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If products like this become widespread isn't it equivalent to 'tricking' FDIC into covering a higher % of your deposits? It appears this is more or less a serv

If products like this become widespread isn't it equivalent to 'tricking' FDIC into covering a higher % of your deposits? It appears this is more or less a service that takes your money and opens a lot of smaller accounts spread throughout all the different banks. Imagine that everyone did this. Now in the event of a medium scale bank default FDIC needs to cover not only the first 250k of a lot of people's money, but some multiple of that depending on how many banks that customer also had money in. Doesn't this stress FDIC insurance as a system? It seems to me it's counter to the intention of FDIC insurance in the first place (keep the small guy's money safe, assume the rich guy has plans to keep himself safe)

chernevik 4y ago
No. - The FDIC's risk is distributed across many bank balance sheets - The FDIC is collecting insurance premium on these deposits Structures like this have existed for decades. [ETA: I've just seen a good bit in the WSJ that such structures do abuse deposit insurance, since they allow large depositors to avoid inspection of bank liquidity. So maybe I'm wrong.]
vineyardmike 4y ago
This would only apply stress in the case of widespread failure. One bad bank means only using $250k in insurance. On the flip side, why would you engage in a bank run when you’re fully insured? It seems it would slow the incentives to be part of a bank run, which is the systemically damaging part.
azinman2 4y ago
Wouldn’t it need to just cover the failed bank?
mikedouglas 4y ago
No, because the FDIC would collect higher fees commensurate with the increase in insured deposits. It would reduce profits for banks like SVB which have a large number of uninsured deposits and were able to take advantage of a "fed put".
- altairprime 4y ago
  The FDIC just collected a fee from all remaining banks to make SVB depositors whole, so they are evidently willing to reduce profits in order to insure deposits.
  - jacooper 4y ago
    > so they are evidently willing to reduce profits in order to insure deposits. Quite refreshing compared to the American Capitalism hellscape, though kind of expected because its a national corporation.
- rootusrootus 4y ago
  I wonder why the FDIC doesn't just offer tiered insurance, in that case.
  - jhfdbkofdchk 4y ago
    Because they want depositors to spread their deposits around and not concentrate them at any one institution.
  - CityOfThrowaway 4y ago
    When all of the money is in one bank, the fees it would need to charge to insure the same deposits is much more. There are many ways that banks might fail. Most of those are idiosyncratic and unique to the bank's operations. When the money is spread across multiple institutions most of the risk the FDIC is taking is uncorrelated, therefore costing less to insure.
SkyMarshal 4y ago
As of yesterday the FDIC is officially backstopping 100% of deposits, even beyond the $250k limit. They decided that confidence in the banking system takes precedence over that limit. The $250k limit no longer exists, de facto at least, if not de jure. So it's actually unclear that a service like this is even useful anymore.
- majormajor 4y ago
  Not everyone will want to rely on a not-guaranteed discretionary call happening again. Don't think of this like a Supreme Court decision that is unlikely to be overturned for decades if not longer.
- selectodude 4y ago
  The FDIC is backstopping deposits over $250k because Silicon Valley Bank has enough money to pay out all deposits. It’s just locked up in 10 year treasuries. The FDIC will give you your money back, sit on the treasuries, and get paid back by the Federal Government when the bonds mature. The bank itself is worthless but the money didn’t disappear.
  - quickthrowman 4y ago
    They also have a portfolio of (dogshit, I’m sure) loans to startups that I would wager is worth at most 50 cents on the dollar. Deposit liabilities at SVB will exceed asset liquidation value, I’d bet a decent sum of money on that.
    - selectodude 4y ago
      Their whole problem was that they didn't have anybody to loan to. Startups aren't borrowing from banks, they're getting VC money and parking it at SVB. Their "dogshit" is 10 year treasuries almost exclusively.

chernevik 4y ago

No. - The FDIC's risk is distributed across many bank balance sheets - The FDIC is collecting insurance premium on these deposits Structures like this have existed for decades. [ETA: I've just seen a good bit in the WSJ that such structures do abuse deposit insurance, since they allow large depositors to avoid inspection of bank liquidity. So maybe I'm wrong.]

vineyardmike 4y ago

This would only apply stress in the case of widespread failure. One bad bank means only using $250k in insurance. On the flip side, why would you engage in a bank run when you’re fully insured? It seems it would slow the incentives to be part of a bank run, which is the systemically damaging part.

azinman2 4y ago

Wouldn’t it need to just cover the failed bank?

mikedouglas 4y ago

No, because the FDIC would collect higher fees commensurate with the increase in insured deposits. It would reduce profits for banks like SVB which have a large number of uninsured deposits and were able to take advantage of a "fed put".

altairprime 4y ago
The FDIC just collected a fee from all remaining banks to make SVB depositors whole, so they are evidently willing to reduce profits in order to insure deposits.
- jacooper 4y ago
  > so they are evidently willing to reduce profits in order to insure deposits. Quite refreshing compared to the American Capitalism hellscape, though kind of expected because its a national corporation.
rootusrootus 4y ago
I wonder why the FDIC doesn't just offer tiered insurance, in that case.
- jhfdbkofdchk 4y ago
  Because they want depositors to spread their deposits around and not concentrate them at any one institution.
- CityOfThrowaway 4y ago
  When all of the money is in one bank, the fees it would need to charge to insure the same deposits is much more. There are many ways that banks might fail. Most of those are idiosyncratic and unique to the bank's operations. When the money is spread across multiple institutions most of the risk the FDIC is taking is uncorrelated, therefore costing less to insure.

SkyMarshal 4y ago

As of yesterday the FDIC is officially backstopping 100% of deposits, even beyond the $250k limit. They decided that confidence in the banking system takes precedence over that limit. The $250k limit no longer exists, de facto at least, if not de jure. So it's actually unclear that a service like this is even useful anymore.

majormajor 4y ago
Not everyone will want to rely on a not-guaranteed discretionary call happening again. Don't think of this like a Supreme Court decision that is unlikely to be overturned for decades if not longer.
selectodude 4y ago
The FDIC is backstopping deposits over $250k because Silicon Valley Bank has enough money to pay out all deposits. It’s just locked up in 10 year treasuries. The FDIC will give you your money back, sit on the treasuries, and get paid back by the Federal Government when the bonds mature. The bank itself is worthless but the money didn’t disappear.
- quickthrowman 4y ago
  They also have a portfolio of (dogshit, I’m sure) loans to startups that I would wager is worth at most 50 cents on the dollar. Deposit liabilities at SVB will exceed asset liquidation value, I’d bet a decent sum of money on that.
  - selectodude 4y ago
    Their whole problem was that they didn't have anybody to loan to. Startups aren't borrowing from banks, they're getting VC money and parking it at SVB. Their "dogshit" is 10 year treasuries almost exclusively.