in modern banks money is just a number in a database, right? What stops the bank owners from just adding an amount to a saldo of an account?
In: Technology
Checks, balances, and the fact that a bank is only valuable if it’s trustworthy. It’s in their own interest to keep very rigorous track of everything, and severe punishments for screwing it up.
A country’s central bank will be keeping track of all the banks in that country to make sure their numbers add up. If the central bank finds one of these banks has started to make money up there will be trouble.
Banks are audited regularly, and any discrepancies will end with employees being fired and having to repay any missing funds.
If money goes PLUS in some account, a same amount of money needs to go MINUS somewhere else.
Just adding money to an account would get caught by audit software not just at the bank itself, but also by the audits done by external parties.
Just adding a sum to an account balance is exactly what a commercial bank does when accepting to grant credit to a customer. Of course there are rules about how to do this.
It would be trivially easy to detect, and it’s illegal.
Turns out that most bankers don’t want to go to jail.
Then the math doesnt add up! Accounting is a balancing act and once unbalanced it is easy to notice.
There’s a technique called double-entry bookkeeping. Basically, every transaction has to appear at least twice, affecting at least two separate accounts, as a combination of credits (money OR goods taken in) and debits (money OR goods taken out), and the total of credits/debits on any one transaction must equal 0.
Example: Grocer buys apples from the farm and sells to you. When they buy an apple from the supplier, they deduct the cost from their purchases account, and add one apple to their inventory account. When you buy the apple from the grocer, they deduct the apple from the inventory account, and credit the revenue account with your payment.
There are finer variants of the process, but that’s the basics. By ensuring that each transaction is listed in multiple places, as an equal combination of credits and debits, you can trace where every dollar goes. Checking the transaction ledgers, which were originally in one physical book per account, to validate all transactions is where we get the term “balancing the books.”
All banks have to do this, too, but in the modern era all of those books are now digital. A bank could put more money in one account, but if they don’t offset that with an equal amount from somewhere else, the discrepancy will be immediately flagged. They can still engage in other shenanigans, but if the books aren’t balanced, that’ll be noticed.
No one is really answering properly so I’ll give it a go.
Money is not just a number in a database. Banks also don’t simply store your money.
Banks use what’s called double entry book keeping. Their accounts have two sides, credit and debit. To credit one account you must debit another account. So you can’t just create money, or add it. You must debit it from somewhere else first.
Banks also don’t hold onto your money. Say you keep $500 in your bank account, and the savings interest is 4%. They will then loan someone $400 for 6%.
Banks don’t create money basically, they can only credit and debit at the same time.
There are a number of factors, but the main one is a concept called zero balance accounting.
When money changes hands, there are two sides of a transaction. For example, if Bob pays sally $500, there are two sides to the transaction:
||Debit|Credit|
|:-|:-|:-|
|Bob|$500||
|Sally||$500|
|Total|$500|$500|
Since debits and credits offset each other, the balance of the transaction nets to $0.
This is the fundamental accounting principle that keeps all accounting in check. It doesn’t prevent crimes of fraud, but it goes a long way toward reducing errors.
Ultimately what prevents bank owners from pumping up their own numbers is the threat of the consequences. Bank owners have plenty of opportunities to make vast sums of money legitimately. Adding to their own balances would be fraud, and fraud has consequences. I know you might read in the news about how banks get away with some pretty unsavory stuff and only experience minor consequences, but the vast majority of that activity is related to mistakes in judgement.
For example, if a bank had too much of their assets (money) invested in real estate in 2006, they they would have faced a business failure due to the rapid decline in real estate values in the Great Financial Crisis of 2007-2008. Many of these bankers kept their exorbitant salaries, and suffered minimal consequences. Whether we agree with that leniency or not, these were *mistakes* that the bankers made, not fraud.
By contrast, someone like Bernie Madoff and Sam Bankman-Fried committed acts of fraud. Essentially doing as you suggest and faking their own numbers. Bernie Madoff was sentenced to 150 years in prison. SBF is facing 25 years.
So banking executives face a choice:
1. Run their business legitimately — albeit straining credibility at times — and earn a healthy living.
2. Commit fraud and face lengthy prison sentences.
There is very little incentive to choose option 2 when option 1 works so well.
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