I mean it is amazing if they do it well. If we don’t have a financial crisis soon, it would be a wonderful sign of responsible governance, effective regulation, and international cooperation.
So many doubt the ability of the US government to govern responsibly. It IS amazing when they demonstrate responsibility!
You mean "lawmakers act quickly to preserve the capital of the global elite, of which the cost will be born by everyone else, in response to extreme moral hazard, and ultimately no one will be held accountable."
The better question of course is who pays for this? They're quiet about it because it's not the banks. The banks paying it is only a technicality. This additional premium they will inevitably have to pay will come from depositors. So, effectively, people who trusted their money with banks are being punished for putting money in banks that abandoned their fiduciary duty to their customers.
Unless the banks themselves pay it and something is in place to prevent these costs being past down to their depositors this should be a non-starter. It is TARP by any other name.
It's just insurance for your own account though. You pay to insure your car and you pay to insure your bank account.
As long as bank regulations are reasonably strict that this happens as infrequently as it does, ultimately having depositors foot the bill doesn't seem problematic.
It's more appropriate than taxpayers generally, and it can't be the bank owners because the whole point is they've already been wiped out.
The problem is they aren't wiped out enough. Bankers who instigated the GFC got jobs elsewhere. One of them was even the CEO of SVB!
Breach of fiduciary duty in any other context is essentially a death sentence for a career in finance. Clearly being wiped out isn't enough. The complexity in the matter is that depositors reasonably expect to be able to get all of their money out at any time. As they should. It's their money. At the command of the fed their reserve rates were dropped to zero essentially making the cash value of an account a meaningless number in a computer.
Given this risk, the bank should be the sole party responsible for paying such insurance for it's depositors. It's a cost of doing business, and importantly taking a risk and fiduciary responsibility over a client. We demand doctors insure themselves because they can destroy a patients life. A bank should be the same. To have the depositor (or patient) front the cash in any form should be made illegal. Hence my demand to insure the funds are secured only through the bank owners themselves. Ideally, the executive board carries enough insurance to make all depositors whole in the event of a bank collapse. This should be uncontroversial.
Corporations (and banks) rest on the bedrock principle of limited liability. To go beyond that is a pretty radical suggestion. That means if grandma buys shares in a bank as part of her retirement portfolio, then the worst case isn't that the shares go to $0, but that she owes money, without any limit she can know beforehand. I don't think that's a good idea.
> Hence my demand to insure the funds are secured only through the bank owners themselves.
I'm not sure there are any insurance companies who will insure an entire bank, and certainly not one of any decent size. That's the entire reason it's pooled insurance provided by the government.
And in any case, if it became that much more expensive to start a bank because you had to pay for all this insurance up-front, banking just becomes that much more expensive for consumers because owners still want to make the same amount of money in the end. At the end of the day, it's still going to cost consumers the same.
FDIC fees are levied on banks. There are a lot of banks, some which compete on deposit rates. (The majors generally do not, but you don’t put your money in a Citibank account to grow.)
> Insuring unlimited amounts based on the whim of the fed while only charging insurance on the first 250k
The FDIC doesn’t charge insurance on only the amount of deposits covered by insurance. Prior to 2010, it did on all deposits, post 2010 under Dodd-Frank it expanded to all liabilities.
Deposit insurance should be unlimited for accounts yielding less than the 1-year T-bill. Insurance should be provided via the Fed's balance sheet, not a separate fund. Bank employee and director compensation above 4x GDP/capita in any year to be paid in shares, which they are enjoined from selling while employed by the bank and for one year afterward. They can borrow against the shares to buy mansions – I want them to live in mansions – but they will lose them if they need help paying their depositors.
Accounts yielding more than the 1-year T-bill should require labeling as subject to loss.
> Bank employee and director compensation above 4x GDP/capita in any year to be paid in shares, which they are enjoined from selling while employed by the bank and for one year afterward
You’ve created an incentive for rotating employment, thereby diffusing responsibility.
Fed accepts Treasuries at face value, not market, at the discount window.
Stress testing for banks with more than $50bn deposits. (No Barney Frank/SVB exception.)
New FDIC assessments for large deposits. Tier so banks can reasonably choose to refuse them, or charge an excess-deposit fee. ($1mm, $10mm, $100mm seem reasonable.)
>Fed accepts Treasuries at face value, not market, at the discount window.
Why would anyone buy short dated treasuries then, when you can load up on 25 year treasuries at a steep discount (relative to face value) then turn around and give it to the fed at face value?
>Stress testing for banks with more than $50bn deposits. (No Barney Frank/SVB exception.)
SVB had just shy of $20B in deposits
>New FDIC assessments for large deposits. Tier so banks can reasonably choose to refuse them, or charge an excess-deposit fee. ($1mm, $10mm, $100mm seem reasonable.)
Is this really an issue that exists? Are banks obligated by regulation to accept deposits or something?
> when you can load up on 25 year treasuries at a steep discount (relative to face value) then turn around and give it to the fed at face value
We’ve already answered this question with the bailouts of SVB and Signature’s depositors. (Granted, not shareholders.)
Maybe a higher penalty rate for face-value borrowing? Or a limit to it, such that it serves as a canary?
> SVB had just shy of $20B in deposits
After the run. Before it had close to $200bn [1].
> really an issue that exists
It doesn’t, and that’s the problem.
The FDIC assesses a uniform charge on all of a bank’s liabilities. It’s clear some depositors pose a greater risk than others. I’m proposing differentiating the FDIC’s fee to incorporate that information, thereby encouraging banks to differentiate. Want to be a loosely-regulated community bank that can offer small depositors a higher rate because you aren’t paying to insure Peter Thiel? Great, now you can.
More turnover among sr folks leads to a greater focus on (1) institutional risk management, because you can’t trust the new guys view things the same as the old, and (2) consistent reevaluation of previous assumptions, because the guy who made them is gone.
I’d argue the long tenure of sr bank employees is a weakness of the current system, not a strength.
I’d want to see research. Hollowing out cultures is rarely the solution to a complex problem.
Trivially, such a rule would be worked around by trading staff back and forth between adjacent firms. Then you’d have minimum-stay and arms-length regulations, at which point we might just see the contracting trend hit Wall Street.
If the bank collapses, you get wiped out. Incentive for the banker is the same. Incentive for the depositor shifts assuming perfect information. But in practice, information asymmetry makes depositor preference insensitive to bank risk, regardless of insurance.
This would just be an acknowledgement “we’re always gonna have to do it for the big guys, might as well make it fair for the little guys too”
Private insurance is available. If you have significantly more than $250k in the bank, you can afford it. Our government has enough "solutions" as it is, and many (most?) of them are targeted toward the people who need them the least.
You are looking at it from the perspective of what features it makes sense to provide to account holders. Instead, after the SVB fiasco we should be looking at it from the perspective that all bank accounts create liability for the FDIC based on public expectations. As such all bank accounts should ultimately be "FDIC insured" - not because we want to help out large account holders with decreased risk, but rather because when something does happen, those nominally "uninsured" account holders are going to be begging for a bailout regardless while spreading panic to get their way.
The insurance premiums on larger accounts should be larger (superlinear) to handle the increased variance of larger amounts. If someone wants to store large amounts of money without (indirectly) paying the FDIC insurance fees, then they choose something else besides a bank account - perhaps a brokerage account and/or buying treasuries directly.
Furthermore, the hazard of bank management gambling the money away should be discouraged through larger capital requirements, and even criminal penalties for blowing through that capital buffer and into customer deposits due to not employing proper hedging or insurance.
It seems unfair to punish depositors that have zero or very low interest rates on their deposits. At the same time, it seems fair to punish depositors which were yeild chasing that 4.50% APY from SVB savings.
I think depositors who are happy with low interest should be able to use accounts directly from the treasury to work with US bonds.. I don't want to bail out companies that try to eek out small profits in the middle and help them drive the average consumers interest to well bellow the bond rates.
The Treasury is selling bonds for the US' interests and should provide adequate accounts to manage your funds within the context of US savings bonds and transfers. People who put a million in bonds through an opaque account at an intermediary are then still at their own risk.
Why subsidize and encourage middlemen? It's like building the scam opportunity for privatized social security insurance management, as if honesty will be the most profitable choice in managing that.. It's inappropriate for the government to design systems that reward scamming in the middle.
I think bonds themselves when bought through a normal broker's normal account are usually true investments in your name that can't be "pledged and re-pledged"..
I generally accept the argument that people are having trouble running the gauntlet to true government backed low risk investment and that is basically by design (well inherent capitalist evolution).. Anyone who fails to get there or gets talked out of that position by an army of telemarketers in turn fuels those telemarketers getting more people to take inherently worse risk/benefit options that pay for sign ups.
Sure most people who use brokers are actually interested in wider arrays of risk and we can't really find anyway to lower the corrupt advisor incentive as that tends to go straight into a complexity trade off.
I don't think there's still good reasons to use banks for savings now that anyone could buy whatever assets they like with a very similar broker account.. I think anyone accepting lower than government bond rates is basically in a corrupt financial advisor situation where the government is providing everything and someone other than the saver is siphoning money out in the good years.
Industries once formed tend to lobby to prevent things that would remove their negative role. I.e. the ability to independently buy savings bonds has not really been kept up with the baseline utility of any other financial account.
Normally banks had much more of a role in lending, etc, which is a bit more complicated than letting them leach between people and well defined bonds so I wouldn't say they can't have a function only that I would like them removed from this one.
At least we could have our effective policy match the stated policy? That would reduce volatility and uncertainty. If the SVB depositors knew what was going to happen ahead of time would there even have been a run at all?
If all deposits were be covered then I doubt there would have been a run at all.
But, Banks pay for FDIC Insurance, the money has to come from somewhere. Either the Tax Payers will pay via higher fees or interest rates to the Banks or via higher Taxes to the Fed.
All this means is people with large deposits will be covered directly by the Tax Payer, it is just a matter of who we pay.
But doing it after the fact is the worst way to do it - it is the most expensive way and also least effective in terms of preventing runs.
So as long as we are going to pay for it anyway, let's at least get the most benefit, which would also, in a happy coincidence, be the least expensive.
Fundamentally the money is protected by the stability and reliability of the US government. Why have these private intermediaries in the middle at all?
If you want to sock away some cash in a place where it won’t disappear due to financial system shenanigans you should be able to give it directly to a US government entity like, say the USPS. Ultimately money is only worth anything in the context of a stable and reliable government anyway.
What you’re getting at is known as the “risk free rate,” or the risk premium of leaving your money with another entity for a period of time. US gov’t treasuries carry a risk free rate; you’d just buy treasuries.
I recently became aware of the Diamond–Dybvig model (which was so influential that Diamond and Dybvig were awarded the 2022 Nobel prize), that argued that deposit insurance is really the best way to avoid bank runs. After reading that, a higher FDIC cap became a no-brainer to me. I encourage everyone to check that out.
I'd be curious to know how much of the "overage" is from businesses that would be fine with narrow banking at the Fed.
The obvious downside is that you still need regular banks and financial institutions for loans, but for large operating accounts for many companies you just want something you can spend and won't disappear. And presumably this is why the Fed doesn't permit narrow banking: major deposits would dry up, loan rates would have to be much higher, and so on.
> for large operating accounts for many companies you just want something you can spend and won't disappear
Every corporate treasurer worth their salt manages a portfolio of short-dated bills, commercial paper and repos for this purpose. Maybe now this knowledge is obsolete. But it’s always been there, at small sizes, via Treasury Direct.
Sure, but when does that start? What set of small businesses have >$1M of operations per month and nobody to manage that? Or even just an owner who wants to "keep it all in cash" instead?
“WORLD WAKING UP to the fact that a bank deposit is an unsecured loan to a leveraged counterparty, that the FDIC insurance fund only has $128bn, that total deposits in US commercial banks=$17.6 trn, &...here's the big one: that money itself is a confidence game (always has been)”[0]
Not a banking expert by any means but what would happen if all banks were forced to pay out failed bank depositors in a cap weighted manner? Banks might then push for sensible regulation themselves to keep risky banks from costing them money.
49 comments
[ 2.9 ms ] story [ 71.4 ms ] threadSo many doubt the ability of the US government to govern responsibly. It IS amazing when they demonstrate responsibility!
Unless the banks themselves pay it and something is in place to prevent these costs being past down to their depositors this should be a non-starter. It is TARP by any other name.
As long as bank regulations are reasonably strict that this happens as infrequently as it does, ultimately having depositors foot the bill doesn't seem problematic.
It's more appropriate than taxpayers generally, and it can't be the bank owners because the whole point is they've already been wiped out.
Breach of fiduciary duty in any other context is essentially a death sentence for a career in finance. Clearly being wiped out isn't enough. The complexity in the matter is that depositors reasonably expect to be able to get all of their money out at any time. As they should. It's their money. At the command of the fed their reserve rates were dropped to zero essentially making the cash value of an account a meaningless number in a computer.
Given this risk, the bank should be the sole party responsible for paying such insurance for it's depositors. It's a cost of doing business, and importantly taking a risk and fiduciary responsibility over a client. We demand doctors insure themselves because they can destroy a patients life. A bank should be the same. To have the depositor (or patient) front the cash in any form should be made illegal. Hence my demand to insure the funds are secured only through the bank owners themselves. Ideally, the executive board carries enough insurance to make all depositors whole in the event of a bank collapse. This should be uncontroversial.
Corporations (and banks) rest on the bedrock principle of limited liability. To go beyond that is a pretty radical suggestion. That means if grandma buys shares in a bank as part of her retirement portfolio, then the worst case isn't that the shares go to $0, but that she owes money, without any limit she can know beforehand. I don't think that's a good idea.
> Hence my demand to insure the funds are secured only through the bank owners themselves.
I'm not sure there are any insurance companies who will insure an entire bank, and certainly not one of any decent size. That's the entire reason it's pooled insurance provided by the government.
And in any case, if it became that much more expensive to start a bank because you had to pay for all this insurance up-front, banking just becomes that much more expensive for consumers because owners still want to make the same amount of money in the end. At the end of the day, it's still going to cost consumers the same.
FDIC fees are levied on banks. There are a lot of banks, some which compete on deposit rates. (The majors generally do not, but you don’t put your money in a Citibank account to grow.)
The FDIC doesn’t charge insurance on only the amount of deposits covered by insurance. Prior to 2010, it did on all deposits, post 2010 under Dodd-Frank it expanded to all liabilities.
Accounts yielding more than the 1-year T-bill should require labeling as subject to loss.
You’ve created an incentive for rotating employment, thereby diffusing responsibility.
Fed accepts Treasuries at face value, not market, at the discount window.
Stress testing for banks with more than $50bn deposits. (No Barney Frank/SVB exception.)
New FDIC assessments for large deposits. Tier so banks can reasonably choose to refuse them, or charge an excess-deposit fee. ($1mm, $10mm, $100mm seem reasonable.)
Why would anyone buy short dated treasuries then, when you can load up on 25 year treasuries at a steep discount (relative to face value) then turn around and give it to the fed at face value?
>Stress testing for banks with more than $50bn deposits. (No Barney Frank/SVB exception.)
SVB had just shy of $20B in deposits
>New FDIC assessments for large deposits. Tier so banks can reasonably choose to refuse them, or charge an excess-deposit fee. ($1mm, $10mm, $100mm seem reasonable.)
Is this really an issue that exists? Are banks obligated by regulation to accept deposits or something?
We’ve already answered this question with the bailouts of SVB and Signature’s depositors. (Granted, not shareholders.)
Maybe a higher penalty rate for face-value borrowing? Or a limit to it, such that it serves as a canary?
> SVB had just shy of $20B in deposits
After the run. Before it had close to $200bn [1].
> really an issue that exists
It doesn’t, and that’s the problem.
The FDIC assesses a uniform charge on all of a bank’s liabilities. It’s clear some depositors pose a greater risk than others. I’m proposing differentiating the FDIC’s fee to incorporate that information, thereby encouraging banks to differentiate. Want to be a loosely-regulated community bank that can offer small depositors a higher rate because you aren’t paying to insure Peter Thiel? Great, now you can.
[1] https://www.nytimes.com/2023/03/10/business/silicon-valley-b...
More turnover among sr folks leads to a greater focus on (1) institutional risk management, because you can’t trust the new guys view things the same as the old, and (2) consistent reevaluation of previous assumptions, because the guy who made them is gone.
I’d argue the long tenure of sr bank employees is a weakness of the current system, not a strength.
Trivially, such a rule would be worked around by trading staff back and forth between adjacent firms. Then you’d have minimum-stay and arms-length regulations, at which point we might just see the contracting trend hit Wall Street.
It would be interesting to read policy or study papers on ideas like this; I don’t have especially strong intuitions for how they’d play out.
This would just be an acknowledgement “we’re always gonna have to do it for the big guys, might as well make it fair for the little guys too”
The insurance premiums on larger accounts should be larger (superlinear) to handle the increased variance of larger amounts. If someone wants to store large amounts of money without (indirectly) paying the FDIC insurance fees, then they choose something else besides a bank account - perhaps a brokerage account and/or buying treasuries directly.
Furthermore, the hazard of bank management gambling the money away should be discouraged through larger capital requirements, and even criminal penalties for blowing through that capital buffer and into customer deposits due to not employing proper hedging or insurance.
It seems unfair to punish depositors that have zero or very low interest rates on their deposits. At the same time, it seems fair to punish depositors which were yeild chasing that 4.50% APY from SVB savings.
Why subsidize and encourage middlemen? It's like building the scam opportunity for privatized social security insurance management, as if honesty will be the most profitable choice in managing that.. It's inappropriate for the government to design systems that reward scamming in the middle.
I generally accept the argument that people are having trouble running the gauntlet to true government backed low risk investment and that is basically by design (well inherent capitalist evolution).. Anyone who fails to get there or gets talked out of that position by an army of telemarketers in turn fuels those telemarketers getting more people to take inherently worse risk/benefit options that pay for sign ups.
I don't think there's still good reasons to use banks for savings now that anyone could buy whatever assets they like with a very similar broker account.. I think anyone accepting lower than government bond rates is basically in a corrupt financial advisor situation where the government is providing everything and someone other than the saver is siphoning money out in the good years.
Industries once formed tend to lobby to prevent things that would remove their negative role. I.e. the ability to independently buy savings bonds has not really been kept up with the baseline utility of any other financial account.
Normally banks had much more of a role in lending, etc, which is a bit more complicated than letting them leach between people and well defined bonds so I wouldn't say they can't have a function only that I would like them removed from this one.
But, Banks pay for FDIC Insurance, the money has to come from somewhere. Either the Tax Payers will pay via higher fees or interest rates to the Banks or via higher Taxes to the Fed.
All this means is people with large deposits will be covered directly by the Tax Payer, it is just a matter of who we pay.
But doing it after the fact is the worst way to do it - it is the most expensive way and also least effective in terms of preventing runs.
So as long as we are going to pay for it anyway, let's at least get the most benefit, which would also, in a happy coincidence, be the least expensive.
If you want to sock away some cash in a place where it won’t disappear due to financial system shenanigans you should be able to give it directly to a US government entity like, say the USPS. Ultimately money is only worth anything in the context of a stable and reliable government anyway.
https://www.treasurydirect.gov/
The obvious downside is that you still need regular banks and financial institutions for loans, but for large operating accounts for many companies you just want something you can spend and won't disappear. And presumably this is why the Fed doesn't permit narrow banking: major deposits would dry up, loan rates would have to be much higher, and so on.
Every corporate treasurer worth their salt manages a portfolio of short-dated bills, commercial paper and repos for this purpose. Maybe now this knowledge is obsolete. But it’s always been there, at small sizes, via Treasury Direct.
“WORLD WAKING UP to the fact that a bank deposit is an unsecured loan to a leveraged counterparty, that the FDIC insurance fund only has $128bn, that total deposits in US commercial banks=$17.6 trn, &...here's the big one: that money itself is a confidence game (always has been)”[0]
[0] https://mobile.twitter.com/CaitlinLong_/status/1637466829219...