Why? Isn't the guaranteed deposits above 250k mainly 'insured' through Fed offering unlimited loans back by the nominal price of bonds owned by affected banks?
I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount.
This doesn't work. The only way to draw a new line in the sand is some sort of reform.
The key issue is that the new line has to be "subgame perfect", meaning it has to be credible that if a bank steps over the new line, it will not simply be bailed out again.
The simplest answer is "excess deposits insurance". Banks (or third-party insurers) could charge a monthly insurance fee for balances over $250k that provides insurance over the FDIC $250k cap. This allows everyone else under the $250k cap to bank without paying fees (the bank already paying insurance on those as per FDIC), and provides greater coverage to those above the cap. Think of it like an Umbrella Insurance policy. Some banks might provide the insurance for their most favored clients if they so choose, or embed the insurance inside other services.
"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage. The FDIC insures trillions of dollars of deposits in U.S. banks and thrifts - deposits in virtually every bank and savings association in the country."
How the banks choose to pass that cost on to customers/shareholders is up to them.
It's instructive to read https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/... for the last available quarter; the insurance fund is on page 24. I can quote you two numbers and you can decide whether they are big or small: there is $128 billion in the fund, and this covers 1.27% of total US banking deposits.
Yes that's correct. I'm suggesting an additional fee that is paid by the account holder who holds excess funds above the amounts that are already covered by the bank in their fees for FDIC insurance coverage. I'm aware of the existing bank-paid insurance that covers the mandatory $250k FDIC coverage up to the cap. The difference that I am suggesting is that the umbrella insurance is paid by the account holder to the bank for excess insurance coverage. This allows insurance coverage for account holders over $250k, of which there is no insurance coverage, optional or of any kind, available today.
I think we've just discovered that account holders over $250k _are_ (or can be) covered regardless?
Surely the logical counterparty for the insurance is not the bank, but the third party insurer? i.e. that people should explicitly have to pay for FDIC coverage themselves?
> of which there is no insurance coverage, optional or of any kind, available today.
This is basically a credit default swap for bank accounts, and if you wanted to insure the reported $450m that Roku allegedly had with SVB, someone would have sold you a product I'm sure.
I think this is a case of insurance coverage. The fact that there's some implicit coverage of excess amounts is not sustainable long-term. Just like we buy insurance in the unlikely event that our house is flooded or damaged by an earthquake, so too should companies with significant assets in banks purchase, on their own, insurance to cover the potential possible, but unlikely, situation of a bank bust causing them to lose most of their bank account funds. In this way the government can focus on insuring the general public, and those "too big to fail" can get private insurance to cover their own risks. This is just my opinion and a possibility. Certainly if governments want to come to the rescue or we have a "survival of the fittest" with the loudest, angriest parties getting their way, then we can run things that way as well.
Insurance won’t matter because the insurer will be bailed out. Remember AIG? They sold insurance (CDS) which everyone bought then when it was time to pay out “oops bail us out please” and they were. So insurance is meaningless because who cares if the risk is priced correctly because the insurer will be bailed out themselves.
The money pipe was opened then and SVB showed it will never be closed. The capture is complete.
Thank you, I’ve been confused about whether this product even potentially exists (as opposed to shotgunning your deposit across lots of banks to game the FDIC limit) and this is the first time I’ve seen it properly named.
> I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount.
If rich people think that, I think they deserve to be taxed at more than 80%, because that's stupid.
FDIC move was perfectly rational and cost-optimized. Had they not done that, there would have been more bank runs, and they would have to actually pay out 250k/account on many more accounts than just SVB's, while ""saving"" SVB cost almost nothing.
Yes, now I wonder if anyone is allowed to fail. David Sacks complained that if the regionals aren't protected, then everyone will only bank with the big four. Yet if everyone is protected even when the bank makes poor decisions, that's a run on the FDIC itself. So as you say, where is this new line, and who can be trusted to allow those who cross it to fail?
<< Yes, now I wonder if anyone is allowed to fail.
That was one of the questions on the call/presentation I was recently on and no one has a clear answer at the moment ( I suppose it is not a surprise since we can't take Yellen at her word ). Some clarity will be needed and sooner rather than later if stated policy and rules are to be believed to be real policy and rules.
FWIW, odds are, just about every bank by now has either reviewed or scrambling to review their exposure.
I do not envy the weight of Yellen's decisions, because from where I sit it is still hard to tell if it was a 'less bad choice' available.
> odds are, just about every bank by now has either reviewed or scrambling to review their exposure
The lesson they learned is to shout global emergency when your regional bank can't meet withdrawals due to poorly managed finances.
Banks will not be more prudent, in the long run. They've just been taught that the government will protect depositors beyond federally insured limits. So now they can make riskier bets.
Don't be too surprised if the FDIC (or perhaps the SEC, since we're talking about equity) forces clawbacks of those payouts, not to mention salary and bonuses in general after December 2021.
What is the case against them? You can't claw back without demonstrating some law was broken. Making a bad financial decision that causes a business to fail isn't against the law unless you somehow profited from it. And, from what's publicly known, SVB's CEO didn't come away with more money from the bank's closure than he would have had he continued running the bank.
It’s possible for the bank to capture a % of the deposit insurance by taking profit neutral risks. This is achieved by just increasing the risk. For example the profit neutral bet:
0.5: 1
0.5: -1
And the bet is made of 80% deposits 20% capital.
For the bank the profit before paying interest to depositors:
0.5 * 1 - 0.2 * 0.5 = 0.4
The bet is profit neutral but the banks profit comes from increasing the risk of triggering the insurance.
For the insurer the cost is:
0.5 * -1* 0.8 = -0.4
If you want to run a ‘scam’ bank that makes money from looting the FDIC fund then having your capital going to zero sometimes is part of the cost of doing business. This is why it’s important for the insurer to try and control risk and insure there is enough capital so the loot equation does not work.
> The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation's financial system.
I see nothing there about "we will guarantee deposits of any amount over $250k."
The decision to guarantee SVB may wreak havoc on the financial system as banks feel comfortable continuing to make risky bets and thus attracting more customers, knowing that the fed will rescue the customer deposits that backed those bets.
Greg Becker isn't going to jail, and he isn't going to be financially ruined. There are thousands of people willing to fill the role of extracting money from the government. The trick is to not give into their attempts to bend the rules.
Why? Isn't the guaranteed deposits above 250k mainly 'insured' through Fed offering unlimited loans back by the nominal price of bonds owned by affected banks?