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?

Question

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

Answer 1

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.