Consuming Issues: I'd love to start a bank that didn't lend your money
Saturday 19 March 2011
Out of the hell's kitchen of the credit crunch, one cri de coeur haunts me still. A correspondent asked me why his bank had gone out and lent his money rather than keeping it safe and sitting on it.
Mixed emotions overwhelmed me. Some sympathy for an individual who thought his savings were at risk; but incredulity that anyone could be so ignorant about our financial system, and his own money. He probably knew more about botany than banking.
Are there really people out there, I wondered, who think that banks do precisely nothing with the funds they take in? Have they never heard of fractional banking, the banking multiplier or maturity transformation? Well, maybe that's asking a bit much, but these are the very things that make the system work, and make it hazardous.
So it's like this. Your bank will lend your money out, because they know from long experience that it is rare for all their customers to turn up at once and want their cash. On average only maybe £10 might be required for such events, at most, for every £100 deposited; they lend the other £90; then that gets spent and deposited, and more gets lent out, and so on. When many banks do this, the money they create – credit – can be a very large multiple of the initial deposit; £100 can become £1,000 very rapidly. The banks pay you a small amount of interest, if you're lucky; they then charge rather more for their loans, overdrafts and mortgages. They borrow short – your current account is money that you have an instant claim on (well, as soon as you can get to cash machine, or web page or a branch) – but they lend long. Thus they cannot get their hands on the funds they've lent someone to buy their dream home in Acacia Avenue on a 25-year mortgage. That is "maturity transformation", and it is how they generate profits and how they get into trouble sometimes.
The regulators are there to make sure that this risky activity – which carries great social and economic benefits – is carried out in a prudent and sensible fashion. It wasn't, of course, as we know from the case of Northern Rock, among others.
The Independent Banking Commission is looking into all this, and will I suspect come up with some very sensible ideas to break up and muzzle the banks when they report in September. They will meet with great resistance in the City and some quarters in government. It will be interesting to see who wins the tussle. (The Governor of the Bank of England, Mervyn King, is firmly against the current set-up, and he should know how costly it has been for the economy as a whole.)
Anyway, I have long thought that my correspondent from a couple of years ago might have been right first time, and that I dismissed his pleas a little too contemptuously. There are serious experts out there who reject modern "fractional banking" in principle, and there is obviously a demand for an explicitly conservative basic or "narrow" banking institution, whether the big groups get broken up or not.
Now this is what I would like to set up. People would leave their money with me, and I would keep it safe, and not lend it. Obviously then the question arises as to how I make a profit. Well, I would have to charge a modest fee to cover my costs. I might, at a push, lend small amounts overnight to the Bank of England or the Treasury, and that might defray the costs too. But there would be little "maturity transformation", and maximum liquidity. My bank would be more like those deposit boxes you used to see on the side of bank premises, great big metal things with hefty locks on the side of substantial buildings with an impressive air of solidity – and which have now almost all been turned into rubbish bars.
All I need, then, is to raise some capital to buy and restore one of these old branches back to its old glory, maybe with other like-minded individuals forming a board of trustees. I'd then install some proper carpentry, bomb-proof safes and a Captain Mainwaring-style manager on a modest salary with his (small) bonus closely linked to how little risk he takes with the cash. I would also need a proper stentorian name, that says what our bank does, and reflects its mutual ownership. In fact, something like "Trustees Savings Bank", or TSB for short.
I believe that that name is owned by Lloyds, but they seem to have little use for it these days. I wonder if they'd let me put it back to work.
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