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Comment by colechristensen | Hacker News Reader

There are already banks that provide products to sweep your large valued accounts into as many banks as necessary to keep your entire balance insured.

Insuring 100% balances is fine, it’s up to them to set premiums and banking policy directly.

As long as failing banks fail (stockholders wiped out, assets seized and sold to cover deposits first) there’s no problem with insuring deposits.

I do have a bit of a problem with how broadly bad mortgage backed securities are being bought by the fed to prevent losses from bad investments from failing more banks.

Housing prices are killing our society and there needs to be pressure against the enormous loans nearly every homeowner has.

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Insuring 100% balances is fine, it’s up to them to set premiums and banking policy directly.

I disagree. Why should everybody suffer higher fees, higher loan interest rates, and lower savings interest rates so that a small number of rich people can be stupid with where they put their money? If your business puts its money in the hands of reckless yahoos and can't pay its salaries it should have to get a loan to do so until it can get its deposits back from the failed bank.

Every time we remove a piece of accountability we inject permanent stupidity into the system.

What the fdic just did was insure 100% at a "systematically important" bank while charging a special assessment to all the banks, even if the same designation and thus extended insurance did not apply to them. It's the worst of both worlds.

Insuring balances is not 100% fine. Spitting money across banks decorrelates the risks. And presumably whomever is picking the actual banks involved is choosing them with some care. So the FDIC is surely fine with people opening multiple accounts.

But insuring 100% of the balances at a single bank creates moral hazard. It gives executives a bigger incentive to gamble knowing that their losses will be covered. They'll be less sensitive to long-tail risk. Their customers will be less worried about bank failure, and so more likely to place their money with banks that are taking more risk.

The executives will have no choice but to take risks. Depositors, knowing their funds are covered no matter what, will chase banks with the highest yield. Eventually, the only way to compete higher is to take greater and greater risks. He who takes the most risks gets the biggest interest rate, he who does not loses his depositors to someone who does. In the end the conservative actors implode from losing their depositors and paying special assessments for 'insurance' risk of competitors, and aggressive actors pump up from those chasing high yields and then explode with their depositors getting bailed out.

Very well put.

It's questionable how much splitting money across banks decorrelates risk. SVB's mistake was buying slightly too many treasuries at slightly too long a duration. Pretty much every bank is in this same boat if interest rates continue going up.

All the banks own debt (treasuries, mortgages, bonds, etc) at pitifully low interest rates.

It's not all that questionable. How many banks have failed out of the total number of banks?

Suppose the FDIC decides they are keeping the 250k limit. The logical outcome is for companies to leverage fintech services that help spread corporate deposits among multiple banks.

The problem is now you have high correlation across that pool of banks. If depositors get scared and a bankrun occurs, they are now pulling money from the entire pool. The 2008 bank failures provided a small glimpse into that correlated risk.

How many banks today are capitalized sufficiently to handle a bankrun of the scale that occurred at SVB? SVB's balance sheet is not unique, all banks have significant unrealized losses due to bonds, mortgages, and any other kind of debt that they own. During the pandemic, the Fed reduced the reserve requirement to zero so banks need to keep 0% of customer money 'in the vault'.

That sounds like a very specific hypothetical future risk. That's a logical outcome in a vacuum, but companies have managed large cash and near-cash positions for a long time without services like you describe. I think your "slippery slope" argument is a fantasy.

But if it weren't, and if it were a problem for the FDIC, which I don't think is established, then the FDIC can just change the definition of what's covered a bit. It's not a hard fix for them to say that they won't cover more than $x per beneficiary total.

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