Abstract
Depositors have perceived banks as acting unethically during the most recent recession. One area of consternation is the ambiguity of the legal obligations entailed by the deposit contract when it is backed with only fractional reserves. In this article, we apply an existing analysis of the legitimacy and ethicality of banking practices to a wider range of financial transactions, including insurance policies, securities lending, perpetual bonds, and callable loans. Securities lending in particular creates rights violations analogous to those in fractional-reserve banking. Both callable loans and perpetual bonds have clear legal obligations which are not inherently problematic, though we herein clarify what these obligations are. Finally, we apply our ethical framework to demonstrate that insurance products are distinct from banking deposit contracts, and that perceived parallels between the two products underestimate these differences.
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Notes
The depositor is exposed to other uncertainties and risks as there are any number of events that could prevent the return of the good in question, e.g., fraud, theft, flood, fire, etc. Some of the events involve, however, risk and are insurable, such as flood and fire catastrophes. The probability of a fire and flood prohibiting the return of a deposit are independent of the depository’s actions and therefore represent insurable risks (although a depository can take precautions to minimize the effects of these catastrophes). Losses incurred with borrowed money that prohibit repayment of a loan, by contrast, are very much related to the borrower’s actions, and thus uninsurable.
Additional legal confusion exists in those countries where the illegality of the practice of lending out deposits is only partially enforced, as in Spain (Huerta de Soto 2009, pp. 125–129; Bagus et al. 2014).
In distinction, money could be held in an equity investment or a money market mutual fund, both products which offer on-demand redemption at market value. Holding money in the form of a time deposit or bond allows for par value redemption, but only after some waiting period. The act of holding money is motivated to hold the unique asset that is both on demand and at par value.
If the purpose of a “callable loan” was to maintain the availability of the “lent” money, it would be a genuine deposit with all corresponding legal obligations applying.
It is true that fractional-reserve banks sometimes also pay interest on deposits. This does not show, ipso facto, that depositors wanted to loan the money to the bank. The undefined term and desire to maintain full availability of the deposit indicate that the depositors did, in fact, intend to make a deposit.
The present value of a no-growth stock, P 0, is equal to the future stream of dividends (D n ) discounted at the appropriate rate (r), which simplifies to D 1/r.
For a group of individuals, the cause of death for any sub-group can be estimated as it involves categorizable risks (e.g., 2.18 % of all people die of lung cancer, 1.73 % of diabetes, etc.). This distinction is brought about by the class that exists with groups but not individuals from which common causes can be probabilistically ascertained.
Many of these freak events, however, are excluded in life insurance policies as “Acts of God”.
Some might claim that banks are agents that provide liquidity services by “borrowing” short term through the deposit base and lending long term through their loan portfolio. Note that even this basic raison d’être for the bank is predicated on a bank acting first and foremost as a depository to obtain funds.
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Bagus, P., Gabriel, A. & Howden, D. Reassessing the Ethicality of Some Common Financial Practices. J Bus Ethics 136, 471–480 (2016). https://doi.org/10.1007/s10551-014-2525-9
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DOI: https://doi.org/10.1007/s10551-014-2525-9