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Deposit insurance maximization as a service
- patmcc 4y agoFun fact: credit unions in my province (BC, Canada) insure 100% of deposits, with no limit. See https://www.bcfsa.ca/public-resources/credit-union-deposit-insurance/about-cudic https://www.bcfsa.ca/public-resources/credit-union-deposit-i... This, thankfully, has never been tested in a significant way, as they are not backstopped by the federal government. (It also suggests a rather lucrative arbitrage opportunity.)
- idiotsecant 4y agoAn assurance of 100% backing with no limit is only as valuable as you think the aggregate institution is stable, which you should read as 'not very' on a long enough timeline. The CUDIC does not have a 1 to 1 backing for these assets and it can't print more, so there's risk there.
- patmcc 4y agoI agree completely. I will say the Canadian banking system (as well as credit unions, which are regulated differently) is generally quite healthy and stable, I don't think it's imminent risk of collapse. But I would certainly not count on this guarantee, it's very silly.
- prottog 4y agoI don't live in Canada but as your (very) southern neighbor, it seems that banks could be in trouble with the real estate market having been so out of control. As interest rates rise, isn't there a real risk of forced liquidations by leveraged property speculators resulting in banks sitting on a lot of losses?
- patmcc 4y agoIt's possible; there really have to be two pieces for it all to come crashing down. The first is rising interest rates leaving people unable to pay, and the other is prices falling enough that mortgages would be underwater. I think the first is pretty likely, but not sure how many people that will hit. There are decent stress test rules so anyone who couldn't afford a 1 or 2 percent jump shouldn't have qualified. The second is less likely, I think. We've got an absolute minimum 5% down payment, and almost always more like 10%, and anything under 20% requires default insurance. So I think pretty low chances unless the housing market craters ~30% or more. Which might be what it actually should fall by, honestly, but the government will probably intervene way before that happens.
- tenpies 4y agoJust to add some colour on the insurance aspect: > Mortgage default insurance protects lenders in the event a borrower defaults on their mortgage. It does not protect the borrower or a guarantor. If a borrower defaults, the insurer may oversee all legal proceedings and payment enforcement. In addition, the insurer compensates the lender should there be a shortfall after the property has been sold and expenses paid. The defaulting borrower remains responsible for any shortfall on the mortgage and the lender or mortgage insurer may pursue the borrower for any deficiency following sale of the property.[1] I just want to highlight that last part because the insurance is 100% not for the borrower, but for the lender. Just like when any other insurance policy is used, the insurance provider has a strong incentive to reduce how much of the policy's pay out it pays from its own reserves and that means going after the borrower. There is also a vague idea that because one of the major mortgage insurers is a government corporation (CMHC), they will pay out and not pursue the borrower. This is not true, and if Canadians know anything it's that no one loves taking other people's money as much as the government. To get out of paying you have to declare bankruptcy, much like the US. [2] So in short, the Canadian system is set up to have the borrower pay for the lender's ability to expeditiously be made whole in the case of default, and for the insurer to then pursue compensation from the borrower if the asset price is below the loan value. It's the most Canadian thing ever: the borrower is getting screwed but thinks it's a good thing. --- [1] https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Default_Insurance.pdf https://www.scotiabank.com/ca/en/files/12/07/Mortgage_Defaul... [2] https://rates.ca/resources/does-declaring-bankruptcy-get-you-out-paying-cmhc https://rates.ca/resources/does-declaring-bankruptcy-get-you...
- advisedwang 4y agoIs it backstopped by the provincial government?
- ceejayoz 4y ago> Section 271 of the Financial Institutions Act provides that the Provincial Government may provide financial support to the CUDIC Fund if the CUDIC Fund is impaired (see the CUDIC Fund Target Policy for further details about the CUDIC Fund).
- JumpCrisscross 4y ago> the Provincial Government may provide financial support to the CUDIC Fund Know nothing about Canadian law. But that doesn't sound like an obligation.
- acover 4y agoThe federal deposit insurance in Canada is the same (cdic). The relevant legislation explicitly says the government has no obligation to bail out the insurance fund. Practically the fund doesn't have sufficient funds to bail out a big bank failure - let alone multiple - and everyone expects a government bailout.
- rkagerer 4y agoThe Federal government can rely on printed money to cover Big Five bank failures. In BC, how would the government fund a bailout if several Credit Unions collapsed at the same time?
- acover 4y agoWhere there is a will, there's a way. The us federal reserve bought corporate bonds during the covid crisis. Can you imagine the fallout of a bank run on all credit unions? The federal government would find a way to prevent that.
- rkagerer 4y agoIn practice, are they perceived to be safer or riskier than banks as a place to store deposits?
- patmcc 4y agoAbout the same, in that the vast majority of Canadians perceive both to be incredibly safe. Which they probably are, the biggest risk would be a huge housing crash, which the government has a lot of incentive to prevent.
- chollida1 4y ago> (It also suggests a rather lucrative arbitrage opportunity.) What is this lucrative arbitrage opportunity we have to make money with this setup?
- maxbond 4y agoI don't think this actually monetizable but if they're giving you unlimited free deposit insurance, while other banks aren't, then you could keep a bunch of money there & resell the deposit insurance. Of course, if you actually pitched someone on this, their first question would be, "who insures you?" At which point you either didn't tell them (and lose their trust and they don't give you their money), tell them and they don't trust the coops (in which case you don't get their money), or tell them and they do trust the coops (in which case, they'll cut you out as a middle man and bank with these coops).
- chollida1 4y agoHow would you sell the insurance? All the insurance does is make sure you get your money back if the credit union ogoes under. If I put $500,000 of my own money in the credit union I can't see how I can sell my "insurance" to someone else as I need it to protect my own money. If someone else wants the insurance they have to put their own money into the credit union. I can't sell my insurance to someone else unless I hand them my money but I cant see why i'd do that as it wouldn't make any sense and its certainly not an arbitrage opportunity as the OP suggested.
- maxbond 4y agoYou'd either write an insurance contract and pray you have enough money in your account when the redemptions come or you'd accept their deposit and put it into your account & basically be a bank with a negative interest rate (that negative rate being your insurance premium). The arbitrage is that in some places, universal deposit insurance costs >$0 but these banks are giving it out free. So there is a difference here that's exploitable on paper, but presumably the reason it exists is that it isn't in practice. It fits the strict definition of an arbitrage opportunity in that there's a difference in pricing that you could exploit without taking on market risk, in a frictionless vacuum where wires clear instantly and carry no transaction fees and a bunch of other unrealistic assumptions. I don't view it as real, but it gave me a chuckle, like when people turn DNS into an ersatz file system or similar hackery. Like a pun in the financial system.
- dehrmann 4y agoApparently lots of places around the world do this. Probably not in Argentina. Not that pesos are worth insuring right now, anyway.
- Animats 4y agoIt's important to make sure that at no point in the process does any uninsured entity have custody of the money. That's the trouble with some "fintech" firms trying to do this. Remember, none of this matters unless the financial system is in severe trouble. Then it really matters. From the article: “We represent 1,728 insured depositors at the now-failed bank who will really need their money Monday morning. Most had precisely $250,000 on deposit. We live to serve your mission of getting these insured depositors their statutorily mandated money back and after you cut one wire to us you’re done with them; we’ll take it from here.". What could possibly go wrong with that?
- cypherpunks01 4y agoI'd think logically, in this hypothetical scenario, that money from the FDIC receivership would be deposited into a new bank such that there is continuous coverage of deposit insurance on all the customers. But yes, reality is that fintech firms don't do everything perfectly, and there are complex constraints that I'm sure we're not aware of.
- Animats 4y agoConsolidating FDIC payouts into one big wire transfer introduces a single point of failure.
- lbwtaylor 4y agoOne key problem is bankruptcy. If the fintech ever touches the money and then goes BK, the court can and will pull back that money and likely pay some to folks who are not the customers, like employees who have senior BK claims. In the linked hypothetical, fintech never touches the money, but the devil is in the implementation details and shortcuts happen.
- Asparagirl 4y agoThis is important: FDIC insurance protects you if the bank goes bust, but it doesn’t protect you if the company/fintech/exchange you’re using goes bust, even if they use an FDIC-insured bank. This exact issue came up repeatedly in the past few years with crypto companies whose FAQs and even executives falsely told people their deposited money was FDIC-insured simply because the company itself banked with an FDIC bank. That’s not how it works. One of many recent sad examples: https://mobile.twitter.com/Frances_Coppola/status/1543279013476683780 https://mobile.twitter.com/Frances_Coppola/status/1543279013... Another one: https://mobile.twitter.com/Frances_Coppola/status/1640909892952244225 https://mobile.twitter.com/Frances_Coppola/status/1640909892... (Frances Coppola is a great person to follow on Twitter.)
- acover 4y agoIs there a bank or credit union that keeps 100% of the money in reserve?
- haneefmubarak 4y agoThis is called full reserve banking, which is a step further than narrow banking (where you only invest in essentially zero risk assets like short term government bonds or let money sit in a federal reserve account). AIUI regulators do not allow this due to systemic risk: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
- nonethewiser 4y agoThat says narrow banking means you park it at the fed. In theory, couldn’t you keep the value of all deposits in cash in a vault and not break any rules? To be clear, I’m not suggesting this is a good idea. I’m just trying to clarify if this is allowed. Because at face value the idea that keeping all deposits liquid is a systemic risk seems counter intuitive. It only begins to make sense with the specific context of parking that money at the Fed.
- acover 4y agoDepositors fleeing traditional banks to narrow banks during a banking crisis can make the bank runs worse.
- haneefmubarak 4y agoRight, so you can think of it as a spectrum where full reserve banking (all deposits held directly, you're most likely going to have to pay for the privilege of secure storage and transactions) is on one end, fractional reserve banking (a small portion of deposits are held liquid, the rest is loaned out to generate interest and pay for operations) is on the other end, and narrow banking (park money in short term treasury notes and at the fed) is in the middle. In our current system, every bank or bank-like institution does fractional reserve banking. The systemic risk posed by a narrow bank or a full reserve bank is that during any potential banking crisis, there is a strong prisoner's dilemma style incentive for depositors to "defect" by withdrawing all of their money from normal banks and moving it to narrow or full reserve banks all of a sudden. This is broadly why regulators won't let you run one. Now, to answer your core question AIUI: "what stops me from running a full reserve bank [equiavalent]?" In theory, you could offer a secure storage service like safety deposit boxes etc and not be subject to finance regulatory controls. In fact, most cities do have businesses that offer secure storage facilities that you can rent space in to store your property and retrieve it as needed. This is perfectly legal and honestly such a business doesn't usually know or even need to know the contents of such storage lockers etc. The problem comes when you want to integrate with the larger financial system. Finance regs are far reaching in a "viral" sort of way; they don't just restrict how you do business, they also typically restrict whom you can do what business with based on how and what kind of business they do. The result of this is that you end up under the purview and subject to the approval of regulators one way or another, at which point they disallow your business. As a simple example, if you want to make it so your customers can easily send or receive money, you'll probably want to be able to process ACH and wire transactions, at which point you fall under extensive regulation administered primarily by the Treasury and the Federal Reserve. I imagine the same will be true for things like debit cards on the standard networks since they're already subject to regulation of a viral nature and so on and so on.
- sdfghswe 4y agoI like reading patio11 just because the alternative writers on the subject are by comparison so bad. But even patio11 could be better. For example > Many financial service providers have so-called treasury management solutions which they sell against these needs. What does "sell against" mean?
- sib 4y ago"sell to customers who have these needs"
- empathy_m 4y agoWhat were SVB customers getting in exchange for encouraging every company to keep their $ in uninsured deposits earning low interest? Was it 2.5% 30yr mortgages for founders? Was it liquidity, in the form of loans against illiquid pre-IPO stock? Were the interests of the companies aligned with those of the people who were getting the perks? (At 4-5% for parking excess cash in simple T bill it seems like a pricey perk)
- indymike 4y ago> What were SVB customers getting in exchange for encouraging every company to keep their $ in uninsured deposits earning low interest? Sometimes the issue is that there is nothing better, that is known to be available. I can't recall being in a treasury management meeting where the CFO or VP of finance raised a concern about maxing coverage by FDIC insurance. In fact, many transactions that even a $2-3M per year company does require pooling more than FDIC covered amounts in a bank account just to cover receiving payments or making payments. Incidentally SVB did have very comparable treasury management feature to other banks. Finally, to address the perk part of the post, at no time did I see SVB offer anything other than market rates for mortgages - the difference is that they would not reject founders immediately because they were a business owner with no W-2 income.
- JumpCrisscross 4y ago> can't recall being in a treasury management meeting where the CFO or VP of finance raised a concern about maxing coverage by FDIC insurance This is standard issue for corporate America. People who cut their teeth in the last decade's tech boom didn't learn it. But managing counterparty risk is one of the core jobs of corporate treasurers.
- empathy_m 4y agoFrankly I don't think the deposit insurance thing is a big deal -- It's really really hard to imagine a world where a big enough bank fails and people don't get $1. But the interest rate spread ... Seems like a lot now? Wasn't, for a long time?
- 4y ago
- cwmma 4y agoMassachusetts has an optional Depositors Insurance Fund[1] that banks can join which insures all their deposits above 250k, seems like if you were really worried you could just open an account in one of those banks. 1. https://www.difxs.com/DIF/Home.aspx https://www.difxs.com/DIF/Home.aspx
- fundad 4y agoHow could they ever enforce a limit on deposit insurance after SVB? Any shred of legitimacy around that limit has faded.
- nonethewiser 4y agoI’m still confused by this. Aren’t they making depositors mostly whole by selling all the banks assets? I believe they are at least doing that. But are they also injecting money to make up the difference?
- kasey_junk 4y agoThe fdic estimates it will cost the fund ~20B https://www.fdic.gov/news/press-releases/2023/pr23023.html https://www.fdic.gov/news/press-releases/2023/pr23023.html
- gr1zzlybe4r 4y agoStill surprising to me how tech is trying to spin this as some novel event. Fractional reserve banking was a known quantity. Risk management of your cash matters in a system like that. Full stop. Whether you think fractional reserve banking is dumb idea is a different discussion, but to willfully pretend that the depositors weren't at least partially culpable for this collapse is something else. Tech has no humility.
- ClumsyPilot 4y ago> Tech has no humility. or self-awareness
- gr1zzlybe4r 4y agoRight. It is incredible to me that a lot of "thought leaders" are acting like this situation hasn't been handled in a structured way since the 30s by the FDIC. It has really made me believe that a lot of tech is just grifters reinventing wheels everywhere, but with great marketing.
- deathbyrtlmt 4y agoWhat even do you mean by “tech”? Tech has no humility? Nonsense. Nobody has humility. Everyone trying to build a business fakes it. Your HVAC guy is highly likely to be a bozo (and overcharging besides). This isn’t “bad” it just is. Tech is people. People suck.
- Scalene2 4y agoIf I was a billionaire I would readily pay 1-5 million dollars a year to a bank that would guarantee an entire 100 million dollar account by not lending out any of the money. This would of course have to be a bank that didn't lend out any money at all and existed entirely to server individuals that didn't want their money held in a bank that used fractional reserve banking.
- prottog 4y agoWho keeps $100mm in cash? This is a solution to an imaginary problem.
- mikeyouse 4y agoNot even a great solution either. For zero risk and zero out-of-pocket cost, you could just find a broker on commission to ladder you in 30-day T-Bills and manage the purchases.
- drinkzima 4y agoI don't understand why you would do this when short term Treasuries or money market funds exist. There are far better solutions than what you suggest.
- ericpauley 4y agoIt really makes no sense. The bank's "cash" is really just database entries with the Fed anyway, why not loan the money to the Fed overnight (reverse repo) at 5%? The reason GP's dream doesn't exist is because MMs do effectively the same thing and pay you.
- tiffanyh 4y agoAnyone else disappointed in patio11 blog posts on payments & banking in general? They either paint an inaccurate picture of the situation or try to frame something old as new.
- wharfjumper 4y agoToo many words for my limited brainpower.
- hnaccount_rng 4y agoDo you have a better (or even just more frequent) source for this kind of information?
- hartator 4y agoWhat’s the point of doing this anymore? It seems FDIC will insure anything too big to fail. You might incurs more risks by spreading your money like this.
- hammock 4y agoFidelity does this for me .. for free .. they work with several banks to do so. Do other banks not do this?
- JumpCrisscross 4y ago> Do other banks not do this? Banks cut sweetheart deals with large depositors to keep their deposits with them. A sweep account is less lucrative than one you can YOLO into long-term Treasuries. I'm not surprised most start-ups didn't have a treasurer; I am surprised e.g. Roku or Circle didn't.
- kasey_junk 4y agoMost depositor networks demand reciprocity for their members, so a dollar that leaves the bank in a sweep comes back from some other bank. They are technically more expensive than a large depositor that wanders in off the street in that the network takes a bit but from a total customer acquisition cost it really depends on the bank. For some banks brokered deposits subsidize all other deposits because their customers otherwise are more expensive. Many small banks that serve underprivileged communities are in this category. For SVB it seems this was decidedly not true! They had low cost to acquire large depositors and had no market pressure to engage with a deposits network.
- zer00eyz 4y agoWow, Talk to your accountant (Most of you here on HN probably make enough to warrant having one of these), Talk to your banker, and if you have more that 50 people working for you then you have a firm or a CIO... You don't call a plumber to fix your electrical wiring... Get advice from a professional and rest easy at night. Take this article and the comments here as you being an informed consumer when you go to your accountant or CFO... speaking their language and understanding what they have to say will benefit both of you.
- kevinak 4y agoImagine if there was some system out there that would let you store your wealth without dealing with any third-party shenanigans. That would be great.