To that end, I'm not sure I see good argument for 100% protection. Money sitting in a bank deposit only creates wealth if we have the banks actively lending. And, annoyingly to me, the largest form of this for the "too big to fail" banks seems to be credit card schemes. Which I actively despise, at the moment. It also incentivizes banks to hunt out places to loan money. Which is why we have ridiculously complicated securities to back mortgages. The amount of those that have been made is only "safe" for the banks with a ton of the extra machinery they have put on top. Which has costs.
Edit: I should add that I'm not 100% on my stance here. Would love to be challenged on any of the above. Can only help my understanding.
Between inflation and income taxes, you don't need to worry about this. I literally can't remember the last time banks paid enough interest to beat inflation and cover 37% income tax (almost 50% if you're in CA).
If anything, this is reason to keep the insurance rate low. After all, they only "lose" the uninsured part that is not recovered in bank seizure.
The scare quotes about people losing 100% of their money in SVB was just that, scare quotes. The assets did not disappear 100% and depositors are first in line.
If anything, that should incentivise wealthy people to pay attention to how a bank is being run. Full insurance means I don't give a shit.
Notably, this has a finite lifespan on how often you can do it. It is not some magical process that has no downside. But, to pretend the people that will buy yachts care about inflation loss on things is silly. Every single asset they buy will result in worse loss than inflation. Having safe assets that they know won't be taken is a very nice source of collateral. And note that I never envision them putting their billions away, in this manner. Just many millions. Because they have many many millions.
That said, your point about better performing assets is why I don't think they care about inflation, as my response to the other thread said. I also agree that the banks should be putting them to good use. Sadly, we have active evidence that the banks are not too good at that. They seem to think it means either credit cards for the masses (which, yes, pays well for the bank), or convincing everyone to refinance their homes. Neither of which feels that good to me.
Tech stocks have screwed this up by fucking up the idea of profit versus non-profit companies. Not paying out dividends to shareholders has made that a near meaningless distinction and made it so that living off changes in the market is all folks can do. That is, you cannot own stock in a company to get residuals while they make the world better for you.
So, to that end, how do you think the banks should be putting that money to work?
My question is specifically what use do you want banks making of deposits? That is better than having active participation in investments?
Realistically, no individual is managing billions without literally having staff accountants. Such that they can and will be more sophisticated. My assertion is in that sophistication will be pockets of "safe" assets. And I am further pushing that there are benefits to smaller caps on those safe assets
This brings up the interesting question of what the role of banks should be. When savers have access to money market funds investing in short-term government debt (this is basically what SVB bought), why bother with the intermediary? We're also in a world of securitized mortgages where banks are just the originators. There are also mortgage originators that just do mortgages. These days, the only unique services banks provide are retail services and small business loans.
To me, it would seem the dynamic is not one of "large depositors can do their own diligence and giving them FDIC coverage would be a burden", but rather "banks and their depositors aren't responsible enough to accept the consequences of uninsured accounts".
Per reporting I can easily find (in that I'm not searching too hard on this), they had 167 billion in assets, and about 119 in deposits. Per the reporting, the sale that was managed by the FDIC sold off part of those assets for 72 billion, at a reported discount of 16.5 billion. About 20%. Now, granted, it is possible that the other 90 billion of assets are somehow way worse, but I have not heard further panic on those?
But, just going by those numbers there was clearly never any risk that depositors lost everything over 250k. Which is how this is largely getting reported.
For sure! The news coverage bothered me too because it seemed to be implicitly treating the SVB failure like a cryptocurrency exit scam, where most/all of the money is just gone. If depositors did have to take a haircut it might have even been lower than 20%, as my understanding is that the FDIC has some power to claw back withdrawals that were part of the bank run. I still think it's fair to call it a bail out because since those accounts weren't FDIC insured then the policy was supposed to be for them to not have been made whole, and they were.
But I don't really see how this affects my original argument. Whether subsequent banks have 5%, 20%, 50%, or 100% of their assets vanish, the political calculus is going to be the same.
I do think the calculus of keeping the bonds from visibly losing value was more important. (Edit: but I do not disagree with your assertion.)
Okay, but the $250k cap doesn't do that, it just encourages them to do the exact same thing, shuffled across multiple banks.
At any rate, yes. But you can only split billions across so many 250k banks (I haven't checked the numbers, but I'd assume this is limited by number of banks). And presumably, that means that many more locally focused places managing more funds. That is, the spread is part of the point.
But! This is just like lines of code. No "true" value answer. And pathological is pathological.
So, did I propose a solution? I specifically think 100% covered it bad. Not clear what number we want.
>There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better.
That is, you advocated the cap as a means to make billionaires use their assets to make the world better. I replied[1] that the cap doesn't make billionaires do that (that= "make the world better"), but simply makes them do the same thing they were doing before, but shuffled across many banks. (i.e. "feel safe with their assets sitting many places, rather than one").
Then, you forgot what argument you were making, including this core point, and are now asking me to re-explain it to you, having since drifted off to a completely different point about whether there are other benefits, unrelated to this point, to storing a billionaire's stash in many places vs one.
Normally, I accept that people might miss key points from earlier in the thread, but here, this is your own argument, and you seem to have forgotten you made it. Come on, show some respect to the people who try to engage with you.
You could be arguing that having the money spread out is not its own good? But, I have specifically posited that having the money spread out among many banks is a good, in itself. What is the number? No clue. Is it guaranteed that having it in several places is better than having it in one? Not really, but the odds of any one bank doing great things with the money seems lower than the odds of any of several banks doing good things with it.
So, yeah, what part are you not following?
So, my assertion a little longer spelled out it that I don't think we want giant caches of wealth in small numbers of places. I would prefer active use, I think. But diverse use by many actors is a good means to that. So, if it gets 250k in 100+ banks, that has better odds that someone finds a use that isn't just "credit cards."
That said, I confess I also see little value conversing with you. I hope others have a better experience with you. Good luck.
Great! This is the first time you've actually said anything that connected "rich people making the world a better place" with "stashing money in multiple banks rather than one". It's still a dubious argument, because in both cases the money would be getting invested, as opposed to gathering dust, and the bank would just invest any excess money it had with other banks, creating the same investment.
It's also really frustrating to have to keep reminding you of what your argument was, in order to get to that point. It would have been much more productive if you had said from the outset "okay, whether rich people's money gets invested at all is a dubious benefit to the insurance cap. But there might still be other benefits, like reduced systemic risk...".
But you didn't do that: instead you acted shocked that I was asserting there were no benefits at all to spreading money across multiple banks, and spoke as if you didn't remember the original benefit you were asserting.
>That said, I confess I also see little value conversing with you
Correct: people that force you to be rigorous in your comments, and don't let you change the topic to hide previous dubious arguments, are going make you look bad. I understand not wanting to get called out on these unproductive tactics, especially if you prefer looking smart rather than learning something.
If I candidates I voted for lost, I had a chance to partake in democracy but how did I actually have a say in a decision made by someone else?
And if the entire question of banks too big to fail want even a talking point in 2004, how was I voting on that?
For me to have a say, at a minimum my elected representatives would have had to engage with his constituents on the new issue. Even better we could handle those situations more like the Swiss, putting it to a ballot vote.
In no way is casting a vote when effectively given a choice between two major part candidates equivalent to ne having any day in how the government makes a fundamental decision to change the banking world.
> And if the entire question of banks too big to fail want even a talking point in 2004, how was I voting on that?
The question is who caused them to fail, and did you vote for anybody that had anything to do with it? This event started in 1994 and didn’t really end until near 2012. You probably voted a few times in that timeframe.
I'm not an accountant, but the fine print does say "Up to at least $250,000.00.", so FDIC insuring the entirety of savings like they did this time around isn't exactly unexpected. They kind of need to if the goal is to shore up the commons' trust in banking, anyway.
This all being said, it doesn't take a rocket scientist to understand it's a bad idea to keep all your eggs (savings) in one basket (savings account). If you're fortunate enough to have enough liquid funds that all of this is a significant concern, definitely consult an accountant about spreading those funds around to mitigate damage and not lose out if the FDIC decides covering the entirety of savings is not something they want to do on that particular day.
Interest rates would suck, but that’s the price you pay for insurance.
Anyone chasing higher rates or pricier customer service (or going with whichever bank blows their budget on marketing) is playing with fire.
Banks don't move fast enough to reinvent their whole business and churn their whole portfolio into T-bills on that time scale, and take too long-term a view for "let's just shutter the business when rates go back to zero" to be a business model they will consider. Having a single product - a single account type that is backed by T-bills - is not something regulators will allow a bank to do: all deposit accounts has to be backed by the bank as a whole.
However, there are non-banking businesses that don't have these constraints, and some of them are doing exactly what you suggest. They are called money market funds and business is great for them right now. You can get the returns and safety of short term Treasuries in return for foregoing other services your bank provides (physical branches, credit cards) and accepting a minor liquidity risk that the fund could pause withdrawals.
Then you charge negative rates or monthly fees
The FDIC Fund has to know how much cash to keep on hand to cover total insured deposits. The minimum is something like 1.35% of all insured deposits if I'm not mistaken, which they have actually been under for a while now. If all deposits are covered 100% the find would have to be dramatically larger, do they just take AL of that from the banks immediately?
I'd be happy to see us abandon the fractional reserve system all together, but that means blowing up the system entirely and getting rid of the concept of debt. Short of that, I don't see how we could keep fractional reserve while making deposits completely risk free.
We don't necessarily need those regulations of the money isn't insured though. Banks should be deciding how much to keep on hand based on their own risk profile. If they make a bad bet and lose the bank folds, depositors get priority on asset liquidation, and other banks take note.
You would see the same issue. Everyone would go for the risk and when the ship sinks it will be "we are to to big to fail! Who could have predicted this? It's a special situation, etc. etc.".
The intended solution isn’t for you to vet your banks, it’s to not exceed the insurance cap. People appear to be willfully ignorant of this.
No, it’s not hard to stay under (cash sweeps and money markets exist). Yes, these products are actually beneficial and not just accounting tricks (cash sweep diversifies bank’s depositors as well, reducing systemic risk).
Consider SVB. Bank run aside deposits were poorly diversified and many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Unlimited insurance does not solve this problem, except in paying out, which the FDIC ideally would not have to do.
Deposit diversification does solve this problem, and the only reason it’s incentivized for depositors is because of the insurance cap. The overhead of sweeps is quite low and money markets even lower (MMFs with the fed outperform best bank deposit rates even after management fees).
Honestly retail banking is the real dead weight loss. Sweep accounts often offer better rates than the underlying banks give their customers because the sweep accounts have low overhead for the bank and pass on the savings. Same goes for other banking products like CDs: banks offer better rates on the market than to their own customers.
Seems like there should be a market for a bank that advertises “no long-duration HTMs unless we hold a duration and interest-matched CD” and “short-dated investments only on checking acct balances”.
If that doesn’t exist, it sounds like big depositors were ignorant or quite happy to get some extra interest (or fancier offices/marketing) in exchange for that risk.
Not sure if a bank would be 100% protected if they had a script that checked their balance every minute and sent it to a MMF.
Well, we transferred most of the customers over this last month, but one of the customers just yesterday made a deposit of $485k. $485k + $185k is well over the insurance limit. I believe it takes 3 days or so to clear so we wouldn’t have been able to transfer it out immediately. Maybe we can ask them to cancel it on Monday, i am not sure yet. As a small business our cash flow is very tight. We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k or watching out in case the bank fails the day after. Maybe there are tricks like you mention but most small businesses do not have experts on this stuff and I don’t think we should have to be.
Seems like there should be a big market for that kind of thing. No idea why anyone holding large $$$ would go with anyone else.
> We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k
My key point is that there are products that do this and also yield higher than retail bank accounts. Difficulty is a straw man. If retirees on bogleheads can do it so can you.
For those looking for the punish-the-rich morality play, the real winner here is likely to be JP Morgan or PNC which may bid to buy up the assets, which is just the rich-getting-richer and a large bank swallowing up a smaller community bank and more consolidation and monopolization of the financial sector.
And if you flagged me, fuck you. The blatant adversarial tone of this comment means it should be flagged just on its own. Flagging my comment without flagging this moronic nonsense is clear evidence of bias and gaming the flag system on HN. If you don't like the obvious counterpoint that the FDIC probably shouldn't exist at all given the moral hazard it creates for all bank depositors, you're a smoothbrain.
The vast majority of Americans have less than 250k in all their savings accounts
Every bank today is really a Highly-Levered Bond Fund. If we increase FDIC insurance to 100%, without commensurate changes in what banks are allowed to do with customer deposits, this seems like it would create a moral hazard where banks would be allowed to do all kinds of crazy shenanigans because they know they'll be bailed out.
To be clear, I'm for 100% FDIC insurance, but if we get this without getting much more stringent duration risk transformation standards (e.g. don't load up on long-dated treasuries in a low-rate environment), I think it could actually make the banking stability issue worse :(
Outside BofA, their balance sheets are healthy. There isn’t serious speculation of contagion out of the regional banks. We put in place regulations to prevent this after 2008. Numpties rolled it back for “community banks” in 2017 [1], and that’s why we have this problem.
[1] https://apnews.com/article/banking-crisis-congress-lobbying-...
Mostly. The other component is how we pretend HTM Treasuries both hold their value and are liquid. Europe marks to market daily. I think you should get to choose: mark at $1, but they don’t count as liquid, or mark to market and they contribute to your liquidity ratio. (The rollback meant nobody was measuring liquidity. SVB would have failed its LCR in March 2022.)
They literally don’t have the data to make this claim. The Fed does. SVB would have failed its LCR in March 2022.
Data please, as this says different: https://www.factcheck.org/2023/03/what-to-know-about-trump-e...
While SVB and Credit Suisse's collapses' causes are directly unrelated, depositor outflows were involved in both, as opposed to fundamental issues with their balance sheets. Credit Suisse's Tier 1 ratio was as good as that of UBS or any other big European bank. <https://www.wsj.com/articles/credit-suisses-death-gives-birt...> At the end of the day, a loss of clients' faith in a bank is something that no stress test can directly measure ahead of time.
https://www.reuters.com/business/finance/us-fed-points-finge...
I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business.
Also, they were aware of the regulation in question, since they paid lobbyists to get that specific rule rolled back specifically so that they could structure their holdings to overinvest in treasuries.
As Quarles says, the report does not actually provide any evidence of this.
Let me repeat: At 12%, SVB's Tier 1 capital ratio was well above the industry standard (5-7%). SVB collapsed because of a liquidity crisis driven by its unusual depositor industry concentration. Nothing SVB did would have been illegal pre-2018; to put another way, poor risk management is not inherently illegal, any more than any other bad investment that ends up losing money is illegal.
T1C is a solvency test. The liquidity test they were exempted from were LCRs. They would have failed that test in March 2022.
Of course you are, you’re clearly biased against the right so without even trying to disprove yourself you just automatically believe anything against them.
https://www.factcheck.org/2023/03/what-to-know-about-trump-e...
Woah, let's not over-exaggerate in times like these. Bank of America has about $110bn of unrealized losses on HTM securities, but that is against $200bn of Tier-1 capital. Comp that to SVB who had $16bn of unrealized losses against about that much Tier-1 capital.
BoA has a worse balance sheet that peers, but not an unhealthy one.
ppl withdraw deposits
80% of them go to JPMC
JPMC buys BofA
They do! But it won’t tank the bank. Because they’ve been working on them for years. Because they’re still under Dodd-Frank’s liquidity coverage rules.
> Why are you blaming 2017 numpties?
They rolled back the regulations that would have, if not prevented this mess, caught it much sooner. BofA has similar issues, but it’s subjected to stress tests. As a result, the risk has been managed in a way it wasn’t at these banks.
Not at all, in fact SVB grew so quick that even with the rule in place they wouldn’t have been caught.
https://www.factcheck.org/2023/03/what-to-know-about-trump-e...
The day political parties/sides die, we can finally start living and being a fruitful country again. I literally cannot wait for that day.
Different regulatory regimes. But it helped make their takeover possible.
In Credit Suisse’s case, specifically, it is difficult to see an alternate endgame. The regulations worked to ease the unwinding. And Switzerland’s lack of receivership showed.
That's already the state of the world. That's why they're considered systemically important banks.
https://en.wikipedia.org/wiki/Systemically_important_financi...
We’d be in better shape if we’d kept the rules we wrote after 2008 to keep 2008 from happening again.
The problems in 2023 were made significantly worse by the rollback on liquidity rules in 2017, which, if we may recall, was not a year that Obama was exerting any influence on banking rules.
The Fed has stress tested for duration since Dodd-Frank. The unsophistication of SVB’s duration simulations was specifically flagged by supervisors ex ante.
Subjecting SVB, Signature and First Republic to LCR requirements would have thrown up early red flags. (You’re partly correct in that the definition of liquid assets is too broad: Treasuries of all kinds get equal weight.)
> media is misleading people about this because they really, really want it to be a story about right wing anti-regulation politicians
The 2017 rollback was bipartisan.
There was also substantial, systematic mortgage fraud by lenders.
I’m sure if banks had donated and lobbied less, some would be in jail.
Again, what was the fraud by lenders? You seem to have to taken the view that securitization turns fraud by borrowers into fraud by lenders.
They were rated as prime but were actually junk.
There was no criminal investigation because the US DoJ decided not to. Civil suits didn’t get far because it was hard to gather information without criminal jurisdiction.
Obama got almost $50M from Wall Street for his 2008 election and it paid off well for his donors. [1]
With that much fraud, there should have been more criminal convictions rather than bonuses as usual.
[0] https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... [1] https://www.opensecrets.org/industries/recips.php?ind=F&cycl...
Now you may argue that banks accepted fraudulent applications that a prudent man would not have and then sold securities based on those, and all the big banks paid out multibillion dollar settlements over that.
Why no criminal prosecution? Two reasons. IANAL, but I believe the standard for criminal fraud is higher than imprudent decisions. Second, and more importantly if you start charging bank employees criminally, you really need to start charging the fraudulent borrowers who by many accounts number in tens of thousands. No one made them commit fraud. They were not victims of fraud, they were literally beneficiaries, though ultimately foolish as well.
https://theintercept.com/2016/07/12/eric-holders-longtime-ex...
https://freebeacon.com/issues/eric-holder-misled-congress-de...
all of the banks have DOA car loans (bigger than student loans now?)
all of the banks have mortgages they underwrote for thirty years at 3%...these may be a relative loss to Treasuries for a generation
all of the banks financed now-empty commercial real estate
when I last checked, First Republic was #10 in % of holdings not covered by FDIC, and plenty of big banks were ahead of them
First Republic may have sucked, but your bank does too
That's actually a good thing: it means a small (relative) haircut the uninsured have to pay for everyone to get their first $250k guaranteed.
When a bank fails and there's a small handful with over $250k in their account, they're going to lose everything over $250k to cover everyone else.
It has now been established as precedent that if depositors of "regional" (or "systemic") banks have enough clout/create enough panic, they can get infinite protection. We will see if FR depositors' money over the FDIC limit is made whole.
If that happens with FR, then Congress should legislate to raise or index-link FDIC limits, for everyone. (If not, we have moral hazard for both depositors and well-managed banks; and also smaller banks have to compete at an ever-increasing disadvantage.)
Even then I thought it was a bad idea because it discouraged depositors from spreading around their assets.
Whether we'll see them treat future failures like SVB or not, TBD!
FDIC(+NCUA) are allowed revise the limit every 5 years, next is 2025. Unless Congress acts sooner.
Should the FDIC limit be indexed on inflation?
Who did lose everything were the investors in the bank. And that still happened.
My remark is that alloeing banks to fail is no longer happening, and that's setting a really bad moral hazard. Some even suggested during SVB there should be infinite FDIC coverage for 2 years, which would have destructive side-effects towards the end of that period. It's strange to hear people (esp. libertarians) complain about the politicization of the IRS (Taibbi/Twitter Files), but not the FDIC.
On the other hand the big banks might receive more deposits but they can't lend it either because they are constrained by capital requirements, not funding.
So logically you should have a contraction of credit, which combined with higher rates, is going to be ugly. Clearly the markets aren't pricing that right now.