Unfortunately, guaranteeing deposits for everyone creates moral hazard, because it means people will not pay attention to the risk level of their bank, giving bank CEOs even more incentive to play "heads I win, tails they lose" with taxpayer money.
I am all for FDIC insuring accounts, and I'm fine with the level being as high as $250k. But anybody with a lot of cash beyond that should already understand what the word "uninsured" means. If they don't my sympathy for them is limited.
If we're going to spend billions more on improving the social safety net, people with hundreds of thousands of dollars in cash just lying around are not my first priority.
People shouldn't need to pay attention to what their bank is doing. That is what regulators are for. Having to constantly review bank financial statements to determine whether you can have an account there is ridiculous.
For individuals, sure. Which is why I'm in favor of the FDIC system. It's a waste of time to make average people try to figure out the safety of particular banks just to be sure their $5k in checking is safe.
For people managing millions of dollars, though, I think they should, y'know, do their jobs and make professional-grade risk management decisions. Especially when the alternative is taxpayers coughing up money to subsidize their mistakes.
It’s so rare that people ignore it. I’m surprised there aren’t insurance companies offering “fdic++” - I’m sure the underwriters could work out what it would have to be.
It's small though and I'm surprised there hasn't been more talk of it and other optional deposit insurance. What does this landscape look like for large companies routinely doing millions in payroll? You can't tell me they sweep it all in/out of different banks in 250k chunks. There has to be some sort of widely used insurance offerings, no?
> People shouldn't need to pay attention to what their bank is doing.
There's a really nice threshold for measuring this: if you have more cash than can be spread conveniently amongst a number of banks such that those account balances do not exceed FDIC insurance limits, you do need to pay attention to what your bank is doing.
I love how many here are suddenly pretending that every mid-sized business in America both can and should be able to perform a deep and ongoing due diligence of their bank, including I suppose various macro stress tests and Monte Carlo simulations, using the limited information available in public filings, and not only this, but that this absurdity is actually desirable.
If you have imagined an argument that is absurd, maybe that's more about what you're imagining than what people are thinking.
You could say absolutely the same thing about buying stocks. By your logic, nobody should be allowed to buy stocks because it's just too darned complicated.
This is not the slam dunk analogy you think it is. Buying stocks is too darned complicated, which is why even the most astute, sophisticated hedge fund managers cannot beat an index fund on any significant timescale. Because even with all of the publicly-available information, and thorough analysis, you still cannot be sure what is happening internally at any particular company.
Similarly, it is quite literally -- and I do mean this literally -- impossible for anyone to conduct a meaningful and ongoing analysis of their bank.
This leaves basically three options:
* Buy private insurance, which is a fool's errand, as there's no guarantee it would make you whole in the event of a major black swan event.
* Split your account up into an absurd number of institutions. (You get FDIC insurance only per depositor, per account category, per institution. You can't open more accounts of the same category at the same institution).
* Place all your money at one of the Systemically Important Banks, where you basically get unlimited insurance.
Please explain what you thin the rational thing to do here is.
Is that really your total understanding of treasury management? You believe all American companies do 1 of 3 things with their cash, and it's those things?
Anyhow, yes, buying stocks is too complicated to be a sure thing. But rather than banning the process, we just make sure there are decent guardrails so the average Joe doesn't get too screwed and systemic risk is limited, and then we let people do a capitalism if they want, but on their own heads be it. And whole industries have risen up to help them do it.
It's the same deal with banks. The government's job isn't to hold the hands of people trying to figure out what to do with their millions. It's to protect the small players from predation and limit systemic risk.
I am not a professional in this field, so I'm not going to pretend to give one-size-fits-all prescriptions for something that is obviously complex and context specific. Instead, I will encourage all fellow founders and would-be founders that there are many things where they should just hire an expert. Like law, or regulatory compliance, or the best way to manage millions in cash.
What if they had, say, an executive-level person who knew a lot about finance? One whose job was understanding money and what to do with it? Maybe an officer of finance. Heck, managing all the company's cash sounds pretty important if it's millions of dollars, so we should probably put them pretty high up. Some sort of C*O title?
Just spitballing here, but since apparently a lot of people with millions of dollars who have heard their whole lives about FDIC-insured deposit limits are suddenly waking up to the fact that things above the line are uninsured, seems like a good time to innovate.
Except no one thought the deposits were actually uninsured.
Back in 2008, the FDIC launched the Transaction Account Guarantee Program to provide unlimited insurance to uninsured deposits in non-interest bearing accounts, and then later expanded to low interest accounts, on an emergency basis.
This program protected nearly a trillion dollars in uninsured deposits, and made all of them whole.
After Dodd-Frank, the program was ended. However, if the FDIC deems a situation to have systemic risks, it's within their statutory authority to do this again. And it now seems the Government is planning to do exactly that, should they be unable to find a buyer for SVB.
Oh, "no one". Gosh golly, impressive how you can read minds like that.
That program was an always-temporary response to a major financial crisis. I expect most finance professionals knew that it was temporary.
But suppose you're right. Suppose all the cool kids thought they'd get bailed out no matter what. In that case, it's even more important now to not use taxpayer money to prevent the big-money SVB accountholders from taking a haircut. Because your justification here is exactly the kind of moral-hazard problem that regulators are very eager to prevent.
The Transaction Account Guarantee Program was industry-funded. There is precisely zero moral hazard in protecting depositors, who have no ability to gauge the risk in any particular bank on an ongoing basis, particularly with an industry-funded program.
But depositors obviously have the ability to gauge risk, especially sophisticated depositors with millions of dollars of cash lying around. Otherwise people wouldn't be squawking right now about the risk of money being moved out of certain banks to certain other banks. Otherwise things like the DIF wouldn't exist. Otherwise treasury management wouldn't be a whole profession.
The problem is that many depositors are not looking just for safety, they pick other things, sometimes over that. Which is their right! But sometimes when trade safety for other things, it turns out badly for them.
If you have more than 250k in bank you probably entered territory of accredited investor and thus I would reasonably expect you to review your investments. Including bank deposits.
I really don't understand the moral hazard here. The people making risk decisions - ie, the SBV staff - should absolutely be wiped out. If there's a legal way to claw back the proceeds from the stock sales they made in the run up to the last few days, I wouldn't have a problem with that either.
It's sort of like federal storm insurance for beachfront property. If you make it too cheap for people to take risks, they will take too many risks, costing the government money. So you have to make sure risk and reward are balanced.
When people choose where to bank their millions of dollars, they are making a market-based choice. Markets only work when, on balance, good choices get good results and bad choices get bad results. If people can make risky choices and still make money because other people bail them out, that creates a moral hazard.
I’ve always been of the idea of the feds are insuring something, they should have a buyout option (something similar to what FDIC just did). FDIC doesn’t wait for the bank to call them, they monitor and step in.
> I really don't understand the moral hazard here.
It incentives ignoring risks from grey/black swan events. Weak analogue, a CTO comes in who removes redundancy/backups from the system, saves huge costs and gets huge bonuses. Once every 5 years system fails and data is lost, CTO loses bonus but on average he is making more.
I am all for FDIC insuring accounts, and I'm fine with the level being as high as $250k. But anybody with a lot of cash beyond that should already understand what the word "uninsured" means. If they don't my sympathy for them is limited.
If we're going to spend billions more on improving the social safety net, people with hundreds of thousands of dollars in cash just lying around are not my first priority.