Economics/Security measures for Safe Deposit Locker Facilities.
QUESTION: Dear Dr Raza
Safe Deposit Locker Facilities are provided to Banking customers to put their valuable belongings viz Jewelry, Cash etc by Private, Public Sector Banks. Banks charge their customers for the Lockers Facilities.
In a worst to worst scenario, How do the Banks do risk management in case if there happens Locker robbery, Scams etc so that the customers get back their valuables kept in the Lockers ?.
Awaiting your reply,
Thanks & Regards,
Prashant S Akerkar
ANSWER: Dear Prashant,
Thank you for asking an interesting question. Your question relates basically to an ancillary service of commercial banks. The bank’s primary job is collection of money from depositors in return for paying to the depositors on average a small rate of interest, lending a large percentage out of the deposited sum to borrowers at a much higher interest, and making money out of the difference between the two rates. Here the bank also has some costs, such as some depositors keeping only a small amount each and withdrawing at regular intervals, which has no benefit to the bank, but a cost of operating their petty accounts. This is what in economics is called “adverse selection” [please look into it in any microeconomics textbook or on the internet]. Banks normally make business on large amounts of fixed deposits, and also on amounts of deposits which are unlikely to be withdrawn full beyond certain percentage, in which case the banks are hedged against unexpected runs by the central bank. There, too, a bank keeps a small amount of money for day-to-day business, which may as well be insured.
As regards safe deposits, a commercial bank makes money, about a size more or less fixed and predetermined, since a depositor has to pay a certain fixed amount of charge for the box kept in his or her name. The bank makes good money because:
(a) Only a small space of the bank’s total premises is segregated for safe deposits, usually a small room with many small boxes of varying sizes as per demand of the depositors according to their need for keeping valuables. If the space occupied in terms of square feet is concerned, the total charges for the boxes in terms of the whole safe-deposit area –consisting of stacks of boxes, narrow standing space, bench or stand for signature of documents, and a small closet for checking the valuables before replacing that in the boxes –is in fact extremely high. So, rent-wise, banks make a very high profit.
(b) The cost of maintenance of safe-deposit business can be categorized into c=a+bX, where c=total monthly cost, a=average monthly fixed cost, and X is the monthly variable cost. Yes, A or fixed cost is quite high –the bank has to install fire-proof, theft-proof thick walls around with heavy, strong, extremely safe door with electronic locks. However, this is a one-time cost. Average fixed cost goes down like anything, and after a time it tends to zero. The other part of the cost, the additional variable cost or what we call in economics marginal cost, is almost zero, since the only things required are very small charges in terms of electricity with almost no need for heating or air-conditioning, and sidebar activity by the working staff as the locker room is run by the same staff that do the main business behind the desk as tellers. So there is almost no cost.
(c) There is such strong protection that the chances of robbery are minimized. For the robbers to get into the strong room is so difficult that normally they don’t try that. Besides, robbers usually want to pull off a heist as easily as possible and with the minimum risk of getting caught. There is one point of inaccessibility that works as a bulwark against robbery.
(d) Yet, even if robbers could with much risk and guts break into the strong room, they would also calculate the benefits of their loot. Usually, they cannot tell what lie inside the boxes and cannot foretell whether such a heist would be any worthwhile for them vis-à-vis direct cash robbery that could be made from the counters.
(e) The robbers have very little interest in jewellery or documents compared with cash. Robbers are much more interested in the “most liquid assets” (cash). The reason why they are less interested in less liquid assets such as gold, silver, etc., is that those things need be exchanged for cash, which may not be very easy for the robbers without getting caught. Or else they may have to sell that at very low prices, if at all they want to remain safe, in which case their very taking of great risk in breaking into the strong room may not be paying them worthwhile benefits.
(f) In addition to that, banks also insure the strong room deposits. Since such cases of strong room robbery are rare, low insurance premium required by the insurance company is acceptable to banks. And because of that, considering the pooling of resources in such context, that is also good business for insurance companies even if it has to settle claims in case of robbery.
(g) The bank can easily make big profit out of the idle strong room and can afford to pay the premiums for insuring the safe boxes against robbery. Whenever a robbery takes place, usually the robbers are caught. Even if they are not caught, the insurance company settles the claims. The depositors are safe. The customers get back the valuables kept in the safe boxes.
(h) Of jewellery, excluding gold, most may be posing some problems to the robbers for getting monetary values. Gems like rubies, emeralds, amethysts, sapphires, ets., are very difficult to subject to ascertained values, and even more difficult to sell, because those who buy also have what in economics we call “information asymmetry” [please look it up on the internet] and would prefer to buy that only from reputed jewellers.
(i) As regards scam, it is almost ruled out. Scam cannot occur non-electronically because the safe boxes cannot be opened by only one key. Both the banker and the customer must be there with two keys. So the boxes are doubly safe. Nobody impersonate as a customer, because a signature is required before having access to the safe box, and that in addition to having the key that belongs to the customer. So we may rule out scam in safe boxes.
(j) As regards important documents, extremely valuable as these are to the customers, these are usually of no “intrinsic value,” for they are of value to the customers only. Even if that may involve some transaction of financial value, robbers are unlikely to execute such documents without getting caught. They would normally not undertake unnecessary risks. Hence robbers have no desire to take away valuable documents from the safe boxes.
I hope, Prashant, this gives you some answer to your query. If you have further question, please feel free to write to me. Best of luck.
---------- FOLLOW-UP ----------
QUESTION: Dear Dr Raza
Do you feel a General Insurance Policy against the safe deposit Locker can help in this regard ?. Are these policies available ?.
i.e. Banks will provide this Facility to their Customers by issuing a General Insurance policy against the Locker to protect there valuables kept inside the Locker. Banks can also tie up with General Insurance cos who provide these facilities.
For example : If a customer feels that his valuables kept in the Locker are Rs 5 Lacs worth, he/she will purchase 5 lacs General Insurance policy
and pay yearly premium to the General Insurance co.
In case robbery or scam happens within the bank, the Customer can only claim Maximum Rs 5 Lacs from Insurance co. The Insurance co will inspect by going to the Bank locker place and check whether really this event has happened to pay for the claims made by the customer.
Do you feel this may work ?.
Awaiting your reply,
Thanks & Regards,
Prashant S Akerkar
Thank you for your sidebar question. I am sorry that I have been a trifle late in answering to your question, as I was busy with the start of the new academic session.
This is a question the answer to which could be rather elusive depending on the context in which unforeseeable things might occur and on the geographical location in which such things might occur.
First, let me not pretend to having a robust idea about all the causative factors for, and the mitigating antidotes to, this probability-ridden problem. I therefore don’t pretend to have a sure-footed answer to this. And, as things fall out, I don’t believe anybody can dig out a clean-cut answer to this from the muddy waters of uncertainty. Yet, given the question you have asked, there is an answer which must go with some caveat.
SCENARIO ONE: GI Policy in Poor Countries with Questionable Law and Order: India as an Example
In countries like India, GI policies work fine in most cases of burglary, stealing, or embezzlement. However, in the case of safe-deposit locker there is ample ground for the insurance companies to put up a non-claimable redemption measure or even an alibi on behalf of the banker. There have been a few such cases where the customers of safe-deposit lockers were robbed of their valuables and were not given satisfactory compensation. The reason is lockers are not totally theft-proof. Secondly, the law doesn’t work there pretty well, at least in some remote localities. Thirdly, the inept investigation, often by corrupt law-enforcing agencies, doesn’t proffer adequate reasons for compensation. Finally, as these problems of course equally well plague other advanced countries which are very respectful to law and security, there is no way for anybody other than the customers themselves to determine the values of the deposits that were presumably stolen. So the customers are at the mercy of several factors associated with such robbery. Take it, however, that it is still safer to keep in lockers than in ordinary homes, especially as the probability of breaking of lockers by robbers is negligible compared to that at homes.
SCENARIO TWO: GI Policy in Advanced Countries with Reliable Law and Order: the U.S. as an Example
In countries like America, Canada, and the like, while fair investigation and strong security exist, one tricky problem besets the arena of insurance with regard to safe deposit lockers. This springs from the following:
(A) By law, nobody except the customer himself or herself has any right to know of the contents in the deposit box, unless otherwise the customer by his or her own volition divulges that to another.
(B) The condition outlined in (A) above allows the customer to open, check, add to or take away from, the deposit boxes at any time the customer wants to, secretly at the permission of the banker at any time during the period of rental.
(C) Whatever is done as outlined in (B) is done both legally and according to the covenants of the bank and according to the agreement entered into between the customer and the bank, and this is done keeping “the bank completely in the dark about the contents in the safe deposit box(es) with full cognizance of the customer(s).” The bank keeps one key, and the customer keeps another separate key, and the locker cannot be opened with either one or the other but only with both. Usually, the bank officer uses bank key, and then the customer uses his or her key, then the box is taken out to a closet in complete privacy. The customer can do whatever he or she likes to do, closes the box, and returns to the strong room. In the presence of the bank official, the box is placed in the particular niche, and then locked with both the keys. The bank official has no way of knowing what has been done with the contents of the deposit box.
(D) Given (B) and (C) as explained above, the bank has no way of knowing whether there are expensive diamonds or rubbish pieces of paper or simply nothing in the box.
(E) Though the probability of theft is extremely negligible, if not almost nonexistent, if any theft takes place, it is “simply impossible to determine the expected value of the theft.” [Expected value is the value of things in the box times the probability of occurrence of theft. Any elementary book on statistical inference will give you an idea about this actuarial probability estimate that is normally done by insurance companies in determining premium.] Here there is NO “premium” but only “rental.” If any "premium" has to be paid, that is paid by the bank to the insurance company on a blanket estimation, and the customers have nothing to do with it.
(F) On the basis of (F), assuming theft from deposit boxes takes place in some extremely unlike circumstance, how will the bank in cooperation with the insurance company make compensation?
(G) Since the bank or the GI company cannot calculate a premium on something never to be known as covenanted in agreement as per (c) above, the best that the bank and the insurance company can do to the satisfaction of the customer is insuring a box under an umbrella consideration for a predetermined lump-sum for any box with whatever values of contents in the box. This invariant sum is usually computed on an average value of all the customers are likely to put in deposit boxes. This sum may be way less than what a customer may typically place in the box. Or, equally well, this could be much greater than the value of the customer’s contents. In any case, the customers cannot predict if there would be any theft, and so a customer's taking of advantage by emptying the box before robbery is not only fraught with unnecessary rental cost but also with near-zero likelihood of gain. So we rule out "baseless compensation." Settlement of claim is therefore not without ground.
(H) The customers may then have to get satisfied with whatever compensation they get as enumerated in (G) above. The question is, will the customer get the compensation?
(I) Yes, if complete investigation takes place, it can beyond doubt be determined that a theft has taken place. The reasons are: these strong rooms are electronically monitored with camera 24 hours a day. There are abundant measures for retrieval of leads left by robbers. There is fair and thorough investigation. So, to a very great extent, this is almost fool-proof.
(J) One point: Unlike as it may happen in some poor countries, there is no possibility of a bank employee to break into the system and make away with anything, with or without impunity.
CONCLUSION: Coming back to your question, I would rather say I feel that a GI policy against safe deposit locker can definitely help in this regard, but subject to the constraints imposed by the requirements put in force by the deposit holders themselves, constraints that are in place to the advantage of the depositors. These policies are available indeed.
I hope this serves your purpose, Prashant. My best wishes to you.