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> Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter a
by Gwypaas 4y ago
> Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future).
This is completely ignoring the time value of money. Money today is worth more than money in the future. We are transferring real value today and thus making the public, through the other less risky banks, eat the haircut that will happen no matter what. The losses are real.
What this has done is create the following incentives:
For depositors:
1. Bank with the riskiest bank possible since all deposits are covered.
For banks:
1. Become super-risky and extract value as soon as possible through dividends and bonuses. Depositors are covered either way.
The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead.
- Ekaros 4y agoAnd for bank owners. Simply setup company or your own funds in bank as deposit and offer huge rates to yourself. 100% safe whatever you do.
- rhaway84773 4y agoYou’re ignoring that banks are highly regulated. The simplest, and first thing to do is to lower the threshold for systemically important banks back down to the original $50Bn before it was raised to $250Bn in 2018.
- AnimalMuppet 4y agoYour incentive for depositors doesn't follow. What incentive do I have to seek out a risky bank? That I won't lose my money? If I have a safe one, I also won't lose my money. And if I have a risky one, I have some possibility that next time the powers that be will decide that the rules are different. Even if they don't, I still have the possibility that my money will be unavailable for a certain amount of time, and that I will have to deal with bureaucracy to get it back. Why would I deliberately choose that? What's my upside? Your incentive for banks doesn't follow either. Shareholders got wiped out. This sure wasn't in their interest, previous dividends or no. Management may get bonuses clawed back, and even if they don't, they're not going to find a job that pays as well ever again.
- orwin 4y agoThey can provide higher rates if they take riskier investments/arbitrages, I thought everyone knew this.
- AnimalMuppet 4y agoWell, and did they? Did SVB provide higher rates than other banks? I don't think so; I recall reading that part of their problem was that they lost tens of billions of dollars of interest free deposits over the last year or so. I think that the risk went into higher profits, not higher rates to depositors. So, not really an incentive to depositors.
- helen___keller 4y ago> 1. Become super-risky and extract value as soon as possible through dividends and bonuses. Depositors are covered either way. Depositor risk has never been a consideration of the bank except as far as it relates to the banks ability to grow shareholder value (if investors are wiped out, the bank doesn’t give a shit whether depositors are also wiped out) > The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead. Strongly agree tbh. There’s social reasons why it won’t happen but I’d much prefer this
- phlakaton 4y agoWow! Is that the "Bank of the United States"'s music I'm hearing? Yeah, I think we had that argument as a society a looooong time ago.