[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.

[salawat]

If that one depositor with 25m banks only at the bank that fails, FDIC is on the hook for all 25m.

If the deposit is 250k across 100 banks, and only 1 bank fails, FDIC is only on the hook for at most the 250k.

Now multiply that by number of depositors. It's RAID for banks. You're gaining fault tolerance by decreasing the impact of any particular failure.

[mercyandgrace]

>It's RAID for banks.

Just wanted to say this is such a great analogy. Thanks.