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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 f

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.
    - anonymouskimmer 3y ago
      > The SVB situation was bad enough that the FDIC opted to make creditors whole, but they don’t always do this. Is this not the first time that they've done this? > Diversification carries an inherent operational cost You would think a Fintech startup would have an app for that. Heck, how many companies are outsourcing payroll anyway? Can't ADP do this on their back end? But, of course, now nobody will, because the FDIC did it for free. The least the FDIC could have done was give everyone a haircut instead of making them 100% whole.
      - LapsangGuzzler 3y ago
        > Is this not the first time that they've done this? The US averages roughly 3-4 bank failures per year, so no, this is definitely not their first time (SVB was the largest, though). This is a core function of the FDIC. > Can’t ADP do this on their back end? I suppose they could, but if there was a market incentive to create a tool like this, then why doesn’t it exist already? I’m not sure, but granting a non-banking 3rd party access to all of your financials does seem like a risk.
        anonymouskimmer 3y ago
        That they've made every depositor whole above and beyond the $250k limit. > if there was a market incentive to create a tool like this, then why doesn’t it exist already? As mentioned elsewhere because people had forgotten the lessons of the S&L crisis. There would have been a market for it now had the FDIC not stepped in and said that they'd fully backstop everyone, regardless. Even if the FDIC had just given deposits above $250k 95% back instead of 100% back, there would be a market for such a tool. > but granting a non-banking 3rd party access to all of your financials does seem like a risk Maybe, but doesn't ADP already have this access, as it's doing payroll for you anyway?

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.
  - anonymouskimmer 3y ago
    > The SVB situation was bad enough that the FDIC opted to make creditors whole, but they don’t always do this. Is this not the first time that they've done this? > Diversification carries an inherent operational cost You would think a Fintech startup would have an app for that. Heck, how many companies are outsourcing payroll anyway? Can't ADP do this on their back end? But, of course, now nobody will, because the FDIC did it for free. The least the FDIC could have done was give everyone a haircut instead of making them 100% whole.
    - LapsangGuzzler 3y ago
      > Is this not the first time that they've done this? The US averages roughly 3-4 bank failures per year, so no, this is definitely not their first time (SVB was the largest, though). This is a core function of the FDIC. > Can’t ADP do this on their back end? I suppose they could, but if there was a market incentive to create a tool like this, then why doesn’t it exist already? I’m not sure, but granting a non-banking 3rd party access to all of your financials does seem like a risk.
      - anonymouskimmer 3y ago
        That they've made every depositor whole above and beyond the $250k limit. > if there was a market incentive to create a tool like this, then why doesn’t it exist already? As mentioned elsewhere because people had forgotten the lessons of the S&L crisis. There would have been a market for it now had the FDIC not stepped in and said that they'd fully backstop everyone, regardless. Even if the FDIC had just given deposits above $250k 95% back instead of 100% back, there would be a market for such a tool. > but granting a non-banking 3rd party access to all of your financials does seem like a risk Maybe, but doesn't ADP already have this access, as it's doing payroll for you anyway?