Skip to content

Well, yes Nils, but…..

Deutsche Bank is no Credit Suisse, despite investors’ fears
Nils Pratley
German lender’s shares were hit by general loss of confidence, not by any specific failings

But, the entirety of banking is a confidence trick. There don’t have to be any specific failings. Sure, specifics make failure easier, possibly more likely, but loss of confidence is, on its own, quite enough.

48 thoughts on “Well, yes Nils, but…..”

  1. Well, yes. The banks take your money, pretend they’re holding it for you, loan your money out for borrowers to gamble with, and pay you interest on what was supposed to be safely stored away.

  2. No, for ’tis true. All banks operate on the basis that everyone doesn’t turn up for their money at the same time. If they do it’s bust. Once people lose confidence in the ability to gain their money back in the future they all turn up at the same time. Thus the banking trick about confidence in banking.

  3. it’s when pension funds play this game that I have doubts

    Why do you think the Canadian government wants to kill the elderly?

  4. “No, for ’tis true. All banks operate on the basis that everyone doesn’t turn up for their money at the same time. If they do it’s bust. Once people lose confidence in the ability to gain their money back in the future they all turn up at the same time. Thus the banking trick about confidence in banking.”

    Hence my point why its stupid to allow the FR banks to have control of the payments system used by billions for their day to day income and expenses. The FRBs are able to operate knowing that they cannot be allowed to fail because Mr and Mrs Public are dependent on them for basic banking services, and governments will always bail them out to protect the public from losses.

    Ergo its high time banking was separated into 100% reserve current account banks, that just hold your money and do all the bill paying etc, and investment banks where people deposit their savings which is then loaned out at risk.

    And its no good saying ‘But then we won’t get the maturity transformation for all the money that floats around the system in everyone’s current accounts’. Because its that maturity transformation that is causing the problems we see today. People don’t want their day to day money loaned out to dodgy property developers, or whatever. They want it held safely so they can pay their bills. Society as whole would be better off if it wasn’t being held to ransom every few decades by having to bail out bankers.

    The alternative is that if a FRB goes bust we shoot all the senior managers. Then they have some skin in the game. As it is they have none. They do well they make a fortune, if they f*ck up they get bailed out by the taxpayer. Win/win for them, lose/lose for the taxpayer.

  5. “And its no good saying ‘But then we won’t get the maturity transformation for all the money that floats around the system in everyone’s current accounts’. Because its that maturity transformation that is causing the problems we see today. People don’t want their day to day money loaned out to dodgy property developers, or whatever. They want it held safely so they can pay their bills. Society as whole would be better off if it wasn’t being held to ransom every few decades by having to bail out bankers.”

    Society would be poorer by not having the maturity transformation.

    “The alternative is that if a FRB goes bust we shoot all the senior managers. Then they have some skin in the game. As it is they have none.”

    Amusingly, CS was paying management bonuses in those A1T bonds that just went to zero – as is the rumour at least.

  6. “Society would be poorer by not having the maturity transformation.”

    Really? How much did the GFC cost us all in lost GDP? And how much will the current crisis cost us? You cannot continue indefinitely with a financial system whose only solution to a problem is ‘Moar Debts!’. At every financial crisis since we went fully fiat in 1970 the solution to the problem has always been more debt shoved into the system. At some point that is going to collapse and the collapse will result in a far greater loss of public wealth than if we didn’t lend out the money that people use to pay their bills.

  7. Boganboy, you’re wrong. “pretend they’re holding it for you” … “on what was supposed to be safely stored away.”: I’ve never known a bank claim any such thing.

    Hell, there’s a sentimental Hollywood film where Jimmy Stewart explains to the ignorant masses that the money isn’t in a safe in his office it’s out on loan to his mortgage customers.

    To confuse a bank with a vault is infantile.

    Jim elaborates on the point but also accepts (if I remember rightly) that compulsion will be required to make people use vaults. No interest paid, no loans available – people aren’t keen on that, as experience shows.

  8. No, for ’tis true. All banks operate on the basis that everyone doesn’t turn up for their money at the same time.

    Yes to “confidence” but no to “trick” since there’s no mystery or dissimulation involved.

    Jim’s recipe sounds like a return to Glass-Steagall which made a great deal of sense. The UK didn’t have this kind of legislataion but prior to Big Bang the demarcation between different disciplines (for want of a better word) was recognised and applied – accepting houses, clearing banks and so on.

    Banks acquiring stock-brokers and building castles in the air out of derivatives whose ramifications were neither understood nor provided for was when it began to go phut. And then the poor old building societies who wanted to play at being banks and, and, and…

  9. The British banks went bust on good old mortgage lending, nowt else. None of the derivatives, stockbroking etc contributed in the slightest. That’s why certain building societies, who also only did mortgages, went bust at the same time.

  10. There used to be a culture where if a Building Society went bust, other Building Societies would gather around the corpse to rescue the customers, minimising fall-out and recourse to the state.

  11. “Jim elaborates on the point but also accepts (if I remember rightly) that compulsion will be required to make people use vaults. No interest paid, no loans available – people aren’t keen on that, as experience shows.”

    We have compulsion now, not so much legal as de facto. You can’t live in Western society without a current account, to the benefit of the current banks.

    All I’m saying is that all current accounts should be taken away from FRBs, and ring fenced into 100% reserve banks. The FRBs would be forbidden from offering current account services to the domestic public. If they want to offer them to millionaires, and large corporations so be it, such people are big enough to look after themselves. But the general public’s day to day money would not be used to make loans.

    So Barclays would be split into two legally separate banks (not to be owned by the same parent) one for all the current accounts, 100% reserve, all money (however much) 100% guaranteed. The other Barclays would be the FRB, taking in deposits and making investment and loans. If the FRB bank goes bust, that only affects those who have made investments at risk. All the current AC money would be in a different bank, salaries paid in, debits go out as normal. The failure of a FRB does not become a danger to ordinary people’s money, because its not allowed to be in one, unless they actively shift it into a FRB.

  12. The British banks went bust on good old mortgage lending

    For what definition of bust? NatWest/RBS? Barclays? Capital adequacy? Disastrous acquisitions?

    You’ve side-stepped the “confidence trick” claim. Bit tuberous…

    Jim: what happens to the current account money in your model? Does it just sit there waiting to be withdrawn? Presumably it can’t be deposited by Barclays Current into Barclays Hairy?

  13. TMB: a not-Jim answer. The Savings Banks used to approximate to Jim’s idea. The last survivor was the Airdrie Savings Bank which hung on till 2017.

    WKPD: ‘In August 2010 it was announced that a new branch would be opened after a cash injection of £10 million, from a group of Scottish entrepreneurs who support the bank’s mutual model. Sir Angus Grossart, Sir David Murray, Ann Gloag, Brian Souter, Sir Tom Farmer and Ewan Brown each provided £1 million. Soutar stated that “Airdrie Savings Bank represents what Scottish banks once stood for – security of funds, a focus on savings and outstanding personal service”. He went on to say that: “We believe the mutual principle is fundamental to the integrity of the bank. We are doing this because so many Scots are dismayed at what has happened within the banking sector”. In January 2017, the board of trustees of Airdrie Savings Bank resolved that the bank should be wound up as a result of changing customer requirements and the increasing cost of regulation.’

  14. In January 2017, the board of trustees of Airdrie Savings Bank resolved that the bank should be wound up as a result of changing customer requirements and the increasing cost of regulation.

    Can’t do much about customer choices making the model redundant, but it would be interesting to see how much all the red tape was to blame.

  15. “Jim: what happens to the current account money in your model? Does it just sit there waiting to be withdrawn? Presumably it can’t be deposited by Barclays Current into Barclays Hairy?”

    If people chose to shift some of their money from Barclays Current Bank to Barclays Hairy Bank (or any of the FRBs) then thats up to them, its now at risk. No deposit guarantee, 100% at risk if the bank goes up the swannee. But all current account activities (salaries in/bills out) would take place in Barclays Current Bank. You wouldn’t be able to have a current AC at Barclays Hairy Bank, unless you are Bill Gates.

    As I see it, the broad mass of the public are loaning their money to FRBs when they have no intention of taking that sort of risk. Most people want ‘their’ money in the bank to be 100% safe. And even though they are covered by the £85k deposit guarantee, the fact they are all mixed in with the rest of the FRB activity allows the FRB to use them as human shields – look Mr Government, if we go bust Mrs Smith won’t be able to access her bank account and pay her bills and buy food, so you better pony up a bailout sharpish!

  16. The British banks went bust on good old mortgage lending,
    Banks shouldn’t be doing mortgage lending.
    Basic rule. All the same class of security to all the same class of borrower. Eggs in one basket. Classic of what not to do in investment.
    The best people to be financing house purchase is those saving to buy houses. It’d be a self limiting system.
    Remember. Property is not an investment. There is no value added.

  17. Is there a trade-off here where the cost of the bank guarantee scheme would offset some of the cost of not having the maturity transformation.

  18. “the broad mass of the public are loaning their money to FRBs when they have no intention of taking that sort of risk. Most people want ‘their’ money in the bank to be 100% safe.”

    That’s not what the revealed preferences were when it came to the Savings Banks. Consider the possibility that people say they want safety but actually want high interest rates on their deposits. What then? I think you were right when you said compulsion would be necessary.

  19. Suppose that on the Jim model there was no deposit protection for the Hairy banks. Would that alter the way they are managed? (I gather there was no deposit protection in Britain until 1979 and that it was introduced as a consequence of Brussels’ deep love of the British people.)

  20. A defect in the Jim scheme, it seems to me, is the risk that it would be imposed by a Labour government and that the Safe Bank would in fact be a state monopoly bank. It would then be absurdly easy for a government to confiscate the cash of anyone it wanted to via the wonders of the electronic state.

    They came for the Russian oligarchs but I was not a Russian oligarch …

  21. So you have banks that only accept deposits and withdrawals. Presumably they have staff and systems and bureaucracy. How do they get paid for?

  22. They lose money hand over fist Diogenes. A “safe” bank would need to charge massive fees. They’ve never existed either, because there’s no way for such a bank to make money.

    Given that we have deposit insurance, what risk are small depositors making anyway?

  23. . . . the wonders of the electronic state.

    Indeed, how would all this play out in a “cashless society”. Could a general run on the banks occur if there was no place for fiat to be except in banks?

  24. “A defect in the Jim scheme, it seems to me, is the risk that it would be imposed by a Labour government and that the Safe Bank would in fact be a state monopoly bank”

    No, there’s no reason for the Safe Bank(s) to be State owned. All it needs is a ban on FR banks offering current accounts, and a 100% reserve requirement for banks that do. Thats it. Split all existing banks into 2, one Safe, one Risky, so you have as many Safe Banks as Risky ones.

    “So you have banks that only accept deposits and withdrawals. Presumably they have staff and systems and bureaucracy. How do they get paid for?”

    By regulated fees. Banking at the money storage/transfer level is a utility and should be paid for and regulated as such. At the moment there’s too much cross subsidisation going on – FR banks offering free current accounts, paid for by the profits made from lending out all the deposits in them. Current accounts should be paid for like any money transfer service. And then savings would be in higher demands (as the FRBs would have access to all that free cash to lend out) so interest rates would be higher, to compensate for the higher risks that FR banking entails.

  25. “And then savings would be in higher demands (as the FRBs would have access to all that free cash to lend out) ”

    Sorry, that should read ‘And then savings would be in higher demand (as the FRBs wouldn’t have access to all that free cash to lend out)’.

  26. It’s an unfortunate confluence of words and meanings.

    “Con job” – a confidence game – is a theft of money by convincing someone of something that’s not true.

    Yes, a bank survives because people are encouraged to be confident that, when they need their money back, they can get it. But most people understand that their money isn’t being placed in a locked drawer somewhere with their name on the front.

    There’s no “con” in that old sense of the word. It can confuse people when the distinction isn’t made. Banks rely on confidence, but they are not predicated upon some con game.

  27. So you have banks that only accept deposits and withdrawals. Presumably they have staff and systems and bureaucracy. How do they get paid for?
    I know this will be a novel idea to you Brits but you pay for banking services. Everybody else seems to.

  28. So if I tell 100 people that I’ll look after their money for them and keep it safe, and spend 90% of it on investments for my own reward, hoping that at any given time only a few will want any of their money back, am I a con man or a fractional reserve bank?

  29. “Given that we have deposit insurance, what risk are small depositors making anyway?” Chester’s question is a good ‘un. We find it laughably simple not to exceed £85k per head per banking licence.

    It’s true that the “per banking licence” is an awkward subtlety but the paperwork does warn you when you open an account (doesn’t it?).

  30. ““Given that we have deposit insurance, what risk are small depositors making anyway?” Chester’s question is a good ‘un. We find it laughably simple not to exceed £85k per head per banking licence.”

    The issue is not that Mrs Smith won’t get the money in her current account back when Global MegaCorp Bank goes t*ts up, its more that she can’t use it while the wheels of the State grind slowly to administer the whole thing. In the meantime she and everyone else can’t pay their bills, or mortgages, employers can’t pay their employees, etc etc. Hence why banks are ‘too big to fail’. If they fall everyone caught within immediately loses access to their cash, the entire payment system fails and the economy melts down in rapid order. No government is going to allow that. Hence why banks get bailouts all the time – a large proportion of the Western public lives on a financial knife edge and no politician wants to be the one to push them over the edge. If the current account banks were completely separate from the lending banks then the failure of the latter does not affect the former, and failing banks can be allowed to fail. Life for everyone else can go on unhindered. There can’t be a run on a 100% reserve bank, because all the money is there, they can pay out every penny in a jiffy if needed.

  31. OK, when my pay reaches my account it’s as safe as humanity can arrange. But what about before that? What if my employer banks with Hairy Megabank and he loses access to his funds? Will you go further and compel employers to keep a month’s worth of salaries in a Safebank at all times? And what happens when the month is up?

  32. But most banks aren’t too big to fail. From the point of view of the owners Silicon Valley and Credit Suisse both failed. From the point of view of depositors (bondholders are indeed depositors) CS failed as well.

  33. “But most banks aren’t too big to fail. From the point of view of the owners Silicon Valley and Credit Suisse both failed. From the point of view of depositors (bondholders are indeed depositors) CS failed as well.”

    Both were bailed out by the State, because they were worried that failure to do so would cause contagion (and probably that the depositors were mostly Silicon Valley tech Democrat donor types). They weren’t allowed to fail as the law dictated – depositors who were uninsured were made whole. Thats a bailout. Similarly the UK authorities forced a larger bank to take over the UK operations, which is a sort of bailout. Its not letting things take their natural course.

    “What if my employer banks with Hairy Megabank and he loses access to his funds? Will you go further and compel employers to keep a month’s worth of salaries in a Safebank at all times? ”

    Almost all businesses would have to have an account at Safe Bank to make payroll anyway, because HMB doesn’t offer current account services remember? I wouldn’t allow even huge corporations to have current account services at HMB, I’d have 100% separation between current accounts and deposit accounts, so every business would have a SB account. Which they would get automatically when the banks were split in two. How much money they chose to keep on the SB side would be up to their risk appetite. Any sensible business would keep a months payroll at least. Small business would probably keep the lot there.

    The other advantage of my idea is that it would impose incredible risk constraints on the HMBs. Because depositors have a safe haven to escape to (at the moment the choice is one FRB or another FRB) then any HMB that got too dodgy would suffer an immediate bank run and go bust in days. No more Fred Goodwins.

  34. No, you’ve got to make the distinction between solvency and liquidity. All FRB banks can be illiquid purely by happenstance. Not all FRB banks are insolvent. SIVB could be insolvent, we’re not really sure yet. SC was solvent but illiquid. So, the cure is that the central bank lends cash against assets. And changes interest (Bagehot point this out in the 19th cent, “lend at a penal rate of interest”). Central bank lending to an illiquid but solvent bank makes a profit for the central bank. Yes, solvency is different, but liquidity is a profit making opportunity for those – central banks – who can supply unlimited cash. And they do make profits from it too.

    “They weren’t allowed to fail as the law dictated – depositors who were uninsured were made whole. Thats a bailout.”

    Bondholders are depositors. CS wiped out $17 billion of A1T bonds, that’s depositors taking a haircut. That’s what the A1T bonds are for too.

    The distinction is important.

  35. “I know this will be a novel idea to you Brits but you pay for banking services. Everybody else seems to.”

    How out of touch you are! I suspect that bank charges don’t really cover the central overheads, however

  36. “Bondholders are depositors. CS wiped out $17 billion of A1T bonds, that’s depositors taking a haircut. That’s what the A1T bonds are for too.”

    Legally yes, everyone is a lender to the bank, whether its Mrs Miggins and her pension paid in every month, or HedgeFund Inc owning millions of A1T bonds.

    But in most people’s minds they are different. People who buy bonds are investors, hoping to get a return, and taking risk. Mrs Miggins needs somewhere to have her pension paid into and that can then pay her bills. Whatever you might say those two things are not the same.

    Thats why I say there should be a split. There is a fundamental lie at the base of FRB and its causing all the troubles we are experiencing, and have been for nearly 20 years now.

  37. Jim,

    I know this is going to sound like a really stupid question (hey, it’s a Sunday morning AND I just lost an hour), but – assuming that this is going to be an electronic process, ie, all the Joes are not going to withdraw hundreds of billions in physical notes from FRBs to deposit safely at SBs – where are all the SBs going to find the (safe) assets to cover these new (on demand) liabilities to all the Joes.

    Currently (big picture) FRB (without getting into HMB territory) has:
    Assets: Mortgages, deposits, loans (due from people and businesses), due from other banks (intra-bank), etc (ie, varying degrees of risk/maturity, including some very safe/instant required in order to stay liquid)
    Liabilities: Current accounts, deposit accounts, longer term bonds, owed to other banks (intra-bank), etc
    The typical net asset position of FRB is not very big (that’s the point), made up of share capital, P&L reserves etc.

    If tomorrow we shift all FRB’s “liability current accounts” (and these are not small numbers) to SB, FRB will need to use existing assets it has to settle those amounts. The alternative – if Joe transfers money electronically to SB – is that FRB will simply to owe the balance to SB (just like the other intra-bank balances above).

    If FRB is forced to settle that balance with SB – and is SB going to hold gold (or bank notes?) so that if all Joes want to withdraw all money from their SB vaults, there is something physical to hand over? – FRB is going to going to have to settle similarly with SB to get to that point, which is not where we are now, clearly.

    These are not small numbers we are talking about. Ie, where are the secure instant assets going to come from (at that scale) that will always act as an “on demand” asset in SB’s vault to enable this ideal position to come into play?

    It’s the old Irish question: “How do I get to Cork?”; “Well, I wouldn’t start from here…”?

  38. A different perspective:

    The very first transaction at FRB (ignoring the fractional bit): Paul built a house. Sold it to Peter. Peter needed a loan so – the bank “created” a) a £100K mortgage and b) £100K of money. Peter owed the bank £100K (mortgage) and paid the £100K of money electronically to Paul. Paul now has a current account with the bank of £100K. Peter will work for the next 10 years and repay the mortgage. Paul will pay Peter £100K over 10 years for the goods and services that Peter produces. We are then back to zero. All the money so-called “created” 10 years ago has now been so-called “destroyed”.

    We can take the bank out of that transaction and it still works fine with Peter owing Paul the £100K directly rather than via a bank, and it working its way back to zero 10 years later. Peter gets the benefit of Paul’s labour and vice versa.

    If Paul (10 years earlier) had wanted to put his £100K of “cash” (safe current account, call it whatever you want) into SB, how exactly was that going to happen? There were no other transactions in existence.

  39. “It’s the old Irish question: “How do I get to Cork?”; “Well, I wouldn’t start from here…”?”

    Well precisely. We are told (by Tim at al) that FRB is ‘good for us’ when its obviously isn’t, as recent history has shown. How we get from the current f*cked up situation to something more stable is not going to be easy. But thats not a reason not to try. At some point the FR banking system is going to utterly destroy Western civilisation (if we don’t allow the Left/wokism to do it first), so getting out of it sooner rather than later seems to me to be worth some pain now to avoid a lot worse down the line. How many financial crises are we going to endure that could have been avoided if only we had been prepared to accept some lesser pain voluntarily earlier on?

    The answer as to how the mechanics of the split into SB and HMB is done is above my pay grade. I suspect some jiggery pokery involving central banks would be required. Maybe the central bank buys assets off HMB to the tune of the required SB cash transfer amount with printed money, that then gets paid to SB. Which being a 100% reserve bank can’t lend out against it so there are no inflationary consequences. You’ve effectively swapped broad money for base money in the system. The central bank then holds those assets (which are all debts) to maturity and cancels the money it receives as the debts are repaid over time. Eventually over 25-30 year period all those debts would be repaid (as mortgages are 25 years and longest Government debt 30 years) and the central bank would end up breaking even.

  40. ” We are told (by Tim at al) that FRB is ‘good for us’ ”

    No, you’ve been told that everything is a trade off. In my opinion the trade off is worth it. Not that FRB is good for us but the balance is beneficial.

    There are 50 million current accounts – or so. Total throughput of those current accounts? Hmm, £2000 a month each? Sorta, maybe? That’s the payment, the Safe accounts you’re talking about. Wages come in, stuff gets paid out on rent, mortgage, utilities etc. £2k a month is an underestimate if anything. What FRB allows is that £100 billion (over the year) to be turned into longer terms loans and investments instead of just being in those 100% reserve bank accounts. It’s a matter of opinion, of course, but maybe that is worth it?

  41. The Meissen Bison

    What FRB allows is that £100 billion (over the year) to be turned into longer terms loans and investments

    There’s the nub of your problem. What FRB – in old fashioned UK parlance we called them clearing banks – used to do was braodly to match current accounts against working capital facilities and personal overdrafts.

    Term loans would be provided only against readily realisable (touch wood) security and “investments” were out of the question.

    So what BiS said earlier about matching is correct and Jim’s position, although a bit extreme, has a sound underpinning in seeking to protect depositors. There’s nothing wrong with banks lending money and facilitating international trade but in the post Big Bang, post Glass-Steagall world the risks of contagion are significant.

  42. “There’s the nub of your problem. What FRB – in old fashioned UK parlance we called them clearing banks – used to do was braodly to match current accounts against working capital facilities and personal overdrafts.

    Term loans would be provided only against readily realisable (touch wood) security and “investments” were out of the question.”

    But to a large extent that’s what the clearing banks currently do. Lloyds finances mortgages and consumer credit. Not much else either. Ditto NatWest and domestic HSBC. That’s also what Halifax did and it still went bust…..

  43. @Jim

    I’m all in favour of there being totally secure current accounts where the money deposited is not lent out. But I am opposed to this being forced upon people. Especially as it would mean the end of free current accounts which is a significant benefit to many people.

    And how would offset mortgages work with such a complete separation between current accounts and savings vehicles?

  44. The Meissen Bison

    You make my point for me: the clearers used not to do mortgages – that was the preserve of the building societies. Halifax had demutualised and been absorbed by Bank of Scotland when the baloon went up and the whole sorry mess was absorbed into the Lloyds group.

  45. ” What FRB allows is that £100 billion (over the year) to be turned into longer terms loans and investments instead of just being in those 100% reserve bank accounts. It’s a matter of opinion, of course, but maybe that is worth it?”

    How much GDP growth did we lose permanently because of the GFC? Yes we got back to where we were eventually, but the lost time is lost forever. We can never get those years back, or the growth they could have produced. IF FR banking causes periodic financial crises then the lost output will over time be huge, due to the lost compounding effect. Would it not be better to have a banking system that might result in lower growth, but allowed that growth to continue year on year on year, without recessions caused by banks lending too much money and bankrupting themselves and threatening the whole financial system itself?

Leave a Reply

Your email address will not be published. Required fields are marked *