Stephen Cotton went to his local HSBC branch this month to withdraw £7,000 from his instant access savings account to pay back a loan from his mother.
A year before, he had withdrawn a larger sum in cash from HSBC without a problem.
But this time it was different, as he told Money Box: “When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”
Mr Cotton says the staff refused to tell him how much he could have: “So I wrote out a few slips. I said, ‘Can I have £5,000?’ They said no. I said, ‘Can I have £4,000?’ They said no. And then I wrote one out for £3,000 and they said, ‘OK, we’ll give you that.’ ”
He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.
When a bank holds fractional reserves, there will come a time when not enough cash is in the vaults to honour the redemption requests of depositors. These instances give rise to the common bank run, though historically banks have tried to avoid this fate through “ingenious” clauses on their deposits.
Option clauses, for example, were widely used in the Scottish “free banking” era as a way to get depositors to stop asking for their money. A bank could elect not to hand over a deposit when asked, but would at least remunerate the customer for this inconvenience. At the time this was widely seen as problematic, as it drove a wedge between the motivations of depositors (have their cash safe and available) and bankers (use depositor funds and remain solvent).
Today’s banks don’t even do this – they just change the rules of the game half-way through. Depositors think they have full access to their money when they make a deposit. Not only that, they think they are the owners of their money. Wrong on both counts. According to the law of most lands, when you deposit your money in a bank it becomes property of the bank and it can use it when it wants. If you need cash in a hurry, as may have well been the case with Mr. Cotton in the story above, it is tough luck. Your bank gets to dictate when you get your money back.
I explained last week why it is that bank runs generate so much ill will towards bankers – depositors don’t think, nor do they want, to give bankers control over their money. HSBC’s actions aimed at limiting withdrawals is not too surprising given the history of fractional-reserve banking. It signals that the bank has insufficient money available to readily honour all the redemption requests of its depositors, or stated another way, there is a run (or “quasi” run in this case) going on. I’d bet my bank deposit account that it won’t be the last one we ever read about.