4 ms·

Maybe it's because I don't understand how deposit insurance works. Maybe it's because I live in a country where there are relatively few banks. But is this insu

by latch 8y ago

Maybe it's because I don't understand how deposit insurance works. Maybe it's because I live in a country where there are relatively few banks. But is this insurance actually meaningful? For example, if RBC "failed" in Canada, woulnd't the payout largely come from the Bank of Canada printing more money and all this could essentially happen without CIDC existing? You might get your money back, but now a loaf of bread costs $1000. Again, maybe I don't understand how it works. Maybe it makes more sense in the US where there are many smaller banks. Insight?

whitepoplar 8y ago
The insurance is meaningful in that its mere existence can prevent financial institutions from collapsing in the first place. If everyone knows that FDIC/CDIC will keep their balances safe and sound, they're less likely to make a run on the bank in times of uncertainty. Bank runs can turn a bank insolvent very quickly, especially when depositors don't need to wait in lines, but can instead tap on their banking apps. Also keep in mind that the financial system is in many ways quite fragile: the failure of one bank makes other bank failures more likely. FDIC/CDIC helps prevent the dominos from falling as easily as would otherwise happen if deposits weren't guaranteed. As for where the funding comes from...the FDIC requires payment into the insurance pool by member institutions, so it's not the government bailing out the depositors each time a bank fails. But if the FDIC pot of money is exhausted, the U.S. Government will still guarantee it by act of Congress. I'm not sure how this works in Canada, however.
astura 8y ago
"Insurance" is the key word here, "insurance" and "promise of a no questions asked unlimited government handout" is not the same thing. Just like auto insurance, everyone pays premiums to the FDIC which pools the money and claims are paid for using that pool.
- roywiggins 8y ago
  In a really really bad situation, there's always the risk that the insurer also runs out of money. The FDIC would run out of money if its pool of money collected from premiums ran out. It's never happened, though they had to finesse it a bit during the 2008 crisis (they required banks to prepay premiums, which recapitalized it in the short term). If the FDIC fund ran out of money the insurance would have to be backed by... the US Treasury, basically? The government would have to open up a money spigot somewhere: either borrow it or print it. It looks like the FDIC has a $100 billion line of credit with the Treasury, so it could use that, but that is just moving money around inside the government.
  - deleted 8y ago
    [deleted]
roywiggins 8y ago
There are lots more small banks in the US than Canada- and a number that are pretty tiny. After the 2008 crisis there were a lot of small banks that folded: https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008%E2%80%93present)#2008 https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U... The FDIC apparently has a $67 billion "Deposit Insurance Fund" that holds money that it pays out the insurance from; that fund is raised from insurance premiums paid by banks. During and after the 2008 crisis the DIF got squeezed pretty hard and so they used a power to require prepayment of premiums (from healthier banks).
Lazare 8y ago
In the US, FDIC is primarily funded by fees banks are required to pay, and there is an actual fund held by the FDIC to cover this. However, if the fund is exhausted the FDIC is backstopped by the federal government, which would step in and cover any losses. Like any other form of government spending, that is not directly covered by "printing money"; that can't be done by the federal government. Instead, the money would come from a mixture of spending cuts, additional taxes, and additional borrowing. (Given current US politics, most of the money would probably come from borrowing.) Now as part of an independent process, the central bank conducts open market operations where it sells and purchases US debt to try and keep inflation and interest rates within targets. When it purchases debt, money is effectively created, and if the US was forced to borrow a large amount of money to cover an FDIC shortfall some of that debt would no doubt end up purchased at least temporarily by the central bank, so: > woulnd't the payout largely come from the Bank of Canada printing more money [...] You might get your money back, but now a loaf of bread costs $1000. In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation. (Also note that even when a pretty big bank goes under, they still have a lot of assets, and the actual cost to the insurance program once everything has been liquidated is generally very small if not zero. Even if extreme cases such as Iceland when Landsbanki went under, the desposit insurance guarantees were eventually covered by assets recovered in liquidation.) So basically: 1) Deposit insurance is very important to prevent bank runs (ie, people panicing and causing bank failures even when the bank is actually solvent and 2) It's not that expensive, and doesn't represent the sort of risk or potential costs you can imagine. There aren't a lot of policies which are basically all upside, but deposit insurance comes close.
- dragonwriter 8y ago
  > In the US, FDIC is primarily funded by fees banks are required to pay, and there is an actual fund held by the FDIC to cover this. However, if the fund is exhausted the FDIC is backstopped by the federal government, which would step in and cover any losses. Moreover, it's “frontstopped” by the government facilitating takeovers of failing banks by healthy banks that will cover deposits. > In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation That's true to the extent that large bank failures are likely to be correlated with (and may contribute to) the broader economic conditions which would promote easier money policies at the Fed, but a major point of independent central banking is creating separation between government fiscal needs (like paying off deposit insurance claims) and monetary policy.

by latch 8y ago

whitepoplar 8y ago

The insurance is meaningful in that its mere existence can prevent financial institutions from collapsing in the first place. If everyone knows that FDIC/CDIC will keep their balances safe and sound, they're less likely to make a run on the bank in times of uncertainty. Bank runs can turn a bank insolvent very quickly, especially when depositors don't need to wait in lines, but can instead tap on their banking apps. Also keep in mind that the financial system is in many ways quite fragile: the failure of one bank makes other bank failures more likely. FDIC/CDIC helps prevent the dominos from falling as easily as would otherwise happen if deposits weren't guaranteed. As for where the funding comes from...the FDIC requires payment into the insurance pool by member institutions, so it's not the government bailing out the depositors each time a bank fails. But if the FDIC pot of money is exhausted, the U.S. Government will still guarantee it by act of Congress. I'm not sure how this works in Canada, however.

astura 8y ago

"Insurance" is the key word here, "insurance" and "promise of a no questions asked unlimited government handout" is not the same thing. Just like auto insurance, everyone pays premiums to the FDIC which pools the money and claims are paid for using that pool.

roywiggins 8y ago
In a really really bad situation, there's always the risk that the insurer also runs out of money. The FDIC would run out of money if its pool of money collected from premiums ran out. It's never happened, though they had to finesse it a bit during the 2008 crisis (they required banks to prepay premiums, which recapitalized it in the short term). If the FDIC fund ran out of money the insurance would have to be backed by... the US Treasury, basically? The government would have to open up a money spigot somewhere: either borrow it or print it. It looks like the FDIC has a $100 billion line of credit with the Treasury, so it could use that, but that is just moving money around inside the government.
- deleted 8y ago
  [deleted]

roywiggins 8y ago

There are lots more small banks in the US than Canada- and a number that are pretty tiny. After the 2008 crisis there were a lot of small banks that folded: https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008%E2%80%93present)#2008 https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U... The FDIC apparently has a $67 billion "Deposit Insurance Fund" that holds money that it pays out the insurance from; that fund is raised from insurance premiums paid by banks. During and after the 2008 crisis the DIF got squeezed pretty hard and so they used a power to require prepayment of premiums (from healthier banks).

Lazare 8y ago

In the US, FDIC is primarily funded by fees banks are required to pay, and there is an actual fund held by the FDIC to cover this. However, if the fund is exhausted the FDIC is backstopped by the federal government, which would step in and cover any losses. Like any other form of government spending, that is not directly covered by "printing money"; that can't be done by the federal government. Instead, the money would come from a mixture of spending cuts, additional taxes, and additional borrowing. (Given current US politics, most of the money would probably come from borrowing.) Now as part of an independent process, the central bank conducts open market operations where it sells and purchases US debt to try and keep inflation and interest rates within targets. When it purchases debt, money is effectively created, and if the US was forced to borrow a large amount of money to cover an FDIC shortfall some of that debt would no doubt end up purchased at least temporarily by the central bank, so: > woulnd't the payout largely come from the Bank of Canada printing more money [...] You might get your money back, but now a loaf of bread costs $1000. In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation. (Also note that even when a pretty big bank goes under, they still have a lot of assets, and the actual cost to the insurance program once everything has been liquidated is generally very small if not zero. Even if extreme cases such as Iceland when Landsbanki went under, the desposit insurance guarantees were eventually covered by assets recovered in liquidation.) So basically: 1) Deposit insurance is very important to prevent bank runs (ie, people panicing and causing bank failures even when the bank is actually solvent and 2) It's not that expensive, and doesn't represent the sort of risk or potential costs you can imagine. There aren't a lot of policies which are basically all upside, but deposit insurance comes close.

dragonwriter 8y ago
> In the US, FDIC is primarily funded by fees banks are required to pay, and there is an actual fund held by the FDIC to cover this. However, if the fund is exhausted the FDIC is backstopped by the federal government, which would step in and cover any losses. Moreover, it's “frontstopped” by the government facilitating takeovers of failing banks by healthy banks that will cover deposits. > In the US, some portion of the funds would indirectly come from the central bank printing more money, but only to the extent that it would not cause that sort of spike in inflation That's true to the extent that large bank failures are likely to be correlated with (and may contribute to) the broader economic conditions which would promote easier money policies at the Fed, but a major point of independent central banking is creating separation between government fiscal needs (like paying off deposit insurance claims) and monetary policy.