The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

18 2 The Ethical Economy of the Credit Market
and investors can choose between investing their own savings in an instant access
account with the facility to make withdrawals at any time, investing them in a
deposit account which stipulates a notice period for withdrawals, investing in debt
securities (bonds) or investing in shares (in corporate stock) in the capital market.
These choices depend on investors’ attitudes to risk and their preferences regarding
the accessibility of the sum invested over the course of time, i.e. their liquidity
preferences. 1 The providers of savings optimize their portfolios between the different
allocations of their savings, which they invest either in the credit market in
short- or long-term bank accounts or debt-based securities, or in the capital market
in ownership-based securities or shares. 2
Banks therefore compete for the financial assets or savings of their customers,
especially those who are current-account holders. Of course, they are competing to
attract these assets as deposits in their accounts, not only among themselves but also
against all the alternative possible deployments of savings in fixed-interest securities
or in shares.
The Purpose of the Bank for Deposit Customers,
as the Bank’s Creditors
Account holders hand over their money to banks, thereby investing in the various
types of bank accounts, for three reasons. They invest money in current accounts
for the sake of easier payment transactions and in order to hold their cash in a form
that is liquid at all times. They invest their savings in interest-bearing bank accounts
with fixed notice periods, as the part of their portfolio which carries a low risk and
ensures a small profit. Customers who maintain a current account at a bank expect
the bank to reduce or even completely bear the risks of their payments, and to serve
as a place of value-custodianship for their liquid funds and financial investments.
1 Cf. B. M. FRIEDMAN: Article on “Capital, Credit and Money Markets”, in: The New Palgrave.
A Dictionary of Economics, London (Macmillan), New York (Stockton), Tokyo (Maruzen) 1987,
Vol. 1, pp. 320–327.
2 Different definitions of the credit market and the capital market exist, based on different distinctions.
In the German discourse, the capital market is defined as the market for long-term financial
resources or long-term loans, according to E. TUCHTFELDT: Article on “Kapitalmarkt”, in:
Handwörterbuch der Wirtschaftswissenschaft, Stuttgart, New York (G. Fischer), Tübingen (Mohr
Siebeck), Göttingen (Vandenhoeck & Ruprecht) 1978, Vol. 4, p. 433. In the Anglo-American discourse,
in contrast, the capital market is defined in line with the portfolio theory of investment as
the market for risk-bearing financial investments, as in FRIEDMAN (1987), p. 320f. By the latter
definition, listed bonds belong to the market for credit, whereas by the former, they belong to the
capital market. Since listed bonds are long-term investments for the investor and carry a certain
price-risk, though not the risk of total loss or bankruptcy, they fall somewhere between bank loans
and corporate shares. Listed bonds will not be dealt with in the present book. The definition of
the capital market used here is that of the market for risk-bearing investments, as per the portfolio
theory of investment.