A Comment on Barnett and Block on Time Deposit and Bagus and Howden on Loan Maturity Mismatching

In Time Deposits, Dimension, and Fraud (2009), William Barnett and Walter Block argue that by borrowing short and lending long there is an over issuance of property rights. Their article, however, does not fully extend the consequences of their contribution. Once this is done, it becomes clearer that their argument suits a great impediment to banking, becoming a possible reason to support rather than to oppose fractional reserve banking. Bagus and Howden (J Bus Ethics 90(3):399–406, 2009) comment on Barnett and Block (J Bus Ethics 88(4):711–716, 2009), the authors claim that while maintaining the illegitimacy of fractional reserve deposits, borrowing short and lending long it is actually not illegitimate. An extension on Bagus and Howden (2009) will show that their line of argumentation can be applied as a defense of fractional reserve banking as well.     

The Continuing Continuum Problem of Deposits and Loans

Barnett and Block (J Bus Ethics 18(2):179–194, 2011) argue that one cannot distinguish between deposits and loans due to the continuum problem of maturities and because future goods do not exist—both essential characteristics that distinguish deposit from loan contracts. In a similar way but leading to opposite conclusions (Cachanosky, forthcoming) maintains that both maturity mismatching and fractional reserve banking are ethically justified as these contracts are equivalent. We argue herein that the economic and legal differences between genuine deposit and loan contracts are clear. This implies different legal obligations for these contracts, a necessary step in assessing the ethics of both fractional reserve banking and maturity mismatching. While the former is economically, legally, and perhaps most importantly ethically problematic, there are no such troubles with the latter.     

Rejoinder to Bagus and Howden on Borrowing Short and Lending Long

In Barnett and Block (J Bus Ethics 88(4):711–716, 2009a), the present authors claim that borrowing short and lending long is fraudulent, and thus ought to be prohibited on legal grounds. Bagus and Howden (J Bus Ethics 90(3):399, 2009) take issue with our ethical analysis. The present paper is our response to these authors; it is an attempt to defend Barnett and Block (J Bus Ethics 88(4):711–716, 2009a) against the very interesting and important, although we believe, erroneous, criticisms of Bagus and Howden (J Bus Ethics 90(3):399, 2009).     

Reassessing the Ethicality of Some Common Financial Practices

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.     

Time Deposits,Dimensions, and Fraud

We stipulate, arguendo, that fractional-reserve-demand deposit banking is per se fraudulent. We ask whether or not time deposit banking can also be illicit, and answer in the positive, if there is a mismatch between the time dimensions of deposits and loans. To wit, if an intermediary borrows short and lends long.     

Some ethical dilemmas of modern banking

How ethical have recent banking practices been? We answer this question via an economic analysis. We assess the two dominant practices of the modern banking system – fractional reserves and maturity transformation – by gauging the respective rights of the relevant parties. By distinguishing the legal and economic differences between deposit and loan contracts, we determine that the practice of maturity transformation (in its various guises) is not only ethical but also serves a positive social function. The foundation of the modern banking system – the holding of fractional reserves against deposits – is, however, problematic from economic, legal and ethical perspectives. Starting from a microanalysis of money's function, a reassessment of the current laws concerning the practice is encouraged, with the aim not only to rectify economic irregularities but also to realign depositors' rights with the obligations of the banking sector.     

In Defence of ‘Demand’ Deposits: Contractual Solutions to the Barnett and Block,and Bagus and Howden Debate

This article contributes to a recent debate between Barnett and Block (J Bus Ethics 88(4): 711–716, 2009), Bagus and Howden (J Bus Ethics 90(3): 399–406, 2009), Barnett and Block (J Bus Ethics 100: 299–238, 2011), Cachanosky (J Bus Ethics 104: 219–221, 2011) and Bagus and Howden (J Bus Ethics 106: 295–300, 2012a) regarding the conceptual distinction between demand deposits and time deposits. It is argued that from an economic perspective there is nothing inherently fraudulent or illegitimate about deposit accounts that are available ‘on demand’, but that this relies on certain contractual provisions. Particular attention is drawn to option clauses and withdrawal clauses, which “solve” the problems raised by Barnett and Block, and Bagus and Howden. Previous authors have also neglected the asset side of banks balance sheets, and this is shown to further justify the legitimacy of fractional reserve banking.     

Chicago Plan und Vollgeld als Alternative zum Kreditgeld: ein Weg zu stetigem Wachstum?

One drawback of our current credit economy is that commercial banks could potentially make too many loans. The supporters of full reserve banking and positive money therefore claim that the abolition of commercial bank money creation would lead to fewer financial crises. This paper argues that the market would bypass any lending regulations by creating its own money substitutes. Such a reform does not take into account the relationship between saving and investing in a growing monetary economy, abandons the benefits that commercial banks have in financing corporate investments, and is harmful for economic growth. As an alternative approach, further macroprudential instruments are suggested.     

The Case Against Fiduciary Media: Ethics is the Key

Salerno (, 2010a) asserts that in the debate between those who favor and oppose fractional reserve banking, the important issue is not whether or not this institution is inherently fraudulent, but, rather, does it or does it not cause the business cycle. We join this author in thinking both important; however, we reverse this order.     

The Increased Role of Foreign Capital in the Peruvian Financial System

Summary

Foreign investment has played a very important role in developing Peru's banking sector since 1990. Indeed, as of June 1998, half of all bank assets were foreign-controlled. Much of this increased participation by outside entities can be traced to the privatization drive and to discriminatory reserve requirements on domestic deposits. Despite financial deepening, the analysis conducted here finds that the financial sector has not become more efficient in lowering the cost of intermediation as measured by the interest spread between loans and deposits.     

Banking Reforms for the 21st Century: A Perfectly Stable Banking System Based on Financial Innovations*

Although bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid equity tranche containing the concentrated credit risk, private information rent and the ‘excess spread’ that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the equity tranche is about 3% for the representative commercial loan portfolios in our sample. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non‐guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit‐lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcy‐remote without sacrificing a bank's traditional role as a financial intermediary.     

‘No Arbitrary Discretion’: Specialisation in Short-Term Commercial Lending by Banks in Late Nineteenth-Century New England

In the late nineteenth century banks in New England embraced an increasingly specialised role in the economy, focusing on the provision of short-term loans to commercial borrowers and eschewing long-term relations with industrial enterprises. This drive to specialise resulted from a particular combination of circumstances: a tremendous expansion in the number of banks, and an equally dramatic rise in deposits as a source of lendable funds. The latter development incresed the interdependence of the banking system, making each institution vulnerable to runs provoked by the unsound practices of its competitors. The former made it difficult to regulate the lending practices of individual banks. By promoting strict standards for short-term commercial loans, bank reformers sought to increase the ablity of directors and stockholders to monitor the decisions of their banks' managers and, at the same time, to limit the damage to the system that unscrupulous bankers could inflict. Similar problems of control arose in the British banking system in the last few decades of the century, and may explain the simultaneous shift toward short-term commercial loans that occurred in that nation. By contrast, large German banks were able to limit the independence of their smaller competitors and hence the threat to the security of the banking system that they posed.     

Bank Work Experience Versus Political Connections: Which Matters for Bank Loan Financing?

This paper examines how bank lending decisions are affected either by executives’ connections with banks, through their former banking experience, or by their political connections with governments, using a sample of bank loans granted to Chinese listed non‐state‐owned enterprises (SOEs) from 2003 to 2010. We find that bank loans are more closely related to profitability for firms with bank connections, while firms’ political connections weaken this relationship. We further find that the influence of bank connections is more significant for firms from less supported industries or less developed regions. Furthermore, firms with bank connections are less likely to become financially distressed after the initiation of their bank loans and experience higher future stock returns, while firms with political connections experience the opposite outcome. Overall, our results indicate that in the context of a relationship‐based economy like China, firms’ connections with banks create value by alleviating information asymmetry and improving banks’ lending decisions, while political connections result in capital misallocation and subsequent deterioration in performance.     

Religiousness, Love of Money, and Ethical Attitudes of Malaysian Evangelical Christians in Business

Recent research suggests there may be a link between religiousness and business ethics. This study seeks to add to the understanding of the relationship through a questionnaire survey on Malaysian Christians in business. The questionnaire taps into three different constructs. The religiousness construct is reflected in the level of participation in various common religious activities. The love of money construct is captured through the Love of Money Scale as used in Luna-Arocas and Tang [Journal of Business Ethics 50 (2004) 329]. Response to 25 business vignettes taken from Conroy and Emerson [Journal of Business Ethics 50 (2004) 383] would surface ethical attitudes. A convenience sample of 300 was drawn from three large churches in the Kuala Lumpur area each with a congregation exceeding 1000 together with some representation from the smaller churches. The study finds some differences in the ethical attitudes of Malaysian Christians in business with different levels of religiousness. The study also finds that those longer in the faith are less accepting of unethical behavior. As such it can be concluded that there are ethical attitude differences between Christians in business with different levels of religiousness. This lends support to the claim of a positive relationship between religion and business ethics. The more significant finding is that even within a somewhat homogenous religious group there are different love of money profiles resulting in significant differences in ethical attitudes. This suggests that moderating money attitudes can contribute towards stronger ethical attitudes. Hong Meng Wong BEcons(Hons)(Malaya), MBA(Cranfield), DBA(UniSA), FCA, ACIS, is the National Secretary of the Full Gospel Business Men's Fellowship Malaysia. His more than 30 years of professional experience had been in management consulting, merchant banking, commercial banking and stock broking. Since becoming a Christian in 1981 he has been actively involved in ministering to men in the marketplace. His burden is to help improve the ethics of Christians in business.     

浅析我国商业银行的贷款营销

目前,国内商业银行贷款营销的现状是贷款有效需求疲软,贷款营销认识普遍不全面,贷款投放谨慎。要辩证地看待买方市场下商业银行贷款营销的特点及其面临的难点,对市场进行细分,选择确定目标市场,做好商业银行贷款营销的定位。在强化贷款营销方面,要转变观念,强化贷款营销意识,树立现代银行营销理念;积极开发新的贷款品种,不断创造新的利润增长点;加强经济形势分析研究,认真开展市场调查;提高贷款营销队伍素质,强化贷款营销技术支持。     

Cross-sectional determinants of bank performance under deposit dollarization in emerging markets

Dollar-denominated deposits and loans could increase financial fragility in emerging market banking systems. This currency mismatch does not only increase banks' currency risk when the proportion of dollar-denominated loans with respect to local-denominated loans increases but also it increases their clients' default risk if depreciation occurs. This paper investigates the profitability of 36 dollarized banking systems. Results suggest that after controlling for some macroeconomic and institutional variables, dollarization, as the currency mismatch hypothesis suggests, depresses bank performance and lowers bank profitability. Results also show that the effect of institutions more than offsets the negative impact of dollarization on banks' profitability.     

Banks,Institutional Constraints and the Limits of Central Banking: Monetary Policy in Britain and West Germany, 1950–52

This paper analyses the anti-inflationary policies which were pursued in Britain and West Germany during the Korean War boom. It argues that the institutional relationships between the government, the central bank and the banking system can have considerable impact on the implementation of policy. The war brought a major shift in raw material prices and a consequent rise in bank lending in both countries to finance the increased import bill. The German independent central bank (BdL) used technical measures to restrain short-term lending, but was frustrated by the willingness of the Landeszentralbanken (regional central banks) to discount the bills of their local banking system. In addition, the banks themselves, because they operated in a competitive system, sought ways to circumvent the restrictions. The BdL took steps to tighten these loopholes and introduce a much stronger and more well defined policy transmission mechanism. Shifts in the terms of trade reduced inflationary pressure but the BdL retained tighter control over the banking system.

In Britain, the Bank of England was nominally controlled by the government, although it was able to exercise a degree of independence. Both parties had clear ideas of how inflationary pressure could be controlled in the economy; but these ideas differed significantly and neither one was able to impose their preferred option on the other. The result was a mixture of quantitative restrictions on the banks' balance sheets and qualitative guidelines to the banking system on the nature and extent of lending. The shift in raw material prices in 1952 largely solved the problem which it had created in 1951. The authorities, however, felt that their policies had been successful in constraining inflation and they failed to improve the monetary policy transmission mechanism as the Germans had done.     

Financial integration and banking crisis. A critical analysis of restrictions on capital flows

We investigate the effect of financial integration on a banking crisis. In contrast to existing works, we allow for capital restrictions while studying the impact of financial integration on a banking crisis. Using firm-level lending and borrowing information in the global market of syndicated loans; we generate aggregate measures of financial integration and examine how countries with capital flow restrictions thrive in the wake of a banking crisis. We concentrate on basic network measures of integration for a panel of 62 countries that allow for capital restriction at any time within the sample period. Financial integration increases the incidence of a banking crisis, and capital restrictions worsen a banking crisis. However, capital restrictions reduce the negative impact of financial integration on the incidence of a banking crisis. Thus, financial integration becomes beneficial when countries allow for some forms of capital control.     

Microenterprises and multiple bank relationships: The case of professionals

The present paper focuses on professionals as a special group of microenterprises. It explains their characteristics and financial relationships, using data from a survey conducted in Germany in 2002. Consistent with the theory of asymmetric information and relationship lending, we find that these firms maintain a small number of bank relationships, which increases in firm size and age. They tend to choose multiple banking relationships to overcome credit rationing and finance larger loans. Credit risk and the structure of the banking market do not seem to matter.     

Interstate banking,bank consolidation,and bank lending to small business

Proponents and critics of interstate banking argue over the implications of nationwide banking for bank lending to small business. This study explores the patterns of (1) bank consolidation at the national level and (2) the share of domestic-bank commercial lending extended to small firms, specifically, small manufacturing firms, over the period 1976–90. The evidence indicates that despite the trend toward fewer banking organizations and increased aggregate bank concentration due largely to cross-state expansion by superregional banking organizations, no significant downtrend is observed in the share of domestic-bank credit extended to small manufacturing firms. Nor is there any discernible downtrend in banks' share of borrowing by small manufacturing firms. These results are consistent with the thesis that banking industry consolidation hasnot led to a reduction in the supply of bank credit to small firms, at least within the manufacturing sector.