A discretionary deposit is the term given to a device by medieval European bankers as a method of circumventing Catholic canon law edicts prohibiting the sin of usury. At the time, most Christian nations heavily incorporated Biblical scripture into their laws, and as such it was illegal for any person to charge interest on a loan of money.
The name comes from the workings of the device: a rich person would deposit a large sum with a bank. His name would be kept a secret (at the banker’s “discretion”), as a discretionary deposit was seen as an obvious dodge around the charging of usury, and it would have embarrassed the Pope, cardinals, and various nobles and merchants who made use of this device. Every year, in gratitude for the personage’s deposit, the banker would make the account a “gift”, the exact amount of which would be at the banker’s discretion. Of course, the gifts would work out to whatever the prevailing rate was, 8-12%, perhaps. Should a banker’s “gifts” be too little, depositors would eventually take their money to another bank whose “gifts” were more commensurate with the going rate. Discretionary deposit accounts were not demand deposit accounts, and so notification of withdrawals often had to be given in advance — sometimes as much as a year.
- Medici money: banking, metaphysics, and art in fifteenth-century Florence, Tim Parks. 2005, W. W. Norton & Company, Inc., ISBN 0-393-05827-1 (2005 hardcover 1st printing)
- De Roover (1904-1972), Raymond Adrien (1948), The Medici Bank: its organization, management, and decline, New York; London: New York University Press; Oxford University Press (respectively)(Largely a reprint of three articles De Roover published in The Journal of Economic History.)
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.