Who owns the money in your bank account?

Introduction

Here’s a question. Who do you think owns the money in your current bank account(s)?

If you are still thinking about it, let me make it easier for you by giving you four options:

  • A) the account holder (i.e. you)
  • B) the bank
  • C) both you and the bank
  • D) I don’t know

Got your answer now?

If you are confused don’t worry. When 2000 members of the British public were asked this exact question they were also confused!

In fact, only 8% of the British people surveyed answered correctly and 90% either got it wrong or didn’t know (source The Cobden Centre).

So what is the correct answer?

As it happens, when you ‘deposit’ money into your bank, you are actually loaning the money to the bank and the bank becomes the legal owner of it.

In other words, the correct answer is B) the bank.

Let me explain.

A ‘deposit’ is not a deposit

Professor Richard Werner – the economist who coined the term ‘quantitative easing’ – has said many times in interviews that, “although banks are thought of as deposit taking institutions that lend money, this is far from the truth”.

So what exactly is a bank deposit? Professor Werner continues:

“A deposit is not actually a deposit, it is not a bailment, it is not held in custody. At law, the word deposit is meaningless. Law courts in various judgments have made it very clear – that if you give your money to a bank (even though it is called a deposit) – this money is simply a loan to the bank.”

There you have it. According to Professor Werner, when you ‘deposit’ money into your bank account, the bank is not holding it for safe keeping. Instead, you have loaned them the money.

Interestingly, this ‘relationship’ between bank and customer (i.e depositor) appears to have been established by various judgments made in law courts.

But what law courts? And would these cases hold up in my own country of Australia?

I decided to dig a bit deeper.

Banking Law in Australia

I found an article called ‘Essential Banking Law and Practice by Elisabeth Wentworth – who at the time of publication was special counsel to the (Australian) Banking and Financial Services Ombudsman.

On page 11, Elisabeth explains that, among other things, when a customer gives money to the bank “the bank borrows the money and proceeds from the customer and undertakes to repay them.”

Elizabeth references two cases in law which she said have been instrumental in articulating the ‘ingredients’ of the banker-customer relationship. These cases are Foley v Hill (1848) and Joachimson v Swiss Bank Corporation (1921).

I noticed Elizabeth also referenced Alan Tyree many times throughout her article.

Alan Tyree is the author of the text book Banking Law in Australia – and former Professor of Information Technology and Law at the University of Sydney.

I decided to reach out to Alan to clarify what Elizabeth had stated in her article.

I couldn’t have been more surprised when Alan promptly returned my query. Alan responded to my question about bank deposits by saying:

“As to the nature of bank deposits: it is no doubt the law of Australia (and other Common Law countries) that a normal bank deposit is indeed a loan to the bank. The relationship was established beyond doubt by Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002. It has been approved by many cases, including Australian cases, since: see the Austlii entry for it“.

I was super excited. Not only did Alan take the time to respond but he laid it out so matter of fact.

It was now hard to dismiss that the money I give to the bank is in fact a loan to the bank!

Alan also made it quite clear that Foley v Hill (1848) was a key law case that established the modern banker-customer relationship.

So why was this case so important?

I went onto the Austlii (Australasian Legal Information Institute) database and found Foley v Hill (1848) here.

The article itself is not too long but it proved somewhat difficult to read.

For help I again turned to Alan Tyree.

This time, I got access to the 9th edition of Banking Law in Australia in which Alan deals with the banker-customer relationship and the Foley v Hill (1848) case specifically in detail (see Chapter 3).

After reading the case, and Alan Tyree’s book, it now started to make some sense.

In a nutshell the (normal) banker-customer relationship is one of debtor-creditor.

What this means is that when a customer ‘deposits’ money into a bank, the bank is the owner of the money and is contracted to pay the customer back when (and only when) the customer demands.

This was made crystal clear in Foley v Hill (1848) when Lord (Chancellor) Cottenham said:

“The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is of course answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.”

Conclusion

When you put your money in the bank, the legal reality is that the bank takes ownership of the money and is contracted to pay you back when (and only when) you ask them to.

In other words, the banker-customer (depositor) relationship is one of debtor-creditor.

Referring back to my original question then. Who owns the money in your bank account(s)? I hope it is obvious that the bank owns the money you ‘deposit’ with them.

Luckily, the bank is obligated to repay this loan as soon as you demand. But what happens if the bank goes out of business (i.e. becomes insolvent)?

This is where the reality of the banker-customer relationship really hits home.

Why? Because if a bank becomes insolvent, a depositor will rank merely as an unsecured creditor (source Banking Law in Australia pg. 41).

To clarify, this means that at the end of the day, technically speaking, the customer (depositor) may or may not get their money back once the bank goes through liquidation.

Thankfully, bank failures in Australia have been very rare. And the few most recent failures of banks resulted in no loss to depositors (source Tuner, 2011).

Yet, as they say in the financial world, past performance does not always predict the future.


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2 thoughts on “Who owns the money in your bank account?”

  1. Peter Romkinson

    So why is there such a problem with passing a law protecting bank deposits at the moment in the Australian Parliament?
    How can someone protect their savings with bank deposits legally?
    Both questions need answers as the major Australian banks are heading for a crash. Reported financial statement may not reflect the real situation as most people have no way to confirm the quality of bank asset claims (ie Derivatives).

    1. Demystifying Money

      Hi Peter. Good questions.

      I’m not sure why passing a law to protect bank deposits in Australia is so hard? My understanding is that the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 is argued by some to open the door to a potential ‘bail-in’. However, there is a bill currently before parliament that aims to take ‘deposits’ off the table (Banking Amendment (Deposits) Bill 2020) but who knows if it will pass.

      The Government often responds to the bail-in question by highlighting the deposit insurance scheme which covers deposits of up to $250,000. However, these scheme is only activated IF a bank actually fails (becomes insolvent). A bail-in scenario is designed to stop a bank failing so how does the deposit insurance scheme play in all this? More clarity is needed.

      https://www.guaranteescheme.gov.au/qa/deposits.html

      Interestingly, New Zealand is very open about their ‘bail-in’ scenario and even urge people to look into the ‘risk profile’ of the bank they keep their deposits in.

      https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution

      I would recommend looking into the work of John Adams and Martin North who have been following this issue very closely.

      https://www.adamseconomics.com/post/australia-s-banks-are-preparing-for-bail-ins-of-retail-bank-deposits

      https://www.youtube.com/watch?v=EZ4efmSDwz4

      https://digitalfinanceanalytics.com/blog/stop-bank-deposit-bail-in-once-and-for-all/

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