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Comment by pearjuice | Hacker News Reader

Another bank, another leeway for the FDIC insurance limit?

It's an interesting question in this case because last month a consortium of banks made a big show of depositing $30B "uninsured" as a show of confidence, and it's not clear whether it's still there.

I guess they just bought FRC's loan book at par.

What do you mean it's not clear it's still there? It was there when they had their earnings call 4 days ago.

4 days is a long time in bank deposit land now!

Silicon Valley bank had sudden collapse. While I don't agree with the decision of FDIC to make everyone whole, I understand why.

First Republic Bank was collapsing for more than a month. If anyone still kept uninsured money there, it's mostly on them.

The whole point of the FDIC is that it's not good idea to reward people for participating in a bank run.

...Actually, there is no disincentive built into the FDIC for people to participate in bank runs. In fact, the entire point of the FDIC was to insulate depositors from banks doing stupid things with everyone's money.

Now that the Fed has bailed out the creme de la creme, I'd like to see the argument employed when the FDIC hasn't got the liquidity left to backstop every other depositor in subsequent bank failures.

They don't have to argue anymore, this isn't the era you grew up in, that world is gone. A reporter who has a question about it won't be selected to ask one.

Recent example of how fake it all is: https://nypost.com/2023/04/26/biden-cheat-sheet-shows-he-had...

Yeah, maybe learn how fake the nypost is. This is typical preparation for a high profile q&a: https://www.cnn.com/2023/04/27/politics/biden-note-card-whit...

Except for the incoming question being on there, per your link:

> While it was notable that a potential question was written on Biden’s card, every White House press office takes scrupulous care to prepare their president for news conferences.

Except for the question on there wasn't the question that was asked. Do you understand how q&a (or for that matter court) prep goes? The question on there was an example question that they expected would be along the lines of what that person would be interested in and how they would phrase it (or what particular things they would try to attack/draw out). The article you just quoted even said that.

CNN isn't exactly the gold standard either.

No. The people that didn't participate in a bank run are the ones that get hurt. The whole point of depository insurance is that people like you and me with less than $250,000 in a single account shouldn't get screwed over with billionaires like Peter Thiel decide to play games with other people's money.

> The whole point of the FDIC is that it's not good idea to reward people for participating in a bank run.

> No. The people that didn't participate in a bank run are the ones that get hurt.

These are the same, right?

No. Because the people that participated got their money out leaving the people that didn’t participate with nothing in their accounts. This happens because of fractional reserve banking.

Think about it. Assume we both have an account with $1 dollar in it, and the bank only has $1 on hand. Now I create a run where I take my dollar out, but you don’t participate. I have my dollar, and now you have nothing because the bank failed.

How are we the same?

> and the bank only has $1 on hand

Well, that's not the truth either. The bank is holding onto 30Y mortgages / 30Y Treasuries that will be worth $2 in the year 2050, but is only worth $1.4 (fair market value) right now.

This loan was good 2 years ago (ie: its fair-market value was $2) in the year 2021. But the Fed rate-hikes have caused the loan's value to collapse, and so here we are.

You withdraw $1, the bank doesn't want to sell the bonds because it'd lock in the loss. The Fed provides a loan at the full principle of the bond (so the Fed now backstops the missing money). The Fed is now acting as the bank of last resort, providing $2 of true dollars to backstop the $1.4 (fair market value) of the bond, which will truly become $2 by the year 2050. The Fed will exist that long so everything should be kosher, in theory.

Or so goes the story one month ago. Why didn't this work? Why is FRC still collapsing despite these loans from the Fed?

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Believe it or not, life is a bit more complicated than just "fractional reserve banking". You're missing a huge part of the story if that's all your mind is open to. I'm not claiming to have all the answers, but I think it would behoove you to at least try to understand the current situation with a bit more nuance.

That’s a lot of words to intentionally obfuscate the simple fact that banks don’t have the money on hand to allow every depositor to simultaneously withdrawal their money.

It's important to know the difference if you hope to fix the system.

Blaming fractional reserve banking for something totally unrelated will help nobody.

That wasn’t the point.

No the point is to prevent a bank run in the first place.

Are you genuinely confused about the mechanism which accomplishes this?

True. That’s why FDIC should fulfill its obligations. But not anything more.

That's just ensuring anyone over the insured limits participates in a bank run on every bank that isn't too big to fail (and the first to do so get rewarded by getting to keep their money).

No, that's ensuring that we follow FDIC rules. Change the rules, and be upfront about the cost, not relay on one-off precedences.

SV bank bailout was a scam. They said taxpayers won't pay for and it'll be paid by banks. Which means customers. I won't pay for it as a taxpayer, I'll just pay it as a bank customer - lovely.

> First Republic Bank was collapsing for more than a month. If anyone still kept uninsured money there, it's mostly on them.

The big banks deposited 30-billion dollars uninsured to try to rescue FRC. Are you saying that you don't want big-banks trying to rescue smaller banks anymore?

Moral hazards, all the way down. We like the deposit they made, but they did so because FDIC seemed to offer assurances to cover even uninsured deposits. We're back to SIVB questions and just delayed by a month.

Big banks and small banks are businesses. I don’t want big bank to “rescue” smaller bank if it doesn’t make economical sense to them.

> If anyone still kept uninsured money there, it's mostly on them.

It's been very difficult for small businesses to open accounts at other banks to move money to. The waiting list is very long, because business accounts require a lot of KYC.

And importantly, the moving out of uninsured deposits (by people who were fortuitous enough to have other accounts to move it to) actually caused the problems we see today.

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