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Comment by phkahler | Hacker News Reader

If you loan out deposits you are already set for a bank run. All it takes is the depositors to ask for their money back.

One deposit. One loan. One withdrawal request.

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The bank has to make money, otherwise it cannot pay it's staff or keep the lights on.

So that's either loans, or effectively giving people a negative interest account where you lose your money. Citibank does this, they just call it "fees" and it really, really hurts the people who don't have much money.

Not if the deposit and loan are duration matched.

"I want my money back."

"Sure, you can have it in two years."

“I want to make a deposit and earn interest”

“Sorry we have to wait for someone else to want a loan”

If you’re trying to solve one extremely rare problem (bank runs) by completely dismantling a much demanded and commonly used banking feature (interest bearing accounts with liquidity) then sure, this would do it.

But nobody actually wants that.

Who would deposit their money in a bank that wouldn't let them get it back for years?

You are touching on the difference between demand deposits and duration deposits.

If you were charged a small nominal fee for your demand deposits, you would likely say "OK, I'll keep a certain amount in my demand deposit account, and then put the stuff I don't need into longer duration deposits, so I can get some interest."

This would be the right thing, and that money could be safely loaned out at durations shorter than you deposited. You would then be signalling to the market exactly what the demand is for money over time, and it could respond appropriately.

To an extent you do this today: you don't keep all your money in demand deposits, you instead put a lot in the market or whatever. Back in the day, you might have even bought a CD, which is almost exactly what I'm describing, sans the requirement that banks not loan funds they can't guarantee are available for the duration of the loan.

So it's not as crazy as it sounds. It's still crazy, but not as crazy as it sounds.

CDs are duration deposits, but you can still get the money out minus some fees associated with the early withdrawal. That doesn't help the run on the bank situation.

So long as the bank has reserves (out of profits) they can offer to buy people out early, according to their own profit and loss calculations. But they can't be compelled to, and they must have that money available to them at the given moment.

In this make believe banking system that I am making up. :)

People do it all the time already, but it is a minor part of banking sector.

Minor part of consumer banking.

For the financial sector at large, treasuries and bonds make up the vast majority of the market

I own a few CDs. They’re not an unusual financial product.

But the longest maturity for CDs is around 5-10 years, while banks loan out money for 15-30 years for mortgages.

And most banks probably have much more money deposited in checking and savings accounts than in CDs.

Yeah but I assume you also have money in an account that lets you withdraw it in less than two years?

A bank that only offers CDs or other long-duration deposits would be pretty weird.

Well sure, but one could theoretically imagine banks which are prohibited to lend money from their customers' current accounts and only make loans based on their CDs - and one aspect of that is that they'd have to offer much better terms for CDs since they would be in much higher demand.

> and one aspect of that is that they'd have to offer much better terms for CDs since they would be in much higher demand.

Why?

CDs are insured by the FDIC. That gives people the same amount of confidence in all CDs no matter what bank they get them from.

Well, if they can only lend from funds in the CD pool, how else would they encourage clients to put more money in that pool? Better terms right?

This is how bond issues work.

CDs?

CDs are definitely not the same as checking and savings accounts though. Most people don't even have any CDs, and the people who do have them also have accounts where they can withdraw money immediately.

I've never seen a bank that only offers CDs. That's probably because such a bank wouldn't survive.

> Most people don't even have any CDs

Because the rates suck, but that hasn’t always been the case.

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