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The problem arises when you look past one bank and consider the banking system as a whole. When the next bank fails and its depositors are backstopped by the FD

The problem arises when you look past one bank and consider the banking system as a whole. When the next bank fails and its depositors are backstopped by the FDIC at 100%, then again and again, eventually the “fund” should run out. In theory. In practice, of course, that will never be allowed to happen. FDIC insurance is now effectively infinite.

hypothesis 4y ago
>FDIC insurance is now effectively infinite. That clearly being the case, what does it mean for insurance premiums?
- hn_throwaway_99 4y ago
  This is from the top HN post: > Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
  - hypothesis 4y ago
    So, going forward, are they planning to do a “special assessment” for every failure? Because before banks were paying premiums into the system, just like an insurance.
    - junofan 4y ago
      Yes, the premiums are called assessments.
      - hypothesis 4y ago
        Ok, that makes sense. My question was more about mechanics of this. Do they plan to keep FDIC fund and grow it or maybe you wind it down and just assess “as needed”, since the other guy is now completely on the hook.
    - dkjaudyeqooe 4y ago
      No insurance premiums will reflect estimated risk of total bank failures going forward.
dkjaudyeqooe 4y ago
You've got this backwards. The FDIC's actions are in part designed to limit its losses, since contagion risk will also be borne by the FDIC. By limiting the chance of runs they are limiting their liabilities. The FDIC always had unlimited resources since it is backed by the US. It always sought to protect the entire banking system without limits. It's doing its job. Lets just say the FDIC officially covers all losses at all banks. That means that the real danger, bank runs, are eliminated and so is the FDIC's risk in that regard. The risk is reduced to bank mismanagement which can be managed through examination and seizure of banks. That's essentially how too big to fail banks are handled.
- politician 4y ago
  I don't think we're in disagreement -- I support the actions of the FDIC, Treasury, and FRB on this issue. A few hours from now, hopefully we will not see runs on other exposed institutions. The decision was made that if the Deposit Insurance Fund [1] was drained as a consequence of this new mandate to protect all depositors while collecting insurance premiums calibrated to the previous $250k limit, the government will backstop the FDIC ("full faith and credit"). Good. My contention is that the future of the DIF itself is murky -- I suspect that it's no longer necessary. If it were still relevant, then shouldn't FDIC dramatically increase insurance premiums going forward? Without getting into too much detail, I find that extremely unlikely because FDIC insurance expenses are already quite high. If FDIC won't increase premiums to the level necessary to fund the DIF properly at the new (unlimited) level of protection, Congress should eliminate the requirement for banks to carry this insurance. > While the DIF is backed by the full faith and credit of the United States government, it has two sources of funds: assessments (insurance premiums) on FDIC-insured institutions and interest earned on funds invested in U.S. government obligations. Revenue from assessments and interest on investments add to the DIF balance (or fund net worth), while losses (primarily from bank failures) and operating expenses reduce the balance. [1] https://www.fdic.gov/resources/deposit-insurance/deposit-insurance-fund/ https://www.fdic.gov/resources/deposit-insurance/deposit-ins...
  - dkjaudyeqooe 4y ago
    > this new mandate to protect all depositors I don't think that exists. They're walking the line between theory (250K max) and reality (want to preserve everyone's deposits in most cases). For smaller banks they routinely sell the failed institutions whole to achieve the later. For larger banks like SVB they may need to get creative. So making it official would be a problem (congress is unlikely to approve unlimited coverage) but handling it on a case by case basis works out and avoids moral hazard.
basch 4y ago
Depositors are backstopped, but shareholders are hosed. Isn’t the market pruning bad banks good? I would be more concerned about the consolidation of small banks into larger ones.

hypothesis 4y ago

>FDIC insurance is now effectively infinite. That clearly being the case, what does it mean for insurance premiums?

hn_throwaway_99 4y ago
This is from the top HN post: > Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
- hypothesis 4y ago
  So, going forward, are they planning to do a “special assessment” for every failure? Because before banks were paying premiums into the system, just like an insurance.
  - junofan 4y ago
    Yes, the premiums are called assessments.
    - hypothesis 4y ago
      Ok, that makes sense. My question was more about mechanics of this. Do they plan to keep FDIC fund and grow it or maybe you wind it down and just assess “as needed”, since the other guy is now completely on the hook.
  - dkjaudyeqooe 4y ago
    No insurance premiums will reflect estimated risk of total bank failures going forward.

dkjaudyeqooe 4y ago

You've got this backwards. The FDIC's actions are in part designed to limit its losses, since contagion risk will also be borne by the FDIC. By limiting the chance of runs they are limiting their liabilities. The FDIC always had unlimited resources since it is backed by the US. It always sought to protect the entire banking system without limits. It's doing its job. Lets just say the FDIC officially covers all losses at all banks. That means that the real danger, bank runs, are eliminated and so is the FDIC's risk in that regard. The risk is reduced to bank mismanagement which can be managed through examination and seizure of banks. That's essentially how too big to fail banks are handled.

politician 4y ago
I don't think we're in disagreement -- I support the actions of the FDIC, Treasury, and FRB on this issue. A few hours from now, hopefully we will not see runs on other exposed institutions. The decision was made that if the Deposit Insurance Fund [1] was drained as a consequence of this new mandate to protect all depositors while collecting insurance premiums calibrated to the previous $250k limit, the government will backstop the FDIC ("full faith and credit"). Good. My contention is that the future of the DIF itself is murky -- I suspect that it's no longer necessary. If it were still relevant, then shouldn't FDIC dramatically increase insurance premiums going forward? Without getting into too much detail, I find that extremely unlikely because FDIC insurance expenses are already quite high. If FDIC won't increase premiums to the level necessary to fund the DIF properly at the new (unlimited) level of protection, Congress should eliminate the requirement for banks to carry this insurance. > While the DIF is backed by the full faith and credit of the United States government, it has two sources of funds: assessments (insurance premiums) on FDIC-insured institutions and interest earned on funds invested in U.S. government obligations. Revenue from assessments and interest on investments add to the DIF balance (or fund net worth), while losses (primarily from bank failures) and operating expenses reduce the balance. [1] https://www.fdic.gov/resources/deposit-insurance/deposit-insurance-fund/ https://www.fdic.gov/resources/deposit-insurance/deposit-ins...
- dkjaudyeqooe 4y ago
  > this new mandate to protect all depositors I don't think that exists. They're walking the line between theory (250K max) and reality (want to preserve everyone's deposits in most cases). For smaller banks they routinely sell the failed institutions whole to achieve the later. For larger banks like SVB they may need to get creative. So making it official would be a problem (congress is unlikely to approve unlimited coverage) but handling it on a case by case basis works out and avoids moral hazard.

basch 4y ago

Depositors are backstopped, but shareholders are hosed. Isn’t the market pruning bad banks good? I would be more concerned about the consolidation of small banks into larger ones.