t’s hard to believe considering what happened in 2008 on Wall Street and in Washington, but banking is built on trust.
A worker hands his hard-earned dollars to a teller and trusts the money will be deposited and available for withdrawal when needed. Despite the crash on Wall Street, workers still trust bankers to safeguard deposits from robbers and reckless investments.
Granting banks a little less credulity might be wise. Just consider what happened in the past two weeks. A U.S. Senate investigation revealed that the 2010 Dodd-Frank banking reforms utterly failed in the case of the $6.2 billion “London Whale” gambling loss at JPMorgan Chase. Then a U.S. House committee passed seven measures to weaken Dodd-Frank. And there was the European Union’s demand that Cyprus expropriate money from depositors to prevent that nation’s big banks from failing. That means no depositor can trust that a government won’t dip its hands into savers’ accounts to bail too-big-to-fail banks. The trust is gone, baby.
Last week’s bad banking news began in Cyprus. It’s a cautionary tale about trust in both politicians and bankers. Cyprus is a tax haven for wealthy Russians the way the Caymans are for wealthy Americans. The Cypriot financial institutions, which made bad bets on Greek debt, are teetering on the edge of bankruptcy and were closed last week to stave off bank runs.