Ask HN: Are there banks that store your balance only in cash?

[innethread]

Perhaps it could be my lack of understanding of the financial world, but are there (or why aren’t there any) banks that simply store your balance in cash? My understanding is that banks invest the deposits of their customers to make a profit. However, why can’t they just charge a fee to sustain the bank’s operations while being a completely safe bank that wont fail if everyone decides to withdraw their cash? Wouldn’t that be an appealing model to the market?

[bediger4000]

To make the kind of profit they make today, they'd have to charge you the interest they charge on loans today. My mortgage is 2.35%. Are you willing to watch your money disappear at that rate? I don't know that I am, but I'd never considered it before.

[innethread]

But considering that a lot of costs could be removed by cutting out the lending aspect of the bank business, wouldn’t this % become significantly lower? I imagine a good chunk of a bank’s budget is spent on loan management, risk assessment, marketing, etc.

[gus_massa]

You should also add the cost to pay more to the guys in the doors with the guns.

A usual bank has only some cash for the day, and a lot of paperwork that is important for the bank but worthless for everyone else.

But a 100% reserve bank must store all the money like Scrooge McDuck so it will be a juicy targets for thieves and you must add much more security guards, something like Fort Knox.

[revelio]

These are called narrow banks or full reserve banks. No such banks exist. There are a few reasons why:

1. It's not appealing to the market when fractional reserve banks get bailed out, as just happened with SVB. Why would you turn down interest payments when they're risk free? For narrow banks to make sense governments have to never bail out depositors.

2. It's not appealing to the market because depositors would be forced to pay into the FDIC scheme, but would never need to call on it, so they'd be subsidizing other people's risk taking and interest payments.

3. It's not appealing to the market because your balance would go down instead of up, and see (1) and (2)

You're right that full reserve is the only system that makes sense. People would still lend and invest, they'd just do it through funds that expose liquidity constraints by saying you can't withdraw from the fund without N days of notice. Banks already offer such funds, it's nothing new.

Unfortunately the system is stuck in a catch 22. To fix banking you first need to convince people you'll let people suffer when a bank collapses. The moment a bailout happens the whole concept collapses, and every full reserve bank with it. Yet such bailouts are controlled by civil servants who fold the moment someone starts to cry, they have nowhere near enough fortitude or democratic mandate to do this. It'd require a party to campaign on fundamentally reforming the way central banks work. In theory the Republicans could do this in the USA, but in Europe the ECB is controlled by the EU and outside the world of democratic politics.