $10 in the Central Bank and someone with $90 “borrowed”. But I digress.
My point is, most people know that banks lend the very same money that is deposited in them. They just seem confident regarding the security of bank deposits. That is, until something nasty happens and then you have bank runs.
Now from this contradiction (of having your money in the bank and having it loaned out simultaneously) arises the contradiction you see in court, where they regard your money as at the bank’s disposal.
I think the issue is not with “term” deposits, which are available to be used more-or-less at the bank’s discretion until the end of the agreed term, at which time the bank and the customer are agreed that the bank must have the funds available to return to the depositor. Certificates of deposit would be like this.
What is shaky is the “demand” deposits, which the bank contractually agrees to have ready to return to the depositor “on demand”. If the bank loans out too much of this money, they are at risk of insolvency if anything triggers a high percentage of their depositors to demand their deposits back all at the same time.
Hello Bill. I once read in a magazine (I think it was The Economist) that banks lend money in longer terms but their deposits are short term. Here where I live (Uruguay) the longest deposit is one year (360 days to be precise), but the terms of payment for a car loan are 4 years and for a house up to 15 years. So even for term deposits there can be a problem if confidence starts going down the drain.
A bank run happened here in 2003. I cashed out all my demand deposits one day before the bank holiday. When the ATMs stopped operating, some people didn’t have money to put gas in their cars or buy groceries!