Who owns bank deposits?
Recently I've been talking to a lot of people about the sorts of issues that are facing the banking system lately and the topic of bail outs and bail ins has come up frequently. A lot of people have trouble understanding why this matters due to misunderstandings about who has ownership of "money" in the banking system.
Specifically I've noticed an extremely common misconception that is nicely highlighted by the following quote:
Walk into a bank, take an extra $100 from them and walk out.
You go to jail as a bank robber.
Your bank "accidentally" charges you $100 in additional fees.
No big deal
So the question many people have is "why isn't this covered by criminal law code regarding theft"?
It turns out that there is a widespread misconception of what constitutes ownership of the money that's deposited in banks. Specifically in many parts of the world when you deposit money in a bank you do not have the ownership of that money.
Many people mistakenly think that bank accounts are a bailment situation. Legally speaking in a bailment arrangement you transfer the possession of some item to someone else while retaining the ownership of that item. When you open a deposit account at a bank and place money in it you do not have a bailment situation, you actually have a contract that promises that you will be able to draw upon that money at some later point in time. However, you do not own the money in a regular bank account. So while banks might end up not returning all the money to clients the laws that will deal with these will not typically be the legal codes that deal with regular instances of theft.
Why is the law set up this way?
Basically the law treats banking with a very specialized set of laws that are distinct from running a regular business. A consequence of any system that allows fractional reserve banking is that the banks can loan out more money than they actually hold in deposits, if banks were treated the same way as other businesses they would be subject to trading while insolvent provisions. Effectively many banks would be bankrupt if the usual bankruptcy laws were applied naively. Because we have a situation where fractional reserve banking is allowed banks can create money out of thin air via issuing loans, this entire system not be possible in the same manner if the title to all money held was owned by the banks customers.
Why this misconception matters politically
A lot of people don't realize that they don't own the funds that are against their names in their bank accounts. As a result we have a large body of legislation that's poorly understood by the public. Many people in the public think that the laws governing banking are identical to those in other areas of corporate law. Often it takes some sort of bad event like the airing of the detailed investigative journalism report called "banking bad" that exposed a lot of misconduct in the banking sector for people to take notice. These scandals led to the Australian Banking Royal Commission which showed systematic fraud and malpractice. This brought the issue of the laws and regulations around banking firmly into the publics mind.
An area where this misunderstanding is of crucial importance to policy debates is covering the situations in which the stability of a bank is insufficient to hold the confidence of the depositors. In essence the laws surrounding what happens to bank accounts in the event that a bank is troubled are very widely misunderstood. This issue became a major topic of attention in the aftermath of the Global Financial Crisis where a number of banks had to be bailed out and others restructured in order to keep the financial system from imploding. Effectively this crisis developed because the banks took on increasingly large amounts of risks and this eventually threatened their ability to provide their core banking services.
The Global Financial Crisis in 2007-2008 was in large part enabled because the repeal of various banking regulations such as the Glass-Steigall Act of 1932 that carefully prevented banks from speculating with depositors money. The repeal of these regulations unsurprisingly led to increased speculation and greatly increased the systematic risks in the sector. Fast forward to 2020 and we are seeing some of the same issues come up again that led to the GFC with politicians pushing for repeals of various banking regulations in misguided attempts to "stimulate the economy". Some argue that the GFC was never fully resolved and that the current 2020 financial crisis a direct continuation of the GFC. In 2020 we are starting to see absolute mania take a hold in the equity markets and also a corporate bond market bubble of proportions potentially never seen before. The amount of volatility is again very high and people are talking about the consequences this has for the stability of the banking system. The Federal Reserve Bank of America releases an interesting bi-annual report on the stability of the financial system, their most recent November 2020 report is worth reading. As is probably obvious the modern banking system is very complicated and this makes it far harder for the average person to have a well informed position on banking regulations and legislation.
Because the regulations around banking have been weakened an enormous amount of moral hazard has been created. Now that making gambles with depositor money, while depositors bear the downside risk, has become easier the rewards for doing so are too great for many in the banking sector to be able to resist. The aftermath of the GFC showed that using taxpayer money to bail out banks, and specifically bankers, that lost money from taking high risk positions is politically undesirable and potentially untenable. However maintaining a functioning banking system is an important part of maintaining the power structures of a country. Legislators are now left with a political and economic dilemma in dealing with the recent problems in the banking sector, backstopping the operations of the banks with taxpayer money might increase the general public's confidence in the banking sector but offering to bail out banks, and especially the bankers, is politically difficult. Also there's an issue that an explicit backstop of banking creates an extreme moral hazard situation that could (perhaps counterintuitively) create far more risk than it actually reduces because it directly incentivizes the banks to speculate on more risky positions. In the aftermath of all this we got a new idea called "bail ins" to deal with troubled banks. The G20 pushed its member countries to create laws for this, laws that most people in the populace would be strongly opposed to if they knew the details of how the system worked because the consequences are just unpopular. It doesn't help that recent banking laws like the "bail-in" laws were so actively kept away from media attention, hence robbing the public of yet another chance to understand how the banking system really works. For example some people call these banking bail-in laws one of the most pernicious pieces of legislation to pass the Australian parliament. These laws were passed without an official vote, something that people have suggested to me is a sign that the politicians involved do not want to have their names attached to any legislation like this in fear of the backlash to them were the laws to be used. None of this seems particularly democratic.
It's important to note that this is not a hypothetical situation either, these "bail in" type laws have already been invoked during the 2013 banking crisis in Cyprus. This wouldn't have been possible if depositors actually owned the money in their accounts. Other countries now have similar "bail-in" laws, including Canada, the UK and various other jurisdiction.
I suspect that if more citizens knew how these systems worked that the political discussions around them would be very different.