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Comment by no_wizard | Hacker News Reader

I don't think its that simple.

Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits.

If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace.

Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow.

Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here

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Last years bank collapse has demonstrated that FDIC coverage is infinite so long as you have the right connections.

Also FDIC limit is theoretically a lifetime limit per individual. Again, no actual limit so long as you know the right people.

Also worth pointing out that when financial institution failure hits people personally regime changes follows quickly. It'd be at the ballot box in the US, but make no mistake it'd come swiftly. As a result, politicians will do whatever it takes to prevent that from happening.

> FDIC coverage is infinite so long as you have the right connections

Which depositors were screwed for not having the right connections?

> FDIC limit is theoretically a lifetime limit per individual

No. It’s not even a limit at the same institution, just per ownership category.

The Big 5 banks have unlimited FDIC coverage because they're "too big to fail" and they scoop up the remains after the FDIC swoops in. Everyone else has the $250k per depositor.

That is why the CRE loans are such a huge problem. Their debt is owed to regional banks, not the big ones.

That said, the FDIC ignored their playbook and rules to try to calm things down last March. A few more banks went down but not the numbers people expected. That means we're in uncharted territory.. will the FDIC follow their own rules next time or do whatever they want? We don't know.

> Big 5 banks have unlimited FDIC coverage because they're "too big to fail"

Less than one year! We had three banks fail—the second, third and fourth largest in our nation’s history—less than one year ago [1]!

None were TBTF, let alone big five. Every deposit was covered. I get that the headline reads hysterically to a lay reader, but less than one year!

[1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...

They were largest failures not largest banks failing.

Going by https://www.federalreserve.gov/releases/lbr/current/ and JumpCrisscross's link, the banks that failed would have been around ~16th largest US bank at the time of failure. I don't know how large Washington Mutual was at the time failure compared to other banks, but just doing straightforward inflation adjustment would put it at #10, and I suspect it's closer to #5 or #6.

> were largest failures not largest banks failing

Correct. The comment I responded to claimed unlimited coverage was limited to the Big 5. We're less than a year from non-TBTF (we let them fail for god's sake) non-big-five banks (a) failing and (b) receiving unlimited depositor coverage.

On paper, yes. Which is why I also said:

> That said, the FDIC ignored their playbook and rules to try to calm things down last March.

There's the SOP and there's what they did, there was no relation between the two which means we have no clue what they might do next time.

> Last years bank collapse has demonstrated that FDIC coverage is infinite so long as you have the right connections.

The intention behind that intervention was clearly to stave off a sector wide run. What held true then and there is by no means guaranteed or even likely to hold true in the event of an actual panic.

Absolutely agree. If you're going to deposit more than $250,000 make sure you have friends in the right places!

> Also FDIC limit is theoretically a lifetime limit per individual.

As far as I know that is not true. Why do you say that? FDIC limits are applied per bank, per individual, per account type, but there is no individual lifetime limit, and a common "cash management" account technique is to distribute your money to multiple banks so you can take advantage of each bank's limit.

looks like the rules were changed sometime in 2020 based off this leaflet:

https://www.fdic.gov/resources/deposit-insurance/brochures/d...

I don't know what section of the Federal Register to consult to see if that is actually backed up by something enforceable

> the rules were changed sometime in 2020

What rule are you referring to? FDIC coverage has never had a lifetime limit. That would mean someone who gets an FDIC payout at one bank should rush to pull their deposits at others.

What are you referring to in this document? The only reference to "lifetime" is for revocable trust accounts, which obviously is not the kind of FDIC insurance most people are concerned about.

FDIC went beyond the $250k limit for depositors last year for SVB collapse.

I know that. I was replying to the statement that "Also FDIC limit is theoretically a lifetime limit per individual" which, AFAIK, has never been true.

I'm not exactly sure what they're saying either. My thought with the "theoretically" part was that the insurance funding program wouldn't be able to support widespread failures. Without adjusting funding, average lifetime claims wouldn't be able to sustain 1 failure per person let alone multiple. Sure, the rules don't stop you, but the reality does.

Regime changes do not happen at a ballot box.

You should stop spreading fud - fdic limit is per account name per bank, not lifetime per person. So anyone can put their money into cash sweep that balances it across many banks to stay under 250k limit

You can't really because healthy banks will fail because of bank runs. Imagine your coworkers bank going under and losing savings above FDIC insured, suddenly everyone in the office is leaving to withdraw all their savings at other banks who are much less distressed.

If banks fail due to mismanagement, letting banks fail should be done, but you can't really blame the banks for not predicting covid and the massive decline in demand for office space. Protecting against once in a lifetime events won't be profitable and governments will have to end up subsidising them anyway.

> the FDIC coverage backstops at $250,000, and it only recovers depositors

Practically, no, the FDIC set the precedent last year of full depositor coverage.

Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break?

I know its un unlikely event but I've always been curious what would necessitate it to fail. As we know, all things can fail.

If the FDIC breaks, then the whole country is broken. FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency, which is ultimately the belief in an orderly US society that results in being able to trust that the digits listed in a database next to your name will allow you to procure products/services you want.

> If the FDIC breaks, then the whole country is broken

Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties.

> FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency

No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.

My point was that the “insurance” premiums and whatnot the FDIC collects are all fiction, because in practice, the Federal government will always step in if the reserves are insufficient (assuming it can). If it can’t, then the country is about to dissolve or otherwise undergo some major changes.

Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago).

https://news.bloomberglaw.com/daily-labor-report/biden-to-un...

>No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.

The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.

> The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency

Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was.

Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.

> Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break?

“The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC.

“FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury.

[1] https://www.fdic.gov/about/what-we-do/index.html#:~:text=The....

[2] https://www.fdic.gov/resources/deposit-insurance/brochures/i....

It's funded by participating banks paying for coverage.

It holds enough capital to cover something like only 2% of insured deposits.

It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.

> It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.

This is wrong. In the case of a large-scale collapse, depositors have a legal claim on the Treasury through the FDIC.

You are referring to SVB. They absolutely did not.

> You are referring to SVB. They absolutely did not.

They absolutely did [1].

[1] https://www.fdic.gov/news/press-releases/2023/pr23019.html

That article doesn't support the claim that there is some precedent for unlimited FDIC insured deposits. It even specifically cites the process by which an exception was created.

Can you elaborate on why you now think there is a precedent that all deposits for future bank failures are insured?

this is the ideal case. this is the healthy case.

but the government is owned and that will never happen.

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