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Risk applies equally to depositors. Apparently we all forgot that banks have risk, just less than our mattresses.

• jedberg 4y ago
  > Risk applies equally to depositors. But it shouldn't. Cash should be riskless no matter where you stash it.
  • runnerup 4y ago
    Classic “should” vs. “is” discussion. GP was talking about our existing financial framework, you are talking about a potential ideal framework.
    • jedberg 4y ago
      But also theory vs practice. In theory a depositor's money is at risk, but at least since the 1930s, no depositor has ever lost money at a US bank. The government always makes depositors whole, despite the supposed insurance limits.
    • mort96 4y ago
      It's wrong still though. Within our existing financial frameworks, the US government clearly wants putting your money in a major US bank to be essentially risk-free. If anything, it's the people on the other side of the discussion who generally think depositing money into banks should be risky because they argue that the government ought to not bail out depositors.
    • jen20 4y ago
      Clearly based on this weekend, our existing financial framework is that depositors are entirely protected, provided the bank is important enough to some important demographic. This should be spelled out in law rather than relying on the existing provision being used ad-hoc, though.
      • twblalock 4y ago
        It's not about the demographic. It's about the consequences to the rest of the banking system. That logic of protecting the system from systemic risk has not changed since the FDIC was founded.
  • HPsquared 4y ago
    Depositors are effectively bondholders. Bondholders get paid before shareholders.
  • cuteboy19 4y ago
    And you shouldn't get any interest on holding cash alone
  • tensor 4y ago
    This is more philosophy than anything. The FDIC, an instituted paid for by taxes, was introduced because farmers lost everything in previous bank failures. Insuring deposits but not shares is entirely a choice made by society, not any inherent property of cash, despite some people wanting it to be so. In my opinion it's really rather arbitrary at a point. If an individual or corporation has a lot of money that they need to store, they need to consider risk and return regardless. Deposits have FDIC reducing risk, but don't earn much interest. There are government bonds which a different risk and earning profile, and stocks with a different risk profile again. I feel it's rather narrow to focus only on deposits when in a practical sense it's pretty unlikely that anyone with any meaningful amount of money will keep it all in deposits. Similarly I also have sympathy for small share holders who lost money as part of their pension funds or otherwise. Not sure why hacker news commenters appear so gleeful about these people losing. It's not like bank failures are a "normal" occurrence in any sense.
    • JamesBarney 4y ago
      There are very good reasons we insure deposits and not shares. 1. (Main reason) We insure deposits is to keep bank runs from happening. That's why it was done here. 2. Insuring stocks costs more money, and creates far more moral hazard. 3. Most people/companies have far more diversified stock portfolios than deposits.
    • blululu 4y ago
      Being a durable store of value is generally part of the definition of cash along with liquidity and fungibility. Governments put so much effort into making banking deposits function as cash because the modern banking system would break down if people thought they were better served by having a hidden shoebox full of cash. I don't think anyone here is gleeful about a pension fund losing its money but there is a meaningful difference in terms of which parties should receive federal assistance.
    • mulmen 4y ago
      > The FDIC, an instituted paid for by taxes FDIC is not funded by taxes. https://www.fdic.gov/about/what-we-do/ https://www.fdic.gov/about/what-we-do/ “The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage.“
  • fastaguy88 4y ago
    To emphasize this point. Most of the deposits potentially lost at SVB were in checking accounts to cover day to day expenses. It is hard to imagine why we would discourage companies from using banks to hold cash over a relatively short term. Should deposits have an associated risk, so that companies prefer to pay their employees in cash and require cash paper bills to settle accounts? If physical cash were required, our economy would be much less efficient.
• runnerup 4y ago
  It’s dubious whether cash deposits should (in an ideal nation) be subject to risk. What would it look like if there was a federal deposit bank which offered lower savings interest rates than private banks but also guaranteed unlimited FDIC coverage?
  • tialaramex 4y ago
    The UK's National Savings & Investment Bank, which is owned by the government, offers almost exactly this, your money is guaranteed because it's the government (in taking your "savings" they are in effect borrowing your cash to run the country) so they can and will literally print money to pay you if necessary, however NS&I is intended to be used by individuals, not organisations, maximum balances even in their lower interest generic savings account top out at £2M.
  • negidius 4y ago
    That would still be subject to risk. It's impossible to completely eliminate risk. The FDIC is not an absolute guarantee. The government could decide that it doesn't want to honour it, or could itself collapse. Both scenarios are very unlikely to happen in the near term, but the same is true for the largest and most stable banks.
    • runnerup 4y ago
      Yeah I mean a dinosaur extinction meteor could hit the planet but for most people the determination of risk ends around “Complete collapse of USA/EU governments and their currency”. It’s probably the most fundamental axiomatic assumption underlying any normal discussion of financial risk. In other countries, it isn’t. “How can we manage a complete collapse of the Filipino government?” Is a reasonable question. If the US government collapses, Coinbase won’t have a market to operate in so further discussion doesn’t matter.
      • negidius 4y ago
        It seems a bit facetious to compare the collapse of the US government with an extinction event. There will almost certainly be a world after the US government, and that world will probably still include ancient banks like Lloyds and Barclays, and large gold vaults under the Swiss Alps. If you round the risk of the US government collapsing (or refusing to honour its obligations) down to zero, you should probably do the same for many private banks.
• NoboruWataya 4y ago
  Of course there is risk in bank deposits, but it is a rather more thorny (and therefore more interesting) topic because the risk is not the purpose of the bank deposit; people generally don't deposit cash with a bank as a means of speculating on the creditworthiness of the bank. A pension fund losing money on stocks is BAU, but a pension fund (or any company) losing bank deposits is exceptional and arguably represents a failure of the market, regulators or both.
• ctvo 4y ago
  > Risk applies equally to depositors. Share holders are owners in the company. They are rewarded financially when the company does well, and risk losing money when the company does poorly. In what world are customers equally subject to the same risks? They obviously do not get the same rewards. Or do you mean in general? In that case, it's not particularly interesting. There's risk in walking outside.
  • johnbellone 4y ago
    Let's not pretend to not understand what they are talking about. It is more than fair to say that the FDIC insurance is common knowledge, and yet, depositors were bailed out despite understanding that risk. Furthermore, depositors have benefited from quite the entanglement with the bank that, in normal business, simply wouldn't fly.
    • gamblor956 4y ago
      The issue was not bank entanglements. The issue was the bank putting all of its deposits in illiquid long-term bonds that were worth substantially less if sold pre-term, and compounding that problem by becoming insolvent selling a large chunk of those bonds per-term at a huge loss to cover immediate liquidity needs.
      • johnbellone 4y ago
        I am referring to the fact that startups that are being advised by VC firms had a requirement to keep their funds in the bank. If you think that SVB and the VC firms didn't have a special kind of relationship you're missing the facts.
        • gamblor956 4y ago
          I'm aware of the relationship betweeen SVB and the VCs, but it seems that you're confused about what you're arguing. You're blaming depositors (specifically VC-funded startups) for "benefiting" from a relationship with SVB they were forced into by VCs, and want to deny making all of SVB's depositors whole on the basis of a bank relationship that, for many, was not their choice. Worse, you want the fact that VC-funded startups over-depositing their cash reserves in a single-bank to be used against non-VC funded depositors (i.e., other businesses in the SV area) to deny making them whole on the basis of a "special relationship" that was simply "geographically closest bank willing to provide a loan and banking services."
• HPsquared 4y ago
  Creditors get paid before shareholders. That is the general rule, and applies here as well. (With the addition of bailouts to pay said creditors). Shareholders don't get bailed out, ever.
• toss1 4y ago
  NO, risk does NOT apply equally to depositors vs stockholders There is a very well-legislated and well-litigated priority of claims agains a business that goes bankrupt. It's roughly: first pay 100% of employee's payroll, then apply what's left to secured creditors (for a bank, I'd expect depositors to fall here), then what's left goes to unsecured creditors, then, preferred shareholders, then common shareholders. Moreover, for all kinds of debt and equity, there are slices of the slices of different risks that can be setup to provide greater return (w/greater risk) or greater security (with lesser return). Expecting the common shareholders to have anything resembling "equal" risk as the depositors is pure ignorance.
• nice_byte 4y ago
  no it doesn't. there is no financial reward from having a deposit in a bank, and therefore there should be no risk. the measly interest that a savings account pays shouldn't even be considered. we are _forced_ to use banks because of the need for cashless transactions. if government had a bank that 1) did not engage in lendigg or investment; 2) offered no interest payments on deposits; 3) only settled cashless transactions -- i would use that, and i bet most people would.
• twblalock 4y ago
  > Risk applies equally to depositors. Apparently we all forgot that banks have risk, just less than our mattresses. Not since 1933, in the US. Our financial institutions have been oriented around protecting depositors since then, and everyone knows it. There is a long list of people who get to make claims on the assets of a business when it fails -- depositors, bondholders, etc. Shareholders are always in last place or close to it. Everyone knows that too. This isn't the wild west. There are longstanding rules and institutions here.