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> bank depositors are not engaging in risky behavior, Because the taxpayers (and all users of USD) repeatedly bail them out. I could define anything as not be

> bank depositors are not engaging in risky behavior, Because the taxpayers (and all users of USD) repeatedly bail them out. I could define anything as not being risky if I knew taxpayers would bail it out. More importantly, if there is no risk, what purpose does a bank serve? They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. The government should be able to offer that service for free.

triceratops 8mo ago
Banking is a basic utility. Penalizing customers of a business for the business going under is bonkers. We learned this lesson during the Great Depression. Bank shareholders or creditors are engaging in risky behavior and should face the full consequences of bank failures. No bailouts for them.
- munk-a 8mo ago
  I dislike that the SVB bailout happened without a revision to FDIC insurance rules. It felt like a good time to reevaluate those rules (if the limit needs to be raised then lets raise it) and encode the new version to ensure consistency of insurance going forward. SVB accounts getting a full bailout without any formal shift towards that being the future policy felt arbitrary - either we want that policy or we don't - lets not just change the rules for a single case.
  - triceratops 8mo ago
    Agreed.
  - YetAnotherNick 8mo ago
    > SVB bailout There wasn't any bailout at all. This entire thread is so confusing. But yes they got 2 days or something of deposit freeze IIRC.
    - munk-a 8mo ago
      My apologies on the imprecise language - maybe "extension of FDIC account insurance beyond the standard 250k limit to depositors" is better terming? SVB came out of this broke - as they should for such mismanagement - but the concern is that depositors were made whole beyond the amount usually insured by the FDIC.
      - SpicyLemonZest 8mo ago
        It's not a question of terminology. As you say, SVB came out of it broke, but their stuff didn't burn to the ground - their operations and assets were taken over by a bridge institution Silicon Valley Bridge Bank, which was then quickly acquired by First Citizens Bank. Where's the point where the depositors should have lost money? Would it have been fair for First Citizens to tell every customer who had over $250k in their account "sorry, we've taken the rest as an acquisition bonus"?
      - YetAnotherNick 8mo ago
        No, not only there was no extension, there even wasn't 250k given by FDIC. Absolutely no taxpayer money or even FDIC money went into the collapse.
stanmancan 8mo ago
> Because the taxpayers bail them out. I could define anything as not being risky if I knew taxpayers would bail it out. I feel like I must be misunderstanding something here because it sounds like you're saying depositing funds in a bank is considered risky behaviour?
- devman0 8mo ago
  It is supposed to be if the amounts are above $250,000. I have no problem with the first $250k being risk free, that is a policy that is well published and that we all "agree" on. Making arbitrary policy decisions that in some cases depositors should be made whole when risky behavior (such as depositing above the insurance limit) bites them is problematic. Stick to the policy or change the policy don't make one off exceptions because that sets weird expectations. 89% of deposits at SVB were uninsured.
  - zeroonetwothree 8mo ago
    I’m sure you would feel differently if it was your employers money there and they weren’t able to pay your salary. $250k is not much at all for a business
    - devman0 8mo ago
      Businesses can use deposit management services to spread cash among many banks. Bonus points they also are less impacted by the poor business practices of one bank. Individuals can do this too with investment brokers or wealth management providers. Alternatively we could just made FDIC coverage unlimited, but then that creates poor risk taking incentives, which is the whole point of not setting the expectation of the a bailout by making exceptions.
- chasd00 8mo ago
  > depositing funds in a bank is considered risky behaviour? of course it is, that's why the bank pays you interest on your deposit. They loan out what you deposit at a higher rate and collect the difference as profit. If that loan defaults then your money is gone because the bank was never able to collect it back. FDIC was invented to insure your deposit up to 250k so you're protected (up to 250k) in case that happens.
lokar 8mo ago
There has been a lot of discussion about how the basic setup of banks (borrow short, lend long, collect the spread) is probably not a great idea, and we should just separate these two activities (see Money Stuff). People who want to lend long should do that with their own money, and people who just want to save should be able to do that. But, at least in the US, regulators keep blocking the 1st step: narrow banking. Let banks offer savings accounts that just stick the money in the Fed, zero risk.
- bpt3 8mo ago
  So I read the Matt Levine article on this and a couple other pieces, and I'm not getting the impression Levine or other mainstream economists think this is a good idea as it currently stands? I don't necessarily think they are suggesting its clearly bad either, but it didn't seem as positive on it as I was expecting from your comment. Can you provide some more information, because I'm not really seeing the value in being required to interact with more financial institutions in practice.
  - lokar 8mo ago
    When you deposit money in a US regulated bank, there are basically two places that can end up: - on deposit at the Fed, in the account of a Fed member bank (which could be your bank, or a bank your bank has an account at) - loaned out by your bank (or again, a bank your bank uses) The Fed, so far, has refused to allow new member banks (eg that could deposit at the Fed) that don't intend to ever loan out deposits. They would take all customer deposits and stick them at the Fed. Many (most? the ones at the Fed anyway) think allowing this would siphon away money that would otherwise be used to make loans. They are, in effect, putting their finger on the scale to push you to allow your savings to be used as loans. The rise of Private Credit, where wealthy individuals and institutions loan money to private firms for to fund loans is the new thing that could break this open. These arrangements are long term, the customer can't "call" the money back, they are committed, and (for the most part) their commitment matches the duration of the loans. So there can be no bank runs. And the people providing the money know what they are doing. Levine is mostly arguing that with so much money in private credit, we could do without forcing small savers to fund loans.
bpt3 8mo ago
Taxpayers don't bail out bank depositors, the FDIC (which is insurance paid for by the banks) does. And banks do a lot more than what you described, which I have to assume you know already.
- lotsofpulp 8mo ago
  Insurance priced for damages capped at $250k per person per bank or whatever it is. If the insurance covered unlimited damages, then this wouldn’t be a discussion.
  - bpt3 8mo ago
    Yes. What are these repeated bailouts by taxpayers that you mentioned? And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
    - lotsofpulp 8mo ago
      https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008–present) https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U... https://americandeposits.com/insights/brief-history-us-bank-failures/ https://americandeposits.com/insights/brief-history-us-bank-... >In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure. I do not have a comprehensive list of every time depositors have been bailed out, but I have read about it multiple times in my adult life of the last 25 years. >And you can't think of any way that the federal government providing retail banking services could possibly go wrong? The federal government already controls all the banks. What could go wrong that they already do not have the power to make go wrong? The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.
epistasis 8mo ago
The FDIC insures $200k of deposits because banks are not supposed to be risky. Thats taxpayers bailing out everybody in order to keep banks as "not risky" In particular the article incorrectly states that the bank was bailed out. It was not. The bank failed. Depositors who were running their non-profit in the Bay Area did not lost all their charitable contributions. The bank failed because it had placed deposits into US Treasury bonds that were temporarily worth less for sale on the open market than they would be at maturity. When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement. When the depositors were bailed out, taxpayers didn't lost anything, it was a wash. We could have paid at bond maturity or now, but it made little difference to us.
- s1artibartfast 8mo ago
  What about banking regulations that mandated that SBC put those deposits into treasury bonds? The bailout did not accelerate bond maturity. Those were picked up by other Banks when assets were sold off. Last, who is the other banks that paid for the bailout, not taxpayers, at least not directly. If you call higher FDIC insurance rates for JPMorgan Chase a taxpayer cost, how does that logic scale to the rest of the economy?
- FireBeyond 8mo ago
  > When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement. I think he did more than that. He either has precognition Nostradamus would be proud of or he absolutely had insider information, and a good amount of it. 1. He knew that when the bank closure would be, because despite how the FDIC has very detailed and historically very successful efforts at keeping such plans highly confidential (for obvious reasons), like agents in hotels under fake names, etc., he told his investments on Wednesday night that "all funds must be out of SVB by COB Thursday". FDIC rolled into SVB 8am Friday morning. 2. He had also had instructed another of his companies to build a website and app that was able to handle applications for business bridge loans, and it "needed to be tested, and ready to go live, by noon on Friday". Also, not for nothing, causing a bank run is a federal felony.
avidiax 8mo ago
Depositors are lending their money to the bank at low interest. They may seek risk in terms of increased yield on their savings account, but FDIC insured banks will have trouble meeting their requirements while offering high yields on their accounts. Banks provide security for deposits as well as liquidity (velocity of money), and slight inflationary pressure. Wiping out depositors doesn't prevent much moral hazard since the depositors are unsophisticated, so they are unable to differentiate risk among banks.
- lotsofpulp 8mo ago
  Unsophisticated depositors are not holding more than $250k of cash in bank accounts. The problem is not that depositors were made whole, the problem is that the FDIC insurance prices are based on limited losses, when for all intents and purposes, the depositors' risk is completely based on their political influence. This type of corruption is antithetical to a strict, rules based system, which is needed for trust in the financial system. Either give everyone the same protection explicitly, or follow the rules. Also, the rules and lack of centralization might have made sense when cash was a thing, but in a society where electronic money is the primary mode of payment, I see no reason why a non government entity should be involved at all in the simple act of maintaining a record of how much money is an account and adding and subtracting to it.
Aunche 8mo ago
> Because the taxpayers (and all users of USD) repeatedly bail them out. The taxpayer didn't pay for those bailouts. They were funded by the DIF, which was replenished by premiums that banks pay. > They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. Did you just look into what banks do at all before making this claim? If that were the case, companies like Apple, Bilt, and Robinhood wouldn't be relying on real banks and could easily start their own.

triceratops 8mo ago

Banking is a basic utility. Penalizing customers of a business for the business going under is bonkers. We learned this lesson during the Great Depression. Bank shareholders or creditors are engaging in risky behavior and should face the full consequences of bank failures. No bailouts for them.

munk-a 8mo ago
I dislike that the SVB bailout happened without a revision to FDIC insurance rules. It felt like a good time to reevaluate those rules (if the limit needs to be raised then lets raise it) and encode the new version to ensure consistency of insurance going forward. SVB accounts getting a full bailout without any formal shift towards that being the future policy felt arbitrary - either we want that policy or we don't - lets not just change the rules for a single case.
- triceratops 8mo ago
  Agreed.
- YetAnotherNick 8mo ago
  > SVB bailout There wasn't any bailout at all. This entire thread is so confusing. But yes they got 2 days or something of deposit freeze IIRC.
  - munk-a 8mo ago
    My apologies on the imprecise language - maybe "extension of FDIC account insurance beyond the standard 250k limit to depositors" is better terming? SVB came out of this broke - as they should for such mismanagement - but the concern is that depositors were made whole beyond the amount usually insured by the FDIC.
    - SpicyLemonZest 8mo ago
      It's not a question of terminology. As you say, SVB came out of it broke, but their stuff didn't burn to the ground - their operations and assets were taken over by a bridge institution Silicon Valley Bridge Bank, which was then quickly acquired by First Citizens Bank. Where's the point where the depositors should have lost money? Would it have been fair for First Citizens to tell every customer who had over $250k in their account "sorry, we've taken the rest as an acquisition bonus"?
    - YetAnotherNick 8mo ago
      No, not only there was no extension, there even wasn't 250k given by FDIC. Absolutely no taxpayer money or even FDIC money went into the collapse.

stanmancan 8mo ago

> Because the taxpayers bail them out. I could define anything as not being risky if I knew taxpayers would bail it out. I feel like I must be misunderstanding something here because it sounds like you're saying depositing funds in a bank is considered risky behaviour?

devman0 8mo ago
It is supposed to be if the amounts are above $250,000. I have no problem with the first $250k being risk free, that is a policy that is well published and that we all "agree" on. Making arbitrary policy decisions that in some cases depositors should be made whole when risky behavior (such as depositing above the insurance limit) bites them is problematic. Stick to the policy or change the policy don't make one off exceptions because that sets weird expectations. 89% of deposits at SVB were uninsured.
- zeroonetwothree 8mo ago
  I’m sure you would feel differently if it was your employers money there and they weren’t able to pay your salary. $250k is not much at all for a business
  - devman0 8mo ago
    Businesses can use deposit management services to spread cash among many banks. Bonus points they also are less impacted by the poor business practices of one bank. Individuals can do this too with investment brokers or wealth management providers. Alternatively we could just made FDIC coverage unlimited, but then that creates poor risk taking incentives, which is the whole point of not setting the expectation of the a bailout by making exceptions.
chasd00 8mo ago
> depositing funds in a bank is considered risky behaviour? of course it is, that's why the bank pays you interest on your deposit. They loan out what you deposit at a higher rate and collect the difference as profit. If that loan defaults then your money is gone because the bank was never able to collect it back. FDIC was invented to insure your deposit up to 250k so you're protected (up to 250k) in case that happens.

lokar 8mo ago

There has been a lot of discussion about how the basic setup of banks (borrow short, lend long, collect the spread) is probably not a great idea, and we should just separate these two activities (see Money Stuff). People who want to lend long should do that with their own money, and people who just want to save should be able to do that. But, at least in the US, regulators keep blocking the 1st step: narrow banking. Let banks offer savings accounts that just stick the money in the Fed, zero risk.

bpt3 8mo ago
So I read the Matt Levine article on this and a couple other pieces, and I'm not getting the impression Levine or other mainstream economists think this is a good idea as it currently stands? I don't necessarily think they are suggesting its clearly bad either, but it didn't seem as positive on it as I was expecting from your comment. Can you provide some more information, because I'm not really seeing the value in being required to interact with more financial institutions in practice.
- lokar 8mo ago
  When you deposit money in a US regulated bank, there are basically two places that can end up: - on deposit at the Fed, in the account of a Fed member bank (which could be your bank, or a bank your bank has an account at) - loaned out by your bank (or again, a bank your bank uses) The Fed, so far, has refused to allow new member banks (eg that could deposit at the Fed) that don't intend to ever loan out deposits. They would take all customer deposits and stick them at the Fed. Many (most? the ones at the Fed anyway) think allowing this would siphon away money that would otherwise be used to make loans. They are, in effect, putting their finger on the scale to push you to allow your savings to be used as loans. The rise of Private Credit, where wealthy individuals and institutions loan money to private firms for to fund loans is the new thing that could break this open. These arrangements are long term, the customer can't "call" the money back, they are committed, and (for the most part) their commitment matches the duration of the loans. So there can be no bank runs. And the people providing the money know what they are doing. Levine is mostly arguing that with so much money in private credit, we could do without forcing small savers to fund loans.

bpt3 8mo ago

Taxpayers don't bail out bank depositors, the FDIC (which is insurance paid for by the banks) does. And banks do a lot more than what you described, which I have to assume you know already.

lotsofpulp 8mo ago
Insurance priced for damages capped at $250k per person per bank or whatever it is. If the insurance covered unlimited damages, then this wouldn’t be a discussion.
- bpt3 8mo ago
  Yes. What are these repeated bailouts by taxpayers that you mentioned? And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
  - lotsofpulp 8mo ago
    https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008–present) https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U... https://americandeposits.com/insights/brief-history-us-bank-failures/ https://americandeposits.com/insights/brief-history-us-bank-... >In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure. I do not have a comprehensive list of every time depositors have been bailed out, but I have read about it multiple times in my adult life of the last 25 years. >And you can't think of any way that the federal government providing retail banking services could possibly go wrong? The federal government already controls all the banks. What could go wrong that they already do not have the power to make go wrong? The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.

epistasis 8mo ago

The FDIC insures $200k of deposits because banks are not supposed to be risky. Thats taxpayers bailing out everybody in order to keep banks as "not risky" In particular the article incorrectly states that the bank was bailed out. It was not. The bank failed. Depositors who were running their non-profit in the Bay Area did not lost all their charitable contributions. The bank failed because it had placed deposits into US Treasury bonds that were temporarily worth less for sale on the open market than they would be at maturity. When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement. When the depositors were bailed out, taxpayers didn't lost anything, it was a wash. We could have paid at bond maturity or now, but it made little difference to us.

s1artibartfast 8mo ago
What about banking regulations that mandated that SBC put those deposits into treasury bonds? The bailout did not accelerate bond maturity. Those were picked up by other Banks when assets were sold off. Last, who is the other banks that paid for the bailout, not taxpayers, at least not directly. If you call higher FDIC insurance rates for JPMorgan Chase a taxpayer cost, how does that logic scale to the rest of the economy?
FireBeyond 8mo ago
> When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement. I think he did more than that. He either has precognition Nostradamus would be proud of or he absolutely had insider information, and a good amount of it. 1. He knew that when the bank closure would be, because despite how the FDIC has very detailed and historically very successful efforts at keeping such plans highly confidential (for obvious reasons), like agents in hotels under fake names, etc., he told his investments on Wednesday night that "all funds must be out of SVB by COB Thursday". FDIC rolled into SVB 8am Friday morning. 2. He had also had instructed another of his companies to build a website and app that was able to handle applications for business bridge loans, and it "needed to be tested, and ready to go live, by noon on Friday". Also, not for nothing, causing a bank run is a federal felony.

avidiax 8mo ago

Depositors are lending their money to the bank at low interest. They may seek risk in terms of increased yield on their savings account, but FDIC insured banks will have trouble meeting their requirements while offering high yields on their accounts. Banks provide security for deposits as well as liquidity (velocity of money), and slight inflationary pressure. Wiping out depositors doesn't prevent much moral hazard since the depositors are unsophisticated, so they are unable to differentiate risk among banks.

lotsofpulp 8mo ago
Unsophisticated depositors are not holding more than $250k of cash in bank accounts. The problem is not that depositors were made whole, the problem is that the FDIC insurance prices are based on limited losses, when for all intents and purposes, the depositors' risk is completely based on their political influence. This type of corruption is antithetical to a strict, rules based system, which is needed for trust in the financial system. Either give everyone the same protection explicitly, or follow the rules. Also, the rules and lack of centralization might have made sense when cash was a thing, but in a society where electronic money is the primary mode of payment, I see no reason why a non government entity should be involved at all in the simple act of maintaining a record of how much money is an account and adding and subtracting to it.

Aunche 8mo ago

> Because the taxpayers (and all users of USD) repeatedly bail them out. The taxpayer didn't pay for those bailouts. They were funded by the DIF, which was replenished by premiums that banks pay. > They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. Did you just look into what banks do at all before making this claim? If that were the case, companies like Apple, Bilt, and Robinhood wouldn't be relying on real banks and could easily start their own.