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The solution to having large deposits at banks is not to have the FDIC charge everyone larger amounts to insure it, but for the banks to charge large depositors

The solution to having large deposits at banks is not to have the FDIC charge everyone larger amounts to insure it, but for the banks to charge large depositors larger amounts to buy third-party insurance. Maybe that will incentivize large depositors to not keep quite so much at any given bank.

notyourwork 3y ago
That would discourage a customer from keeping more funds at a bank. As a bank, that would be counter productive to the purpose of having more deposits, right?
- anonymouskimmer 3y ago
  If someone is putting more than $250k in your bank you would presumably be offering them various value-added investment products to keep them depositing more.
polygamous_bat 3y ago
Why buy insurance when you can just flex your political muscles and get others do provide it for free? Some may even say it's the best way of maximizing return to your shareholders.
- LapsangGuzzler 3y ago
  AIG taught us that private insurance is not any more insulated from financial disaster than the government-backed insurance systems anyway. They’re so deeply connected that catastrophic events deeply impact both.
loeg 3y ago
I don't understand the perspective of "large depositors should just smurf their deposits across 1000x FDIC banks." If they do that, the FDIC is still on the hook for the aggregate large deposits, so why not cut out the smurfing middleman and just insure large deposits directly?
- LapsangGuzzler 3y ago
  Because this is what prevents contagion from spreading across the banking system. If you hold 1M in 4 different banks, you’re in way better shape if one bank fails than if you put it all in one place (plus you’re still fully insured if you deposit evenly). Odds are that not all 4 banks are collapsing due to their stupidity (as SVB did).
  - loeg 3y ago
    The FDIC insuring all deposits is also very effective at preventing contagion.
    - anonymouskimmer 3y ago
      Except that it encourages banks like SVB to specialize instead of distributing depositor risk. I can imaging a scenario where specialized bank failure can lead to contagion where it wouldn't if all banks distributed risk. E.g. The companies keep their payroll funds in Industry Payroll Bank (IPB). IPB fails the same way SVB did, and suddenly everyone working for the industry companies are short for a week on their pay. A bunch of these people bank with Local Bank and Credit Unions (LBCUs). Instead of getting expected deposits suddenly many of their depositors are borrowing from their lines of credit. Now probably, given the short-term nature of the contagion, the LBCUs can survive this by temporarily borrowing capital. And at the very least, if they did fail, it would probably be due to liquidity instead of being underwater, so shouldn't hit the depositor's insurance funds much, if at all. But maybe there's a scenario I can't think of in which something like this could be bad.
      - LapsangGuzzler 3y ago
        > Except that it encourages banks like SVB to specialize instead of distributing depositor risk. Which is why the FDIC only insures up to $250k per account. The SVB situation was bad enough that the FDIC opted to make creditors whole, but they don’t always do this. Part of this is depositor laziness. Businesses figured out really quick during the savings and loan crisis in the 80’s not to bank at just one bank. But most people running companies now weren’t around for that. Diversification carries an inherent operational cost and companies got lazy/cheap and stopped practicing good banking habits.
LapsangGuzzler 3y ago
Most banks do not have this problem. The fundamental problem with SVB was that it was a bank that didn’t really act like a bank. Most banks don’t have a depositor base consisting of one specific type of class and industry, they’re typically diversified. Also, most banks benefit from rising interest rates and organize their offerings to capture the benefits of rising interest rates. SVB has to be one of the only banks in recent history to bet against interest rate hikes by investing heavily in interest-rate sensitive instruments. The whole thing was a risk management nightmare and they didn’t even have a risk management officer when they failed. No need to solve a problem that doesn’t exist for banks that know what they’re doing. SVB were complete idiots.

notyourwork 3y ago

That would discourage a customer from keeping more funds at a bank. As a bank, that would be counter productive to the purpose of having more deposits, right?

anonymouskimmer 3y ago
If someone is putting more than $250k in your bank you would presumably be offering them various value-added investment products to keep them depositing more.

polygamous_bat 3y ago

Why buy insurance when you can just flex your political muscles and get others do provide it for free? Some may even say it's the best way of maximizing return to your shareholders.

LapsangGuzzler 3y ago
AIG taught us that private insurance is not any more insulated from financial disaster than the government-backed insurance systems anyway. They’re so deeply connected that catastrophic events deeply impact both.

loeg 3y ago

I don't understand the perspective of "large depositors should just smurf their deposits across 1000x FDIC banks." If they do that, the FDIC is still on the hook for the aggregate large deposits, so why not cut out the smurfing middleman and just insure large deposits directly?

LapsangGuzzler 3y ago
Because this is what prevents contagion from spreading across the banking system. If you hold 1M in 4 different banks, you’re in way better shape if one bank fails than if you put it all in one place (plus you’re still fully insured if you deposit evenly). Odds are that not all 4 banks are collapsing due to their stupidity (as SVB did).
- loeg 3y ago
  The FDIC insuring all deposits is also very effective at preventing contagion.
  - anonymouskimmer 3y ago
    Except that it encourages banks like SVB to specialize instead of distributing depositor risk. I can imaging a scenario where specialized bank failure can lead to contagion where it wouldn't if all banks distributed risk. E.g. The companies keep their payroll funds in Industry Payroll Bank (IPB). IPB fails the same way SVB did, and suddenly everyone working for the industry companies are short for a week on their pay. A bunch of these people bank with Local Bank and Credit Unions (LBCUs). Instead of getting expected deposits suddenly many of their depositors are borrowing from their lines of credit. Now probably, given the short-term nature of the contagion, the LBCUs can survive this by temporarily borrowing capital. And at the very least, if they did fail, it would probably be due to liquidity instead of being underwater, so shouldn't hit the depositor's insurance funds much, if at all. But maybe there's a scenario I can't think of in which something like this could be bad.
    - LapsangGuzzler 3y ago
      > Except that it encourages banks like SVB to specialize instead of distributing depositor risk. Which is why the FDIC only insures up to $250k per account. The SVB situation was bad enough that the FDIC opted to make creditors whole, but they don’t always do this. Part of this is depositor laziness. Businesses figured out really quick during the savings and loan crisis in the 80’s not to bank at just one bank. But most people running companies now weren’t around for that. Diversification carries an inherent operational cost and companies got lazy/cheap and stopped practicing good banking habits.

LapsangGuzzler 3y ago

Most banks do not have this problem. The fundamental problem with SVB was that it was a bank that didn’t really act like a bank. Most banks don’t have a depositor base consisting of one specific type of class and industry, they’re typically diversified. Also, most banks benefit from rising interest rates and organize their offerings to capture the benefits of rising interest rates. SVB has to be one of the only banks in recent history to bet against interest rate hikes by investing heavily in interest-rate sensitive instruments. The whole thing was a risk management nightmare and they didn’t even have a risk management officer when they failed. No need to solve a problem that doesn’t exist for banks that know what they’re doing. SVB were complete idiots.