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> Pretty Simple fix. Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions. I'm not even saying that wha

> Pretty Simple fix. Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions. I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not is "simple", because the consequences could be far reaching, unintended, and unpredictable, both short term and long term.

acjohnson55 4y ago
I think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard. The bigger issue is the concentration of deposits and potential suppression of investment.
- bubbleRefuge 4y ago
  agree with all except your last sentence . whats the issue ?
  - acjohnson55 4y ago
    Concentration of deposits leads to less competition in the banking sector and more concentrated risk in global systemically important banks, i.e. the ones that are too big to fail. But maybe that's no the end of the world, and maybe the deposit limit isn't the best way to create competition. And if banks aren't allowed to make risky investments with deposits (good policy, IMO), then I believe we want people and businesses using banks for their most liquid needs, but otherwise, putting their money to work through investment.
    - bubbleRefuge 4y ago
      banks don not lend deposits per say. this is an anachronism. banks make loans and loans create deposits. there is not a dependency on deposit funding loans. banks create loans on demand so long as they meet capital requirements. deposits are not capital. they are liabilities. (there as a thread last week about all this which you can read that is probably helpfull)
- maxilevi 4y ago
  Managers might have been fired and equity wiped out but they still have all the rent and bonuses that were extracted during the high risk high reward activities. That’s why it’s a morale hazard and the fed taking over it doesn’t solve it.
  - acjohnson55 4y ago
    I don't see how letting the depositors get hosed while the bank gets taken over is any better than bailing out the depositors. Either way, the rents have been extracted. Why does the $250k limit make a difference to bank management behavior?
    - yipbub 4y ago
      They don't stand to lose much if their risky behavior fails, but they stand to make a lot if it succeeds.
    - watwut 4y ago
      It makes difference in where people put money into. Despite VCs and startups not using it, you can buy insurance over $250k limit and spread accounts into multiple banks. It is actually standard product. Basically, VCs did not wanted to pay for that and were rewarded. They advised or forced their startups to not insure money too. Also, before someone makes that point, these are supposed to be highly sophisticated operators. They are supposed to have know how. The people being bailed out are not Johny-the-cleaner working on his small busines.
  - gnicholas 4y ago
    You've just coined a new term, "morale hazard". Perhaps this is when there is a moral hazard problem that affects morale?
    - maxilevi 4y ago
      Haha that is hilarious, I can't edit my comment but thanks for pointing it out
bee_rider 4y ago
Hmm. Would it be easy nowadays to just have a software service that split up an account into n accounts of less than $250k, and then presented a single interface to all of them? I guess individual purchases over $250k would be a problem, but I guess a short-term gather operation could be ok, as long as you aren’t too worried about a bank run while that transaction was occurring.
- acjohnson55 4y ago
  This exists, many times over. It's called a cash sweep. See one example here: https://www.wellsfargo.com/investing/cash-sweep/ https://www.wellsfargo.com/investing/cash-sweep/
  - qqqwerty 4y ago
    And just as a warning, it is still not clear how sweep accounts are handled in the case where the primary bank fails. SVB offered sweep accounts. But due to the intervention, the recovery process of those accounts was never tested in a real life scenario. If recovering your sweep accounts takes months, that could be really bad for a business trying to make payroll. And from what I read, there is some "operational risk" as well, i.e. if a bunch of money hits your account the same day a bank fails, that money will be in your primary banks account and if it is over the FDIC limit that amount will be uninsured.
    - acjohnson55 4y ago
      Great points. Maybe protection can be written into the rules to remove that uncertainty?
- astura 4y ago
  See, for example, Fidelity's FDIC-Insured Deposit Sweep Program. https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBankList https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa... >To provide you with the benefit of FDIC insurance eligibility, the cash balance in your account will be automatically swept into an interest-bearing FDIC-Insured Deposit Sweep position. Since FDIC insurance coverage is currently limited to $250,000 per qualified customer account per banking institution, Fidelity may use several banks, rather than just one, to maximize your FDIC coverage.
bubbleRefuge 4y ago
One prediction : no more bank runs.
marcosdumay 4y ago
AFAIK, the current normal is for banking systems to ensure all of the deposits, the US is an exception. And this policy hasn't caused any disaster anywhere yet. But yes, the US has more singular things that can interact badly with no limits on insurance. As a start, the insuring entity has much shallower pockets than most places I know about.
- morelisp 4y ago
  Your knowledge is wrong. Most European DGSs cover up to 100k, for example. https://en.wikipedia.org/wiki/Deposit_insurance https://en.wikipedia.org/wiki/Deposit_insurance
JeremyNT 4y ago
> Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions. To me this makes intuitive sense, but are the only options 250k or infinity? What's the "magic" behind that $250k number? Is there some reason to expect that this is an optimal number? I feel like maybe it's cargo-culting - it isn't even re-adjusted for inflation is it?
- rtkwe 4y ago
  At the time it's probably the level that covers most people's deposits. It's pretty rare for a person to have >250k in pure savings deposits so setting it at that level protects most people lessening the pressure causing bank runs. It doesn't work so well for banks like SVB where a few huge businesses make up a majority of their deposits. 250k probably still covers 90+% of people in the US.

acjohnson55 4y ago

I think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard. The bigger issue is the concentration of deposits and potential suppression of investment.

bubbleRefuge 4y ago
agree with all except your last sentence . whats the issue ?
- acjohnson55 4y ago
  Concentration of deposits leads to less competition in the banking sector and more concentrated risk in global systemically important banks, i.e. the ones that are too big to fail. But maybe that's no the end of the world, and maybe the deposit limit isn't the best way to create competition. And if banks aren't allowed to make risky investments with deposits (good policy, IMO), then I believe we want people and businesses using banks for their most liquid needs, but otherwise, putting their money to work through investment.
  - bubbleRefuge 4y ago
    banks don not lend deposits per say. this is an anachronism. banks make loans and loans create deposits. there is not a dependency on deposit funding loans. banks create loans on demand so long as they meet capital requirements. deposits are not capital. they are liabilities. (there as a thread last week about all this which you can read that is probably helpfull)
maxilevi 4y ago
Managers might have been fired and equity wiped out but they still have all the rent and bonuses that were extracted during the high risk high reward activities. That’s why it’s a morale hazard and the fed taking over it doesn’t solve it.
- acjohnson55 4y ago
  I don't see how letting the depositors get hosed while the bank gets taken over is any better than bailing out the depositors. Either way, the rents have been extracted. Why does the $250k limit make a difference to bank management behavior?
  - yipbub 4y ago
    They don't stand to lose much if their risky behavior fails, but they stand to make a lot if it succeeds.
  - watwut 4y ago
    It makes difference in where people put money into. Despite VCs and startups not using it, you can buy insurance over $250k limit and spread accounts into multiple banks. It is actually standard product. Basically, VCs did not wanted to pay for that and were rewarded. They advised or forced their startups to not insure money too. Also, before someone makes that point, these are supposed to be highly sophisticated operators. They are supposed to have know how. The people being bailed out are not Johny-the-cleaner working on his small busines.
- gnicholas 4y ago
  You've just coined a new term, "morale hazard". Perhaps this is when there is a moral hazard problem that affects morale?
  - maxilevi 4y ago
    Haha that is hilarious, I can't edit my comment but thanks for pointing it out

bee_rider 4y ago

Hmm. Would it be easy nowadays to just have a software service that split up an account into n accounts of less than $250k, and then presented a single interface to all of them? I guess individual purchases over $250k would be a problem, but I guess a short-term gather operation could be ok, as long as you aren’t too worried about a bank run while that transaction was occurring.

acjohnson55 4y ago
This exists, many times over. It's called a cash sweep. See one example here: https://www.wellsfargo.com/investing/cash-sweep/ https://www.wellsfargo.com/investing/cash-sweep/
- qqqwerty 4y ago
  And just as a warning, it is still not clear how sweep accounts are handled in the case where the primary bank fails. SVB offered sweep accounts. But due to the intervention, the recovery process of those accounts was never tested in a real life scenario. If recovering your sweep accounts takes months, that could be really bad for a business trying to make payroll. And from what I read, there is some "operational risk" as well, i.e. if a bunch of money hits your account the same day a bank fails, that money will be in your primary banks account and if it is over the FDIC limit that amount will be uninsured.
  - acjohnson55 4y ago
    Great points. Maybe protection can be written into the rules to remove that uncertainty?
astura 4y ago
See, for example, Fidelity's FDIC-Insured Deposit Sweep Program. https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBankList https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa... >To provide you with the benefit of FDIC insurance eligibility, the cash balance in your account will be automatically swept into an interest-bearing FDIC-Insured Deposit Sweep position. Since FDIC insurance coverage is currently limited to $250,000 per qualified customer account per banking institution, Fidelity may use several banks, rather than just one, to maximize your FDIC coverage.

bubbleRefuge 4y ago

One prediction : no more bank runs.

marcosdumay 4y ago

AFAIK, the current normal is for banking systems to ensure all of the deposits, the US is an exception. And this policy hasn't caused any disaster anywhere yet. But yes, the US has more singular things that can interact badly with no limits on insurance. As a start, the insuring entity has much shallower pockets than most places I know about.

morelisp 4y ago
Your knowledge is wrong. Most European DGSs cover up to 100k, for example. https://en.wikipedia.org/wiki/Deposit_insurance https://en.wikipedia.org/wiki/Deposit_insurance

JeremyNT 4y ago

> Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions. To me this makes intuitive sense, but are the only options 250k or infinity? What's the "magic" behind that $250k number? Is there some reason to expect that this is an optimal number? I feel like maybe it's cargo-culting - it isn't even re-adjusted for inflation is it?

rtkwe 4y ago
At the time it's probably the level that covers most people's deposits. It's pretty rare for a person to have >250k in pure savings deposits so setting it at that level protects most people lessening the pressure causing bank runs. It doesn't work so well for banks like SVB where a few huge businesses make up a majority of their deposits. 250k probably still covers 90+% of people in the US.