[Gunax]

I agree about 400 banks failing would likely be due to some greater catastrophe.

But financially I think it's the same. If 400 customers each use 1 bank each, then a single bank failure means the FDIC needs to make whole one customer.

But if every customer put 1/400th of their wealth into each of the 400 banks, then FDIC has to cover all customers for 1/400th each.

The cost to us as depositors/taxpayers is equal.

[lmm]

> But if every customer put 1/400th of their wealth into each of the 400 banks, then FDIC has to cover all customers for 1/400th each.

Seems like having everyone use at least 400 different banks achieves one of the core goals of the FDIC guarantee - making small/midsize banks viable and preventing everyone from piling into the big four megabanks.

[mercyandgrace]

I'm not sure I'm following. If the FDIC only needs to insure 1/400 of all deposits, then they only need to have on balance 1/400 of the total funds. So the cost to all accounts is in effect 1/400, no?

If customers are only utilizing a single bank, and the FDIC will insure all deposits regardless of amount, they would need 400 times as much than would be necessary if the balances were swept.

[FreakLegion]

The FDIC insures the entirety of the deposits either way.

> Insurance only pays out . . . if a bank fails

That's a good point. So one difference is that while the money is equally insured in both cases, the payout dynamics would change. Very roughly, the amount of a payout might be expected to go down in the cross-bank case (smaller account values, but then also more accounts per bank, so it isn't quite so simple), and the likelihood of a payout might be expected to go up (higher chance of failure with more and smaller banks). But this all depends on how interlocked the banks become; in the extreme they could end up functionally a single bank.

The first thing that came to mind for me is somewhat related: Spreading deposits across banks is relatively better for small banks and worse for big ones, since the small banks gain deposits and the big banks lose them. So you can definitely argue there's some advantage to keeping a lower insurance limit, although it gets murkier when we bring behavioral considerations and "too big to fail" into the picture.

[mercyandgrace]

>The FDIC insures the entirety of the deposits either way.

This is new with SVB. I get the whole "250K minimum" argumemt, but this is the first where we are seeing major 10M++ depositors getting 100% guarantees.

I don't see issue with spreading money across smaller banks - other than perhaps they may not be able to assess risk as well as larger banks. But again, SVB.

I think one thing to keep in mind is that most bank depositors hold far, far less than the 250K guaranteed by FDIC. By a large margin. Id be surprised if the average was above 10K. There are $17T in deposits across the country [1]. The FDIC at the beginning of the year had $128B in balance as insurance to depositors [2].

[1] https://fred.stlouisfed.org/series/DPSACBW027SBOG

[2] https://www.fdic.gov/analysis/quarterly-banking-profile/inde...

[FreakLegion]

If you look through the thread I replied to and the broader conversation, some people objected to backstopping deposits without limit and think rates have to go up if this is the new status quo.

The question is in what way(s) does it matter whether deposits are insured without limit in a single account, which is new, or with limits when spread across an arbitrary number of accounts, which isn't? If one costs 1x, why should the other cost > 1x?

It's a serious question. FDIC assessment rates aren't as simple as tax brackets and for example it's possible that the act of spreading deposits across more accounts in more banks would increase the fees paid into the existing system anyway.

[mercyandgrace]

>The question is in what way(s) does it matter whether deposits are insured without limit in a single account, which is new, or with limits when spread across an arbitrary number of accounts, which isn't?

It matters because only 1 (SVB) bank failed. If those depositors had their money swept across multiple banks this point would be moot.

Edit: If deposits are spread about multiple banks, the FDIC does not need to carry as large of a balance to cover the loses of any single bank, which results in less indirect fees to depositors of different banks.

[peyton]

I don’t follow the math. A bank failure is a bank failure. There’s no difference to the FDIC between 100 depositors with $250k swept across 100 banks and 1 depositor with $25m.