Hacker News Reader

Comment by tempsy | Hacker News Reader

can’t people buy private insurance for their deposits above the $250k threshold?

if you buy an expensive house or car you generally pay a lot more to insure that asset. not sure why people don’t think of buying insurance on their bank deposits in the same way if you find yourself in a situation where you need to hold much more than $250k in one account for whatever reason.

But even if you’re an individual holding million in cash (and for whatever reason it is not invested), it isn’t exactly difficult to open 10 checking + savings accounts and putting $250k each. In fact that is the prudent thing to do.

View on HN

Yes, you can buy it. It's very common at wholesale banking levels (credit default swaps are extremely commonly used to cover counterparty risk). Also credit insurance is available to anyone.

However, the simple option here is to put money into short term govt bonds, there are ETFs like SGOV that make this extremely easy.

Even more ridiculous is that you are getting 4-5% yield on them.

This is what is so crazy about this entire saga - people should not be parking millions upon millions at a bank earning no interest when you could be getting 4-5%+ - regardless of solvency issues.

It is frightening to me people don't seem to understand this. It's absolutely basic money management. It would be more understandable when interest rates were basically 0 and you wouldn't get any yields from bonds. But that isn't the case and hasn't been the case for a long time now.

Now clearly SVB were offering perks for doing this, but say you had $100m parked there, are those perks really worth $5m/year? People should have been asking that. It's a whole team of engineers paid for!

And really offering personal perks to founders contingent on company money doesn't sit completely right with me, unless the founder owns 100% of the equity which most do not. It's one thing offering perks as goodwill but putting convents etc on company money for personal perks is suspect to me.

>It is frightening to me people don't seem to understand this. It's absolutely basic money management.

It isn't frightening to me, because the trust people put into banks' reliability is a testament to the fundamental strength of the American financial system. I'd rather have that than the opposite, where everyone is hyper-sensitive about everything and even refuse to use banks at all.

That said, there is no excuse for Roku, for example, to have more than $400 million in uninsured funds at SVB. That is fundamental malpractice on the part of its corporate treasury, CFO, and management.

Since bank run can be contagious, private insurance may fail to pay out in those cases.

I am fairly sure that the FDIC does not want people to need private insurance for bank deposits. This is a big sign your banking system sucks and is expected to fail badly at least some of the time, the avoidance of which is why the FDIC exists.

And, yes, opening ten checking accounts is difficult and inconvenient.

Then maybe banks should be required to have private insurance for accounts with balances above $250k? More conservative banks would pay very little for insurance while banks that take on more risk would pay more for insurance.

Who, if not the government with a printing press, can insure nearly all the money in the banking system? Where does it come from?

The government could insure it. The first $250k per depositor is automatically insured and then after that they have to pay premiums per account.

The Fed wants to enforce fractional reserve lending, therefore they won’t permit a Narrow Bank (which takes deposits and holds them solely in treasuries). If the government provided unlimited insurance for deposit accounts, the thought goes it encourages excessive risk taking on the part of financial institutions.

Long story short, you’re caught up in monetary policy. To mitigate these risks, you can use deposit accounts that sweep across multiple banks to get the cash insurance you need, and your finance/treasury department can invest the rest in short dated treasuries (which are backed by the Federal Reserve with no limit, and are considered risk free) or money market funds which contain only these same securities.

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

https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...

> The Fed wants to enforce fractional reserve lending

Maybe the fraction should be made larger than 0%? Or maybe bailouts should come with more strings attached including actual penalties for executives and board members?

> The first $250k per depositor is automatically insured and then after that they have to pay premiums per account.

No, the banks have to pay premiums to FDIC for the insured amount, period. They have to pay premiums for these first $250k that get insured; it's "automatically insured" because they don't get a choice, but that insurance costs a market-price premium out of which all the potential payouts come.

They can insure it, however the banks explicitly don't want all those deposits (beyond what the law requires) to be insured because they don't want to pay the insurance cost. If you want that insurance, it's available, but of course it's not free.

they'd all set maximum balances instead

I would imagine that larger balances would be accepted for a fee.

If the fractional reserve requirements were raised, banks would need the deposits in order to lend and they likely would welcome some larger balances.

Do you think the $250,000 limit was an accident? Someone tripped on a keyboard and that’s how the provision capping the insured amount came to be in the law?

Since it was the result of single moment in time 100 years ago and never adjusted, yes it was basically an accident of history.

You really think the FDIC limit was $250k in 1933? I mean go ahead and google but you should have been able to intuit this one.

“Only six months after the creation of the FDIC, government leaders realized the initial $2,500 limit was not enough to effectively support the banking system. So, on July 1, 1934, the FDIC limit was doubled to $5,000.”

i can open a bank account in 2 minutes on my phone

it certainly isn’t alone an excuse if you are wealthy enough to even worry about the limit.

most wealthy people probably have dozens of accounts for this reason alone. I read an article just yesterday about how Giannis (NBA star) opened 50 bank accounts to put $250k each years ago.

Reply on news.ycombinator.com