"Punishing the sinful" isn't about morals, it's about incentives, and ensuring a level playing field where sinning doesn't improve your long-term competitiveness.
Will senior management have to return their 2021 performance bonuses? If not, successful sinning is just a matter of ensuring you cash out early.
Who are you trying to disincentivize? How would it dissuade the bank's management if depositors took a haircut? What behavior do you think punishing depositors would prevent? Do you think depositors should hire an accountant and economist to review their bank's balance sheet every quarter?
This is a simplification, but: the bank should have to offer depositors an interest rate (or other value-add, such as competitive services) that makes it worth their while to trust the bank with their deposits. A bank that makes very conservative investments/loans can only offer a low interest rate to depositors, because they earn less profit on the spread, but their depositors will accept it because of the safety of the institution. A bank that makes speculative investments/loans can offer a high interest rate to depositors, because they earn enough to offer it, and they'll need to, to attract depositors away from the safer conservative institutions.
A bank that can offer a government-backed guarantee to depositors can offer a low interest rate while making big profits, and pay big dividends to their shareholders and executives, steal market share from their conservative competitors while making themselves more systemically essential in the process, and leave the public on the hook if they fail.
If you allow banks to make extremely speculative investments with depositor money, you end up with Ponzi-like behavior that ultimately hurts unsophisticated retail folks. Just like all the crypto "banks" offering 20% staking that are collapsing now.
All you've described is a way to build a pitfall for naive investors so they can lose the first $20k they've ever saved.
> Do you think depositors should hire an accountant and economist to review their bank's balance sheet every quarter?
Basically, yes, but without the hyperbole - an accountant yes, an economist no. This is not that hard. Treasury management is a specific function of any company.
I definitely don't blame these startups for not being financial experts, but VCs absolutely should have been coaching their client companies how to manage their cash safely.
Imagine what the world would look like if you got what you're asking for. Tens of thousands of extra dollars of overhead to open a bank account? To save literally nothing directly for taxpayers, and a few dollars per account for banks? I would strongly prefer to he socialized insurance and safety net in this case, and I'm a die hard capitalist.
You seem to think that the world doesn't already work like this. There are tons [1] of [2] products [3] that are offered specifically to make it easy to spread cash around at multiple institutions. And that in and of it self is beneficial, because it is essentially diversifying the risk of those deposits. Now, with what the fed has done, why would anyone bother spreading their risk around?
I think this is exactly it. More and more this arrangement is starting to sound like the baseless justification used for US healthcare: a bunch of middle men milking value for little actual benefit.
Addressing risk can be more efficient and we can make the system far more efficient by cutting out all of this overhead and red tape. As long as the banks are properly disincentivized in other ways from being over-leveraged and taking too much risk, this arrangement would just be much better overall.
It very quickly devolves to socialism, however. Without the incentive to make money, you lose market competition. Eventually it collapses to a handful of big players, but they are all extremely constrained by the government insofar as they are really one government run operation with different names. Suddenly all market efficiencies are lost and you end up in a worse position than the market originally presented.
A bank makes money from deposits by making available a % of them for loan originations. If all deposits are assured, then either the bank cannot take on any risk, or they can take on risk with the knowledge that the gov will foot the bill for any loss scenarios.
If the gov removes the potential for risk, banks will be free to make wildly speculative loans/investments, which will of course fail in time, causing the gov to tighten regulations even more until all profit is driven out of the game. Thus the gov would be the sole regulator of loans centralizing banking.
Sure,maybe you get some banks that pop up and offer assured deposits by only floating operating costs from risk-free assets like treasuries, but then you're looking at pay-to-bank for economic times with unusually low treasury rates.
Maybe I'm being hyperbolic, but it seems like a potential evolution when moral hazard isn't controlled.
So the government regulates how much risk they're allowed to take. They already do that with leverage ratios, for instance. I'm just not sure I see the problem with changing the status quo, but I do see the benefits of assuring all deposits.
Right now every single business of even moderate size has to have dedicated treasurers distribute payroll and other cash across multiple banks to ensure they fall under the FDIC insurance level cutoff. This is a totally unnecessary waste of time and capital, and so reduces market efficiency. If companies could just deal with one bank and offload risk management to people who should be better informed about doing it properly, backstopped by the government who ensures they stick to sane rules, how is this not a net win?
I agree moral hazard is an issue, and much stricter penalties for malfeasance of over risk, both for banks and for credit rating agencies are needed IMO. Moral hazard is already an issue though as 2008 and SVB have shown.
If they have more than $250K in the one institution: yes, they should.
Better yet would be spreading their deposits around, but if they don't want to do that, they should take the necessary steps to evaluate the risk appropriately.
Ok but that's a bad policy that makes no sense and I'm glad the fed, Treasury, and FDIC are stepping in to change it. Sad that congress hasn't done anything over the past few years, but better the problem be solved than letting faith in our financial system collapse.
It does seem like a weird loophole and charade to have to split money among many banks. Just give businesses a way to store their money without earning interest and with no risk. As far as I know that’s not an option under our banking system
It's neither a loophole nor a charade: it's diversification to reduce exposure to risk. Bank failures are somewhat coordinated, sure. Still, it's much more likely that one bank fails than N>1 banks. Since you are exposed to less risk, your insurer (FDIC) is also exposed to less risk. It makes complete sense for the insurer to incentivize this sort of behavior.
But what it really incentivizes is putting all your money in a too-big-to-fail bank. That's much easier and just as safe as opening a dozen, or hundreds of accounts. And it results in there being 3 banks in the whole country.
There is, in truth, only one “bank” in this country. The Federal Reserve Banks that hold the master ledger for the official US Dollar market. Everything else downstream is basically redundant legacy infrastructure from a time before pervasive broadband network infrastructure.
Will senior management have to return their 2021 performance bonuses? If not, successful sinning is just a matter of ensuring you cash out early.