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Comment by danielmarkbruce | Hacker News Reader

Everyone doesn't need to know or care in many cases. The FDIC insures deposits up to $250k. That covers the vast majority of accounts at most banks. So a run won't occur at most banks. There were hardly any runs in 2008 for this reason - the relatively few "run type things" which happened were where big interbank exposures existed.

SVB's customers are weighted significantly more towards businesses who will have more than $250k in the bank. So, they have to be ready to take action fast, so a bank run on SVB is much more likely.

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FDIC insurance is similar in the sense that if the feds ever have to say "don't worry that JP Morgan or <other large consumer facing bank> is going under, most of you will be covered within the FDIC limit", then we're fucked in so many other ways it doesn't matter. That is after all why we invented the term "systemically important".

Your acting as if the FDIC only exists to cover a massive systemic failure. In the event of something like that additional intervention may be need sure.

However, the FDIC covers all banks, and is generally involved with smaller banks fail and they are they to insure whatever balance the bank could not cover with its remaining assets when it failed.

I’m not actually aware though what the last incident they actually had to pay out was though. Looking through their historical data on bank failures every one I’ve seen says the insured accounts were assumed by another bank purchasing up the failing bank.

One of the largest recent FDIC payouts was IndyMac. I'm not sure if this was the most recent one, but certainly one of the most recent big ones. They were so bad that no one wanted to take them over! And the other banks were in such a bad way at the time, the FDIC couldn't force through a shotgun wedding with a semi-willing suitor. So the FDIC got stuck with them.

But worse, thousands of the individual depositors and businesses who banked at IndyMac were over the FDIC limits and they lost, collectively, hundreds of millions of dollars. The FDIC insurance limit at that time was $100k per separately-named account per bank; it is now $250k. And the $250k raise was, in a surprisingly kind move, purposely made retroactive to help cover some of the losses that people had suffered during the GFC under the previous lower limit.

And still, despite all that, lots of people lost lots of money when the bank went under:

https://www.latimes.com/archives/la-xpm-2010-may-31-la-fi-in...

> SVB's customers are weighted significantly more towards businesses who will have more than $250k in the bank.

If you have that much money, FDIC is not adequate for you (and isn't intended to be). There are other mechanisms for those sorts of depositors. Surely, those businesses got solid financial advice and are using them, right?

The mechanism is to watch the banks you have money in. A company still has to pay it's bills. To pay bills, you need some money in a bank, it's unavoidable.

So, let's say you are a company with 4 banks accounts. Each has $500k in it. One of them is SVB. You probably just move the $500k into one of the other bank accounts. It's no big deal per se, but you do it. That's a run on the bank if lots of companies do the same thing.

There’re always T-Bills…

Your employees don't accept t-bills as payment. Your suppliers don't accept them either. To do business, you need money in a bank account. Not all your money, but a decent chunk of money needs to be there for day to day.

Sure, you need some, but many small businesses leave it all in a bank. It's easy to just set up recurring buys of 4 week t-bills that you can halt at any time, payroll is predictable, and suppliers are commonly on net 30-90.

Yup, and you stop using a bank which is in trouble.

Employees will take risky stuff like equity as payment, but the IRS won't take it for their payroll taxes.

The number of employees who take equity as a significant portion (>50%) of their comp rounds to zero.

I wouldn't want to get paid in equity if the IRS didn't accept it for tax payments either. If you accept 100% of your compensation in equity you are bankrupt because you can't pay your taxes.

This is a chicken and egg situation.

I take 10% of my salary in an equity IOU (ESPP) and I'd do more if they'd let me. But they only let execs into the deferred compensation plan.

Not after hyperinflation

Or just use a Too Big To Fail bank. The government will never allow JPM/WF/BofA to go under, that'd wreck the economy.

Maybe. Smart people assumed Lehman wouldn't be left to sink. It was. And it caused a lot of problems. And the people who realized afterward that it was a mistake are retiring right about now.

Lehman had assets of ~4% of GDP and was a pure investment bank.

JPM has assets of ~15% of GDP and has 66 million household clients.

I'll take the odds that it's too big to fail.

These are logical sounding arguments, and you are going to be right more often than not. But humans make these decisions, they made the decision to let Lehman sink and it was obviously bad in retrospect, and there were many folks who were opposed to the bailouts in 08.

There are better options than playing these odds. Spread across banks, hold short term treasuries etc. Treasury functions at a company exist for a reason.

True, true, but I don't want to take zero risk. I want to take some risk. For example, I do own short term Treasuries, but I want to borrow against them to short some stocks I don't like. And as soon as I have a margin account, my counterparty risk changes drastically due to how brokers work.

>The FDIC insures deposits up to $250k

Per depositor, per insured bank, per account category.

It’s not that difficult to keep significant excess deposits insured.

Not difficult for the average person. Extremely difficult for a business running hundreds of thousands in transactions per month.

This. Entire companies exist to help try and solve this problem for businesses.

... until you find out the FDIC itself has a weak reserve ratio against their insured accounts, meaning they will be as broke as everybody else in a systemic banking failure.

They've been around almost 100 years now... They went through 2008. The reserve ratio seems low, but when you consider the likely asset coverage for the first ranking creditors across the entire industry, the FDIC doesn't need to cover much.

and that's how you and I will be bailed-in my friend.

> The FDIC insures deposits up to $250k. That covers the vast majority of accounts at most banks. So a run won't occur at most banks.

That's akin to saying my house won't burn down because I have insurance. Don't underestimate the stupidity of large crowds of people.

No FDIC insured account has ever lost a penny, despite bank failures happening.

I don't disagree with you. Bank runs can still happen even with the (successful) FDIC backstop.

Hm? Plenty of them did back in 2008. They were only insured uptm to $100k back then, it's up to $250k now but anyone who has more than that in the bank, which plenty of companies do, is sitting on a pile of risk. So then you withdraw your money from SVB down to $250k and then everyone else doing that - you have your bank run.

Pragmatically, the FDIC is very effective at moving things around with minimum disruption.

I still have cheques that say Washington Mutual on them; literally no disruption to my life when they started floating upside down.

Terrible analogy. The insurance in the case of banking deposits changes human behavior to entice them to leave the money in the bank. History shows it. Fire on the other hand isn't aware of insurance, and if anything it makes humans less careful and your house more likely to burn.

This "don't underestimate the stupidity..." might feel like a clever or wise speech to give, but history suggests the FDIC has been incredibly successful at reducing bank runs. Insert "those who don't learn history...." speech here.

I'd be interested to learn how that insurance fund actually works. Is there a big stockpile of cash somewhere or is that invested in (gulp) "super-safe bonds"?

FDIC insurance can also take time to recover your money. If you need cash tomorrow, you also may need to participate in the bank run.

That FDIC thing is so laughable to me because it's purely symbolic. Even the feds would have some serious trouble absorbing bank-run losses.

It’s not symbolic, it’s literally an insurance company that the banks pay premiums to.

The FDIC does in fact insure up to 250k per account/bank. You can get more insurance by spreading your deposits between banks, a service some financial institutions will do for you.

https://archive.fdic.gov/view/fdic/4116

The problem isn't insuring the losses, that they can do. The problem is will you even be able to buy anything after the chaos if a systemically important financial institution goes under? The banks that hold the most ordinary customer deposits aren't like Lehman Brothers and the fallout from one of them going under would be catastrophic on a level far beyond something like 2008.

FDIC was invented for the great depression when banks were not as large or concentrated, nor were they as globally connected and intertwined with day to day business. The reality is that FDIC is far from being sufficient insurance to calm down a collapsing market, that's why we had to do bailouts in 2008, because of what was coming down the road in that regard if the contagion were to spread further.

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