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> 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 t

> 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 3y 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 3y 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 3y 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.
    - ericpauley 3y ago
      This is what MMFs accomplish, and they yield higher than banks accounts.
      - Scoundreller 3y ago
        Sorta. The problem is big corps do a lot of transactions in their account and can't predict when that $850k (or $850m) transfer is on the way in as their bank is collapsing. And even debits can't always be predicted, but I doubt big payments are pre-authed like that. Not sure if a bank would be 100% protected if they had a script that checked their balance every minute and sent it to a MMF.
dreewf 3y ago
We are a small business (less than 100 employees). We have about 50 large paying customers. As soon as SVB happened we transferred almost all our money out of FRB to our other banks and only left a small amount of the money ($185k) under the ‘insurance cap’. But we still have payroll going out, we have deposits coming, etc. so we started transferring all that over. It’s not simply “not exceeding the insurance cap’. It’s a huge pain and takes a very long time since our customers are huge companies and updating our banking information with them is a long drawn out process. Well, we transferred most of the customers over this last month, but one of the customers just yesterday made a deposit of $485k. $485k + $185k is well over the insurance limit. I believe it takes 3 days or so to clear so we wouldn’t have been able to transfer it out immediately. Maybe we can ask them to cancel it on Monday, i am not sure yet. As a small business our cash flow is very tight. We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k or watching out in case the bank fails the day after. Maybe there are tricks like you mention but most small businesses do not have experts on this stuff and I don’t think we should have to be.
- Scoundreller 3y ago
  Is there a bank out there that advertises that they don’t do any long term fixed loans with their checking account deposits? Seems like there should be a big market for that kind of thing. No idea why anyone holding large $$$ would go with anyone else.
  - ericpauley 3y ago
    Money markets. You can loan your money overnight to the fed at zero risk for 4.5% right now.
- ericpauley 3y ago
  Sure, maybe changing is hard in the short term. The solution would have been to not do highly consolidated banking over limits in the first place. > We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k My key point is that there are products that do this and also yield higher than retail bank accounts. Difficulty is a straw man. If retirees on bogleheads can do it so can you.

stickfigure 3y 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 3y 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 3y 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.
  - ericpauley 3y ago
    This is what MMFs accomplish, and they yield higher than banks accounts.
    - Scoundreller 3y ago
      Sorta. The problem is big corps do a lot of transactions in their account and can't predict when that $850k (or $850m) transfer is on the way in as their bank is collapsing. And even debits can't always be predicted, but I doubt big payments are pre-authed like that. Not sure if a bank would be 100% protected if they had a script that checked their balance every minute and sent it to a MMF.

dreewf 3y ago

We are a small business (less than 100 employees). We have about 50 large paying customers. As soon as SVB happened we transferred almost all our money out of FRB to our other banks and only left a small amount of the money ($185k) under the ‘insurance cap’. But we still have payroll going out, we have deposits coming, etc. so we started transferring all that over. It’s not simply “not exceeding the insurance cap’. It’s a huge pain and takes a very long time since our customers are huge companies and updating our banking information with them is a long drawn out process. Well, we transferred most of the customers over this last month, but one of the customers just yesterday made a deposit of $485k. $485k + $185k is well over the insurance limit. I believe it takes 3 days or so to clear so we wouldn’t have been able to transfer it out immediately. Maybe we can ask them to cancel it on Monday, i am not sure yet. As a small business our cash flow is very tight. We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k or watching out in case the bank fails the day after. Maybe there are tricks like you mention but most small businesses do not have experts on this stuff and I don’t think we should have to be.

Scoundreller 3y ago
Is there a bank out there that advertises that they don’t do any long term fixed loans with their checking account deposits? Seems like there should be a big market for that kind of thing. No idea why anyone holding large $$$ would go with anyone else.
- ericpauley 3y ago
  Money markets. You can loan your money overnight to the fed at zero risk for 4.5% right now.
ericpauley 3y ago
Sure, maybe changing is hard in the short term. The solution would have been to not do highly consolidated banking over limits in the first place. > We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k My key point is that there are products that do this and also yield higher than retail bank accounts. Difficulty is a straw man. If retirees on bogleheads can do it so can you.