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Yet another new precedent by the Fed and FDIC. All depositors are now guaranteed their funds if a bank fails. This is the definition of Moral Hazard [1]. [1]
by pdq 4y ago
Yet another new precedent by the Fed and FDIC. All depositors are now guaranteed their funds if a bank fails.
This is the definition of Moral Hazard [1].
[1] https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard
- oblio 4y agoIf payment is done by other banks, doesn't that serve as mitigation? Sure, when the government pays, it's super risky. However if other banks pay, for sure they'll either self regulate or push for better legislation.
- expazl 4y ago> If payment is done by other banks, doesn't that serve as mitigation? Seems the exact opposite. Why would any bank ever conduct risk assessment if their potential failure will be paid by the industry as a whole. This effectively tells any other bank that might be fearing for a bank run to stock up on super risky assets and to let the dice roll to see if they end up winning big, or if their competitors end up paying for their losses.
- buffalobuffalo 4y agoThis is not the moral hazard risk he was referring to. The bank still has no incentive to load up on overly risky investments because in the case of an FDIC takeover, they (the investors and executives) will still loose everything. The moral hazard here is for depositors. They have an incentive to put their money in the bank with the highest possible yield no matter what the bank's investment portfolio looks like, since their deposits are now seemingly guaranteed by the banking system as whole. To be fair, I'm not sure if this is necessarily a bad thing for certainly types of very low yield accounts (checking accounts with no interest, etc). But there certainly is an element of moral hazard at play.
- post-it 4y agoBecause the owners of SVB lost everything, it's only the customers that are being made whole.
- shoxty 4y ago"lost everything" — they sold stock and received bonuses before the takeover.
- travisjungroth 4y agoIt’s really amazing the number of people that don’t seem to understand that. It would be like if a dairy farmer overloaded his truck, crashed it and died. The government steps in and makes sure everyone gets milk while they sell off the cows. Then people say “this creates a moral hazard for dairy farmers to overload their trucks without consequences!”. No, dude. He died.
- college_physics 4y agoDude, a depositor provides funds. Might get them back with interest, or not. Thats not the definition of a customer, thats the definition of an investor. The fact that it is supposed to be a low risk low return investment does not change that fundamental relation.
- travisjungroth 4y agoFine, lender. Doesn’t change my analogy. My point is this question is easily answered. > Why would any bank ever conduct risk assessment if their potential failure will be paid by the industry as a whole. So the bank doesn’t go under, causing them to lose their jobs and equity.
- t3rmi 4y agoThis is incorrect. The correct analogy would be if I set the speed of my automated truck to 20mph over the speed limit causing me to earn 10% more income for 10 years. Then the truck crashes and burns and my neighbors pay for it.
- Cyph0n 4y agoBut it’s not other banks - it’s customers of other banks.
- yibg 4y agothat seems like a bit of a silly argument. By that token any time we fine a bank we're not fining the bank, but the bank's customers?
- Cyph0n 4y agoFDIC is arguing that taxpayers will not be affected because they are bankrolling this backstopping operation by forcing other banks to cover losses beyond the limit. But banks will most likely recover this imposed “fine” from customers, which means that customers (aka: taxpayers) are the ones who are ultimately bankrolling this whole fiasco.
- yibg 4y agoI get what you're saying. But by that token any fines that are levied against banks are also paid by taxpayers. So if you're saying that this move is wrong since it puts the burden on taxpayers, then we shouldn't fine banks either?
- Cyph0n 4y agoThe only thing I’m saying is that - technically - taxpayers are footing this bill, even if FDIC claims otherwise. Whether or not this backstop should have even happened in the first place is a different issue.
- jnwatson 4y agoNo it isn't. In the history of the FDIC, no depositor has ever lost money, regardless of balance. The whole point of the FDIC is to avoid contagion, and they nipped this in the bud, again. Moral hazard is if they made the investors whole. They did not. Depositors are not investors.
- dragonwriter 4y ago> In the history of the FDIC, no depositor has ever lost money, regardless of balance. This is false. No depositor has ever lost insured money. Uninsured money has been lost. E.g., Washington Federal Bank for Savings failure in 2018 [0] has resulted in dividend payments for uninsured balances covering only 41.66% [1], and that took nearly three years. [0] https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/wafedbank.html https://www.fdic.gov/resources/resolutions/bank-failures/fai... [1] https://closedbanks.fdic.gov/dividends/bankfind/Dividendindex?fin=10530 https://closedbanks.fdic.gov/dividends/bankfind/Dividendinde...
- turingfeel 4y agoI’m inclined to believe that may not be entirely true [1]. It seems there is some evidence of depositor losses but they have been incredibly rare and insubstantial. [1] https://money.stackexchange.com/questions/129772/has-anyone-ever-lost-money-over-the-fdic-limit https://money.stackexchange.com/questions/129772/has-anyone-...
- Rury 4y ago>The whole point of the FDIC is to avoid contagion, and they nipped this in the bud, again. Maybe. Part of the problem here is related to Glass-Stegall. Depositors are essentially the ones backing the investors at a bank these days. So, they just shifted who's footing things here, from the depositors and investors at SIVB, to depositors and investors at other banks. This approach has essentially dispersed the risk into the broader economy. As so, don't be surprised if this ultimately exacerbates contagion in the end.
- Ekaros 4y agoTime to start the ponzi schemes. It goes on you win. When it fails any bank account holder pays. Win-win for everybody. Nothing wrong there.