5 ms·

I think it's a bit far to say it was never intended for them. Likely the intent was just for people not to have to worry about the money they had in banks disap

by pc86 5y ago

I think it's a bit far to say it was never intended for them. Likely the intent was just for people not to have to worry about the money they had in banks disappearing. Even more likely, if enough people had wanted the FDIC limit to be per depositor and not per bank it very easily could have been.

eru 5y ago
FDIC was a pretty silly idea anyway. If you want to keep the banking system stable, it's good to keep some skin in the game for depositors. There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.
- darkerside 5y ago
  FDIC is to insure people, not the institution. At that point, the institution has failed, so their skin is long gone.
  - eru 5y ago
    Expectations about what happens in the future drive behaviour in the present. Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe. (Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.) With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available. (FDIC charges insurance premiums, but they are not properly risk adjusted.)
    - snowwrestler 5y ago
      If natural incentives obviated the need for the FDIC, we would not have the FDIC, because both banks and incentives pre-date the FDIC by hundreds of years. It was created for a reason.
      - dnautics 5y ago
        note that the FDIC was created AFTER the Fed, so you don't know that the reason isn't that "the fed fucked things up and created an economic environment that necessitated the FDIC".
      - eru 5y ago
        That's a rather rosy view of how laws and regulations in general come about. First, the stated reasons might not be the real reasons. Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening. See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-currency-began-and-how-private-banknotes-ended/ https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
    - arcticbull 5y ago
      ... which is why strict regulations exist to cover what banks can and cannot invest in. Retail banks can't just YOLO reserves into GME lol.
      - eru 5y ago
        In the regulatory environment of 19th century Canada or 18/19th century Scotland, they could have. And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south. In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations. It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
        arcticbull 5y ago
        Your plan literally never works. It simply never works. It’s a lovely theory that in the real world doesn’t yield results. You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap. The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are. Banks are too important to yolo. Retailers can get their risk on elsewhere.
        eru 5y ago
        Huh? What I described worked really well in eg Scotland and Canada. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
        5y ago
- 1123581321 5y ago
  For small accounts, the FDIC premium levied on the institutions is sufficient skin in the game. It goes up during volatile times. I’ve been in meetings worrying about it. The other skin a bank has is making sure its loan and fee business keep up with savings and is sufficiently risk-managed. This pressure regulates the accumulation of large savings accounts.
  - eru 5y ago
    FDIC doesn't charge enough, and doesn't charge not differentiated enough. (No fixed regulation could charge the right amounts. You'd need competing private insurance companies to get a better approximation for that.) Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
    - 1123581321 5y ago
      Good point about the lack of differentiated underwriting. The costs are plenty for small institutions though. Other than perhaps raising money market rates, there aren’t any meaningful gaming levers to pull other than keeping the loan and fee business healthy (right mix of promotions and upsell prompts by tellers.)
- mcherm 5y ago
  > FDIC was a pretty silly idea anyway. In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks. By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings. This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4] The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices. [1] https://www.investopedia.com/terms/f/federal-savings-and-loan-insurance-corporation-fslic.asp https://www.investopedia.com/terms/f/federal-savings-and-loa... [2] https://www.fdic.gov/bank/historical/history/167_188.pdf https://www.fdic.gov/bank/historical/history/167_188.pdf [3] https://www.history.com/topics/great-depression/bank-run https://www.history.com/topics/great-depression/bank-run [4] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/ https://www.fdic.gov/resources/resolutions/bank-failures/fai...
  - eru 5y ago
    The counterfactual here is that without the government back-stopped insurance, customers would have had an incentive to push back against the banking behaviours that led to these mass failures. The Savings and Loan crisis also didn't happen in a vacuum. See https://www.econlib.org/library/Enc/SavingsandLoanCrisis.html https://www.econlib.org/library/Enc/SavingsandLoanCrisis.htm... for some background. A short excerpt from the start: > Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough. The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.
darkerside 5y ago
Like cameronh90 said, it limits the liability to the government by capping the payout by the number of account holders, which is finite. The assets that could be held there otherwise are theoretically infinite. So, this is smart government policy for institutional protection, not some kind of progressive giveaway.

by pc86 5y ago

eru 5y ago

FDIC was a pretty silly idea anyway. If you want to keep the banking system stable, it's good to keep some skin in the game for depositors. There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.

darkerside 5y ago
FDIC is to insure people, not the institution. At that point, the institution has failed, so their skin is long gone.
- eru 5y ago
  Expectations about what happens in the future drive behaviour in the present. Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe. (Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.) With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available. (FDIC charges insurance premiums, but they are not properly risk adjusted.)
  - snowwrestler 5y ago
    If natural incentives obviated the need for the FDIC, we would not have the FDIC, because both banks and incentives pre-date the FDIC by hundreds of years. It was created for a reason.
    - dnautics 5y ago
      note that the FDIC was created AFTER the Fed, so you don't know that the reason isn't that "the fed fucked things up and created an economic environment that necessitated the FDIC".
    - eru 5y ago
      That's a rather rosy view of how laws and regulations in general come about. First, the stated reasons might not be the real reasons. Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening. See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-currency-began-and-how-private-banknotes-ended/ https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
  - arcticbull 5y ago
    ... which is why strict regulations exist to cover what banks can and cannot invest in. Retail banks can't just YOLO reserves into GME lol.
    - eru 5y ago
      In the regulatory environment of 19th century Canada or 18/19th century Scotland, they could have. And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south. In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations. It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
      - arcticbull 5y ago
        Your plan literally never works. It simply never works. It’s a lovely theory that in the real world doesn’t yield results. You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap. The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are. Banks are too important to yolo. Retailers can get their risk on elsewhere.
        eru 5y ago
        Huh? What I described worked really well in eg Scotland and Canada. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
        5y ago
1123581321 5y ago
For small accounts, the FDIC premium levied on the institutions is sufficient skin in the game. It goes up during volatile times. I’ve been in meetings worrying about it. The other skin a bank has is making sure its loan and fee business keep up with savings and is sufficiently risk-managed. This pressure regulates the accumulation of large savings accounts.
- eru 5y ago
  FDIC doesn't charge enough, and doesn't charge not differentiated enough. (No fixed regulation could charge the right amounts. You'd need competing private insurance companies to get a better approximation for that.) Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
  - 1123581321 5y ago
    Good point about the lack of differentiated underwriting. The costs are plenty for small institutions though. Other than perhaps raising money market rates, there aren’t any meaningful gaming levers to pull other than keeping the loan and fee business healthy (right mix of promotions and upsell prompts by tellers.)
mcherm 5y ago
> FDIC was a pretty silly idea anyway. In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks. By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings. This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4] The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices. [1] https://www.investopedia.com/terms/f/federal-savings-and-loan-insurance-corporation-fslic.asp https://www.investopedia.com/terms/f/federal-savings-and-loa... [2] https://www.fdic.gov/bank/historical/history/167_188.pdf https://www.fdic.gov/bank/historical/history/167_188.pdf [3] https://www.history.com/topics/great-depression/bank-run https://www.history.com/topics/great-depression/bank-run [4] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/ https://www.fdic.gov/resources/resolutions/bank-failures/fai...
- eru 5y ago
  The counterfactual here is that without the government back-stopped insurance, customers would have had an incentive to push back against the banking behaviours that led to these mass failures. The Savings and Loan crisis also didn't happen in a vacuum. See https://www.econlib.org/library/Enc/SavingsandLoanCrisis.html https://www.econlib.org/library/Enc/SavingsandLoanCrisis.htm... for some background. A short excerpt from the start: > Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough. The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.

darkerside 5y ago

Like cameronh90 said, it limits the liability to the government by capping the payout by the number of account holders, which is finite. The assets that could be held there otherwise are theoretically infinite. So, this is smart government policy for institutional protection, not some kind of progressive giveaway.