3 ms·

Splitting deposits to stay under the 250k limit is artificial behaviour that doesn’t change the overall risk profile for FDIC. The total amount of money covered

Splitting deposits to stay under the 250k limit is artificial behaviour that doesn’t change the overall risk profile for FDIC. The total amount of money covered by insurance is the same regardless of how it’s subdivided. Splitting up deposits isn’t the intended outcome by regulators here. It doesn’t actually achieve anything meaningful.

JohnFen 4y ago
Splitting deposits isn't the only option and is often not the best one. There are a number of other solutions available, including buying your own insurance. FDIC insurance isn't the only insurance available (and isn't even intended primarily for businesses). It's just the free one.
- initplus 4y ago
  There isn't enough money in the world to insure the bank deposits of every business. Think about how big insurers would have to be if they needed to insure all the deposits of every business. "Every business should have private deposit insurance" isn't the goal of regulators because it's not a workable solution. So instead the government acts as a sort of "insurer of last resort" by promising they will do everything they can to protect depositors in the case of banking instability.
  - JohnFen 4y ago
    > There isn't enough money in the world to insure the bank deposits of every business. And yet, that is exactly how it's been done for a very, very long time. There is, of course, enough money to insure all of the deposits, for the same reason there's enough money to insure all the buildings, all the ships, and so forth.
em500 4y ago
Splitting deposits to stay under the 250k limit would have reduced funding for this specific, narrow focused bank with an exceptionally high duration risk. It's less likely that the customers would try to pull 250k from 4 bank accounts at once because they believe all of them are unsafe than 1M from a single account. How could that not change the overall risk profile for the FDIC?
- initplus 4y ago
  Imagine a world where this splitting is normal. If SVB depositors had split their deposits up and stored them at other banks, other banks depositors would have done the same and split their deposits up - and stored some of them at SVB. So from FDIC's perspective, the total amount of deposits at every bank (and so the risk they take as an insurer) after this splitting is the same. FDIC insurance limited to 250k and a banking system where everybody splits their deposits up into 250k/bank is the same risk profile for FDIC as unlimited FDIC insurance and no splitting up of accounts, assuming the same deposit distribution between banks.
  - em500 4y ago
    Ok, but since they now only have a small fraction instead of everything stored at SVB, they wouldn't have to withdraw all their deposits from all their different accounts when word gets out that SVB is unsafe. An being explicitly fully insured, a lot of them might not even have bothered to withdraw from SVB. How would that result in the same risk profile?
    - initplus 4y ago
      It's the same risk profile to the FDIC (risk as in the the risk that they have to pay out on the insurance). Unless you change the overall weighting of deposits between banks the total covered deposits at risk per bank is the same in both cases. If every single depositor split their accounts up to always stay under the 250k limit at each bank, FDIC has to insure 100% of deposits at each bank. If there was no limit, and customers didn't split accounts, FDIC has to insure 100% of deposits at each bank. For any individual bank failure the amount paid out by the FDIC will be the same under 100% deposit insurance vs 250k split deposits. The total deposits insured per bank is the same The behavior change (businesses less likely to panic in a run) is the same. So it seems to me there isn't a meaningful risk difference to FDIC between this theoretical 250k split deposits world and a 100% deposit insurance world.

JohnFen 4y ago

Splitting deposits isn't the only option and is often not the best one. There are a number of other solutions available, including buying your own insurance. FDIC insurance isn't the only insurance available (and isn't even intended primarily for businesses). It's just the free one.

initplus 4y ago
There isn't enough money in the world to insure the bank deposits of every business. Think about how big insurers would have to be if they needed to insure all the deposits of every business. "Every business should have private deposit insurance" isn't the goal of regulators because it's not a workable solution. So instead the government acts as a sort of "insurer of last resort" by promising they will do everything they can to protect depositors in the case of banking instability.
- JohnFen 4y ago
  > There isn't enough money in the world to insure the bank deposits of every business. And yet, that is exactly how it's been done for a very, very long time. There is, of course, enough money to insure all of the deposits, for the same reason there's enough money to insure all the buildings, all the ships, and so forth.

em500 4y ago

Splitting deposits to stay under the 250k limit would have reduced funding for this specific, narrow focused bank with an exceptionally high duration risk. It's less likely that the customers would try to pull 250k from 4 bank accounts at once because they believe all of them are unsafe than 1M from a single account. How could that not change the overall risk profile for the FDIC?

initplus 4y ago
Imagine a world where this splitting is normal. If SVB depositors had split their deposits up and stored them at other banks, other banks depositors would have done the same and split their deposits up - and stored some of them at SVB. So from FDIC's perspective, the total amount of deposits at every bank (and so the risk they take as an insurer) after this splitting is the same. FDIC insurance limited to 250k and a banking system where everybody splits their deposits up into 250k/bank is the same risk profile for FDIC as unlimited FDIC insurance and no splitting up of accounts, assuming the same deposit distribution between banks.
- em500 4y ago
  Ok, but since they now only have a small fraction instead of everything stored at SVB, they wouldn't have to withdraw all their deposits from all their different accounts when word gets out that SVB is unsafe. An being explicitly fully insured, a lot of them might not even have bothered to withdraw from SVB. How would that result in the same risk profile?
  - initplus 4y ago
    It's the same risk profile to the FDIC (risk as in the the risk that they have to pay out on the insurance). Unless you change the overall weighting of deposits between banks the total covered deposits at risk per bank is the same in both cases. If every single depositor split their accounts up to always stay under the 250k limit at each bank, FDIC has to insure 100% of deposits at each bank. If there was no limit, and customers didn't split accounts, FDIC has to insure 100% of deposits at each bank. For any individual bank failure the amount paid out by the FDIC will be the same under 100% deposit insurance vs 250k split deposits. The total deposits insured per bank is the same The behavior change (businesses less likely to panic in a run) is the same. So it seems to me there isn't a meaningful risk difference to FDIC between this theoretical 250k split deposits world and a 100% deposit insurance world.