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Comment by imhoguy | Hacker News Reader

Is it possible for FDIC to bankrupt with enough number of banks failing?

Where that $250k insurance money come from really?

If it is all Fed printed first then I understand assets are auctioned later to suck that printed money out of the market, sell and burn cash, right?

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No, it is not possible for the FDIC to go bankrupt. The law that creates the FDIC specifies that it is backed by the "full faith and credit" of the United States. While no specific mechanisms are defined (since they've never been needed), it means the FDIC has infinite money as long as the United States exists and can print its own money.

https://www.fdic.gov/consumers/assistance/protection/depacco...

100% correct. Why is this same logic not used for SS and medicare?

My personal theory: if people even had the remotest inkling that the insurance would fail, then it is next to useless. The point of it is to prevent the majority of people from inciting a bank run since they know for sure that their money is safe. It's a bit of weird game theory.

There is no equivalent to a bank run risk on SS/Medicare so why put it in. Putting it in also means that these programs could cause massive inflation if the US Gov had to print money to finance them.

Dumb answer: because SS and Medicare pay for "real" goods and services and have to interact with the main street economy, whereas FDIC acts in conjunction with the Federal Reserve, and the effects aren't seen by the public - the money isn't "spent" on something, it's just not _not_ there.

Also, the original statement is not quite correct - FDIC is funded by a special levy on all US banks, so while on principle it's backed by the "full faith and credit" of the US government, in actuality the money comes from the banking system itself.

Edit to add: from the article:

>The FDIC is funded by its member institutions through premiums and assessments paid on deposits. And, if ever needed, the FDIC can draw on a line of credit with the U.S. Treasury.

So, if you're a bank, you have to be a member of FDIC, or the banking regulators come and take your bank away. Being an FDIC member means you have to give them money, pretty much according to their whim (or they come and take your bank away). If that's ever not enough to fund a "not bailout", FDIC can get a loan from the Treasury, to be paid back from those premiums and levies on the banks over a period of time.

> Also, the original statement is not quite correct - FDIC is funded by a special levy on all US banks, so while on principle it's backed by the "full faith and credit" of the US government, in actuality the money comes from the banking system itself.

The banking system funds an insurance fund, but if that insurance fund is exhausted, the federal government is backstopping it.

Because no one has promised that SS and medicare benefits will stay the same forever.

The FDIC is unlikely to fail. After all, as long as there is no major credit crunch (de-leveraging), money simply moves from one bank to another, and insurance premiums are collected regardless of where the money is located, money (and MTM short-falls) can be absorbed to big banks. Big banks, Fed and FDIC can work together to sort things out like this time.

Additionally, the dollar is merely a piece of paper, and the FDIC essentially guarantees pieces paper with $250,000 or whatever face value printed. There may be intricate mechanisms at play, such as the FDIC issuing bonds which the Federal Reserve subsequently purchases, or the Fed buying Treasury securities and providing the proceeds to the FDIC in the form of loans or capital injections. Or Fed directly offers credit line with failing banks. It is difficult to envision any issues the FDIC could encounter that could not be effectively addressed by the Federal Reserve essentially printing more money.

The value of US dollar is all about confidence, in the event of failing of FDIC, it is a testing moment of the confidence of USD. Although forced to print a lot more money could be bad for confidence, but not that catastrophic as FDIC failing.

After all, as long as there is no major credit crunch (de-leveraging), money simply moves from one bank to another, and insurance premiums are collected regardless of where the money is located, money (and MTM short-falls) can be absorbed to big banks.

The insurance premiums are collected and insured amounts. Uninsured amounts don’t pay premiums. That’s why this was a bailout and not an insurance payout.

That's not correct.

> The assessment base has always been more than just insured deposits. From 1935 to 2010, a bank's assessment base was about equal to its total domestic deposits. As required by the Dodd- Frank Act, however, the FDIC amended its regulations effective April 2011 to define a bank's assessment base as its average consolidated total assets minus its average tangible equity. Therefore, a bank pays assessments on its total liabilities, not just insured deposits.

From here: https://www.fdic.gov/resources/deposit-insurance/deposit-ins...

They can run out of funds but the taxpayer will bailout the FDIC. The FDIC has a pool of money that comes from fees they charge the banks. Currently I believe there is around 100 Billion left.

Last time in 2009, they took three years of advance premiums from its member institutions and operated the fund with a negative net balance. So it's unlikely that FDIC will go bankrupt.

FDIC holds $128 Billion that aims to protect ~$17 Trillion in depositor funds.

With a 0.75% coverage ratio I do worry what happens in the case of more bank failures. The only question is will the bag holders be the US taxpayer or all dollar holders globally via inflation?

The Fed is determined to fight inflation until their shareholders, the banks, are in trouble. Then we get to learn who the Fed really works for. Hint: not the people.

The fed has a dual mandate: employment and control on inflation. They don’t care about banks. Powell explicitly said as much in the press conference after they announced another rate hike and no intention to reduce interest rates in reaction to the SVB implosion.

They are now also a bank regulator, though it seems a poor one given these events.

https://www.federalreserve.gov/supervisionreg.htm

You put more faith in the Fed than I do. As I see it, the Fed caused this crisis with a decade of loose money policy.

Then they told us there would be no inflation.

Then inflation was transitory.

Then they were serious about fighting inflation until banks started failing.

Suddenly they reversed course and wiped out 2 years of quantitative tightening in the past 2 weeks. [0]

The Fed hasn’t apologized for any of those actions or accepted any responsibility, which tells me they haven’t learned a thing.

As far as I am concerned the Fed is both regulator and PR arm of the banking industry.

The Fed regulates their member banks, and very poorly it would seem based on events during the GFC and today.

You can take Powell at his word. I remain skeptical.

[0] https://mobile.twitter.com/1MarkMoss/status/1640099789537939...

>Then they were serious about fighting inflation until banks started failing.

Their stance on interest rates has not changed.

That tweet is someone who doesn’t understand the nuance of the balance sheet.

>As far as I am concerned the Fed is both regulator and PR arm of the banking industry.

They are not helping banks. What are you missing here? Nothing they are doing with rapid rate hikes is advantageous to banks.

>You can take Powell at his word. I remain skeptical.

I’m not, I’m just looking at his actions and the markets priced in probabilities of interest rate changes from the fed.

I agree that they have not lowered rates. However as the chart shows they did dramatically increase the Fed’s balance sheet in the past two weeks. They did this in order to facilitate loans to banks who have underwater assets on a mark to market basis.

It would be one thing if they were lending to banks based on the current market value of the assets, but instead they are letting the banks pretend the assets are worth what they would be if held to maturity. So both the Fed and the banks are playing pretend.

We can argue about whether or not this is inflationary. I suppose it would depend on what these funds are used for. It certainly isn’t as inflationary as if the Fed had simply given this money to consumers to spend.

However, I do think it is an error to ignore such a swift reversal of quantitative tightening over the past couple years.

>With a 0.75% coverage ratio I do worry what happens in the case of more bank failures.

Hypotheticals like this are detached from reality.

Under what scenario would the entire depositor base try to withdraw all of their funds? What would be happening in the world for that to happen? People "lose faith" in banks? Okay, where are they now putting their money, under their mattress?

It wouldn’t need to be the entire depositor base. If only 2% of banks by deposits were to fail then FDIC would itself be bankrupt and require a bailout.

You’re forgetting the ~ 10% of tier 1 capital, and even more in other buckets…

Plus, every time you think a social issue "would never ever happen," it happens.

Only if 2% of banks lost all of their money. It would more likely be something like 10% of banks by deposits lost 20% of their money.

I disagree with your numbers. Based on current bank reserves, if ~20% of a banks deposits were to be withdrawn the bank would be insolvent. You don't need to withdraw 100% of deposits to have a run on the bank.

> The Fed is determined to fight inflation until their shareholders, the banks, are in trouble. Then we get to learn who the Fed really works for. Hint: not the people.

Then we move into the real world where reality exists: Fed officials double down on rate rise decision citing high inflation

If banks are failing at that rate it means that the national banking system has collapsed, and the FDIC is irrelevant.

We just burned ~1/6 of it on a single bank...

Which was the second largest bank failure in US history. If we have 5 more of these in quick succession then it's pretty safe to say that an insurance agency isn't going to be able to save the economy. You're going to need an act of Congress and a massive bailout, and perhaps even that won't be enough.

FDIC's reserves are less than 2% of insured deposits and far less than 1% of GDP. Perhaps the banking system is broken if 5x more spooked VCs pull their money out in similarly correlated banks means everything goes up in flames.

For some perspective there was an average of one bank failure every two days in 1990. We were fine back then, we’ll be fine now.

I'm pretty sure they all had been just small banks. SVG was really big compared to almost every other bank who failed the last 20 years. As banks get bigger and bigger, like CS and UBS is just UBS now. People say the new UBS is now to big to bail for Switzerland and not to just big to fail anymore.

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