Under normal circumstances if you give your money to someone for safe keeping you would not expect them to use it for speculating in high risk areas; so why are the rules different when it comes to banks

Clearly this 'custodian' concept does not apply to the banking system, which seems to be able to lose depositors money with impunity and then expects Governments to step in to bail them out; thereby mutualising their problems over the entire taxpayer base

Surely speculating with client money is not the function of the banking system, however attractive the idea of quick profits at someone else's expense may be? We are all quite capable of gambling/speculating/trading on our own behalf if we want to, so the very fact that most people do not risk their own money in this way must mean that they are not comfortable with the risks involved

Therefore with this in mind, why should depositors with 'risk averse' profiles be jeopardised by the greed of the banks which inevitably means breaking the 'trust contract' between bank and depositor

This type of 'trading' may be highly profitable but getting it wrong can prove disastrous and essentially leaves the depositor with all of the downside and virtually none of the upside - therefore the risk/reward ratio is all geared in favour of the banks and stacked against the depositor/customer

Client Money .v. Deposit

  • Client money - cash in you accounts is segregated from the bank's own assets and held in trust accounts
  • Deposit - banks hold money as a banker and not as a trustee

Why are bank customers not given the choice of how the banks hold their money (client .v. deposit)?

Taking this approach to banking would allow customers to determine their own exposure to the banking system and moreover would permit the Government to withdraw their compensation scheme (£85,000) for those who chose to accept the risks involved with allowing banks to handle their money as deposits

Finally, just to reinforce the whole subject - there needs to be proper accountability and in this context and in this context the proponent of 'Black Swan' events Nassim Nicholas Taleb has the right approach with the 'architect rule' - if an architect builds a house and it collapses killing the occupants then the architect himself if put to death

After all there is nothing quite like accountability to provide a wake-up call for ones actions

Tags: | Categories: Banking

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