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Comment by slv77 | Hacker News Reader

Traditionally banks which needed cash to balance their books worked through the interbank market. Interbank lending was unsecured but short term so the risks were manageable. If a bank was known to be insolvent however lending would quickly dry up and banks would need to go hat-in-hand to the Federal Reserves discount window. That came with a high cost and invited regulatory scrutiny.

Now the FDIC has indicated that it will insure deposits in unlimited amounts doing a direct deposit maybe a more attractive option to banks? That $30B previously was sitting around at the Fed earning a risk free return at prevailing interest rates. I have to assume that there is special treatment here and the banks are earning above market returns and the banks didn’t put cash-at-risk sitting in zero interest accounts out of the goodness of their hearts.

If that is the case the Fed, FDIC and Yellen have effectively nerfed the interbank market.

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>Now the FDIC has indicated that it will insure deposits in unlimited amounts

My understanding is that the FDIC does not have cash on hand to cover "unlimited" amounts. My (somewhat dated reference, 2010) said they have about $0.70 for every $100 insured, based on the idea that the number of depositors they would have to cover at any single time is relatively small. Similar to the idea that banks don't have to have enough reserves because depositors won't all request to pull their funds at the same time. Until they do.

FDIC has government guarantees for the $250k portion, and implicit guarantees beyond that. And with the SVB bailout of depositors it’s now signaled that FDIC is effectively insuring the full balance backed by the Treasury.

Right, but the issue is they may not have $250k on hand for everyone who is insured. (Essentially no different than the banks needing enough reserves to cover withdrawal amounts.) The "implicit" part essentially means Congress will act on their behalf if needed. Which means the mechanism is to sell Treasuries to the Fed, who pays for it by printing money. I don't know if that's great option in the context of the highest inflationary period in 40 years.

Or am I wrong on that understanding?

Technically FDIC can "levy an assessment" on all banks to cover deficiencies, or anything they want to.

In reality Congress would step in, but they did the above for SVB.

See 5-(c): https://www.law.cornell.edu/uscode/text/12/1817

> In addition to the other assessments imposed on insured depository institutions under this subsection, the Corporation may impose 1 or more special assessments on insured depository institutions in an amount determined by the Corporation if the amount of any such assessment is necessary—

Practically this means that FDIC can levy on the banks for some amount more that won't crash the banks; anything above that and they'll be going to Congress, or the Treasury will do some trickery.

Yeah, that aligns with my (limited) understanding. The assessments are a relatively small portion of the funds, I believe. My understanding is that the rate charged is the same regardless of the riskiness of the bank, which could become a moral hazard in its own right. (I.e., if the assessment rate is the same regardless of risk, it may incentivize riskier behavior)

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