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When SVB was failing, I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts. The usual response was we need to punish startups

When SVB was failing, I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts. The usual response was we need to punish startups for being reckless, and we need market forces to encourage banks to be well-managed. It turns out having the time or know-how to identify poorly managed banks is rare (and if you did, you should be in the business of short selling, not making widgets), but we all know which banks are too big to fail, so just move your money there.

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taeric 4y ago
There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. Not just living off of leveraged value forever. To that end, I'm not sure I see good argument for 100% protection. Money sitting in a bank deposit only creates wealth if we have the banks actively lending. And, annoyingly to me, the largest form of this for the "too big to fail" banks seems to be credit card schemes. Which I actively despise, at the moment. It also incentivizes banks to hunt out places to loan money. Which is why we have ridiculously complicated securities to back mortgages. The amount of those that have been made is only "safe" for the banks with a ton of the extra machinery they have put on top. Which has costs. Edit: I should add that I'm not 100% on my stance here. Would love to be challenged on any of the above. Can only help my understanding.
- dehrmann 4y ago
  > There is a reason we don't want billionaires to feel safe with their assets sitting places... Between inflation and income taxes, you don't need to worry about this. I literally can't remember the last time banks paid enough interest to beat inflation and cover 37% income tax (almost 50% if you're in CA).
  - taeric 4y ago
    Billionaires care very little on either of those things? Leveraged income is not taxed. Is why you don't pay taxes as income on the loan to pay for your house. And inflation they have beat with other returns. If anything, this is reason to keep the insurance rate low. After all, they only "lose" the uninsured part that is not recovered in bank seizure. The scare quotes about people losing 100% of their money in SVB was just that, scare quotes. The assets did not disappear 100% and depositors are first in line. If anything, that should incentivise wealthy people to pay attention to how a bank is being run. Full insurance means I don't give a shit.
  - Izkata 4y ago
    Income tax is on the gain, not the whole amount, so beating the income tax doesn't even make sense. There's nothing to beat.
    - ummonk 4y ago
      You can't deduct inflation from the interest earning, so yes the interest rate has to be high enough to cover inflation after tax.
      - taeric 4y ago
        But if it is, let's say 7 million dollars, even earning 0 interest, it can be used as collateral for loans that they can then use in places that has something to beat inflation. Notably, this has a finite lifespan on how often you can do it. It is not some magical process that has no downside. But, to pretend the people that will buy yachts care about inflation loss on things is silly. Every single asset they buy will result in worse loss than inflation. Having safe assets that they know won't be taken is a very nice source of collateral. And note that I never envision them putting their billions away, in this manner. Just many millions. Because they have many many millions.
- AmericanChopper 4y ago
  The problem you’re talking about doesn’t exist. Billionaires are never going to leave much of their money sitting in a bank account, because there’s always going to be better performing assets for them to invest it in. Even if they did, the banks would be putting most of that money to work themselves anyway.
  - taeric 4y ago
    I don't see them leaving all of it. I do see them leaving enough to have collateral for a loan that they can live off for a long time. Heck, just the rate that is common for bump CDs right now is not too shabby and makes me regret not setting up a savings ladder sooner. That said, your point about better performing assets is why I don't think they care about inflation, as my response to the other thread said. I also agree that the banks should be putting them to good use. Sadly, we have active evidence that the banks are not too good at that. They seem to think it means either credit cards for the masses (which, yes, pays well for the bank), or convincing everyone to refinance their homes. Neither of which feels that good to me. Tech stocks have screwed this up by fucking up the idea of profit versus non-profit companies. Not paying out dividends to shareholders has made that a near meaningless distinction and made it so that living off changes in the market is all folks can do. That is, you cannot own stock in a company to get residuals while they make the world better for you. So, to that end, how do you think the banks should be putting that money to work?
    - AmericanChopper 4y ago
      This comment describes a moral judgement about consumerism, and maybe that’s perfectly reasonable, but it doesn’t relate to issues around the productive use of capital.
      - taeric 4y ago
        Not what I meant, amusingly. I seriously meant it as a question of what you think they should do? Funding consumers is somewhat fine, as far as money making goes. But our rules are made to drive to outcomes we want. So, what do we want banks doing?
- mindslight 4y ago
  My argument: Accounts seem to be de facto fully protected anyway, or at least close enough. So making it official allows the FDIC to assess the proper rates for what they're actually insuring (which is necessarily super-linear due to increased variance). Anyone who wants to park lots of money without paying the FDIC insurance cost can buy Treasury bills/notes directly.
  - dehrmann 4y ago
    > Anyone who wants to park lots of money without paying the FDIC insurance cost can buy Treasury bills/notes directly This brings up the interesting question of what the role of banks should be. When savers have access to money market funds investing in short-term government debt (this is basically what SVB bought), why bother with the intermediary? We're also in a world of securitized mortgages where banks are just the originators. There are also mortgage originators that just do mortgages. These days, the only unique services banks provide are retail services and small business loans.
    - ummonk 4y ago
      SVB bought mortgage backed securities as well, not just treasuries.
  - taeric 4y ago
    This is mainly from poor coverage of what happened with SVB. The main thing protected there was the value of long term bonds. Last thing that fed wanted was for those to plummet at auction. Not the large deposits that would have gone down with them.
    - mindslight 4y ago
      I don't understand the argument you are making. Regardless of any additional reasons it happened, depositors at SVB were bailed out, right? And it's widely held that depositors at the TBTF megabanks will be bailed out similarly, right? So unless/until a bank fails and the feds actually make large depositors take a haircut, then it seems that large accounts are de facto covered. To me, it would seem the dynamic is not one of "large depositors can do their own diligence and giving them FDIC coverage would be a burden", but rather "banks and their depositors aren't responsible enough to accept the consequences of uninsured accounts".
- SilasX 4y ago
  >There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. Okay, but the $250k cap doesn't do that, it just encourages them to do the exact same thing, shuffled across multiple banks.
  - taeric 4y ago
    Oddly, it is worth noting that many of the accounts at SVB were completely uninsured business accounts. At any rate, yes. But you can only split billions across so many 250k banks (I haven't checked the numbers, but I'd assume this is limited by number of banks). And presumably, that means that many more locally focused places managing more funds. That is, the spread is part of the point.
    - SilasX 4y ago
      Yes, but it's just as "with their assets sitting places"[1] as it was before -- the shuffling doesn't address the problem you raised in your comment[1] and proposed that as a solution to. [1] https://news.ycombinator.com/item?id=35749378 https://news.ycombinator.com/item?id=35749378
      - taeric 4y ago
        I'm not sure I follow? Use some charity in this, as I am on a phone most of the time. But, sitting many places is better than fewer. And smaller amounts is better than larger. But! This is just like lines of code. No "true" value answer. And pathological is pathological. So, did I propose a solution? I specifically think 100% covered it bad. Not clear what number we want.
        SilasX 4y ago
        You don't follow... your own argument, that you were advancing? You were bringing up the insurance cap to support this argument: >There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. That is, you advocated the cap as a means to make billionaires use their assets to make the world better. I replied[1] that the cap doesn't make billionaires do that (that= "make the world better"), but simply makes them do the same thing they were doing before, but shuffled across many banks. (i.e. "feel safe with their assets sitting many places, rather than one"). Then, you forgot what argument you were making, including this core point, and are now asking me to re-explain it to you, having since drifted off to a completely different point about whether there are other benefits, unrelated to this point, to storing a billionaire's stash in many places vs one. Normally, I accept that people might miss key points from earlier in the thread, but here, this is your own argument, and you seem to have forgotten you made it. Come on, show some respect to the people who try to engage with you. [1] https://news.ycombinator.com/item?id=35754102 https://news.ycombinator.com/item?id=35754102
linksnapzz 4y ago
A bank too big to fail, is also too big to exist.
- dehrmann 4y ago
  2008 happened and we collectively decided(?) this isn't the case. Don't expect anyone to care this time, either.
  - _heimdall 4y ago
    May just be me, but I don't remember getting a say in this in 2008
    - tatersolid 4y ago
      Did you vote from 2004-2008? If so, you had your “say”. The USA is a representative democracy. If you elected idiots unable to do the job it’s on the royal “you”.
      - harimau777 4y ago
        I don't think that's meaningfully the case between gerrymandering, the electoral college, voter suppression, first past the post voting, and lobbying.
        Ekaros 4y ago
        All decisions done by electorate or those who they elected.
        dehrmann 4y ago
        Despite the establishment not wanting it, Trump still won. Everything you mentioned only goes so far once people are unhappy.
        _heimdall 4y ago
Dalewyn 4y ago
>I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts. I'm not an accountant, but the fine print does say "Up to at least $250,000.00.", so FDIC insuring the entirety of savings like they did this time around isn't exactly unexpected. They kind of need to if the goal is to shore up the commons' trust in banking, anyway. This all being said, it doesn't take a rocket scientist to understand it's a bad idea to keep all your eggs (savings) in one basket (savings account). If you're fortunate enough to have enough liquid funds that all of this is a significant concern, definitely consult an accountant about spreading those funds around to mitigate damage and not lose out if the FDIC decides covering the entirety of savings is not something they want to do on that particular day.
- Scoundreller 4y ago
  I just don’t understand how none of the 5000 banks in USA haven’t renamed themselves as “safe bank” and promises to only invest in t-bills or maybe just floating rate low-ltv loans. That’s great for entities finding themselves with millions in their checking account. Interest rates would suck, but that’s the price you pay for insurance. Anyone chasing higher rates or pricier customer service (or going with whichever bank blows their budget on marketing) is playing with fire.
  - ummonk 4y ago
    Why would they be any safer than the too-big-to-fail megabanks?
    - Scoundreller 4y ago
      because they're not taking the same risks, but yeah, if there are banks that can take risks while someone else bailouts any losses from those decisions, then yeah, I get going with the latter.
  - dmurray 4y ago
    As recently as 1 year ago, the fed funds rate was 0.2%, which isn't enough to pay the overheads of a bank. Banks don't move fast enough to reinvent their whole business and churn their whole portfolio into T-bills on that time scale, and take too long-term a view for "let's just shutter the business when rates go back to zero" to be a business model they will consider. Having a single product - a single account type that is backed by T-bills - is not something regulators will allow a bank to do: all deposit accounts has to be backed by the bank as a whole. However, there are non-banking businesses that don't have these constraints, and some of them are doing exactly what you suggest. They are called money market funds and business is great for them right now. You can get the returns and safety of short term Treasuries in return for foregoing other services your bank provides (physical branches, credit cards) and accepting a minor liquidity risk that the fund could pause withdrawals.
nradov 4y ago
Bank depositors should have a choice depending on their risk tolerance. There should be fully insured accounts which charge a fee to safely hold your money. And there should be uninsured accounts which pay interest. But the notion of earning interest on insured accounts is essentially financial alchemy: it appears to create something from nothing and ends to causing serious moral hazards.
- sschueller 4y ago
  AT1 bond holders at Credit Suisse knew that those are risky bonds but now they are all filling legal actions because they lost them. You would see the same issue. Everyone would go for the risk and when the ship sinks it will be "we are to to big to fail! Who could have predicted this? It's a special situation, etc. etc.".
_heimdall 4y ago
How would that work exactly? The FDIC Fund has to know how much cash to keep on hand to cover total insured deposits. The minimum is something like 1.35% of all insured deposits if I'm not mistaken, which they have actually been under for a while now. If all deposits are covered 100% the find would have to be dramatically larger, do they just take AL of that from the banks immediately?
- slashdev 4y ago
  Up the rate and ammortize it over the next 20 years. The alternative is to kill the regional banks and concentrate power in the few really huge banks. I’m not much for conspiracy theories, but the problem is so obvious and the solution so simple, it does make one wonder if that’s not intentional.
  - _heimdall 4y ago
    The fund is already below their minimum requirement though and didn't actually have enough cash to cover SVB insured deposits when it failed. Amortizing over 20 years likely means tax payers will cover it if any more banks fail in the near future
    - slashdev 4y ago
      The funny thing is, if you insure everything everywhere then why would anyone pull their money out of a bank to begin with? That ends the bank runs and the deposit flight right there. It probably wouldn’t come to that.
      - _heimdall 4y ago
        Beyond that, if all money is insured 100% why would banks keep any reserve? And what keeps a check on the risks banks are willing to make? I'd be happy to see us abandon the fractional reserve system all together, but that means blowing up the system entirely and getting rid of the concept of debt. Short of that, I don't see how we could keep fractional reserve while making deposits completely risk free.
ericpauley 4y ago
> It turns out having the time or know-how to identify poorly managed banks is rare The intended solution isn’t for you to vet your banks, it’s to not exceed the insurance cap. People appear to be willfully ignorant of this. No, it’s not hard to stay under (cash sweeps and money markets exist). Yes, these products are actually beneficial and not just accounting tricks (cash sweep diversifies bank’s depositors as well, reducing systemic risk).
- stickfigure 4y ago
  There is no social value to raising FDIC limits as a technicality via financial engineering. The money spent to maintain these schemes is pure dead weight loss on the economy.
  - ericpauley 4y ago
    No it’s not. Sweep accounts reduce systemic risk because your money is at different banks. MMFs are an independent product. Consider SVB. Bank run aside deposits were poorly diversified and many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Unlimited insurance does not solve this problem, except in paying out, which the FDIC ideally would not have to do. Deposit diversification does solve this problem, and the only reason it’s incentivized for depositors is because of the insurance cap. The overhead of sweeps is quite low and money markets even lower (MMFs with the fed outperform best bank deposit rates even after management fees). Honestly retail banking is the real dead weight loss. Sweep accounts often offer better rates than the underlying banks give their customers because the sweep accounts have low overhead for the bank and pass on the savings. Same goes for other banking products like CDs: banks offer better rates on the market than to their own customers.
    - Scoundreller 4y ago
      > many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Seems like there should be a market for a bank that advertises “no long-duration HTMs unless we hold a duration and interest-matched CD” and “short-dated investments only on checking acct balances”. If that doesn’t exist, it sounds like big depositors were ignorant or quite happy to get some extra interest (or fancier offices/marketing) in exchange for that risk.
lamontcg 4y ago
It isn't like these banks are really that badly run. They've just inherently got interest rate exposure. It isn't like the 80s S&L crisis or the 2009 financial crisis where the paper was backing bad investments or mortgages which had defaulted. The problem is just interest rate risk and that the current value of the paper has gone down. That only creates a problem if the bank is forced to sell those assets, and if there wasn't a classical bank run then the bank wouldn't be forced to sell those assets. This is exactly the kind of borrow-short-lend-long risk that all banks inherently run and is why we supposedly have the FDIC to stop these kinds of bank runs. SVG had worse issues where their deposits were inherently draining due to the startups using them for their corporate accounts, and then they went out and sold some of their paper, booking their losses, instead of looking for financing. For those looking for the punish-the-rich morality play, the real winner here is likely to be JP Morgan or PNC which may bid to buy up the assets, which is just the rich-getting-richer and a large bank swallowing up a smaller community bank and more consolidation and monopolization of the financial sector.
- beambot 4y ago
  They've just inherently got un-hedged interest rate exposure.
  - makomk 4y ago
    Yup, that is basically inherent. In order to hedge their interest rate exposure they'd have to find some counterparty that can afford to do it - there is no magic hedging or insurance fairy - which with previous interest rates would probably wipe out all their interest income and expose them to counterparty risk at the same time if they could even find anyone.
    - lamontcg 4y ago
      Yeah, AIG selling credit default swaps against CDOs comes to mind. Hedging isn't magic, someone else winds up eating all the losses.
anon291 4y ago
"Normal" bank accounts do not have more than 250k. The only thing that should change is that the limit should apply to one's total assets in all FDIC banks, not per bank.
- brvsft 4y ago
  [flagged]
- brvsft 4y ago
  Counterpoint, they should just get rid of the FDIC. And if you flagged me, fuck you. The blatant adversarial tone of this comment means it should be flagged just on its own. Flagging my comment without flagging this moronic nonsense is clear evidence of bias and gaming the flag system on HN. If you don't like the obvious counterpoint that the FDIC probably shouldn't exist at all given the moral hazard it creates for all bank depositors, you're a smoothbrain.
  - deleted 4y ago
    [deleted]
  - anon291 4y ago
    I didn't flag you. My comment is not adversarial. The vast majority of Americans have less than 250k in their account. Thus having above this amount is abnormal. The vast majority of Americans have less than 250k in all their savings accounts
_huayra_ 4y ago
In reality, there is no such thing as a "bank" in the sense that it's a big vault of money so you don't lose it in a house fire. Every bank today is really a Highly-Levered Bond Fund. If we increase FDIC insurance to 100%, without commensurate changes in what banks are allowed to do with customer deposits, this seems like it would create a moral hazard where banks would be allowed to do all kinds of crazy shenanigans because they know they'll be bailed out. To be clear, I'm for 100% FDIC insurance, but if we get this without getting much more stringent duration risk transformation standards (e.g. don't load up on long-dated treasuries in a low-rate environment), I think it could actually make the banking stability issue worse :(
- wbl 4y ago
  Banks are unstable but that is good because we want maturity transformation. A great society is one where old men are paying young men to plant trees with money that would be sitting around instead.
  - isbwkisbakadqv 4y ago
    I’m not sure I fully agree but I like it

deleted 4y ago

[deleted]

taeric 4y ago

There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. Not just living off of leveraged value forever. To that end, I'm not sure I see good argument for 100% protection. Money sitting in a bank deposit only creates wealth if we have the banks actively lending. And, annoyingly to me, the largest form of this for the "too big to fail" banks seems to be credit card schemes. Which I actively despise, at the moment. It also incentivizes banks to hunt out places to loan money. Which is why we have ridiculously complicated securities to back mortgages. The amount of those that have been made is only "safe" for the banks with a ton of the extra machinery they have put on top. Which has costs. Edit: I should add that I'm not 100% on my stance here. Would love to be challenged on any of the above. Can only help my understanding.

dehrmann 4y ago
> There is a reason we don't want billionaires to feel safe with their assets sitting places... Between inflation and income taxes, you don't need to worry about this. I literally can't remember the last time banks paid enough interest to beat inflation and cover 37% income tax (almost 50% if you're in CA).
- taeric 4y ago
  Billionaires care very little on either of those things? Leveraged income is not taxed. Is why you don't pay taxes as income on the loan to pay for your house. And inflation they have beat with other returns. If anything, this is reason to keep the insurance rate low. After all, they only "lose" the uninsured part that is not recovered in bank seizure. The scare quotes about people losing 100% of their money in SVB was just that, scare quotes. The assets did not disappear 100% and depositors are first in line. If anything, that should incentivise wealthy people to pay attention to how a bank is being run. Full insurance means I don't give a shit.
- Izkata 4y ago
  Income tax is on the gain, not the whole amount, so beating the income tax doesn't even make sense. There's nothing to beat.
  - ummonk 4y ago
    You can't deduct inflation from the interest earning, so yes the interest rate has to be high enough to cover inflation after tax.
    - taeric 4y ago
      But if it is, let's say 7 million dollars, even earning 0 interest, it can be used as collateral for loans that they can then use in places that has something to beat inflation. Notably, this has a finite lifespan on how often you can do it. It is not some magical process that has no downside. But, to pretend the people that will buy yachts care about inflation loss on things is silly. Every single asset they buy will result in worse loss than inflation. Having safe assets that they know won't be taken is a very nice source of collateral. And note that I never envision them putting their billions away, in this manner. Just many millions. Because they have many many millions.
AmericanChopper 4y ago
The problem you’re talking about doesn’t exist. Billionaires are never going to leave much of their money sitting in a bank account, because there’s always going to be better performing assets for them to invest it in. Even if they did, the banks would be putting most of that money to work themselves anyway.
- taeric 4y ago
  I don't see them leaving all of it. I do see them leaving enough to have collateral for a loan that they can live off for a long time. Heck, just the rate that is common for bump CDs right now is not too shabby and makes me regret not setting up a savings ladder sooner. That said, your point about better performing assets is why I don't think they care about inflation, as my response to the other thread said. I also agree that the banks should be putting them to good use. Sadly, we have active evidence that the banks are not too good at that. They seem to think it means either credit cards for the masses (which, yes, pays well for the bank), or convincing everyone to refinance their homes. Neither of which feels that good to me. Tech stocks have screwed this up by fucking up the idea of profit versus non-profit companies. Not paying out dividends to shareholders has made that a near meaningless distinction and made it so that living off changes in the market is all folks can do. That is, you cannot own stock in a company to get residuals while they make the world better for you. So, to that end, how do you think the banks should be putting that money to work?
  - AmericanChopper 4y ago
    This comment describes a moral judgement about consumerism, and maybe that’s perfectly reasonable, but it doesn’t relate to issues around the productive use of capital.
    - taeric 4y ago
      Not what I meant, amusingly. I seriously meant it as a question of what you think they should do? Funding consumers is somewhat fine, as far as money making goes. But our rules are made to drive to outcomes we want. So, what do we want banks doing?
mindslight 4y ago
My argument: Accounts seem to be de facto fully protected anyway, or at least close enough. So making it official allows the FDIC to assess the proper rates for what they're actually insuring (which is necessarily super-linear due to increased variance). Anyone who wants to park lots of money without paying the FDIC insurance cost can buy Treasury bills/notes directly.
- dehrmann 4y ago
  > Anyone who wants to park lots of money without paying the FDIC insurance cost can buy Treasury bills/notes directly This brings up the interesting question of what the role of banks should be. When savers have access to money market funds investing in short-term government debt (this is basically what SVB bought), why bother with the intermediary? We're also in a world of securitized mortgages where banks are just the originators. There are also mortgage originators that just do mortgages. These days, the only unique services banks provide are retail services and small business loans.
  - ummonk 4y ago
    SVB bought mortgage backed securities as well, not just treasuries.
- taeric 4y ago
  This is mainly from poor coverage of what happened with SVB. The main thing protected there was the value of long term bonds. Last thing that fed wanted was for those to plummet at auction. Not the large deposits that would have gone down with them.
  - mindslight 4y ago
    I don't understand the argument you are making. Regardless of any additional reasons it happened, depositors at SVB were bailed out, right? And it's widely held that depositors at the TBTF megabanks will be bailed out similarly, right? So unless/until a bank fails and the feds actually make large depositors take a haircut, then it seems that large accounts are de facto covered. To me, it would seem the dynamic is not one of "large depositors can do their own diligence and giving them FDIC coverage would be a burden", but rather "banks and their depositors aren't responsible enough to accept the consequences of uninsured accounts".
SilasX 4y ago
>There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. Okay, but the $250k cap doesn't do that, it just encourages them to do the exact same thing, shuffled across multiple banks.
- taeric 4y ago
  Oddly, it is worth noting that many of the accounts at SVB were completely uninsured business accounts. At any rate, yes. But you can only split billions across so many 250k banks (I haven't checked the numbers, but I'd assume this is limited by number of banks). And presumably, that means that many more locally focused places managing more funds. That is, the spread is part of the point.
  - SilasX 4y ago
    Yes, but it's just as "with their assets sitting places"[1] as it was before -- the shuffling doesn't address the problem you raised in your comment[1] and proposed that as a solution to. [1] https://news.ycombinator.com/item?id=35749378 https://news.ycombinator.com/item?id=35749378
    - taeric 4y ago
      I'm not sure I follow? Use some charity in this, as I am on a phone most of the time. But, sitting many places is better than fewer. And smaller amounts is better than larger. But! This is just like lines of code. No "true" value answer. And pathological is pathological. So, did I propose a solution? I specifically think 100% covered it bad. Not clear what number we want.
      - SilasX 4y ago
        You don't follow... your own argument, that you were advancing? You were bringing up the insurance cap to support this argument: >There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. That is, you advocated the cap as a means to make billionaires use their assets to make the world better. I replied[1] that the cap doesn't make billionaires do that (that= "make the world better"), but simply makes them do the same thing they were doing before, but shuffled across many banks. (i.e. "feel safe with their assets sitting many places, rather than one"). Then, you forgot what argument you were making, including this core point, and are now asking me to re-explain it to you, having since drifted off to a completely different point about whether there are other benefits, unrelated to this point, to storing a billionaire's stash in many places vs one. Normally, I accept that people might miss key points from earlier in the thread, but here, this is your own argument, and you seem to have forgotten you made it. Come on, show some respect to the people who try to engage with you. [1] https://news.ycombinator.com/item?id=35754102 https://news.ycombinator.com/item?id=35754102

linksnapzz 4y ago

A bank too big to fail, is also too big to exist.

dehrmann 4y ago
2008 happened and we collectively decided(?) this isn't the case. Don't expect anyone to care this time, either.
- _heimdall 4y ago
  May just be me, but I don't remember getting a say in this in 2008
  - tatersolid 4y ago
    Did you vote from 2004-2008? If so, you had your “say”. The USA is a representative democracy. If you elected idiots unable to do the job it’s on the royal “you”.
    - harimau777 4y ago
      I don't think that's meaningfully the case between gerrymandering, the electoral college, voter suppression, first past the post voting, and lobbying.
      - Ekaros 4y ago
        All decisions done by electorate or those who they elected.
      - dehrmann 4y ago
        Despite the establishment not wanting it, Trump still won. Everything you mentioned only goes so far once people are unhappy.
        _heimdall 4y ago

Dalewyn 4y ago

>I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts. I'm not an accountant, but the fine print does say "Up to at least $250,000.00.", so FDIC insuring the entirety of savings like they did this time around isn't exactly unexpected. They kind of need to if the goal is to shore up the commons' trust in banking, anyway. This all being said, it doesn't take a rocket scientist to understand it's a bad idea to keep all your eggs (savings) in one basket (savings account). If you're fortunate enough to have enough liquid funds that all of this is a significant concern, definitely consult an accountant about spreading those funds around to mitigate damage and not lose out if the FDIC decides covering the entirety of savings is not something they want to do on that particular day.

Scoundreller 4y ago
I just don’t understand how none of the 5000 banks in USA haven’t renamed themselves as “safe bank” and promises to only invest in t-bills or maybe just floating rate low-ltv loans. That’s great for entities finding themselves with millions in their checking account. Interest rates would suck, but that’s the price you pay for insurance. Anyone chasing higher rates or pricier customer service (or going with whichever bank blows their budget on marketing) is playing with fire.
- ummonk 4y ago
  Why would they be any safer than the too-big-to-fail megabanks?
  - Scoundreller 4y ago
    because they're not taking the same risks, but yeah, if there are banks that can take risks while someone else bailouts any losses from those decisions, then yeah, I get going with the latter.
- dmurray 4y ago
  As recently as 1 year ago, the fed funds rate was 0.2%, which isn't enough to pay the overheads of a bank. Banks don't move fast enough to reinvent their whole business and churn their whole portfolio into T-bills on that time scale, and take too long-term a view for "let's just shutter the business when rates go back to zero" to be a business model they will consider. Having a single product - a single account type that is backed by T-bills - is not something regulators will allow a bank to do: all deposit accounts has to be backed by the bank as a whole. However, there are non-banking businesses that don't have these constraints, and some of them are doing exactly what you suggest. They are called money market funds and business is great for them right now. You can get the returns and safety of short term Treasuries in return for foregoing other services your bank provides (physical branches, credit cards) and accepting a minor liquidity risk that the fund could pause withdrawals.

nradov 4y ago

Bank depositors should have a choice depending on their risk tolerance. There should be fully insured accounts which charge a fee to safely hold your money. And there should be uninsured accounts which pay interest. But the notion of earning interest on insured accounts is essentially financial alchemy: it appears to create something from nothing and ends to causing serious moral hazards.

sschueller 4y ago
AT1 bond holders at Credit Suisse knew that those are risky bonds but now they are all filling legal actions because they lost them. You would see the same issue. Everyone would go for the risk and when the ship sinks it will be "we are to to big to fail! Who could have predicted this? It's a special situation, etc. etc.".

_heimdall 4y ago

How would that work exactly? The FDIC Fund has to know how much cash to keep on hand to cover total insured deposits. The minimum is something like 1.35% of all insured deposits if I'm not mistaken, which they have actually been under for a while now. If all deposits are covered 100% the find would have to be dramatically larger, do they just take AL of that from the banks immediately?

slashdev 4y ago
Up the rate and ammortize it over the next 20 years. The alternative is to kill the regional banks and concentrate power in the few really huge banks. I’m not much for conspiracy theories, but the problem is so obvious and the solution so simple, it does make one wonder if that’s not intentional.
- _heimdall 4y ago
  The fund is already below their minimum requirement though and didn't actually have enough cash to cover SVB insured deposits when it failed. Amortizing over 20 years likely means tax payers will cover it if any more banks fail in the near future
  - slashdev 4y ago
    The funny thing is, if you insure everything everywhere then why would anyone pull their money out of a bank to begin with? That ends the bank runs and the deposit flight right there. It probably wouldn’t come to that.
    - _heimdall 4y ago
      Beyond that, if all money is insured 100% why would banks keep any reserve? And what keeps a check on the risks banks are willing to make? I'd be happy to see us abandon the fractional reserve system all together, but that means blowing up the system entirely and getting rid of the concept of debt. Short of that, I don't see how we could keep fractional reserve while making deposits completely risk free.

ericpauley 4y ago

> It turns out having the time or know-how to identify poorly managed banks is rare The intended solution isn’t for you to vet your banks, it’s to not exceed the insurance cap. People appear to be willfully ignorant of this. No, it’s not hard to stay under (cash sweeps and money markets exist). Yes, these products are actually beneficial and not just accounting tricks (cash sweep diversifies bank’s depositors as well, reducing systemic risk).

stickfigure 4y ago
There is no social value to raising FDIC limits as a technicality via financial engineering. The money spent to maintain these schemes is pure dead weight loss on the economy.
- ericpauley 4y ago
  No it’s not. Sweep accounts reduce systemic risk because your money is at different banks. MMFs are an independent product. Consider SVB. Bank run aside deposits were poorly diversified and many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Unlimited insurance does not solve this problem, except in paying out, which the FDIC ideally would not have to do. Deposit diversification does solve this problem, and the only reason it’s incentivized for depositors is because of the insurance cap. The overhead of sweeps is quite low and money markets even lower (MMFs with the fed outperform best bank deposit rates even after management fees). Honestly retail banking is the real dead weight loss. Sweep accounts often offer better rates than the underlying banks give their customers because the sweep accounts have low overhead for the bank and pass on the savings. Same goes for other banking products like CDs: banks offer better rates on the market than to their own customers.
  - Scoundreller 4y ago
    > many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Seems like there should be a market for a bank that advertises “no long-duration HTMs unless we hold a duration and interest-matched CD” and “short-dated investments only on checking acct balances”. If that doesn’t exist, it sounds like big depositors were ignorant or quite happy to get some extra interest (or fancier offices/marketing) in exchange for that risk.

lamontcg 4y ago

It isn't like these banks are really that badly run. They've just inherently got interest rate exposure. It isn't like the 80s S&L crisis or the 2009 financial crisis where the paper was backing bad investments or mortgages which had defaulted. The problem is just interest rate risk and that the current value of the paper has gone down. That only creates a problem if the bank is forced to sell those assets, and if there wasn't a classical bank run then the bank wouldn't be forced to sell those assets. This is exactly the kind of borrow-short-lend-long risk that all banks inherently run and is why we supposedly have the FDIC to stop these kinds of bank runs. SVG had worse issues where their deposits were inherently draining due to the startups using them for their corporate accounts, and then they went out and sold some of their paper, booking their losses, instead of looking for financing. For those looking for the punish-the-rich morality play, the real winner here is likely to be JP Morgan or PNC which may bid to buy up the assets, which is just the rich-getting-richer and a large bank swallowing up a smaller community bank and more consolidation and monopolization of the financial sector.

beambot 4y ago
They've just inherently got un-hedged interest rate exposure.
- makomk 4y ago
  Yup, that is basically inherent. In order to hedge their interest rate exposure they'd have to find some counterparty that can afford to do it - there is no magic hedging or insurance fairy - which with previous interest rates would probably wipe out all their interest income and expose them to counterparty risk at the same time if they could even find anyone.
  - lamontcg 4y ago
    Yeah, AIG selling credit default swaps against CDOs comes to mind. Hedging isn't magic, someone else winds up eating all the losses.

anon291 4y ago

"Normal" bank accounts do not have more than 250k. The only thing that should change is that the limit should apply to one's total assets in all FDIC banks, not per bank.

brvsft 4y ago
[flagged]
brvsft 4y ago
Counterpoint, they should just get rid of the FDIC. And if you flagged me, fuck you. The blatant adversarial tone of this comment means it should be flagged just on its own. Flagging my comment without flagging this moronic nonsense is clear evidence of bias and gaming the flag system on HN. If you don't like the obvious counterpoint that the FDIC probably shouldn't exist at all given the moral hazard it creates for all bank depositors, you're a smoothbrain.
- deleted 4y ago
  [deleted]
- anon291 4y ago
  I didn't flag you. My comment is not adversarial. The vast majority of Americans have less than 250k in their account. Thus having above this amount is abnormal. The vast majority of Americans have less than 250k in all their savings accounts

_huayra_ 4y ago

In reality, there is no such thing as a "bank" in the sense that it's a big vault of money so you don't lose it in a house fire. Every bank today is really a Highly-Levered Bond Fund. If we increase FDIC insurance to 100%, without commensurate changes in what banks are allowed to do with customer deposits, this seems like it would create a moral hazard where banks would be allowed to do all kinds of crazy shenanigans because they know they'll be bailed out. To be clear, I'm for 100% FDIC insurance, but if we get this without getting much more stringent duration risk transformation standards (e.g. don't load up on long-dated treasuries in a low-rate environment), I think it could actually make the banking stability issue worse :(

wbl 4y ago
Banks are unstable but that is good because we want maturity transformation. A great society is one where old men are paying young men to plant trees with money that would be sitting around instead.
- isbwkisbakadqv 4y ago
  I’m not sure I fully agree but I like it