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> A stable banking system is very much in regular people's interest. Everyone and everything responds to incentives. The message that FDIC just sent out is tha

> A stable banking system is very much in regular people's interest. Everyone and everything responds to incentives. The message that FDIC just sent out is that you can make mistakes, you can mismanage your liquidity, and everyone else will pay to clean up your bill. What does that incentivize banks to do? It just encourages repeat behavior until there's nobody large enough to pay the difference. Not a recipe for stability. Whereas, let's say SVB fell. Painful, yes. Lessons learned? Oh yes, nobody's going to let that happen again anytime soon; be it depositors or bankers. Long-term stability or short-term stability, pick one.

creato 4y ago
Anyone actually involved with decisions managing the bank was not bailed out. The people who were bailed out are depositors. If you want to make this argument, the correct version is that depositors are incentivized to find the bank paying the highest interest regardless of risk. But I think this argument is very weak.
- deleted 4y ago
  [deleted]
- chippiewill 4y ago
  > But I think this argument is very weak. It's particularly weak given that depositors are deliberately not given clear information on the liquidity and balance sheets of their banks to avoid bank runs. The FDIC said that SVB was stable and in good shape a day before it failed.
- unyttigfjelltol 4y ago
  The event illustrates that banking is an inherently unstable business. Depositors must have the illusion of being able to withdraw everything anytime on demand, because it's their "money". Banks have a huge incentive to invest the deposits in things that can't necessarily be liquidated on demand, because what in the world other than a bank account can be? The choice then is a) to accept some bank failures and depositor wipeouts, or b) inexorable pressure to centralize the risk structure until you have something remarkably like Gosbank[1] or 1 bank for everyone. We tried the FDIC scheme, it was nice, but when the deposit limit is overtopped these days the bank is not stable. [1] https://en.m.wikipedia.org/wiki/Gosbank https://en.m.wikipedia.org/wiki/Gosbank
  - kelnos 4y ago
    Absolutely; someone else somewhere in these threads called banking something like "a utility masquerading as a business", and I couldn't agree more. Bank accounts should be provided directly by the Fed, and/or perhaps have US Post Office branches act as bank branches. Accounts should be provided for free, with minimal hassle needed to open one.
- kelnos 4y ago
  > If you want to make this argument, the correct version is that depositors are incentivized to find the bank paying the highest interest regardless of risk. But I think this argument is very weak. Not only is it weak, it argues the wrong thing. Depositors should be incentivized to find the bank paying the highest interest, and should not have to worry about risk. That's kinda the point of the FDIC. Your average banking consumer is woefully unqualified to evaluate a bank's risk level, and that's how it should be. SVB's customers took a risk putting more than $250k into their accounts. Sure, many of them had deals on loans and such that required them to keep high balances, but they also had the option to purchase additional depositor insurance. They chose not to, so I don't see why anyone should be forced to bail out their/SVB's losses, whether it's taxpayers as a whole, or even just customers at some subset of other banks. Remember, we're not talking about random average-Joe banking customer. These are businesses that should mostly know better. A possible fix for this might be that banks could be required to notify customers when they have uninsured deposits, and suggest alternative insurance options. And in a case like SVB, where some depositors were contractually obligated to keep more than $250k there, perhaps the bank should be required to provide additional insurance along side deals where they require higher balances.

creato 4y ago

Anyone actually involved with decisions managing the bank was not bailed out. The people who were bailed out are depositors. If you want to make this argument, the correct version is that depositors are incentivized to find the bank paying the highest interest regardless of risk. But I think this argument is very weak.

deleted 4y ago
[deleted]
chippiewill 4y ago
> But I think this argument is very weak. It's particularly weak given that depositors are deliberately not given clear information on the liquidity and balance sheets of their banks to avoid bank runs. The FDIC said that SVB was stable and in good shape a day before it failed.
unyttigfjelltol 4y ago
The event illustrates that banking is an inherently unstable business. Depositors must have the illusion of being able to withdraw everything anytime on demand, because it's their "money". Banks have a huge incentive to invest the deposits in things that can't necessarily be liquidated on demand, because what in the world other than a bank account can be? The choice then is a) to accept some bank failures and depositor wipeouts, or b) inexorable pressure to centralize the risk structure until you have something remarkably like Gosbank[1] or 1 bank for everyone. We tried the FDIC scheme, it was nice, but when the deposit limit is overtopped these days the bank is not stable. [1] https://en.m.wikipedia.org/wiki/Gosbank https://en.m.wikipedia.org/wiki/Gosbank
- kelnos 4y ago
  Absolutely; someone else somewhere in these threads called banking something like "a utility masquerading as a business", and I couldn't agree more. Bank accounts should be provided directly by the Fed, and/or perhaps have US Post Office branches act as bank branches. Accounts should be provided for free, with minimal hassle needed to open one.
kelnos 4y ago
> If you want to make this argument, the correct version is that depositors are incentivized to find the bank paying the highest interest regardless of risk. But I think this argument is very weak. Not only is it weak, it argues the wrong thing. Depositors should be incentivized to find the bank paying the highest interest, and should not have to worry about risk. That's kinda the point of the FDIC. Your average banking consumer is woefully unqualified to evaluate a bank's risk level, and that's how it should be. SVB's customers took a risk putting more than $250k into their accounts. Sure, many of them had deals on loans and such that required them to keep high balances, but they also had the option to purchase additional depositor insurance. They chose not to, so I don't see why anyone should be forced to bail out their/SVB's losses, whether it's taxpayers as a whole, or even just customers at some subset of other banks. Remember, we're not talking about random average-Joe banking customer. These are businesses that should mostly know better. A possible fix for this might be that banks could be required to notify customers when they have uninsured deposits, and suggest alternative insurance options. And in a case like SVB, where some depositors were contractually obligated to keep more than $250k there, perhaps the bank should be required to provide additional insurance along side deals where they require higher balances.