4 ms·

It’s too late now, but the FDIC should just guarantee all deposits with no limit. If they did it with SVB they should do it for every other bank too moving forw

It’s too late now, but the FDIC should just guarantee all deposits with no limit. If they did it with SVB they should do it for every other bank too moving forward. It is ridiculous to expect the average person to dig into bank balance sheets and try to determine whether their bank is managing risk properly. That would have prevented these runs, which counterintuitively means fewer FDIC payouts, not more. Then couple that with stricter rules to prevent risky gambles funded by deposits.

senectus1 3y ago
with what money will they guarantee all deposits? Governments dont have much money, they have taxes. when they can't tax their current voters they tax future voters by printing money. If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do? this is so very screwed up.
- jliptzin 3y ago
  Did you read my last sentence? Make the law such that bank failures can only occur in situations of outright fraud/criminal behavior. Most failures occur because of bank runs or stupid/risky bets, unlimited FDIC takes care of runs and stricter rules would stop bad risk management.
- mrep 3y ago
  > If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do? That's not what the FED is doing though. They are protecting the depositors not the business. The equity holders are getting completely wiped out and most of the employees at First Republic Bank are probably going to lose their jobs so the business is definitely getting screwed.
  - CrimsonCape 3y ago
    But people don't really understand the nuance between "let First Republic fail and let the FDIC step in to protect the depositors" versus "let's sell First Republic to Wells Fargo under orders of USGov to protect the depositors." Why not the former? I agree that in both of the above cases, First Republic shareholders and staffing suffer. But the latter introduces the conspiratorial angle and the unjust-ness.
- beiller 3y ago
  The government controls the amount of dollars. It's not paying back out of coffers, just print the money. But if you really want to, you could cover the deposits from FDIC which is insurance paid by that bank. Secondly we're not bailing out banks. We'd be bailing out the depositors. The banks and their stock is free to go to zero, everyone is fired, etc. I think you've conflated two different things.
  - lxgr 3y ago
    So you're suggesting we should let commercial banks run as risky a business as they like, pocket the profits if it works out, and pay for the deficits using newly printed central bank money if it doesn't? > The banks and their stock is free to go to zero, Sure, but what about the dividends and bonuses already paid out from the times it worked out in the risky banks' favor? You're suggesting a government/central bank subsidized casino.
    - beiller 3y ago
      Well maybe we can claw back the bonuses. You're right and I did think a bit on that after writing the comment. But there should be a clear incentive still to not go bankrupt and make their shares they hold worthless. With or without making depositors whole via ramping up the printer, your scenario still would make sense since even without the Fed backing, they could still just walk away couldn't they. The depositors would be left to sue to return the funds no? I've seen some good arguments to cover 100% of the deposits, but actually _regulate_ the banks instead of allowing their yolo fest.
      - lxgr 3y ago
        > But there should be a clear incentive still to not go bankrupt and make their shares they hold worthless. Absolutely. I just can't think of a good mechanism to implement it in the current framework. Maybe bonus payouts should be held in escrow/be otherwise claw-back-able for some time? The only instance of clawing back dividends that I'm aware of is, ironically, Wirecard – I believe there is an ongoing lawsuit to claw back dividend payments from investors. (The irony is that the German government/regulator were actively prosecuting journalists and short sellers back when the line was trending up, yet now German courts are effectively holding long investors liable for Wirecard's fraud.)
lxgr 3y ago
> It is ridiculous to expect the average person to dig into bank balance sheets and try to determine whether their bank is managing risk properly. We don't: The average person does not have $250k sitting in a checking or savings account at a single bank. SVB collapsed because they have highly correlated (due to being startups under effective, if not actual, corporate control of a few VCs), jumpy depositors. This is something regulatory rules have not incorporated into their risk frameworks (at least not sufficiently to allow for a margin of safety in times of raising interest rates).
- jliptzin 3y ago
  Some do though. Having a lot of money in a checking account doesn’t mean someone is any more sophisticated with respect to finances. It could be retirement savings or an inheritance. No one should wake up one day and find out most of their life savings or inheritance is gone because of banking shenanigans. This is not like a hurricane or catastrophic expensive surgery. This is entirely preventable and fixable by the government. Gov’t sells low yield bonds to banks during pandemic => gov’t jacks up interest rates to fight inflation => value of bonds previously sold to banks plummet => bank marks bond values to market and is now technically insolvent causing a bank run => grandma loses majority of her life savings => government refuses to reimburse depositors above FDIC limit even though it created the problem to begin with. That is not a chain of events I am ok with. Bank management and equity holders should get wiped out but not depositors.
  - CrimsonCape 3y ago
    We have a de-facto two class system: the capitalists and "everybody else class". The capitalist class, those with capital, investments, stake (a la stakeholder), who mobilize lobbying on behalf of and to protect their capital, who will 99.99% of the time have the ultimate impact on legislation; the impact being positive effects on themselves at the cost of everyone else in the general public. I'm not sure we can even get a vote on the floor that would have detrimental effects on the former class. The legislation is preordained. You are proposing that bank management and equity holders get wiped out, not the general public checking account-holder; how would that even be possible, since they write the rules, pull the strings, lobby, etc. magnitudes more than you? They are the rulebook. They do so to such an extent that the entire system is predicated on everybody agreeing to do the same thing lest the system collapse.
brodouevencode 3y ago
That would almost certainly ensure too-big-to-fail scenarios. I agree with the sentiment that bank failures and the resulting domino effect are terrible, but I don't think carte blanche unlimited depositor insurance is the answer.
hakfoo 3y ago
I don't understand why when a bank fails, the FDIC is so desperate to toss the carcass back to the private sector. Nationalize it. We've already established that the shareholders are getting zilch, so there's no argument where we're "destroying value." From a consumer/operations level, pulling the bank under the state umbrella instantly dissipates any need for a run. They're backed by the full financial might of the government, so you don't have to worry that the ATM will be taped over and you can't get your $35.19 out of the account. From a contagion perspective, the state backstop and elimination of investor-centric motivations allows for stabilization and avoids fire sales. If the institution was asset-sound but not liquid, as people claimed for SVB, the state could afford to cut margins and pull funds from other sources while they waited for the maturity-mismatch problems to unwind as they mature. From a social perspective, suddenly you have a new toy in your box of social engineering tricks. The branches that used to cater to crypto-bros can reopen offering basic checking for the unbanked, small-business loans, and mortgages in historically red-lined areas. A conceptual equivalent might be the story of Conrail: in 1976, the Federal government took over a handful of basket-case Northeastern railroads; without investor meddling, they were able to take the long game-- rehabilitate and rationalize the system, eventually re-privatizing it in 1987. I'd argue banks are less difficult than railroads in that regard-- you're not as tied to physical place and literally rusting assets.

senectus1 3y ago

with what money will they guarantee all deposits? Governments dont have much money, they have taxes. when they can't tax their current voters they tax future voters by printing money. If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do? this is so very screwed up.

jliptzin 3y ago
Did you read my last sentence? Make the law such that bank failures can only occur in situations of outright fraud/criminal behavior. Most failures occur because of bank runs or stupid/risky bets, unlimited FDIC takes care of runs and stricter rules would stop bad risk management.
mrep 3y ago
> If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do? That's not what the FED is doing though. They are protecting the depositors not the business. The equity holders are getting completely wiped out and most of the employees at First Republic Bank are probably going to lose their jobs so the business is definitely getting screwed.
- CrimsonCape 3y ago
  But people don't really understand the nuance between "let First Republic fail and let the FDIC step in to protect the depositors" versus "let's sell First Republic to Wells Fargo under orders of USGov to protect the depositors." Why not the former? I agree that in both of the above cases, First Republic shareholders and staffing suffer. But the latter introduces the conspiratorial angle and the unjust-ness.
beiller 3y ago
The government controls the amount of dollars. It's not paying back out of coffers, just print the money. But if you really want to, you could cover the deposits from FDIC which is insurance paid by that bank. Secondly we're not bailing out banks. We'd be bailing out the depositors. The banks and their stock is free to go to zero, everyone is fired, etc. I think you've conflated two different things.
- lxgr 3y ago
  So you're suggesting we should let commercial banks run as risky a business as they like, pocket the profits if it works out, and pay for the deficits using newly printed central bank money if it doesn't? > The banks and their stock is free to go to zero, Sure, but what about the dividends and bonuses already paid out from the times it worked out in the risky banks' favor? You're suggesting a government/central bank subsidized casino.
  - beiller 3y ago
    Well maybe we can claw back the bonuses. You're right and I did think a bit on that after writing the comment. But there should be a clear incentive still to not go bankrupt and make their shares they hold worthless. With or without making depositors whole via ramping up the printer, your scenario still would make sense since even without the Fed backing, they could still just walk away couldn't they. The depositors would be left to sue to return the funds no? I've seen some good arguments to cover 100% of the deposits, but actually _regulate_ the banks instead of allowing their yolo fest.
    - lxgr 3y ago
      > But there should be a clear incentive still to not go bankrupt and make their shares they hold worthless. Absolutely. I just can't think of a good mechanism to implement it in the current framework. Maybe bonus payouts should be held in escrow/be otherwise claw-back-able for some time? The only instance of clawing back dividends that I'm aware of is, ironically, Wirecard – I believe there is an ongoing lawsuit to claw back dividend payments from investors. (The irony is that the German government/regulator were actively prosecuting journalists and short sellers back when the line was trending up, yet now German courts are effectively holding long investors liable for Wirecard's fraud.)

lxgr 3y ago

> It is ridiculous to expect the average person to dig into bank balance sheets and try to determine whether their bank is managing risk properly. We don't: The average person does not have $250k sitting in a checking or savings account at a single bank. SVB collapsed because they have highly correlated (due to being startups under effective, if not actual, corporate control of a few VCs), jumpy depositors. This is something regulatory rules have not incorporated into their risk frameworks (at least not sufficiently to allow for a margin of safety in times of raising interest rates).

jliptzin 3y ago
Some do though. Having a lot of money in a checking account doesn’t mean someone is any more sophisticated with respect to finances. It could be retirement savings or an inheritance. No one should wake up one day and find out most of their life savings or inheritance is gone because of banking shenanigans. This is not like a hurricane or catastrophic expensive surgery. This is entirely preventable and fixable by the government. Gov’t sells low yield bonds to banks during pandemic => gov’t jacks up interest rates to fight inflation => value of bonds previously sold to banks plummet => bank marks bond values to market and is now technically insolvent causing a bank run => grandma loses majority of her life savings => government refuses to reimburse depositors above FDIC limit even though it created the problem to begin with. That is not a chain of events I am ok with. Bank management and equity holders should get wiped out but not depositors.
- CrimsonCape 3y ago
  We have a de-facto two class system: the capitalists and "everybody else class". The capitalist class, those with capital, investments, stake (a la stakeholder), who mobilize lobbying on behalf of and to protect their capital, who will 99.99% of the time have the ultimate impact on legislation; the impact being positive effects on themselves at the cost of everyone else in the general public. I'm not sure we can even get a vote on the floor that would have detrimental effects on the former class. The legislation is preordained. You are proposing that bank management and equity holders get wiped out, not the general public checking account-holder; how would that even be possible, since they write the rules, pull the strings, lobby, etc. magnitudes more than you? They are the rulebook. They do so to such an extent that the entire system is predicated on everybody agreeing to do the same thing lest the system collapse.

brodouevencode 3y ago

That would almost certainly ensure too-big-to-fail scenarios. I agree with the sentiment that bank failures and the resulting domino effect are terrible, but I don't think carte blanche unlimited depositor insurance is the answer.

hakfoo 3y ago

I don't understand why when a bank fails, the FDIC is so desperate to toss the carcass back to the private sector. Nationalize it. We've already established that the shareholders are getting zilch, so there's no argument where we're "destroying value." From a consumer/operations level, pulling the bank under the state umbrella instantly dissipates any need for a run. They're backed by the full financial might of the government, so you don't have to worry that the ATM will be taped over and you can't get your $35.19 out of the account. From a contagion perspective, the state backstop and elimination of investor-centric motivations allows for stabilization and avoids fire sales. If the institution was asset-sound but not liquid, as people claimed for SVB, the state could afford to cut margins and pull funds from other sources while they waited for the maturity-mismatch problems to unwind as they mature. From a social perspective, suddenly you have a new toy in your box of social engineering tricks. The branches that used to cater to crypto-bros can reopen offering basic checking for the unbanked, small-business loans, and mortgages in historically red-lined areas. A conceptual equivalent might be the story of Conrail: in 1976, the Federal government took over a handful of basket-case Northeastern railroads; without investor meddling, they were able to take the long game-- rehabilitate and rationalize the system, eventually re-privatizing it in 1987. I'd argue banks are less difficult than railroads in that regard-- you're not as tied to physical place and literally rusting assets.