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I don't think its that simple. Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talkin

I don't think its that simple. Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits. If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace. Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow. Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here

JumpCrisscross 3y ago
> the FDIC coverage backstops at $250,000, and it only recovers depositors Practically, no, the FDIC set the precedent last year of full depositor coverage.
- boringg 3y ago
  Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? I know its un unlikely event but I've always been curious what would necessitate it to fail. As we know, all things can fail.
  - lotsofpulp 3y ago
    If the FDIC breaks, then the whole country is broken. FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency, which is ultimately the belief in an orderly US society that results in being able to trust that the digits listed in a database next to your name will allow you to procure products/services you want.
    - JumpCrisscross 3y ago
      > If the FDIC breaks, then the whole country is broken Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties. > FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
      - lotsofpulp 3y ago
        My point was that the “insurance” premiums and whatnot the FDIC collects are all fiction, because in practice, the Federal government will always step in if the reserves are insufficient (assuming it can). If it can’t, then the country is about to dissolve or otherwise undergo some major changes. Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago). https://news.bloomberglaw.com/daily-labor-report/biden-to-unveil-bailout-plan-for-multiemployer-pension-funds https://news.bloomberglaw.com/daily-labor-report/biden-to-un... >No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation. The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
        deleted 3y ago
        [deleted]
        dragonwriter 3y ago
        > The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was. Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.
  - JumpCrisscross 3y ago
    > Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? “The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC. “FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury. [1] https://www.fdic.gov/about/what-we-do/index.html#:~:text=The%20FDIC%20receives%20no%20Congressional,pay%20for%20deposit%20insurance%20coverage https://www.fdic.gov/about/what-we-do/index.html#:~:text=The.... [2] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/#:~:text=FDIC%20insurance%20is%20backed%20by,penny%20of%20FDIC%2Dinsured%20deposits https://www.fdic.gov/resources/deposit-insurance/brochures/i....
  - Workaccount2 3y ago
    It's funded by participating banks paying for coverage. It holds enough capital to cover something like only 2% of insured deposits. It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.
    - JumpCrisscross 3y ago
      > It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event. This is wrong. In the case of a large-scale collapse, depositors have a legal claim on the Treasury through the FDIC.
- nonethewiser 3y ago
  You are referring to SVB. They absolutely did not.
  - JumpCrisscross 3y ago
    > You are referring to SVB. They absolutely did not. They absolutely did [1]. [1] https://www.fdic.gov/news/press-releases/2023/pr23019.html https://www.fdic.gov/news/press-releases/2023/pr23019.html
    - nonethewiser 3y ago
      That article doesn't support the claim that there is some precedent for unlimited FDIC insured deposits. It even specifically cites the process by which an exception was created. Can you elaborate on why you now think there is a precedent that all deposits for future bank failures are insured?
sidewndr46 3y ago
Last years bank collapse has demonstrated that FDIC coverage is infinite so long as you have the right connections. Also FDIC limit is theoretically a lifetime limit per individual. Again, no actual limit so long as you know the right people. Also worth pointing out that when financial institution failure hits people personally regime changes follows quickly. It'd be at the ballot box in the US, but make no mistake it'd come swiftly. As a result, politicians will do whatever it takes to prevent that from happening.
- JumpCrisscross 3y ago
  > FDIC coverage is infinite so long as you have the right connections Which depositors were screwed for not having the right connections? > FDIC limit is theoretically a lifetime limit per individual No. It’s not even a limit at the same institution, just per ownership category.
  - caseysoftware 3y ago
    The Big 5 banks have unlimited FDIC coverage because they're "too big to fail" and they scoop up the remains after the FDIC swoops in. Everyone else has the $250k per depositor. That is why the CRE loans are such a huge problem. Their debt is owed to regional banks, not the big ones. That said, the FDIC ignored their playbook and rules to try to calm things down last March. A few more banks went down but not the numbers people expected. That means we're in uncharted territory.. will the FDIC follow their own rules next time or do whatever they want? We don't know.
    - JumpCrisscross 3y ago
      > Big 5 banks have unlimited FDIC coverage because they're "too big to fail" Less than one year! We had three banks fail—the second, third and fourth largest in our nation’s history—less than one year ago [1]! None were TBTF, let alone big five. Every deposit was covered. I get that the headline reads hysterically to a lay reader, but less than one year! [1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failures_in_the_United_States https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
hasty_pudding 3y ago
this is the ideal case. this is the healthy case. but the government is owned and that will never happen.
Rastonbury 3y ago
You can't really because healthy banks will fail because of bank runs. Imagine your coworkers bank going under and losing savings above FDIC insured, suddenly everyone in the office is leaving to withdraw all their savings at other banks who are much less distressed. If banks fail due to mismanagement, letting banks fail should be done, but you can't really blame the banks for not predicting covid and the massive decline in demand for office space. Protecting against once in a lifetime events won't be profitable and governments will have to end up subsidising them anyway.

JumpCrisscross 3y ago

> the FDIC coverage backstops at $250,000, and it only recovers depositors Practically, no, the FDIC set the precedent last year of full depositor coverage.

boringg 3y ago
Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? I know its un unlikely event but I've always been curious what would necessitate it to fail. As we know, all things can fail.
- lotsofpulp 3y ago
  If the FDIC breaks, then the whole country is broken. FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency, which is ultimately the belief in an orderly US society that results in being able to trust that the digits listed in a database next to your name will allow you to procure products/services you want.
  - JumpCrisscross 3y ago
    > If the FDIC breaks, then the whole country is broken Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties. > FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
    - lotsofpulp 3y ago
      My point was that the “insurance” premiums and whatnot the FDIC collects are all fiction, because in practice, the Federal government will always step in if the reserves are insufficient (assuming it can). If it can’t, then the country is about to dissolve or otherwise undergo some major changes. Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago). https://news.bloomberglaw.com/daily-labor-report/biden-to-unveil-bailout-plan-for-multiemployer-pension-funds https://news.bloomberglaw.com/daily-labor-report/biden-to-un... >No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation. The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
      - deleted 3y ago
        [deleted]
      - dragonwriter 3y ago
        > The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was. Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.
- JumpCrisscross 3y ago
  > Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? “The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC. “FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury. [1] https://www.fdic.gov/about/what-we-do/index.html#:~:text=The%20FDIC%20receives%20no%20Congressional,pay%20for%20deposit%20insurance%20coverage https://www.fdic.gov/about/what-we-do/index.html#:~:text=The.... [2] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/#:~:text=FDIC%20insurance%20is%20backed%20by,penny%20of%20FDIC%2Dinsured%20deposits https://www.fdic.gov/resources/deposit-insurance/brochures/i....
- Workaccount2 3y ago
  It's funded by participating banks paying for coverage. It holds enough capital to cover something like only 2% of insured deposits. It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.
  - JumpCrisscross 3y ago
    > It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event. This is wrong. In the case of a large-scale collapse, depositors have a legal claim on the Treasury through the FDIC.
nonethewiser 3y ago
You are referring to SVB. They absolutely did not.
- JumpCrisscross 3y ago
  > You are referring to SVB. They absolutely did not. They absolutely did [1]. [1] https://www.fdic.gov/news/press-releases/2023/pr23019.html https://www.fdic.gov/news/press-releases/2023/pr23019.html
  - nonethewiser 3y ago
    That article doesn't support the claim that there is some precedent for unlimited FDIC insured deposits. It even specifically cites the process by which an exception was created. Can you elaborate on why you now think there is a precedent that all deposits for future bank failures are insured?

sidewndr46 3y ago

Last years bank collapse has demonstrated that FDIC coverage is infinite so long as you have the right connections. Also FDIC limit is theoretically a lifetime limit per individual. Again, no actual limit so long as you know the right people. Also worth pointing out that when financial institution failure hits people personally regime changes follows quickly. It'd be at the ballot box in the US, but make no mistake it'd come swiftly. As a result, politicians will do whatever it takes to prevent that from happening.

JumpCrisscross 3y ago
> FDIC coverage is infinite so long as you have the right connections Which depositors were screwed for not having the right connections? > FDIC limit is theoretically a lifetime limit per individual No. It’s not even a limit at the same institution, just per ownership category.
- caseysoftware 3y ago
  The Big 5 banks have unlimited FDIC coverage because they're "too big to fail" and they scoop up the remains after the FDIC swoops in. Everyone else has the $250k per depositor. That is why the CRE loans are such a huge problem. Their debt is owed to regional banks, not the big ones. That said, the FDIC ignored their playbook and rules to try to calm things down last March. A few more banks went down but not the numbers people expected. That means we're in uncharted territory.. will the FDIC follow their own rules next time or do whatever they want? We don't know.
  - JumpCrisscross 3y ago
    > Big 5 banks have unlimited FDIC coverage because they're "too big to fail" Less than one year! We had three banks fail—the second, third and fourth largest in our nation’s history—less than one year ago [1]! None were TBTF, let alone big five. Every deposit was covered. I get that the headline reads hysterically to a lay reader, but less than one year! [1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failures_in_the_United_States https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...

hasty_pudding 3y ago

this is the ideal case. this is the healthy case. but the government is owned and that will never happen.

Rastonbury 3y ago

You can't really because healthy banks will fail because of bank runs. Imagine your coworkers bank going under and losing savings above FDIC insured, suddenly everyone in the office is leaving to withdraw all their savings at other banks who are much less distressed. If banks fail due to mismanagement, letting banks fail should be done, but you can't really blame the banks for not predicting covid and the massive decline in demand for office space. Protecting against once in a lifetime events won't be profitable and governments will have to end up subsidising them anyway.