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Right, but the issue is they may not have $250k on hand for everyone who is insured. (Essentially no different than the banks needing enough reserves to cover w
by bumby 4y ago
Right, but the issue is they may not have $250k on hand for everyone who is insured. (Essentially no different than the banks needing enough reserves to cover withdrawal amounts.) The "implicit" part essentially means Congress will act on their behalf if needed. Which means the mechanism is to sell Treasuries to the Fed, who pays for it by printing money. I don't know if that's great option in the context of the highest inflationary period in 40 years.
Or am I wrong on that understanding?
- bombcar 4y agoTechnically FDIC can "levy an assessment" on all banks to cover deficiencies, or anything they want to. In reality Congress would step in, but they did the above for SVB. See 5-(c): https://www.law.cornell.edu/uscode/text/12/1817 https://www.law.cornell.edu/uscode/text/12/1817 > In addition to the other assessments imposed on insured depository institutions under this subsection, the Corporation may impose 1 or more special assessments on insured depository institutions in an amount determined by the Corporation if the amount of any such assessment is necessary— (C) for any other purpose that the Corporation may deem necessary. Practically this means that FDIC can levy on the banks for some amount more that won't crash the banks; anything above that and they'll be going to Congress, or the Treasury will do some trickery.
- bumby 4y agoYeah, that aligns with my (limited) understanding. The assessments are a relatively small portion of the funds, I believe. My understanding is that the rate charged is the same regardless of the riskiness of the bank, which could become a moral hazard in its own right. (I.e., if the assessment rate is the same regardless of risk, it may incentivize riskier behavior)