U.S. lawmakers to examine merits of higher FDIC bank deposit insurance cap
cnbc.com
cnbc.com
Accounts yielding more than the 1-year T-bill should require labeling as subject to loss.
You’ve created an incentive for rotating employment, thereby diffusing responsibility.
Fed accepts Treasuries at face value, not market, at the discount window.
Stress testing for banks with more than $50bn deposits. (No Barney Frank/SVB exception.)
New FDIC assessments for large deposits. Tier so banks can reasonably choose to refuse them, or charge an excess-deposit fee. ($1mm, $10mm, $100mm seem reasonable.)
Why would anyone buy short dated treasuries then, when you can load up on 25 year treasuries at a steep discount (relative to face value) then turn around and give it to the fed at face value?
>Stress testing for banks with more than $50bn deposits. (No Barney Frank/SVB exception.)
SVB had just shy of $20B in deposits
>New FDIC assessments for large deposits. Tier so banks can reasonably choose to refuse them, or charge an excess-deposit fee. ($1mm, $10mm, $100mm seem reasonable.)
Is this really an issue that exists? Are banks obligated by regulation to accept deposits or something?
We’ve already answered this question with the bailouts of SVB and Signature’s depositors. (Granted, not shareholders.)
Maybe a higher penalty rate for face-value borrowing? Or a limit to it, such that it serves as a canary?
> SVB had just shy of $20B in deposits
After the run. Before it had close to $200bn [1].
> really an issue that exists
It doesn’t, and that’s the problem.
The FDIC assesses a uniform charge on all of a bank’s liabilities. It’s clear some depositors pose a greater risk than others. I’m proposing differentiating the FDIC’s fee to incorporate that information, thereby encouraging banks to differentiate. Want to be a loosely-regulated community bank that can offer small depositors a higher rate because you aren’t paying to insure Peter Thiel? Great, now you can.
[1] https://www.nytimes.com/2023/03/10/business/silicon-valley-b...
More turnover among sr folks leads to a greater focus on (1) institutional risk management, because you can’t trust the new guys view things the same as the old, and (2) consistent reevaluation of previous assumptions, because the guy who made them is gone.
I’d argue the long tenure of sr bank employees is a weakness of the current system, not a strength.
Trivially, such a rule would be worked around by trading staff back and forth between adjacent firms. Then you’d have minimum-stay and arms-length regulations, at which point we might just see the contracting trend hit Wall Street.
It would be interesting to read policy or study papers on ideas like this; I don’t have especially strong intuitions for how they’d play out.
This would just be an acknowledgement “we’re always gonna have to do it for the big guys, might as well make it fair for the little guys too”
The insurance premiums on larger accounts should be larger (superlinear) to handle the increased variance of larger amounts. If someone wants to store large amounts of money without (indirectly) paying the FDIC insurance fees, then they choose something else besides a bank account - perhaps a brokerage account and/or buying treasuries directly.
Furthermore, the hazard of bank management gambling the money away should be discouraged through larger capital requirements, and even criminal penalties for blowing through that capital buffer and into customer deposits due to not employing proper hedging or insurance.
It seems unfair to punish depositors that have zero or very low interest rates on their deposits. At the same time, it seems fair to punish depositors which were yeild chasing that 4.50% APY from SVB savings.
Why subsidize and encourage middlemen? It's like building the scam opportunity for privatized social security insurance management, as if honesty will be the most profitable choice in managing that.. It's inappropriate for the government to design systems that reward scamming in the middle.
I generally accept the argument that people are having trouble running the gauntlet to true government backed low risk investment and that is basically by design (well inherent capitalist evolution).. Anyone who fails to get there or gets talked out of that position by an army of telemarketers in turn fuels those telemarketers getting more people to take inherently worse risk/benefit options that pay for sign ups.
I don't think there's still good reasons to use banks for savings now that anyone could buy whatever assets they like with a very similar broker account.. I think anyone accepting lower than government bond rates is basically in a corrupt financial advisor situation where the government is providing everything and someone other than the saver is siphoning money out in the good years.
Industries once formed tend to lobby to prevent things that would remove their negative role. I.e. the ability to independently buy savings bonds has not really been kept up with the baseline utility of any other financial account.
Normally banks had much more of a role in lending, etc, which is a bit more complicated than letting them leach between people and well defined bonds so I wouldn't say they can't have a function only that I would like them removed from this one.
Unless the banks themselves pay it and something is in place to prevent these costs being past down to their depositors this should be a non-starter. It is TARP by any other name.
As long as bank regulations are reasonably strict that this happens as infrequently as it does, ultimately having depositors foot the bill doesn't seem problematic.
It's more appropriate than taxpayers generally, and it can't be the bank owners because the whole point is they've already been wiped out.
Breach of fiduciary duty in any other context is essentially a death sentence for a career in finance. Clearly being wiped out isn't enough. The complexity in the matter is that depositors reasonably expect to be able to get all of their money out at any time. As they should. It's their money. At the command of the fed their reserve rates were dropped to zero essentially making the cash value of an account a meaningless number in a computer.
Given this risk, the bank should be the sole party responsible for paying such insurance for it's depositors. It's a cost of doing business, and importantly taking a risk and fiduciary responsibility over a client. We demand doctors insure themselves because they can destroy a patients life. A bank should be the same. To have the depositor (or patient) front the cash in any form should be made illegal. Hence my demand to insure the funds are secured only through the bank owners themselves. Ideally, the executive board carries enough insurance to make all depositors whole in the event of a bank collapse. This should be uncontroversial.
Corporations (and banks) rest on the bedrock principle of limited liability. To go beyond that is a pretty radical suggestion. That means if grandma buys shares in a bank as part of her retirement portfolio, then the worst case isn't that the shares go to $0, but that she owes money, without any limit she can know beforehand. I don't think that's a good idea.
> Hence my demand to insure the funds are secured only through the bank owners themselves.
I'm not sure there are any insurance companies who will insure an entire bank, and certainly not one of any decent size. That's the entire reason it's pooled insurance provided by the government.
And in any case, if it became that much more expensive to start a bank because you had to pay for all this insurance up-front, banking just becomes that much more expensive for consumers because owners still want to make the same amount of money in the end. At the end of the day, it's still going to cost consumers the same.
FDIC fees are levied on banks. There are a lot of banks, some which compete on deposit rates. (The majors generally do not, but you don’t put your money in a Citibank account to grow.)
The FDIC doesn’t charge insurance on only the amount of deposits covered by insurance. Prior to 2010, it did on all deposits, post 2010 under Dodd-Frank it expanded to all liabilities.
So many doubt the ability of the US government to govern responsibly. It IS amazing when they demonstrate responsibility!
“WORLD WAKING UP to the fact that a bank deposit is an unsecured loan to a leveraged counterparty, that the FDIC insurance fund only has $128bn, that total deposits in US commercial banks=$17.6 trn, &...here's the big one: that money itself is a confidence game (always has been)”[0]
[0] https://mobile.twitter.com/CaitlinLong_/status/1637466829219...
The obvious downside is that you still need regular banks and financial institutions for loans, but for large operating accounts for many companies you just want something you can spend and won't disappear. And presumably this is why the Fed doesn't permit narrow banking: major deposits would dry up, loan rates would have to be much higher, and so on.
Every corporate treasurer worth their salt manages a portfolio of short-dated bills, commercial paper and repos for this purpose. Maybe now this knowledge is obsolete. But it’s always been there, at small sizes, via Treasury Direct.
If you want to sock away some cash in a place where it won’t disappear due to financial system shenanigans you should be able to give it directly to a US government entity like, say the USPS. Ultimately money is only worth anything in the context of a stable and reliable government anyway.
But, Banks pay for FDIC Insurance, the money has to come from somewhere. Either the Tax Payers will pay via higher fees or interest rates to the Banks or via higher Taxes to the Fed.
All this means is people with large deposits will be covered directly by the Tax Payer, it is just a matter of who we pay.
But doing it after the fact is the worst way to do it - it is the most expensive way and also least effective in terms of preventing runs.
So as long as we are going to pay for it anyway, let's at least get the most benefit, which would also, in a happy coincidence, be the least expensive.