[kolbe]

The FDIC is just a ruse to let "useful idiots" think that everything is okay. In reality, the FDIC charges banks 90% less than the actuarial value of the risk they take on, and banks make wildly risky loans/bets all the time, knowing it's "heads I win, tails the taxpayer loses."

Insofar as you can call US Finance any better than crypto, it's because of socialized losses. IMO, bank failures are a much more appropriate solution.

[lottin]

What is the 'actuarial value' of the risk a bank takes on?

[kolbe]

I can tell you a bank like say JP Morgan Chase, who is charged 5bp a year (i.e. 5 cents for every $100 dollars), has a much higher chance of catastrophic failure than 1 in 2000. Many banks just like them fail every few decades, and it was generous of me to only say they're undercharged by 90% (i.e. 1 in 200 odds), when the reality is probably more within a range like 1 in 20 to 1 in 100.

[Sholmesy]

> who is charged 5bp a year (i.e. 5 cents for every $100 dollars)

Am I crazy or would 5 basis points be 0.05 cents (1/100th of a percent)

[lottin]

So you're making this numbers up? If banks are being undercharged, the insurer will be incurring losses. It's as simple as that.

[kolbe]

The insurer is the United States government. They take losses on things all the time. It's called "socialized losses." I referred to it before, and it sounds like you don't even understand these finance 101 (or even basic high school civics) topics, so why are you insulting anyone?

[lottin]

The insurer is a corporation with its own financial statements, so it's pretty easy to see if it's operating at a loss (and thus subsidising the banking industry) or at a profit (not subsidising it). I guess you didn't know that either.

[areyousure]

In case anyone is curious, here is what some of my research has found:

The empirical rate of bank failure in the last couple decades has been slightly over 1 in 250 banks per year (that is, ~0.4%/bank/year, or "40 basis points"). This is from these two sources: https://www.fdic.gov/bank/historical/bank/ says that on average 27.3 banks per year have failed, while https://banks.data.fdic.gov/explore/historical?displayFields... says that there have been ~6500 banks covered. (I think that the probability of a massive bank failure is in fact higher than the empirical rate, due to the tail risk of catastrophic failures.)

I have not been able to find what rates JP Morgan Chase pays for their deposit insurance, but I think this page https://www.fdic.gov/deposit/insurance/historical.html suggests that the rate is between 1.5 and 40 basis points per year. Some other sources I've found do suggest that the average rate is around 5 bps/year.

Already we see that the empirical failure rate is higher than the assessment rate. (Although note that the probability was not weighted by dollars, whereas the rate is.) This is perhaps surprising, because the FDIC claims that "The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage." https://www.fdic.gov/about/what-we-do/index.html Perhaps this is part of the point of this comment I am replying to.

But indeed, we find that historically the FDIC's Deposit Insurance Fund has gone negative multiple times: https://www.aba.com/news-research/research-analysis/fdic-cap... https://www.fdic.gov/deposit/insurance/assuringconfidence.pd... Historically, in such a situation, the FDIC is able to borrow from the federal government. It has done so in 1990, while in 2008 it did other maneuvers that similarly show that the rate is insufficient.

As a result, it's plausible to predict: (a) the deposit insurance fund might go negative again (ie, the insurance rate is incorrect), (b) the deposit insurance fund will definitely go negative in a situation like the S&L crisis or the 2008 financial crisis (thus requiring tricks like the borrowing mentioned above), and (c) in the event of a more catastrophic failure, the insurance fund will go so far negative that it might be explicitly bailed out by the broader federal government.