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Comment by mrtksn | Hacker News Reader

Yes but banks do it within a legal framework that moderates the risk(at least in theory) and people know what they are signing into and what are their guarantees. You don't see too many banks collapsing, don't you? When it happens, its a big deal like with the SVB earlier last year.

It's also what Sam Bankman-Fried and others did in exchanges that acted as unregulated banks.

The system is not perfect and there are many scandals but if you compare it to what happens in crypto exchanges, its a day and night difference.

Running a machine as intended and screwing up is different from pretending doing one thing and actually doing something else and screwing up. This is also why bankers and fund managers don't usually go to jail when they lose clients money. It's not illegal to suck at your job as long as you follow the rules.

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There have been 538 US bank failures since 2008.

https://www.spglobal.com/marketintelligence/en/news-insights...

I'm not so sure most people know what they're signing up for when opening a bank account. I also don't think banks particularly hide it, but I'd be surprised if the average person realizes that their checking and savings accounts are only IOUs or that money lent out for a mortgage likely didn't exist until they signed closing documents.

For all practical purposes for a customer who doesn't do more than putting money in, it's just a storage and they know how much of it is protected if something happens to the bank. From their point of view their money is there, even if the implementation details are much more complicated.

But the money literally isn't there, and the FDIC insurance that secures up to a limit is itself poorly funded and incapable of covering the failure of a moderately sized bank.

Saying the money appears to be there is very different from the reality of it, and in the context of whether customers consent to how the system works its also feels disingenuous IMO.

Can people spend the money as though it were there? Sure. Is the money they deposited there or are they aware that 90-100% of the money was immediately allocated to something else? Almost certainly no.

Who cares, the customers aren't exposed to all that and that's why they don't know it. It's like saying that McDonald's doesn't have any hamburgers, it's all buns and meat and lettuce. Yeah, that's how it works.

Last year a few banks went tits up, all the deposits were paid.

In my opinion a more apt analogy would be McDonalds selling low quality food that includes ingredients known to very likely ve bad for your health without ever making that clear. Sure a customer could technically dig into research and health studies but that's not really the point here.

Is it consent if you aren't made aware or given reasonable access to information that the average person could be expected to understand?

> FDIC insurance that secures up to a limit is itself poorly funded and incapable of covering the failure of a moderately sized bank

Can you clarify what you mean by "covering the failure of a moderately sized bank"? Bank is almost never "all the money is missing". Instead, it's usually something like "we have assets > deposits, but they're long term assets that can't be liquidated immediately so we can't pay all the depositors right this second", or "we have assets < deposits, but the gap isn't big enough that FDIC can't handle it".

The FDIC insurance fund has been below its target reserve rate for years now and continues to be underfunded.

At the end of 2022 the fund had $128.2 billion. I can't find a solid number on domestic deposits that are covered by FDIC based on the maximum deposit amount, but their Q2 2023 report showed $17.2 trillion in total domestic deposits across all FDIC institutions.

I'd expect that more than 0.7% of all deposits are under the $250k deposit limit. Let's just say 30% is actually covered, SVB had 89% of deposits above the limit when it failed, the insurance fund couldn't cover the failure of a bank with more than 3% of the market share of deposits.

The caveat there is that bank assets can be liquidated, but if the failure is fast enough that becomes really hairy. I haven't yet seen clear details on what strings they pulled and what sweetheart deals they gave when SVB was sold at the last minute, but that really means the fund isn't funded to cover enough and the hope really lies in market manipulation and a forced sale (likely funded in part by tax payers).

> …checking and savings accounts are only IOUs…

That are guaranteed by the US Government up to $250,000. While the average person may not know the details, the average person’s faith in the banking system is well founded. That’s why these “alt-banks”, which avoid FDIC or NCUA coverages, are so problematic.

>You don't see too many banks collapsing, don't you? When it happens, its a big deal like with the SVB earlier last year.

"Moderating risk" = depending on the US federal government bail you out?

There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible by the federal government at very little cost (maybe even lower cost due to not needing FDIC and all that infrastructure) without having to pay a middleman.

Nope. It's about creating a system that attempts to analyse risks and invests within margins that are acceptable for specific products.

It impossible for a bank for example to put all their money into Dogecoin because someone got a hunch that Musk will tweet about it. To do that they will need to create some kind of instrument that allows others to bet on Musks tweeting habits.

> There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible

That's not what banks do. You can do that without being a bank, like PayPal did. Most places will have different and much lightweight regulations than banks for this and you will go to jail if you do anything more than holding and transmitting customer money.

>That's not what banks do. You can do that without being a bank, like PayPal.

Except PayPal has no FDIC protection.

The part of the bank (or credit union) that required the US government to provide FDIC protection was due to dealing with cash. Imagine creating a country with just electronic money. What purpose would a bank with a FDIC protection serve if the government can just operate electronic money accounts itself? And if you want to take more risk and earn a higher return, you find a broker or investment fund or investor.

>Imagine creating a country with just electronic money. What purpose would a physical bank serve?

Investing customers money, create money.

Most money in the world is digital already, there are many banks that don't have physical presence and traditional banks are shutting down branches more than the open because branches are just the foot soldiers. There are also countries where cash is almost not used. Banks are not about cash, they are about credit.

I don't know what a "physical bank" means though, AFAIk there's no such thing and the buildings that banks own or operate would serve functions like hosting employees/clients/systems but they might choose not to have some of those.

>Investing customers money, create money.

And they can do this without a federal government backstop, just like an SP500 ETF does or a US Treasuries mutual fund, or an REIT, etc.

My point is the federal government need not provide a subsidy to these businesses that "invest" customer's money (or simply handle the underwriting of loans in many cases).

Right now in the US, via the Fed Funds rate, the federal government pays a business 5.5% just so the business then turns around and pays me 5.05%, all for keeping an entry in a database. And these businesses pay a lot of less discerning depositors a lot less. Surely the federal government can just give all 5.5% to people directly.

I wouldn't know about the legal structure you would like to invest your assets. Do it as you please, these things vary country by country too. The core concept is that you need to have some kind of structure for handling the money and a method to keep that structure in check.

The problematic part starts when someone acts outside of this structure, like employees who take customers money and invest with it without explicitly having a right to do that.

> Their whole role in transmitting and keeping an account of money is surely reproducible by the federal government at very little cost (maybe even lower cost due to not needing FDIC and all that infrastructure) without having to pay a middleman.

Banks don't store money. They connect money to businesses in a structured way. No banks means businesses won't get created.

Fewer rather than zero businesses. Rich individuals could directly invest. Where banks shine is in making moderate risk investments which aren’t worth much individually but are a significant economic boost in aggregate.

Housing may be unaffordable, but people aren’t living in sod houses with dirt floors and no running water either.

Going cap in hand to an angel investor for every £10k loan is not viable. And they don't have the levels of cash needed for this.

Why not use banks for this as well?

Get rid of Banks and many different things change.

Some wealthy investors would setup a lending operation using their own cash, based on historical examples of such. They would however need to charge higher interest rates than banks because they would be more capital constrained.

I specified an (FDIC insured) bank's role "in transmitting and keeping an account of money". There would be nothing stopping a lender from lending if the US government gets rid of FDIC insurance and just provides the people of the US electronic money accounts directly.

Sure, but then what happens to the thing I said? How do businesses get loans? How much interest should be paid on that money, if any?

Supply and demand determine the price (or interest rate). Businesses get loans the same say any other business transaction happens. A buyer and seller hash out an agreement. This already happens all the time, even in the US (see investment banking).

If the lender, such as a bank, is any good at their job of underwriting, then they won’t need the federal government’s assurance to bail them out and they will still be able to attract funds from people seeking returns (and risk).

> Businesses get loans the same say any other business transaction happens. A buyer and seller hash out an agreement. This already happens all the time, even in the US (see investment banking).

Yes, but a big way small business loans happen is with people's deposited money. You're naming alternatives, but not replacements. If my money is deposited with the government, then I have to go and find someone to lend to myself, and actually have the money removed from my bank account?

Yes, is this a problem? There are businesses that assist you with this already. Called investment banks. Or the government if you are looking for small business loans via SBA (and the government hires banks to do the underwriting, which the banks can still do).

> If my money is deposited with the government, then I have to go and find someone to lend to myself, and actually have the money removed from my bank account?

Also, you know the savings rate you earn at a bank is not because of the loans a bank makes, but because the government pays the bank. Why do you want your government to pay a middleman before paying you?

There was a time and purpose for this system, before instant communications and electronic databases. Now, those purposes have been automated away.

Sounds like it could be a variation of the office space skit:

So what would you say you do here at the business factory?

[…]

I connect the money with the businesses because businesses are not good at dealing with money! I have people skills, can’t you see that?

>There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible by the federal government at very little cost (maybe even lower cost due to not needing FDIC and all that infrastructure) without having to pay a middleman.

Banks' job isn't just keeping money safe and doing transactions. It includes maturity transformation as well.

[1] https://en.wikipedia.org/wiki/Maturity_transformation

I should have written "There really is no need for the charade of FDIC insured banks now that electronic databases are very solid technology."

I am not seeing the necessity of the federal government backstop to these businesses.

> I should have written "There really is no need for the charade of FDIC insured banks now that electronic databases are very solid technology."

What does this have anything to do with maturity transformation? Are you simply trying to say that we don't need banks to do maturity transformation, and they should stick to handling transactions?

I am saying we don’t need the federal government to backstop businesses just so people do not “lose” money.

Money is electronic, the government can handle electronic money accounts directly, and skip paying businesses for no reason.

Banks or whatever other financial businesses can continue to sell maturity transformation services, without FDIC insurance.

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