[insaneirish]

> Pretty Simple fix.

Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions.

I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not is "simple", because the consequences could be far reaching, unintended, and unpredictable, both short term and long term.

[acjohnson55]

I think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard.

The bigger issue is the concentration of deposits and potential suppression of investment.

[maxilevi]

Managers might have been fired and equity wiped out but they still have all the rent and bonuses that were extracted during the high risk high reward activities.

That’s why it’s a morale hazard and the fed taking over it doesn’t solve it.

[acjohnson55]

I don't see how letting the depositors get hosed while the bank gets taken over is any better than bailing out the depositors. Either way, the rents have been extracted. Why does the $250k limit make a difference to bank management behavior?

[watwut]

It makes difference in where people put money into. Despite VCs and startups not using it, you can buy insurance over $250k limit and spread accounts into multiple banks. It is actually standard product.

Basically, VCs did not wanted to pay for that and were rewarded. They advised or forced their startups to not insure money too. Also, before someone makes that point, these are supposed to be highly sophisticated operators. They are supposed to have know how. The people being bailed out are not Johny-the-cleaner working on his small busines.

[yipbub]

They don't stand to lose much if their risky behavior fails, but they stand to make a lot if it succeeds.

[gnicholas]

You've just coined a new term, "morale hazard". Perhaps this is when there is a moral hazard problem that affects morale?

[maxilevi]

Haha that is hilarious, I can't edit my comment but thanks for pointing it out

[bubbleRefuge]

agree with all except your last sentence . whats the issue ?

[acjohnson55]

Concentration of deposits leads to less competition in the banking sector and more concentrated risk in global systemically important banks, i.e. the ones that are too big to fail. But maybe that's no the end of the world, and maybe the deposit limit isn't the best way to create competition.

And if banks aren't allowed to make risky investments with deposits (good policy, IMO), then I believe we want people and businesses using banks for their most liquid needs, but otherwise, putting their money to work through investment.

[bubbleRefuge]

banks don not lend deposits per say. this is an anachronism. banks make loans and loans create deposits. there is not a dependency on deposit funding loans. banks create loans on demand so long as they meet capital requirements. deposits are not capital. they are liabilities. (there as a thread last week about all this which you can read that is probably helpfull)

[JeremyNT]

> Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions.

To me this makes intuitive sense, but are the only options 250k or infinity?

What's the "magic" behind that $250k number? Is there some reason to expect that this is an optimal number? I feel like maybe it's cargo-culting - it isn't even re-adjusted for inflation is it?

[rtkwe]

At the time it's probably the level that covers most people's deposits. It's pretty rare for a person to have >250k in pure savings deposits so setting it at that level protects most people lessening the pressure causing bank runs. It doesn't work so well for banks like SVB where a few huge businesses make up a majority of their deposits.

250k probably still covers 90+% of people in the US.

[bee_rider]

Hmm.

Would it be easy nowadays to just have a software service that split up an account into n accounts of less than $250k, and then presented a single interface to all of them?

I guess individual purchases over $250k would be a problem, but I guess a short-term gather operation could be ok, as long as you aren’t too worried about a bank run while that transaction was occurring.

[acjohnson55]

This exists, many times over. It's called a cash sweep. See one example here: https://www.wellsfargo.com/investing/cash-sweep/

[qqqwerty]

And just as a warning, it is still not clear how sweep accounts are handled in the case where the primary bank fails. SVB offered sweep accounts. But due to the intervention, the recovery process of those accounts was never tested in a real life scenario. If recovering your sweep accounts takes months, that could be really bad for a business trying to make payroll. And from what I read, there is some "operational risk" as well, i.e. if a bunch of money hits your account the same day a bank fails, that money will be in your primary banks account and if it is over the FDIC limit that amount will be uninsured.

[acjohnson55]

Great points. Maybe protection can be written into the rules to remove that uncertainty?

[astura]

See, for example, Fidelity's FDIC-Insured Deposit Sweep Program.

https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa...

>To provide you with the benefit of FDIC insurance eligibility, the cash balance in your account will be automatically swept into an interest-bearing FDIC-Insured Deposit Sweep position. Since FDIC insurance coverage is currently limited to $250,000 per qualified customer account per banking institution, Fidelity may use several banks, rather than just one, to maximize your FDIC coverage.

[SOLAR_FIELDS]

Mercury has a been taking this idea to a pretty logical extreme lately. At first it was just $1M, but it’s now $5M

https://mercury.com/blog/company-news/understanding-bank-swe...

[bee_rider]

Interesting. So is the coverage cap actually accomplishing much?

[freeone3000]

It spreads risk throughout the system. In a maximally-resilient scenario, everyone would have a small deposit at every possible bank -- then when any bank fails, it's "no big deal", and you won't panic and withdraw your money from the rest. This is similar -- any particular failure is going to be for half (or less!) of your money, instead of all of it, reducing the urgency and spreading out the risk.

[bee_rider]

Ah, that’s interesting. So spreading the accounts across multiple banks is essentially accomplishing the goal of the program.

[dehrmann]

Seems silly to make people jump through these hoops when all the want is a safe, low-yield investment.

[oblio]

There is no safe investment of any kind. Even bonds or cash have risks.

This stuff is immensely complicated once you peer behind the curtains.

[drexlspivey]

Putting money at the central bank (deposit facility) is safe

[oblio]

That's not an investment, though, there's no return on investment. It's just storage.

[drexlspivey]

No you get the overnight rate. Currently 4.65% for USD and 3% for EUR

[marcosdumay]

AFAIK, the current normal is for banking systems to ensure all of the deposits, the US is an exception. And this policy hasn't caused any disaster anywhere yet.

But yes, the US has more singular things that can interact badly with no limits on insurance. As a start, the insuring entity has much shallower pockets than most places I know about.

[morelisp]

Your knowledge is wrong. Most European DGSs cover up to 100k, for example.

https://en.wikipedia.org/wiki/Deposit_insurance

[bubbleRefuge]

One prediction : no more bank runs.