4 ms·

If we have to buy insurance to insure our money, the financial sector will just game that, too, and make even riskier bets. That we (taxpayers) end up paying fo

by apercu 4y ago

If we have to buy insurance to insure our money, the financial sector will just game that, too, and make even riskier bets. That we (taxpayers) end up paying for.

Eddy_Viscosity2 4y ago
This is the gaming of the system that is resulting in the government FULLY covering the bets of the rich. They could have bought insurance, but running a bank is cheaper.
gwd 4y ago
Not necessarily. If insurance companies were allowed to set prices based on the bank you're deposited with, then what's currently a political process could become a market-based process. Have assets that are exposed to interest rate hikes? Higher insurance rates. Have assets that hedge against changes in the interest rate? Lower deposit insurance rates. Won't let us see your asset mix? Assume the worst case scenario. So in this universe, when you go to get insurance at SVB, you see that it costs you 1% per year, which seems high to you. You go to the insurance company's website, and see that insurance for Chase is only 0.5%, so you switch to them instead. SVB is pressured to change to a less risky strategy by the market, not b the government. (NB I'm not a libertarian, nor am I recommending this approach; I'm just saying that in theory such a system could work.) EDIT: Upon reflection, this might just punt the issue down the road: Suppose SVDI (Silicon Valley Deposit Insurance) gives you a rate of 0.1% per year at SVB. Everything is fine until SVB fails, and then it turns out SVDI didn't have enough capital to back their insurance, and you lose anyway. Maybe there are ways you could fix this, but my preliminary conclusion would be that you need some kind of regulation somewhere.
- nradov 4y ago
  You can sort of fix this in a free market system through reinsurance which spreads the risk out across multiple counterparties with deep capital reserves. But ultimately the only way to eliminate the risk is through insurance by a sovereign with the ability to levy taxes and print fiat currency.
- junofan 4y ago
  FDIC already charges different amounts per bank. SVDI would buy reinsurance.
pjc50 4y ago
Is "keeping your money in a bank account" supposed to be a "bet"? (or, as an argument I made earlier, if your company is completely dependent on a single other company to function, such as AWS, is there really any more risk in having only one bank account?)
- ledauphin 4y ago
  at this point, who could doubt that AWS itself is faaar too big to fail?
- AdamN 4y ago
  I would say 'yes'. Banks should start offering fully insured accounts (maybe they already do) and those accounts should cost more and possibly have different liquidity profiles.
  - Tinyyy 4y ago
    Fully insured by whom?
    - AdamN 4y ago
      A re-insurance company probably, or the FDIC which would charge a premium for the excess insurance.
  - pjc50 4y ago
    Why banks specifically? Should there be insurance for AWS and Github accounts? > maybe they already do "Insured cash sweep" (which is basically "RAID for banking")
    - AdamN 4y ago
      There already is DR and business continuity insurance so non-financial assets have an entire industry around insuring against events there. Cash sweep is insured but only to a limit, there's nothing magical there and the underlying securities have default risk (or breaking the buck).
tankerkiller 4y ago
Potential solution? Make the bank board and C-suite pay for all the insurance out of their own compensation packages. And the the bank fails it comes direct out of their pockets. When the bank fails, they end up living on the streets for their mistakes, and will never (hopefully) be able to do it again to another bank.
- pjc50 4y ago
  This was the "Lloyd's Names" situation: https://www.reuters.com/article/uk-financial-equitas-names-idUKL2058881720061020 https://www.reuters.com/article/uk-financial-equitas-names-i... ; although they weren't decision makers, they were a special class of investors.
chasd00 4y ago
And insurance won’t even matter. Credit default swaps were suppose to be insurance and those holders were bailed out in 2008/9, remember AIG? In 2008/9, The fact that a solidly red administration (Bush) wrote the check and a solidly blue administration (Obama) delivered it on bended knee to the banking industry made it clear who really ran things. “Paying your bills is a moral hazard” - guy in the background of a tv interview that birthed the tea party in the US.
velavar 4y ago
You're right. It can't just be about paying for insurance but also has to include undergoing and passing regular stress tests. Just because one buys fire insurance shouldn't give them a free pass to fill their house up with large amounts of flammable material and sparking wires.
slowmovintarget 4y ago
They did have insurance... They had significant campaign contributions to the DNC.

by apercu 4y ago

If we have to buy insurance to insure our money, the financial sector will just game that, too, and make even riskier bets. That we (taxpayers) end up paying for.

Eddy_Viscosity2 4y ago

This is the gaming of the system that is resulting in the government FULLY covering the bets of the rich. They could have bought insurance, but running a bank is cheaper.

gwd 4y ago

Not necessarily. If insurance companies were allowed to set prices based on the bank you're deposited with, then what's currently a political process could become a market-based process. Have assets that are exposed to interest rate hikes? Higher insurance rates. Have assets that hedge against changes in the interest rate? Lower deposit insurance rates. Won't let us see your asset mix? Assume the worst case scenario. So in this universe, when you go to get insurance at SVB, you see that it costs you 1% per year, which seems high to you. You go to the insurance company's website, and see that insurance for Chase is only 0.5%, so you switch to them instead. SVB is pressured to change to a less risky strategy by the market, not b the government. (NB I'm not a libertarian, nor am I recommending this approach; I'm just saying that in theory such a system could work.) EDIT: Upon reflection, this might just punt the issue down the road: Suppose SVDI (Silicon Valley Deposit Insurance) gives you a rate of 0.1% per year at SVB. Everything is fine until SVB fails, and then it turns out SVDI didn't have enough capital to back their insurance, and you lose anyway. Maybe there are ways you could fix this, but my preliminary conclusion would be that you need some kind of regulation somewhere.

nradov 4y ago
You can sort of fix this in a free market system through reinsurance which spreads the risk out across multiple counterparties with deep capital reserves. But ultimately the only way to eliminate the risk is through insurance by a sovereign with the ability to levy taxes and print fiat currency.
junofan 4y ago
FDIC already charges different amounts per bank. SVDI would buy reinsurance.

pjc50 4y ago

Is "keeping your money in a bank account" supposed to be a "bet"? (or, as an argument I made earlier, if your company is completely dependent on a single other company to function, such as AWS, is there really any more risk in having only one bank account?)

ledauphin 4y ago
at this point, who could doubt that AWS itself is faaar too big to fail?
AdamN 4y ago
I would say 'yes'. Banks should start offering fully insured accounts (maybe they already do) and those accounts should cost more and possibly have different liquidity profiles.
- Tinyyy 4y ago
  Fully insured by whom?
  - AdamN 4y ago
    A re-insurance company probably, or the FDIC which would charge a premium for the excess insurance.
- pjc50 4y ago
  Why banks specifically? Should there be insurance for AWS and Github accounts? > maybe they already do "Insured cash sweep" (which is basically "RAID for banking")
  - AdamN 4y ago
    There already is DR and business continuity insurance so non-financial assets have an entire industry around insuring against events there. Cash sweep is insured but only to a limit, there's nothing magical there and the underlying securities have default risk (or breaking the buck).

tankerkiller 4y ago

Potential solution? Make the bank board and C-suite pay for all the insurance out of their own compensation packages. And the the bank fails it comes direct out of their pockets. When the bank fails, they end up living on the streets for their mistakes, and will never (hopefully) be able to do it again to another bank.

pjc50 4y ago
This was the "Lloyd's Names" situation: https://www.reuters.com/article/uk-financial-equitas-names-idUKL2058881720061020 https://www.reuters.com/article/uk-financial-equitas-names-i... ; although they weren't decision makers, they were a special class of investors.

chasd00 4y ago

And insurance won’t even matter. Credit default swaps were suppose to be insurance and those holders were bailed out in 2008/9, remember AIG? In 2008/9, The fact that a solidly red administration (Bush) wrote the check and a solidly blue administration (Obama) delivered it on bended knee to the banking industry made it clear who really ran things. “Paying your bills is a moral hazard” - guy in the background of a tv interview that birthed the tea party in the US.

velavar 4y ago

You're right. It can't just be about paying for insurance but also has to include undergoing and passing regular stress tests. Just because one buys fire insurance shouldn't give them a free pass to fill their house up with large amounts of flammable material and sparking wires.

slowmovintarget 4y ago

They did have insurance... They had significant campaign contributions to the DNC.