7

Another year, another major bank or two goes down because it decided to take the money that it was entrusted with it and go gamble. All of them fear "bank runs" because they know that they can't give back all the money that was entrusted to them at the same time, since they're using some of it for side hustles.

Which makes me wonder - are there any financial institutions which make a point of simply being a storage unit and nothing else? Like, I can open an account there and I can pay money into the account, and I can get a card to pay with which is linked to that account - but I can also rest assured that the money will be there when I want it. This institution would give no loans or credits of any sort, and never pay any interest rates on any deposits. It would not invest the money entrusted to it or do anything else with it besides just storing it. Basically it would be the digital equivalent of the proverbial mattress.

It would subsist solely on fees for maintaining the accounts. Understandably, these fees would be larger than in other "regular" banks, but that would be the price of stability. No bank run or economic instability would be able to touch it.

Somehow I've never heard of anything like that. Why is that?

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    1. How in your opinion did SVB gamble with depositors money? 2. Where do banks get the money to loan to people? 3. Go watch It’s A Wonderful Life; specifically the part where George tells people where their money is.
    – RonJohn
    Mar 16, 2023 at 4:47
  • 10
    The question is based on an incorrect assumption, and shows very little understanding of real world banking activity.
    – Aganju
    Mar 16, 2023 at 6:12
  • 6
    can people please quit with the "OMG the banks are unsafe" fear mongering? It is ill-informed ignorance to the point of intentionally lying. Banks don't decide to "go gamble". There haven't been any bank failures since the Great Recession. SVB's investments weren't unreasonable at all, they just weren't very liquid. Also if you're in the wrong site you don't delete and repost, you "flag"..."mod assist"... "please xfer to desired destination". Mar 16, 2023 at 6:57
  • 8
    @Vilx- "someone is taking my money (without my permission no less...)" Double LOL. You gave it to them, remember?
    – RonJohn
    Mar 16, 2023 at 17:47
  • 4
    @Vilx- "I gave it to them for safekeeping." Guess what? (In the US, at least; can't answer about unspecified places around the world) your money is safe.
    – RonJohn
    Mar 16, 2023 at 18:02

7 Answers 7

18

We call such institutions "safe deposit boxes." There is no version of a true equivalent to a safe deposit box that is widely available to the public and accessible via an electronic transfer in the United States. And, among muggles without access to Gringotts Wizarding Bank, very few people manage their cash savings that way. In part, this is because this children's book financial institution runs in a way that children and other people who don't understand banking think that banks work, even though they really don't work that way (and ultimately can't work that way at a macroeconomic level).

In many countries outside the United States, government run postal service banking systems with savings accounts from which you can make payments via a money order like document sometimes called a giro serve this purpose. Giro based payments through a postal banking system was the main means by which consumer payments were processed, in the era when U.S. consumers made payments with checks drawn on commercial bank deposit accounts, in much of the world. Some of these systems now allow for electronic fund transfers. The first postal banking system was established in Great Britain in 1861.

In Japan, for example, where this system was established in 1875, there have been times in recent history (I don't know if it is still true) when most household savings were in the form of deposit accounts with the postal system. As of March 3, 2006, the Japanese people had "about ¥330 trillion in assets, which is roughly 65% of Japan’s GDP" in aggregate postal savings account balances. (Incomplete efforts to privatize this system started in 2005 but the government still owns a majority of the postal banking system.)

Western Union in the United States was an attempt to imitate a postal banking system in the private sector, but it has never really gained a large market share outside the niche of international remittance payments to expatriates homelands.

None of these systems, however, is truly loan free or risk free, although they invest the savings of their customers in very low risk investments which are sometimes guaranteed by the government. Money in a modern economy is predominantly just negotiable third-party debt.

At the macroeconomic level of an entire economy, savings accounts and investments in real world economic assets are two inextricably tied sides of the same coin, however indirectly. Savings are a right to something of value in the future, but at any given moment in time, all real world assets have to be in use by someone. Real world goods and services can't miraculously time travel to the future from the time that you want to save money for future purposes. All of the goods and services available in the economy at any given time have to exist or be replaced by substitute real world goods and services at every moment of time between the time when you forego consumption by saving and the time when you want to withdraw your savings to consume real world goods and services.

In American popular culture, the classic illustration of the concept that savings are ultimately impossible to segregate from real world investments is a speech by George in the classic 1946 movie "It's A Wonderful Life" (paraphrased here), in which he explains to people in the midst of a run on a bank how their money isn't sitting in the safe but is instead tied up in mortgages on houses and the like. The key portion of the script for this purpose says:

MISS ANDREWS. But I’ve got my money here, George, and I’ll take it now.

GEORGE. No. Miss Andrews, you’re thinking of this place all wrong. As if I had the money back in the safe. The money’s not here. Your money’s in the Grange’s house right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?

In the case of commodities (like gold) negotiable warehouse receipts are used in a similar way to a safe deposit box.

In the case of securities, a "nominee" holder often serves a safe deposit box like role. There is also a little known government agency that protects customers of these firms from events that deprive them of their securities (like embezzlement or destruction of stock certificates), in a way similar to the way that the FDIC protects commercial bank depositors.

An account in a Federal Deposit Insurance Corporation (FDIC) insured commercial bank up to the insured dollar amount is functionally equivalent although the "back office" way that it gets to functional equivalency is not the situation that you contemplate. Consumer authorized electronic fund transfers from commercial bank accounts insured by the FDIC, while they have had a legal framework in place for decades, have only very recently been used on a widespread basis by ordinary banking industry customers.

The existence of equivalents (from the small customer's perspective) like the FDIC insured banks is the operational reason that this isn't done, even though the macroeconomic link between savings and investments is the fundamental reason that this is the case. Borrowing cheap and lending high is a large share of the profit of a commercial bank that subsidizes its ordinary customer deposit account operations. Withdrawing this revenue stream would make it economically non-viable in competition with firms that do so.

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  • 1
    SDBs are worse than bank accounts, because they have NO protection. They get accidentally drilled into All. The. Time., get lost, etc, etc.
    – RonJohn
    Mar 16, 2023 at 17:17
  • 1
    @RonJohn Safe deposit boxes are quite secure so long as you hold onto the key and know the box number and street address of it. I've been a lawyer since 1995 and have never encountered a problem with one or met a lawyer who'd ever had a problem with one or seen a media report or court case with a problem with one - apart from dead people who don't tell their heirs where it is and lose the key (in which case it is drilled). Natural disasters or building fires or failures that compromise safe deposit boxes are very, very rare in most places. Theft/fraud by family/employees also happens.
    – ohwilleke
    Mar 16, 2023 at 17:22
  • 3
    nytimes.com/2019/07/19/business/safe-deposit-box-theft.html "In Maryland, a large bank closed several branches and lost track of hundreds of safe deposit boxes, according to a lawsuit filed by a customer who said he lost gold and gems valued at $500,000."
    – RonJohn
    Mar 16, 2023 at 17:28
  • 2
    "I've been a lawyer since 1995 ... or seen a media report or court case with a problem with one". They're all over the media.
    – RonJohn
    Mar 16, 2023 at 18:00
  • 2
    @RonJohn Clearly I read different media than you do or just haven't noticed those stories in the daily torrent of news.
    – ohwilleke
    Mar 16, 2023 at 18:05
13

Why would you want that?

Banks don't "gamble", banks do what they're supposed to be doing: borrowing from those who have extra cash to lend to those who have not enough and earning the arbitrage on the interest difference and fees from both sides.

If you're looking for a bank that would just store your pile of cash - you'd need to pay that bank significant amounts for the service. You'd need to finance their operations, their expenses, their security and safety (after all, you don't want your proverbial mattress robbed or stolen), and provide them additional money as profit so that it would be worth their while to store your pile of cash. As the result, your pile of cash would erode, significantly and at high rate.

The way the banking system works is that you pay for the service not by reducing your balance but instead by allowing the bank using your cash while you don't. Sure, in some banks and in some countries they still charge fees from depositors, but even there if you deposit high enough amounts the fees diminish or disappear altogether.

Retail investors are insured by governments and central banks in case of bank collapses, and those with high enough balances that exceed the insurance have means to protect themselves (either by diversifying the deposits, or by getting their own private insurance).

In any case, as the examples of the three largest bank failures in the US show, the depositors are the last to get hurt even when the banks do fail. So I see no reason why you'd want to fund a bank operation and profits out of your own pocket - what would the benefit to you be?


The other answer mentions postal financial systems as an alternative. This is a slightly different system than a commercial bank. These are usually subsidized by governments and are created to allow access to banking services for all (given the prevalence of postal branches compared to commercial banks at the time). In many countries the postal banks have become regular banks for all intents and purposes, in others they still exist and provide mostly basic services (cash deposits/withdrawals, bill payments, etc). People with high cash balances would probably be lacking a lot of services through these systems that they'd need.

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    @Vilx - In the US, small depositors aren't cut off from their money any more than they are when one bank merges with another. The old bank closes on Friday, it opens on Monday under new management, and everything just works. As for fees, Bank of America had ~80 B in operating expenses and ~37 M depositors in 2022 which would be a $2000 fee per depositor if spread evenly. If half those expenses are eliminated by eliminating all loans, that's still $1000 per depositor. That's in the ballpark- banks generally expect it to cost a couple hundred dollars a year to manage a checking account. Mar 16, 2023 at 14:59
  • 1
    @Vilx- It's unlikely that you're going to drastically reduce the cost. If BoA was able to cut the cost of running a checking account, they have every incentive to do that. It would be less expensive if you didn't need brick and mortar branches, phone support for issues, you didn't need to mail out statements, etc. But doing that rules out reasonably large segments of the population who want/ need those services. Mar 16, 2023 at 15:55
  • 1
    @Vilx- the first $250,000 you wanted to say. As I said before and will say again - no depositor has been cut off from their money no matter the amount, let alone the insured ones (all the average Joe's and some more).
    – littleadv
    Mar 16, 2023 at 17:02
  • 1
    @Vilx- It's hard to address concerns that you have specifically about your country when you don't disclose any details of your situation. There are about 200 countries in the world, some with better protections for consumers than others. So you'd probably get a more useful answer if you'd provide more specific details.
    – littleadv
    Mar 16, 2023 at 17:14
  • 1
    @Vilx- "bank-like business ... without the other stuff that banks do" you see the problem with your question, don't you? The "other" stuff that banks do is what banks are.
    – littleadv
    Mar 16, 2023 at 19:27
1

There are cultures where any form of interest is considered to be religiously forbidden, I believe. It is possible that these have fee-only banks of the sort you imagine.

But think about it: what are they going to do with the piles of cash they're holding? At some point you or they either wind up having to build and defend your own Fort Knox, or put the money into the banking system as a whole. Heck, even electronic funds transfer itself means you're involved in and to some degree exposed to that system, just as money itself means you're exposed to inflation risks...

There also used to be banks in the US that were pure savings-and-loan institutions, whose main exposure was to the loans they issued. Again, that's a different kind of risk, and you need to decide how much you would trust them to pick good loans and to charge interest rates that covered their occasional losses. If this approach appeals to you, many (most?) credit unions still operate on this basis, so that might be an acceptable alternative to your no-investment-risk goal.

18
  • Well, nobody is protected from general economic collapse or inflation. That's fair. But storing piles of cash in a Fort Knox is not what I had in mind. Rather they should store the money electronically as numbers in a database. Physical cash - well, they would need some of it on hand, of course, but most could be given back to the State for safekeeping (with the provision that they can get it back on a moments notice when needed).
    – Vilx-
    Mar 16, 2023 at 15:24
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    @Vilx-: What you are describing (piles of cash held by the government for safekeeping) is exactly Fort Knox. Well, likely more bullion than paper currency. From the bank's perspective, it's also exactly what SVB did do -- use the deposits to purchase government bonds.
    – Ben Voigt
    Mar 16, 2023 at 15:42
  • @BenVoigt - The difference is that each government already has a Fort Knox by necessity (they need to store piles of cash to release/absorb as necessary). So that each bank does not need to build its own.
    – Vilx-
    Mar 16, 2023 at 15:45
  • 2
    @Vilx- "they should push for electronic money transfer". Who is they?
    – RonJohn
    Mar 16, 2023 at 17:36
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    The religious prohibition in Islam and Judaism is against interest, not loans. Islamic do banks loan your money out, just with different structures. For example, an Islamic bank could invest in mortgages, but those mortgages would be essentially a capital lease (Ijarah). Judaism does not prohibit charging non-Jews interest, so making interest-free loans to other Jews is encouraged by the Torah. Often this is done on a person-to-person basis, which makes it significantly riskier than banking.
    – user71659
    Mar 16, 2023 at 18:39
1

Various countries around the world are currently toying with the idea of a so-called "Central bank digital currency", which would have the properties you are after - effectively it would be a digital equivalent of the idea of storing cash in a safety deposit box. But there's no significant currency offering that today.

As other answers have explained, banks that lend out deposits do have a vital role in the economy of funding loans. If there was a widespread move to keeping deposits directly with the central bank, the central bank would likely find itself taking on more of the "money creation" role by making its own loans to retail banks which would then lend on to consumers.

Arguably the current situation where central banks are increasingly finding themselves guaranteeing 100% of bank deposits is getting us closer to this situation anyway.

1

Because the FED won´t allow it. There were at least 2 attempts in the US to do it: Custodia bank and The Narrow bank. In Custodia's case, FED took incredible 18 month to decide, while it normally takes 5-7 days, filing a lawsuit is not necessary, unlike Custodia's case.

8
  • Custodia seems to be a crypto exchange trying to pose as a bank. I found no references other than the linked tweet to the other entity.
    – littleadv
    Mar 22, 2023 at 20:18
  • Narrow Bank's homepage: tnbusa.com
    – xmrk
    Mar 22, 2023 at 20:51
  • 1
    didn't go into too many details, but it sounds like a ponzi scheme. Two quotes: "TNB seeks to serve institutional customers by offering safe depository services at attractive interest rates." and "A narrow bank is a financial institution that issues demandable liabilities and invests in assets that have no nominal interest rate and credit risk." cannot both be true. The first quote suggests they do not intend to be a retail bank, so wouldn't be relevant to the OP anyway.
    – littleadv
    Mar 22, 2023 at 20:53
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    re ponzi: what is so difficult about offering a checking account with 100% reserve and 0% interest rate (and presumably even a fee), and savings account with interest rate but restricted withdrawals (or term deposits)? I guess any bank that offers the two is a ponzi scheme by your definition.
    – xmrk
    Mar 22, 2023 at 21:12
  • 1
    Alex Harris at Bloomberg points out that money market funds are essentially narrow banks, and they are exacerbating the current banking crisis by enticing deposits away from traditional banks at exactly the moment those banks need deposits. Mar 31, 2023 at 2:23
1

Just look at the numbers.

If I opened a bank-like institution that keeps your money and doesn’t lend it out, I might get 100 million in deposits and say in 10 years I pay the money back with interest. Meanwhile I have to pay for running this bank for ten years. Build a big safe to put the money in and armed guards so nobody just steals it. And I’d like to make some profit. But I make no money.

Even if I kept the cost down to a million a year, in ten years I could only pay back 90 million. I’d have to charge maybe one percent to hold your money for you.

-3

Paying banks a percentage of custodied assets or a flat fee for safe storage definitely has large market demand-- my personal utility curve would probably allow for payments of over 1% the time-weighted average of assets should I get free and unencumbered access to the funds, and I'm someone who never loans more than 250k to commercial banks.

Alas this market demand is part of the reason why the cartel mobilizes to prevent attempts at full reserve banking-- doing so would drain resources from cartel members in a free market. There have been a couple of attempts at such a full reserve model, many of which have been predictably shut down by the regulatory and compliance strangle of the administrative/bureaucratic state. One famous related example is the narrow bank (see for example here).

There are a few options to get out of this system, but none perfectly matches your requests.

  1. Transform your counterparty to the U.S. government. You can buy T-Bills directly from the treasury at auction or on the secondary market at https://www.treasurydirect.gov/. Holding to maturity guarantees a positive nominal return so long as we don't head all the way back to ZIRP or lower. The flaws with this approach are lock-up periods (i.e. lack of direct liquidity that is available with cash or debt), relatively larger though not huge minimums, inability to invest odd lots, and tax hassle.

  2. Introduce additional (small) counterparty and market risk in exchange for liquidity while pursuing the same strategy as 1. You can open a brokerage account and buy something like SHV or BIL, then transfer funds back to a bank account that is funded with requirement minimums whenever you want to make purchases. This carries the same tax hassle as one, but provides better liquidity, has no minimums, and allows for trading with fractional shares. ETFs such as SHV and BIL are collateralized with treasuries, and over the last 15 years, BIL has traded in a range between 91.34 and 92.08. Note that in contrast to directly buying and holding treasuries mentioned in 1, you can lose money in nominal terms here, since the fund is constantly managing maturities to provide investors with a relatively stable duration risk (note that commercial bankers who forgo using rate contracts might stand to learn a thing or two by studying why such management is useful...).

  3. Use cryptographic monies. While this meets your criteria, the downsides to this strategy are obvious, though should still be mentioned for completeness. While you may have control over the nominal value of your "account" in cryptographic monies, the purchasing power of this nominal quantity is rapidly changing compared to more stable fiat currencies such as USD, CHF, EUR, or JPY. Apart from that, mass adoption to these newer types of decentralized structures has not occurred, and so transacting in, e.g. BTC, is still a somewhat novel and not near universally available option. It is beyond the scope of the question, but these phenomena's are likely linked-- should cryptocurrencies begin to function as a true medium of exchange by gaining a critical mass in transaction volume, exchange rates would probably be more stable and vise-versa.

  4. Keep physical cash on hand, and pay an insurance premium to keep the notional value of the cash safe. This essentially transforms payments you would have paid to a full-reserve bank to an insurance provider. The premium for safety is sometimes forgotten in our digitalized world, and has led to more than a couple of instances where I've witnessed junior traders dream up what they think to be a nice arbitrage involving physical delivery on futures contracts of e.g. precious metals, bring it to the PM, and then come to learn that there is a cost to store and protect gold that they didn't include in their carry calculation.

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    But why do you want this? What’s the difference between a full-reserve bank and an insured fractional-reserve bank to you, as a depositor, other than the added fees? Mar 29, 2023 at 20:01
  • @Kevin Arlin Same reason there is a market for ESG products-- mostly ethical concerns and moral considerations. Also the idea of no such thing as a free lunch. Protection isn't free, and I view the cost of FDIC to come in the form of moral hazard, a broad increase in prices that wouldn't exist should debt not have been slowly built itself into a requisite for most people to function, and plenty of other issues. I know as an individual I make no difference, but I don't want to contribute to the issues, so opt out as best I can.
    – EDS
    Mar 29, 2023 at 22:58
  • 1
    @EDS this makes no sense. Ideology aside, the FDIC cost (just as any insurance) is capped at most by the insured amount, where your proposal will be capped exactly by the insured amount. So in essence you're proposing to pay the maximum cost of the FDIC insurance whereas for most depositors the insured event never happens and as such the premium for covering the risk is much lower. Economically your reasoning is unsound.
    – littleadv
    Mar 31, 2023 at 18:14
  • @littleadv you are neglecting the effects of leverage. But more to the point, the above comment outlines the moral and ethical concerns that impact my personal utility curve
    – EDS
    Apr 2, 2023 at 22:07
  • Right, ideology. Not sure what effects of leverage means here, but it's ok to admit that your motivation is influenced by a belief, religions are not illegal.
    – littleadv
    Apr 2, 2023 at 22:18

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