The Deficiency of Trust: How Banks are Failing Us

By Konstantine Roccas, Staff Writer

Last month in Cyprus, tens of thousands of Cypriot citizens woke up to find out that their government, in a move unprecedented in modern financial history, had agreed to a special tax levy on depositor accounts over 100,000 euros. To finance the bank bailout they were to receive, the Cypriot government was forced by the Troika of lenders to literally take money away from people’s bank accounts. This left people all around the world worried about the security of their deposits in banks. Even though the Cypriot government and European Union claim that this move was one-time only, real fears persist that Cyprus was a dress-rehearsal for a depositor levy on a much larger scale.

Since 2008 when Lehman Brothers went under, setting off a financial chain-reaction worldwide, there has been increasing concern over the power of financial institutions and their ability to get away with dubious investments with your money. We, as regular folk, use banks as a secure place to store our money and choose a bank to do so because we trust them to not do anything that could risk our investments.  Since 2008, this trust has come under much scrutiny, because after all, tax-payer funded dollars are being used to pay for the bail-outs requested by these supposed “safe havens for investment and fiscal storage.” If Cyprus is any indication, we may be paying for future bailouts straight out of our bank accounts.

In any case, bank failure is nothing new; 50 years after the creation of the first modern bank in Venice in 1157, the banking system was riddled with banking failures. What isnew however, are the ways in which we are paying for the mistakes of over-enthused bankers world-wide.Frankly speaking, banks are failing us, and we’re paying for their mistakes.                                

Image Courtesy of NPR.org

The Deficiency of ‘Trustee-ship’:

Banks are not supposed to make mistakes. Yes, accidents do happen, but we trust in banks to keep our money secure while we go about our lives. Economist Richard D. Wolff explains that when we entrust a bank with our deposits, “they are supposed to lend out a portion of those deposits, but do so very prudently to make sure that they are not taking excessive risk, because after all they are investing other people’s moneydeposited with them with the idea of trusteeship or safety. ”

“So if a bank takes a depositors money, and invests it in a way that loses money, they are ipso facto defunct and deficient in their performance,” continues Wolff.

The problem is that once we give the banks our money, there is very little we can do to tell them how to invest the money. Sure we can choose from a variety of investments such as RRSPs and GICs, but we have absolutely no control over the larger decision making process of a bank. After all, when you open up a bank account anywhere in the world and deposit money, you are giving the bank the right to invest and move your money around however they see fit.

This all comes to a head when a bank finds out that its returns are less than what they had anticipated and come to the conclusion that they wasted their deposits and do not have the money to return to depositors. This is what is “collectively known as bank failure,” says Wolff.

At this point, the banks run to the government and beg for money to ensure the entire economic system doesn’t collapse. Since most governments are reliant upon this system, they usually reluctantly agree or ask a higher authority like the EU or the International Monetary Fund to lend them money so that they can give the banks the money to avoid a collapse. Let’s be clear about one thing, a bailout in this sense has little to do with you and me, we just end up paying for it.

The Next Episode:

The story doesn’t end there. Usually, the end results are government and social service cuts, which are collectively known as austerity. What Cyprus has shown us, is that banks are “evolving” in the face of crisis. By taxing depositors to cover the impending costs of a bailout, banks and by extension their lenders, have a “new and creative” way to cover their losses.

By allowing this brazen theft to occur, banks are essentially being given yet another free pass for their over-indulgence with other people’s money.  This essentially means that “the banks, whose depositors’ money is being taken by the government, will end up receiving as profits and their own money a portion of what they allowed the banks to steal from their own depositors,” says Wolff.

The kicker is that after seeing the above work, other banks have rushed to implement similar solutions, such as in New Zealand where they are floating around the idea of covering the cost of any future bailouts with depositor funds.

Lawmakers and the banks can get away with this because of two main reasons. First off, they can control the hours and stream of liquidity the banks release in order to prevent a bank run as was the case in Cyprus. Secondly, when banks go bust, your money is merely a set of digital numbers on a screen. If a bank loses its money, they don’t have the money to pay you back when you go to make a withdrawal, so you either accept the “medicine” or risk losing your life savings.

A Bleak Future:

When something is generally deficient in society, people attempt to create a barrier to prevent this deficiency from happening again.  With the banking sector however, there has been little oversight or mechanisms to prevent these failures from happening again.

In the end, something has to give. Either someone or something clamps down on the ability of banks and their associates to risk your investments and forces them to actually exercise fiduciary duty, or we continue to allow these banks to do whatever they want and bring governments, citizens and countries to the edge of the abyss.

Konstantine Roccas is an observer of local and international affairs and governance, but also writes about anything else that piques his ire. He enjoys a half kilo of Greek yogurt daily. He writes for the Arbitrage Magazine. More of his work can be found at myriadtruths.blogspot.ca and he can be followed on Twitter @KosteeRoccas.