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Comment by carmelo5 | Hacker News Reader

What exact protections are you talking about? The market is already rewarding the most efficient banks.

treating liabilities (demand deposits) as assets, using theoretical selling prices of assets to leverage. in this they are protected by legal tender laws and FDIC. banks basically get heavily subsidized insurance for their investment business at taxpayer expense.

Sorry, but that's highly misleading. Demand deposits are liabilities on the commercial bank's financial statements. The "cash" is an asset, which is owed to the depositor. That's very basic financial accounting.

Banks pay for FDIC coverage, like you or I pay for car insurance.

Government-supplied insurance is a bit different than private-sector-provided insurance, though. It's essentially the "public option" for banks.

they absolutely do not pay an amount commensurate with the amount and risk insured. In a for profit insurance system the insuree is paying more than their expected liability, the banks pay much less than this and the taxpayer adopts the rest of the burden.

also banks use demand deposits to back their loan liabilities. the only reason customers put up with such a thing is again FDIC.

That is absolutely untrue. Taxpayers do not pay for any FDIC insurance.

In all fairness, those of you downvoting the parent need to address the following:

The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.

Source: http://www.fdic.gov/about/learn/symbol/index.html

I remember there being some talk about FDIC potentially needing to borrow from the Treasury during the financial crisis however as far as I know, it didn't happen.

That's a bit like the way Fannie and Freddie received no direct appropriations... before they collapsed. They had an implicit guarantee, which was worth just as much as cash, and wound up costing a lot.

When people trust the FDIC, it's not based on the idea that they're an independent entity charging sufficient premiums to handle any eventuality. They're not; they predict they will be below their legally-required reserve level through 2017 and not hit their target reserve level until 2027 (with rosy economic assumptions):

http://problembanklist.com/fdic-deposit-insurance-fund-to-re...

http://problembanklist.com/fdic-projects-losses-of-billion-o...

The FDIC only inspires confidence because of the understanding that if necessary the full resources of the government would back it.

Not so far, but if we ever let more than one of the TBTF banks go, then the FDIC will be taking out billions in loans at sub-market interest from the taxpayer.

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