People do the same thing in the US to take advantage of FDIC insurance, which only goes up to $250,000. Not terribly novel.
Wealthy people opening multiple accounts to stay under the FDIC limit is just an example of folks finding a loophole to receive a government benefit that was never really intended for them in the first place.
For instance, I keep $XX,000 in my bank account but a negative $XXX,000 balance in my brokerage account.
And I'm not particularly wealthy.
This way I have an isolated cash cushion buffer separate from my investments, and I don't really care what, if anything, that money makes. It's actually invested in my brokerage account, at a [edit](1.25%) margin APR, that's tax deductible - and offsets my capital gains.
[edit] correction: I double-checked, I guess I'm paying closer to 1.25%. Looks like margin rates are both up at IBKR, and my recollection was off. Thanks for the spot-check throwaway2037. It's hard to find the historical rates, too.
If you want to keep the banking system stable, it's good to keep some skin in the game for depositors.
There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.
Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe.
(Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.)
With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available.
(FDIC charges insurance premiums, but they are not properly risk adjusted.)
First, the stated reasons might not be the real reasons.
Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening.
See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south.
In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations.
It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap.
The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are.
Banks are too important to yolo. Retailers can get their risk on elsewhere.
See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
I agree I overstepped when I said it "never" works - generously, I was being hyperbolic, however cherry picking a few good outcomes doesn't a blueprint make, IMO.
> In this book, Robert Anderson, a development consultant and former World Bank economist, recommends a different approach. Instead of adopting policies that are common in rich countries, Anderson suggests that policymakers take into account the institutional weaknesses typical of developing countries - corruption, deficient rule of law, cronyism, and so on. Simpler, market-oriented policies are more suitable to poor countries institutional environments and more likely to produce growth and keep the private and public sectors honest.Anderson recommends sometimes counterintuitive policy solutions for a number of areas - banking, privatization, corporate governance, bankruptcy, and competition. For instance, he argues that "rich countries were once poor countries" and that "examples from the past in rich countries may be more appropriate for poor countries today."
I chatted with the author a bit. Many of his suggestions are useful for rich countries as well.
The argument starts from the observation that honest and competent civil servants are one of the most precious commodities a country can posses. They are in limited supply, and should be used wisely and sparingly.
To give an example from child rearing: instead of the parents always intervening for how to share, teach your kids the divide-and-choose rule. https://en.wikipedia.org/wiki/Divide_and_choose
Similarly, in the US there are essentially two kinds of bankruptcies: chapter 7 and chapter 11.
Simplified, in chapter 7 the business just gets auctioned off, and proceeds go to the creditors.
In chapter 11, the business keeps running mostly under old management, but with lots of micromanaging from a court.
The former is rather simple. The latter has lots of opportunities for incompetence and corruption.
The author suggests not implementing something like chapter 11.
> Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
The average individual is not an expert in making shoes. But we allow everyone to manufacture shoes.
Customers are by and large wise enough to buy shoes from competent producers.
Historically, for banking it turns out that regulating them like shoe factories works really well. Adding special regulations just leads to lots of gaming of the system, and to regulatory capture and suppression of competition etc.
From a game theoretic point of view, governments also have a hard time committing themselves. Eg committing themselves to paying back their debts or not issuing too much of a currency even in emergencies.
That's because governments are, in a sense, too powerful.
A normal company can bind itself with contracts, and they will be enforced in court.
A government can try to do the same, but they can always pass a law that makes the old contracts void.
(Rant over for now. It's becoming a bit rambly.)
Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks.
By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings.
This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4]
The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices.
[1] https://www.investopedia.com/terms/f/federal-savings-and-loa...
[2] https://www.fdic.gov/bank/historical/history/167_188.pdf
[3] https://www.history.com/topics/great-depression/bank-run
[4] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
The Savings and Loan crisis also didn't happen in a vacuum. See https://www.econlib.org/library/Enc/SavingsandLoanCrisis.htm... for some background. A short excerpt from the start:
> Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough.
The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.
But when you say this:
> customers would have had an incentive to push back against the banking behaviours that led to these mass failures
I'm not persuaded. Do you think that customers would have gotten savings and loan corporate officers to provide them with detailed documentation of the S&L's risk portfolio and then would have analyzed this in detail and chosen where to save their money based on the results? Because I don't believe ANY customers could have done that. As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
I can dig up how that worked in practice in the free banking eras in Scotland and Canada.
> As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
In general the regulatory regime for banking is a bit weird in this respect:
The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine.
In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements.
What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term.
But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc.
Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them.
In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.)
Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company.
If you want to know more, have a look at eg http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf
(https://www.iea.org.uk/sites/default/files/publications/file... is also quite interesting, but on a slightly different topic.)
Minimal comfortable retirement at 65 requires is what, ~ 1M USD in assets? What the FDIC rule implies, is you can't do this in cash. So obviously, inflation makes it stupid to do that in cash, but even without inflation this FDIC rule basically forces you into playing the wall street game (aka subsidizing rich people) in order to retire comfortably. Think about that!
Of course, in our economy inflation is real, too, so pretty soon they are going to have to increase this to beyond $250k even.
ETA: 2011
So it's worth knowing which "banks" are really just different different brands of the same parent institution, if you're trying to diversify because of this limit.
https://www.fscs.org.uk/what-we-cover/banks-building-societi...
_If you have money in multiple accounts with banks that are part of the same banking group (and share a banking licence) we have to treat them as one bank. This means that our compensation limit applies to the total amount you hold across all these accounts, not to each separate account._
To take an extreme example, imagine running Apple’s reserves. It’s probably close in scale to the finances of a fairly large country (and considerably more profitable).
Czech Republic GDP (2021) $276 billion
That means Apple, one entity, receives (not including spending) as much money as every single transaction that occurred in the entire country of the Czech Republic in a given year. Any people say Apple is overvalued...
Not that individual depositors get a say, but isn't this (the consolidation of banks to relatively few players) the larger source of risk?
In the US, my understanding is that there are a lot of small local banks, but that they are all dependent clients on a much smaller number of larger banks. If I go to my local credit union, I don't think I have a straight-forward way of knowing which mega-bank they depend on, if any. If "per-bank" limits are meant to spread out risk, isn't this undermined by consolidation? Or do I misunderstand the structure of mutual dependence between banks?
That's because branch banking used to be banned.
Predictably, the US also had a history of bank instability.
Canada, by comparison, has enjoyed stable banks with many branches diversified over the whole country for centuries.
I'd ask for sources if you want to make claims that broad.
Well, 'centuries' interpreted as an integer multiply of 100s of years was probably overstating things a bit.
See also https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
Of course, this is not limited to big businesses. You can do the same with an IB brokerage account but I guess the added complexity is what puts people off.