Abstract
Survey evidence regularly shows that bank customers view bankers as less ethical or honest than other professions. This article sheds light on one potential origin of these misgivings that has been until now unaddressed. The legal system endows certain rights to banks without altering the duties obliged of depositors. By categorizing rights according to their corresponding duties we show that a conflict exists between: (1) depositors with an on-demand right to their deposited sum, and (2) depositories (banks) that are given the legal right to make use of these deposited funds at any time. Using a legal-economic analysis, we demonstrate that the latter right held by the bank is misplaced. Rectifying this erroneous assignment of rights removes the conflict apparent in the contract. Clarifying banking rights also aids in avoiding many of the misunderstandings seemingly inherent in the banking industry. Addressing this legal inconsistency removes one source of ire directed at bankers during banking crises.
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Notes
Stöckl [41] offers a different explanation for the experiment’s results. Bankers do not behave dishonestly per se, but rather in accordance with the professional requirements of the banking industry. This interpretation raises the further question of why the professional requirements of the banking industry would promote behavior viewed by outsiders as ethically deficient, while few other industries seem to suffer the same affliction.
This general concept can be applied to other depositories. Since we deal specifically with the banking industry we make use of the terms “banks” and “depositories” interchangeably.
But be mindful not to reverse the proposition—an obligation to someone does not necessarily create a right [33]: 375).
We refer here to Hohfeld’s [19] distinction between claim rights and liberty rights.
Kant considers two shipwrecked men with one plank between them, but of sufficient size to only save one of them. Does either have a right to fight the other off and in essence kill him, while he saves himself? Kant’s denial of such a right was the first reasoned defense of the decision, although both Pufendorf and Hobbes had briefly considered the conflict previously.
Indeed, in a deposit contract it is the depositor that would pay the depository for these safekeeping services. In many circumstances today, depositors do not pay a fee in part because banks waive it to entice business, and also, as we shall see, because banks treat the deposited funds as loans.
We know of the depositor´s intent because there are financial products commonly used (e.g., investment accounts, time deposits, etc.) that are not made for safekeeping or availability purposes. The fact that the depositor does not make use of these alternatives suggests a different intention which the bank deposit fulfills.
This does not imply that the depository cannot place constraints on these withdrawals out of practical convenience or necessity (e.g., business hours). It means that the depositor can access his funds within the limits as set out in the contract, and that the depository must also abide by this requirement. For example, if the deposit stipulates that withdrawals are available during business hours only, the depository cannot deny the depositor’s right to his funds during these hours. Furthermore, the full availability of the deposit has an economic definition that differs from the legal requirement, namely, that nothing can be done to impinge on the availability of the good (see [6]).
The difficulty inherent in the bank returning the deposit on demand is complicated by the fact that not only does it not know when this deposit will be requested, but also that the depositor himself lacks this knowledge. As money and deposits are held to provide insurance against an unknown future event, it is impossible to predict when this future event will occur, as well as in what amount the required funds will be.
The dual claim nature of the fractional-reserve demand deposit contributes to a wealth affect whereby more than one party is feels wealthier than would otherwise be the case as they (depositor and bank) each deem ownership of the deposit to reside with them. (In fact, legal ownership solely lies with the bank notwithstanding the general consumer perception that the depositor owns the deposit.) To the extent that lending against fractional reserves is now a primary function of banks, the undue creation of credit and debt contributes to the “normalization” of debt found in Peñaloza and Barnhart [37]. It is the duality of ownership claims to the FRDD that Hoppe et al. [21] find problematic, both economically and ethically, with the contract.
This is similar to the historical use of an “option clause” on deposits that gave a bank to the ability to not redeem the depositor’s funds on demand if constrained by liquidity. In a similar manner to the modern notice of withdrawal waiver, these clauses solved the apparent problem of an impossible to honor conflict of rights while creating another conflict by altering the rights of the depositor and forcibly converting him into a lender.
Holding “safer” investments to sell in the event of a withdrawal that cannot be met through the bank’s liquid reserves will not solve this problem. All non-money financial assets are exposed to some degree of risk inherent from either their fluctuating market values or the timing of their availability. Since the withdrawals of deposits are not forecastable, there is no way for a bank to ensure that a safer portfolio of assets will provide better collateral against its deposit base than will a riskier portfolio. Recent complications during banking crises (e.g., between 2008 and 2012 in Belgium, Cyprus, Iceland, Ireland, the United Kingdom, United States and Spain) all exposed the fallacy that a sufficiently safe or liquid portfolio could protect banks against a critical mass of withdrawals. This outcome stems from the uncertainty of holding an asset that is valued on a market or available after only some period, an outcome that does not exist if the bank held money in reserve. In any case, holding safer assets does nothing to rectify the conflict of rights inherent in the fractional-reserve deposit contract.
It is not even clear that the economic problem is fully solved by deposit insurance. Evidence already points to financial instability by extending deposit insurance in the United States to products such insurance was not designed for. With such overreach, financial stability can be enhanced by removing insurance from some of these products [23, 24].
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Bagus, P., Howden, D. Consumer rights and banking contracts. J Bank Regul 24, 105–114 (2023). https://doi.org/10.1057/s41261-021-00185-x
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DOI: https://doi.org/10.1057/s41261-021-00185-x