I believe what you mean is that it's something that doesn't happen frequently. But do you know why that is?

It's not because banks are unable to steal customer's deposits. It's because of the capital investment these banks have made in their reputations. That capital investment is in the form of fixed infrastructure, real estate, licenses, and reputations. It's that capital investment, and the threat of losing it if they break the law, that keeps your money safe.

That all works pretty well at keeping money safe, as you noted. But it has another effect. It makes it extremely expensive to start a bank, or other financial service. This is what crypto democratizes. It makes it possible to start a financial service without massive capital investment in things like this.

Sorry, that doesn't make any sense. We don't live in a society where crime is prevented by reputation. Laws and law enforcement prevent crime, not reputation. Second, a bank's reputation comes from its past behaviour, not from the amount of capital it has invested. Banks invest in capital because providing financial services requires large amounts of capital. Crypto is not going to magically let you provide financial services without investing similar amounts of capital.

> Laws and law enforcement prevent crime, not reputation

Enforcement, by definition, does not prevent crime. It may deter crime. But a bank cannot be put in prison. The damage to a bank from stealing its clients money is reputational, the loss of their business.

> Second, a bank's reputation comes from its past behaviour, not from the amount of capital it has invested

It comes from both. Past behavior, and the amount of capital invested. If a bank has $1mm in assets, would you deposit $10mm? I wouldn't.

> Crypto is not going to magically let you provide financial services without investing similar amounts of capital.

Yes, it will. In fact, it already has. DeFi provides many of the same services banks do, for a miniscule fraction of the capital investment. You can deploy a contract right now that provides services like margin lending for a few dollars. Building the infrastructure and trust to do that at a bank would take you decades, and tens of millions of dollars in capital expense.

No, a bank can't go to prison, but its executives can. Further, a bank is a registered corporation and a legal holder assets which can be seized by courts. This means it can't escape legal action. The courts would seize the stolen money and return it to the rightful owner, while the bank would be fined and/or stripped of its license. The size of the bank is irrelevant, as far as the rule of law is concerned, because a key principle behind the rule of law is equality before the law. Therefore, no, nobody thinks that because a bank is small it's more likely to steal their money. That's a bizarre idea. The size of banks, and firms in general, is explained entirely by economies of scale. It has nothing to do with reputation, or the fear that they will steal your money. (No offence, but you sound like someone from a communist country who is unfamiliar with how the capitalist system work.) Lastly, deploying a contract is not the same thing as providing financial services. You can deploy a contract in conventional finance too without investing any capital at all. This is not what banks do. The problem with DeFi is that it's crippled because of its intrinsic limitations, namely the fact that smart contracts lack coercive power. As a result, most real-life contracts (such as a simple signature loan agreement) are unenforceable in DeFi, and therefore not possible at all.

> No, a bank can't go to prison, but its executives can. Further, a bank is a registered corporation and a legal holder assets which can be seized by courts. This means it can't escape legal action. The courts would seize the stolen money and return it to the rightful owner, while the bank would be fined and/or stripped of its license. The size of the bank is irrelevant, as far as the rule of law is concerned, because a key principle behind the rule of law is equality before the law.

But the principals of the bank can abscond with the value before the law has a chance to react. The thing that prevents them from doing so is their investment in the bank's reputation. The size of that investment is correlated to the bank's scale.

> Therefore, no, nobody thinks that because a bank is small it's more likely to steal their money. That's a bizarre idea. The size of banks, and firms in general, is explained entirely by economies of scale. It has nothing to do with reputation, or the fear that they will steal your money. (No offence, but you sound like someone from a communist country who is unfamiliar with how the capitalist system work.)

I work in quantitative finance. I think i'm doing capitalism just fine. It's understandable for you not to be aware of the dynamics of these things, because you probably don't deal with large enough amounts of money to think about what percentage of assets you are at a bank or financial institution. However, anyone who has started a hedge fund has confronted this problem: Nobody wants to be more than 10% of your assets under management. If all you have is a million dollars, all anyone wants to invest is 100k. The same is true for banks, or any depository institution.

You wouldn't deposit $10,000 at a bank that only has $1,000 in other deposits. Google isn't going to deposit $10bn at a bank that only has $1bn. You can't trust someone to hold your assets that is small relative to your deposit, for a few reasons, but a big one is that the incentives are all wrong.

> The problem with DeFi is that it's crippled because of its intrinsic limitations, namely the fact that smart contracts lack coercive power. As a result, most real-life contracts (such as a simple signature loan agreement) are unenforceable in DeFi, and therefore not possible at all.

DeFi does not require coercive power to do what it does. DeFi is structurally incapable of violating its own contracts. They do what they say, always. They do not require a legal system to enforce their tenets.

This has advantages, and it has disadvantages. The disadvantage is that it is highly inflexible. The advantage is that it is deterministic and certain. Sometimes you want one, sometimes you want the other. They are both useful in different circumstances.

> But the principals of the bank can abscond with the value before the law has a chance to react. The thing that prevents them from doing so is their investment in the bank's reputation. The size of that investment is correlated to the bank's scale.

Do you seriously not see that this doesn't make any sense? Why would a criminal bank executive who's willing to run away with the bank's money care about the damage being done to the bank's reputation? They don't have any issue with stealing money from the bank but somehow they wouldn't want to damage its reputation?

> I work in quantitative finance.

I very much doubt that. It's clear that you don't understand incentives, and that you're unfamiliar with basic economic concepts such as the minimum efficient scale of a business. The notion that the amount of a bank's capital is the result of the bank wanting to maximise its reputation is not found in the scientific literature, nor it is supported by any economic theory, nor by common sense. Feel free to prove me wrong by providing a reference.

> DeFi does not require coercive power to do what it does.

That's because it doesn't have coercive power and therefore it can only do stuff that doesn't require coercive power, such as over-collateralised loans and voluntary exchanges, but this is just a tiny subset of finance. For example, under-collateralised loans, mortgages, bond indentures, basic enforcement of property rights, all that requires an authority with coercive power.

> Do you seriously not see that this doesn't make any sense? Why would a criminal bank executive who's willing to run away with the bank's money care about the damage being done to the bank's reputation? They don't have any issue with stealing money from the bank but somehow they wouldn't want to damage its reputation?

The executives and shareholders have the incentives. Their incentives cause them to create mechanisms to incentivize and validate the people below them. Simple.

> I very much doubt that. It's clear that you don't understand incentives, and that you're unfamiliar with basic economic concepts such as the minimum efficient scale of a business. The notion that the amount of a bank's capital is the result of the bank wanting to maximise its reputation is not found in the scientific literature, nor it is supported by any economic theory, nor by common sense. Feel free to prove me wrong by providing a reference.

I'm certainly not going to provide you a reference as I value my privacy more than winning this argument. But it's true, whether or not you want to believe it.

Go ask anyone you know working in finance if they'd allocate $10mm to a manager with $1mm in assets. Go ask anyone running a hedge fund if they'd allocate $10bn to a brokerage managing only $1bn. Go ask anyone with a hundred million dollars to deposit if they'd deposit $50mm in a bank that only has $10mm in assets. This is no mystery. It's not some secret knowledge that only I possess. Anyone in a position to do these things has thought about these problems, and can and will tell you the same thing: hell no I wouldn't do that.

We can bring this back to a concrete level you've probably had experience with, if you like. Let's say you have a wealthy friend, worth a few tens of millions. And let's say you have another less well off friend, say someone that makes 20k/year. The three of you are walking around town, but both of your friends forgot their wallets at home. Your rich friend sees something expensive, say, $1000 he wants to buy. He asks you to spot him the money and he'll pay you back later. Your poor friend asks you the same thing. Who do you feel more comfortable lending to?

Deposits at banks are loans to that bank. Every lender on the face of the planet looks at the creditworthiness of their borrower. Creditworthiness comes from assets and income. The legal system matters too, of course. Interest rates will be lower under strong legal systems. The legal system is one of several parameters in the creditworthiness/interest rate function. The other parameters are assets, income, and reputation. If we think a little more abstractly, we can simply file 'reputation' under the 'assets' column.

Again, this is not a mystery. You just aren't used to thinking of your bank deposits as loans, because of the FDIC. But they absolutely are loans. Every time you deposit a paycheck you're lending your bank money. You are acting as a creditor, just not a very smart one. And you don't have to be smart, because the government has de-risked your loans for you, at least, until you hit the FDIC deposit insurance limit.

Read literally any credit valuation model from any finance textbook or Wikipedia. Every single one will ask "How big is your loan relative to the income and assets of your borrower?", without exception.

> That's because it doesn't have coercive power and therefore it can only do stuff that doesn't require coercive power, such as over-collateralised loans and voluntary exchanges, but this is just a tiny subset of finance. For example, under-collateralised loans, mortgages, bond indentures, basic enforcement of property rights, all that requires an authority with coercive power.

Great, we've already made progress then. A tiny subset of finance. That is more than nothing. You're well on your way to getting it.

But I only asked for a reference to a journal article that supports your assertion that the size of banks is the result of banks investing capital in order to build a reputation.

I'm not really interested in hearing more of your crackpot theories.