Hacker News Reader

Comment by acjohnson55 | Hacker News Reader

I think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard.

The bigger issue is the concentration of deposits and potential suppression of investment.

View on HN

Managers might have been fired and equity wiped out but they still have all the rent and bonuses that were extracted during the high risk high reward activities.

That’s why it’s a morale hazard and the fed taking over it doesn’t solve it.

I don't see how letting the depositors get hosed while the bank gets taken over is any better than bailing out the depositors. Either way, the rents have been extracted. Why does the $250k limit make a difference to bank management behavior?

They don't stand to lose much if their risky behavior fails, but they stand to make a lot if it succeeds.

It makes difference in where people put money into. Despite VCs and startups not using it, you can buy insurance over $250k limit and spread accounts into multiple banks. It is actually standard product.

Basically, VCs did not wanted to pay for that and were rewarded. They advised or forced their startups to not insure money too. Also, before someone makes that point, these are supposed to be highly sophisticated operators. They are supposed to have know how. The people being bailed out are not Johny-the-cleaner working on his small busines.

You've just coined a new term, "morale hazard". Perhaps this is when there is a moral hazard problem that affects morale?

Haha that is hilarious, I can't edit my comment but thanks for pointing it out

agree with all except your last sentence . whats the issue ?

Concentration of deposits leads to less competition in the banking sector and more concentrated risk in global systemically important banks, i.e. the ones that are too big to fail. But maybe that's no the end of the world, and maybe the deposit limit isn't the best way to create competition.

And if banks aren't allowed to make risky investments with deposits (good policy, IMO), then I believe we want people and businesses using banks for their most liquid needs, but otherwise, putting their money to work through investment.

banks don not lend deposits per say. this is an anachronism. banks make loans and loans create deposits. there is not a dependency on deposit funding loans. banks create loans on demand so long as they meet capital requirements. deposits are not capital. they are liabilities. (there as a thread last week about all this which you can read that is probably helpfull)

Reply on news.ycombinator.com