The traditional view of banks is as follows.
Banks have shareholders, bondholders and depositors. Shareholders allegedly perform a function: they foot the bill when things go seriously wrong. In contrast, depositors and bondholders supply funds on which they expect interest – a reward for forgoing consumption. But they don’t expect to be first in line for a hair cut when things go badly wrong: indeed, depositors don’t expect to take a hair cut at all (though of course recent events in Cyprus have dented faith in the latter idea).
And that “division of labour” as between shareholders and depositors seems to make sense: it seems to give people FLEXIBILITY as regards what risks they want to accept and what costs they want to bear.
But there is a catch in the latter argument, and as follows. There is already a HUGE VARIETY of different forms of saving and investment available. For example in Britain people can put their money into the ultra safe and government run “National Savings and Investments”. While at the other end of the scale, savers can buy shares in a dodgy gold mine in a developing country.
So why would anyone want to put their money into anything other than an ultra safe form of saving, while at the same time demanding 100% safety? Well it can only be because interest rates paid by the more risky savings institutions are better – and precisely because of the additional risk. In short, depositors who put their money into anything other than the ultra-safe are demanding the right to the rewards of taking a risk at the same time as being insulated against the downside of that risk.
IT’S NONSENSE !!!!
Put another way, wherever there is a risk over and above the risk involved in an ultra-safe forms of saving, ALL ADDITIONAL INTEREST should go to shareholders because they are the ones carrying the additional risk.
So savers are being illogical when they lodge their money in anything other than a 100% safe manner. But that raises the question as to why savers ACTUALLY DO put their savings into commercial banks – i.e. less than 100% safe types of saving.
Well the explanation is that they’ve found a “mug insurer” who is prepared to cover the risks those depositors are taking, and at an artificially low premium. The insurer is the taxpayer.
In short, the whole “shareholder / depositor” symbiotic relationship is nothing more than an organised raid on the public purse.
The raid has arisen because of various political and populist forces: the corrupt banker / politician nexus, for example. Plus there are well orchestrated mobs of depositors crying wolf when ever their savings are threatened – or crying: “we want to have our cake and eat it”. Or crying “We’re little old ladies relying on our pitifully small deposits to keep body and soul together.”
If there is little sense in having different types of bank creditor (shareholders, depositors, etc), then that supports the case for full reserve banking: the latter being a system in which depositors who want their money loaned on by their bank have to foot the bill if those loans go badly wrong. Put another way, full reserve is a system under which those depositors are in effect shareholders.
And that ties up with the recent statement by Mervyn King that British building societies are entities in which depositors “are in effect the shareholders”.