[nicgrev103]

Isn't this literally what banks do? Take peoples deposits paying a minimal interest rate and then invest that money to earn a return higher than the interest rate they pay the customer (they actually will also borrow more money on the back of your deposit). So, when it's the bank doing it it's ok but a bank employee doing it independently for personal gain it's an issue.

The book deal aspect was interesting also. So, the guy profits and has a potentially lucrative book deal with minimal jail time.

[mrtksn]

Yes but banks do it within a legal framework that moderates the risk(at least in theory) and people know what they are signing into and what are their guarantees. You don't see too many banks collapsing, don't you? When it happens, its a big deal like with the SVB earlier last year.

It's also what Sam Bankman-Fried and others did in exchanges that acted as unregulated banks.

The system is not perfect and there are many scandals but if you compare it to what happens in crypto exchanges, its a day and night difference.

Running a machine as intended and screwing up is different from pretending doing one thing and actually doing something else and screwing up. This is also why bankers and fund managers don't usually go to jail when they lose clients money. It's not illegal to suck at your job as long as you follow the rules.

[ChiperSoft]

There have been 538 US bank failures since 2008.

https://www.spglobal.com/marketintelligence/en/news-insights...

[_heimdall]

I'm not so sure most people know what they're signing up for when opening a bank account. I also don't think banks particularly hide it, but I'd be surprised if the average person realizes that their checking and savings accounts are only IOUs or that money lent out for a mortgage likely didn't exist until they signed closing documents.

[topkai22]

> …checking and savings accounts are only IOUs…

That are guaranteed by the US Government up to $250,000. While the average person may not know the details, the average person’s faith in the banking system is well founded. That’s why these “alt-banks”, which avoid FDIC or NCUA coverages, are so problematic.

[mrtksn]

For all practical purposes for a customer who doesn't do more than putting money in, it's just a storage and they know how much of it is protected if something happens to the bank. From their point of view their money is there, even if the implementation details are much more complicated.

[_heimdall]

But the money literally isn't there, and the FDIC insurance that secures up to a limit is itself poorly funded and incapable of covering the failure of a moderately sized bank.

Saying the money appears to be there is very different from the reality of it, and in the context of whether customers consent to how the system works its also feels disingenuous IMO.

Can people spend the money as though it were there? Sure. Is the money they deposited there or are they aware that 90-100% of the money was immediately allocated to something else? Almost certainly no.

[mrtksn]

Who cares, the customers aren't exposed to all that and that's why they don't know it. It's like saying that McDonald's doesn't have any hamburgers, it's all buns and meat and lettuce. Yeah, that's how it works.

Last year a few banks went tits up, all the deposits were paid.

[_heimdall]

In my opinion a more apt analogy would be McDonalds selling low quality food that includes ingredients known to very likely ve bad for your health without ever making that clear. Sure a customer could technically dig into research and health studies but that's not really the point here.

Is it consent if you aren't made aware or given reasonable access to information that the average person could be expected to understand?

[gruez]

> FDIC insurance that secures up to a limit is itself poorly funded and incapable of covering the failure of a moderately sized bank

Can you clarify what you mean by "covering the failure of a moderately sized bank"? Bank is almost never "all the money is missing". Instead, it's usually something like "we have assets > deposits, but they're long term assets that can't be liquidated immediately so we can't pay all the depositors right this second", or "we have assets < deposits, but the gap isn't big enough that FDIC can't handle it".

[_heimdall]

The FDIC insurance fund has been below its target reserve rate for years now and continues to be underfunded.

At the end of 2022 the fund had $128.2 billion. I can't find a solid number on domestic deposits that are covered by FDIC based on the maximum deposit amount, but their Q2 2023 report showed $17.2 trillion in total domestic deposits across all FDIC institutions.

I'd expect that more than 0.7% of all deposits are under the $250k deposit limit. Let's just say 30% is actually covered, SVB had 89% of deposits above the limit when it failed, the insurance fund couldn't cover the failure of a bank with more than 3% of the market share of deposits.

The caveat there is that bank assets can be liquidated, but if the failure is fast enough that becomes really hairy. I haven't yet seen clear details on what strings they pulled and what sweetheart deals they gave when SVB was sold at the last minute, but that really means the fund isn't funded to cover enough and the hope really lies in market manipulation and a forced sale (likely funded in part by tax payers).

[lotsofpulp]

>You don't see too many banks collapsing, don't you? When it happens, its a big deal like with the SVB earlier last year.

"Moderating risk" = depending on the US federal government bail you out?

There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible by the federal government at very little cost (maybe even lower cost due to not needing FDIC and all that infrastructure) without having to pay a middleman.

[mrtksn]

Nope. It's about creating a system that attempts to analyse risks and invests within margins that are acceptable for specific products.

It impossible for a bank for example to put all their money into Dogecoin because someone got a hunch that Musk will tweet about it. To do that they will need to create some kind of instrument that allows others to bet on Musks tweeting habits.

> There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible

That's not what banks do. You can do that without being a bank, like PayPal did. Most places will have different and much lightweight regulations than banks for this and you will go to jail if you do anything more than holding and transmitting customer money.

[lotsofpulp]

>That's not what banks do. You can do that without being a bank, like PayPal.

Except PayPal has no FDIC protection.

The part of the bank (or credit union) that required the US government to provide FDIC protection was due to dealing with cash. Imagine creating a country with just electronic money. What purpose would a bank with a FDIC protection serve if the government can just operate electronic money accounts itself? And if you want to take more risk and earn a higher return, you find a broker or investment fund or investor.

[mrtksn]

>Imagine creating a country with just electronic money. What purpose would a physical bank serve?

Investing customers money, create money.

Most money in the world is digital already, there are many banks that don't have physical presence and traditional banks are shutting down branches more than the open because branches are just the foot soldiers. There are also countries where cash is almost not used. Banks are not about cash, they are about credit.

I don't know what a "physical bank" means though, AFAIk there's no such thing and the buildings that banks own or operate would serve functions like hosting employees/clients/systems but they might choose not to have some of those.

[lotsofpulp]

>Investing customers money, create money.

And they can do this without a federal government backstop, just like an SP500 ETF does or a US Treasuries mutual fund, or an REIT, etc.

My point is the federal government need not provide a subsidy to these businesses that "invest" customer's money (or simply handle the underwriting of loans in many cases).

Right now in the US, via the Fed Funds rate, the federal government pays a business 5.5% just so the business then turns around and pays me 5.05%, all for keeping an entry in a database. And these businesses pay a lot of less discerning depositors a lot less. Surely the federal government can just give all 5.5% to people directly.

[gruez]

>There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible by the federal government at very little cost (maybe even lower cost due to not needing FDIC and all that infrastructure) without having to pay a middleman.

Banks' job isn't just keeping money safe and doing transactions. It includes maturity transformation as well.

[1] https://en.wikipedia.org/wiki/Maturity_transformation

[lotsofpulp]

I should have written "There really is no need for the charade of FDIC insured banks now that electronic databases are very solid technology."

I am not seeing the necessity of the federal government backstop to these businesses.

[gruez]

> I should have written "There really is no need for the charade of FDIC insured banks now that electronic databases are very solid technology."

What does this have anything to do with maturity transformation? Are you simply trying to say that we don't need banks to do maturity transformation, and they should stick to handling transactions?

[lotsofpulp]

I am saying we don’t need the federal government to backstop businesses just so people do not “lose” money.

Money is electronic, the government can handle electronic money accounts directly, and skip paying businesses for no reason.

Banks or whatever other financial businesses can continue to sell maturity transformation services, without FDIC insurance.

[robertlagrant]

> Their whole role in transmitting and keeping an account of money is surely reproducible by the federal government at very little cost (maybe even lower cost due to not needing FDIC and all that infrastructure) without having to pay a middleman.

Banks don't store money. They connect money to businesses in a structured way. No banks means businesses won't get created.

[Retric]

Fewer rather than zero businesses. Rich individuals could directly invest. Where banks shine is in making moderate risk investments which aren’t worth much individually but are a significant economic boost in aggregate.

Housing may be unaffordable, but people aren’t living in sod houses with dirt floors and no running water either.

[robertlagrant]

Going cap in hand to an angel investor for every £10k loan is not viable. And they don't have the levels of cash needed for this.

Why not use banks for this as well?

[Retric]

Get rid of Banks and many different things change.

Some wealthy investors would setup a lending operation using their own cash, based on historical examples of such. They would however need to charge higher interest rates than banks because they would be more capital constrained.

[lotsofpulp]

I specified an (FDIC insured) bank's role "in transmitting and keeping an account of money". There would be nothing stopping a lender from lending if the US government gets rid of FDIC insurance and just provides the people of the US electronic money accounts directly.

[robertlagrant]

Sure, but then what happens to the thing I said? How do businesses get loans? How much interest should be paid on that money, if any?

[lotsofpulp]

Supply and demand determine the price (or interest rate). Businesses get loans the same say any other business transaction happens. A buyer and seller hash out an agreement. This already happens all the time, even in the US (see investment banking).

If the lender, such as a bank, is any good at their job of underwriting, then they won’t need the federal government’s assurance to bail them out and they will still be able to attract funds from people seeking returns (and risk).

[klabb3]

Sounds like it could be a variation of the office space skit:

So what would you say you do here at the business factory?

[…]

I connect the money with the businesses because businesses are not good at dealing with money! I have people skills, can’t you see that?

[npteljes]

>So, when it's the bank doing it it's ok but a bank employee doing it independently for personal gain it's an issue.

Yes, this is correct. The bank does it in a somewhat government controlled fashion, with checks and balances, which the world has been fighting for a millennia, if not more. And the guy inside does it with stolen money, for personal gain.

Consent, for one, is a difference between the two actions, if we're talking morality.

[nicgrev103]

I'm not sure how many people know this is what the bank is doing with their deposits, making consent difficult.

[ilammy]

Usually people don't care what the bank does because they consent to the government making them whole in case the bank fails to return the deposit.

[nicgrev103]

You could use the same argument for the scammer employee who gambles with your money to make a personal gain. You implicitly consent because you consent to the government prosecuting injustice and returning your misappropriated funds.

[_heimdall]

Do you have any examples of the public being asked to consent before governments made banks whole after a failure?

[throwawaymaths]

Well, not really. Do people consent when politicians reallocate their taxes to bail out too "large to fail" institutions? Given the protests, I think not. What if you didn't vote for the candidate that voted in the bailout? What if you specifically didn't vote (or voted for an opponent of) that policymaker. That's actually anti-consent

[6figurelenins]

The concept of voting includes the possibility that a plurality of voters reject your preference. You consent to this outcome by participating.

When half[1] the population refuses to participate (perhaps they're tired of being lied to, or the candidates are slime, or there are too many selectively-interpreted, arbitrarily-enforced "laws" to count[2], or the idea one person should represent 617,000 is absurd, or they just don't like bossing their neighbors around)...

Maybe the government doesn't have consent.

[1] https://www.politico.com/news/magazine/2020/02/19/knight-non... [2] https://en.wikipedia.org/wiki/United_States_Code#Number_and_...

[npteljes]

I believe that people have the opportunity to learn about banks' dealings, which is to an extent mandated by law. This can't be said about the person stealing the funds for their high-risk investment.

Consent is a difficult topic though, I agree. For example, what choice does a person have, not use banks at all? I don't think that's realistic.

[_heimdall]

Have you ever tried calling your brokerage firm, if you own any stocks or a 401k, to ask them who owns the actual shares you purchased?

$10 says they won't give a straight answer unless you ask just the right question. Eventually you'll find that there isn't a share you own directly, its effectively an IOU claim to a share. People can technically learn how the system works, but that leaves a lot of gray area there.

We could also technically read medical journals and learn how our medications work, but its unreasonable to expect everyone will and recent history has shown that in a pinch you'll be called out for doing your own research and thinking critically.

[npteljes]

I'm sure I wouldn't understand their answer, even if they would give it to me 100% truthfully. In fact I just recently learned about the share IOU thing you mention too. And I'm somewhat interested in the topic too, so I too think that people in general understand it even less. Same for medication.

[stephen_g]

It’s what investment banks do, but it’s not how retail banking works.

Retail banks hold their assets in various forms (central bank reserves, bonds etc.) but can’t really ‘invest’ because they can’t accept the risk.

They make most of their money on lending, but can’t actually “lend deposits” because they are on the wrong side of the balance sheet. The bank levers up capital (money that shareholders have put in as well as retained earnings from previous years) to lend from.

Deposits do count as liquidity and are a fairly inexpensive form of it, which is why banks want you to move money into them and pay interest to encourage you to not transfer them out.

[Aurornis]

> So, when it's the bank doing it it's ok but a bank employee doing it independently for personal gain it's an issue.

If the bank came into your home, took money without your consent, gambled it on high-risk activities, then tried to replace it before you noticed that would also be bad.

But that’s not what banks do. People deposit their money at the bank consensually and with an understanding that the bank’s activities are regulated within relatively strict frameworks.

I don’t understand if you are trying to downplay the severity of criminal embezzlement by bank employees or trying to demonize banks, but the two scenarios you’re equating are nothing alike in terms of consent, regulation, risk, and criminality.

[nicgrev103]

It was more a curiosity driven statement. I think the similarity is interesting, that is all.

[infecto]

By no means are banks the hero in most stories but from the view of normal depository actions I do not believe them to be the villain. Banks are required to follow very specific rules when it comes to deposits and while yes they should be making a spread on the money, they are not just buying up risky investments with it.

[mempko]

No, banks don't take deposits and invest that money. Banks don't loan out deposits. The opposite is true, loans create deposits. Banks make money off the spread in the interest of their loans to deposits (which are usually zero ore almost zero). Also fees, they make money off charging fees.

[dkasper]

Not quite because it’s almost backward with banks. Yes they take your deposits, but to the bank a deposit is a liability not an asset. Banks can lend out much more than their deposits (fractional reserve) but they technically don’t even need deposits at all to create a loan, because a loan is credit (asset) and a liability to the borrower. This means banks in the modern sense can literally create money, so they don’t need your deposits. You can imagine if no one defaults banks can balance their cash flows without any deposits at all, but in practice there is risk so deposits are more like a form of reserves more or less, and potentially an expensive one if interest rates are high. https://www.investopedia.com/articles/investing/022416/why-b...

[reese_john]

> but to the bank a deposit is a liability not an asset

Deposits are an asset AND a liability

> This means banks in the modern sense can literally create money, so they don’t need your deposits

Not really. Banks still have to spend central banking money when doing interbank settlements, and deposits are an important source of funding to day-to-day operations.

Say you have an account within Chase and want to send money to your friend at JPMorgan, Chase can't simply "create dollars" - they need to have enough reserves in their Central Bank account.

[rileymat2]

The part that is missing is that when you take that money to buy the thing intended with the loan the bank has to give you that money unless it is going to a customer of the same bank; impacting the fractional reserve requirement.

As a thought experiment, if you started a bank from 0, how do you pay out the first loan?

Yes, they create money, but deposits are a requirement to do it. (Unless you are doing some interest rate arbitrage by getting a loan from another source)

[reese_john]

> Yes, they create money, but deposits are a requirement to do it.

Deposits, although an important source of funding are not a requirement, capital is. There are capital requirements that make starting and running a bank a fairly expensive enterprise - you need to put up a lot of your own money (equity) for use.

[benlivengood]

I think a primary benefit of a bank is the ability to borrow directly from the Federal Reserve or similar central government bank. The spread on interest rates between the central bank and consumer rates is revenue.

[mempko]

To add to what you said, fractional reserve banking is really not a think. Many countries don't have any fractional requirements and in some it only applies to certain kinds of loans.