[HN Gopher] Deposit insurance maximization as a service
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Deposit insurance maximization as a service
Author : graeme
Score : 66 points
Date : 2023-04-05 17:14 UTC (5 hours ago)
(HTM) web link (www.bitsaboutmoney.com)
(TXT) w3m dump (www.bitsaboutmoney.com)
| cwmma wrote:
| Massachusetts has an optional Depositors Insurance Fund[1] that
| banks can join which insures all their deposits above 250k, seems
| like if you were really worried you could just open an account in
| one of those banks.
|
| 1. https://www.difxs.com/DIF/Home.aspx
| gr1zzlybe4r wrote:
| Still surprising to me how tech is trying to spin this as some
| novel event.
|
| Fractional reserve banking was a known quantity. Risk management
| of your cash matters in a system like that. Full stop. Whether
| you think fractional reserve banking is dumb idea is a different
| discussion, but to willfully pretend that the depositors weren't
| at least partially culpable for this collapse is something else.
|
| Tech has no humility.
| ClumsyPilot wrote:
| > Tech has no humility.
|
| or self-awareness
| gr1zzlybe4r wrote:
| Right. It is incredible to me that a lot of "thought leaders"
| are acting like this situation hasn't been handled in a
| structured way since the 30s by the FDIC.
|
| It has really made me believe that a lot of tech is just
| grifters reinventing wheels everywhere, but with great
| marketing.
| acover wrote:
| Is there a bank or credit union that keeps 100% of the money in
| reserve?
| kasey_junk wrote:
| Even if there were it wouldn't obviate the need for orderly
| receiverships for banks. Operational risk is a common reason
| for holes in a banks balance sheet (eg fraud by a bank
| employee).
|
| Deposit insurance is a useful tool to manage the orderly
| unraveling of a bank independent of how it goes bust.
| acover wrote:
| That makes sense, but how many US banks have failed due to
| fraud or error? Counting if deposits = money at the fed seems
| vastly easier managing loans that differ from your deposits.
| kasey_junk wrote:
| When the fdic studied it they concluded 37% of failed banks
| had evidence of insider abuse or fraud[0].
|
| They don't state that the fraud caused the failure and
| perhaps fraud would be harder in a fully reserved bank, but
| the incidence level is high.
|
| [0] https://www.fdic.gov/analysis/cfr/2017/wp2017/cfr-
| wp2017-06....
| haneefmubarak wrote:
| This is called full reserve banking, which is a step further
| than narrow banking (where you only invest in essentially zero
| risk assets like short term government bonds or let money sit
| in a federal reserve account).
|
| AIUI regulators do not allow this due to systemic risk:
| https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
| nonethewiser wrote:
| That says narrow banking means you park it at the fed. In
| theory, couldn't you keep the value of all deposits in cash
| in a vault and not break any rules?
|
| To be clear, I'm not suggesting this is a good idea. I'm just
| trying to clarify if this is allowed. Because at face value
| the idea that keeping all deposits liquid is a systemic risk
| seems counter intuitive. It only begins to make sense with
| the specific context of parking that money at the Fed.
| acover wrote:
| Depositors fleeing traditional banks to narrow banks during
| a banking crisis can make the bank runs worse.
| haneefmubarak wrote:
| Right, so you can think of it as a spectrum where full
| reserve banking (all deposits held directly, you're most
| likely going to have to pay for the privilege of secure
| storage and transactions) is on one end, fractional reserve
| banking (a small portion of deposits are held liquid, the
| rest is loaned out to generate interest and pay for
| operations) is on the other end, and narrow banking (park
| money in short term treasury notes and at the fed) is in
| the middle.
|
| In our current system, every bank or bank-like institution
| does fractional reserve banking. The systemic risk posed by
| a narrow bank or a full reserve bank is that during any
| potential banking crisis, there is a strong prisoner's
| dilemma style incentive for depositors to "defect" by
| withdrawing all of their money from normal banks and moving
| it to narrow or full reserve banks all of a sudden. This is
| broadly why regulators won't let you run one.
|
| Now, to answer your core question AIUI: "what stops me from
| running a full reserve bank [equiavalent]?"
|
| In theory, you could offer a secure storage service like
| safety deposit boxes etc and not be subject to finance
| regulatory controls. In fact, most cities do have
| businesses that offer secure storage facilities that you
| can rent space in to store your property and retrieve it as
| needed. This is perfectly legal and honestly such a
| business doesn't usually know or even need to know the
| contents of such storage lockers etc.
|
| The problem comes when you want to integrate with the
| larger financial system. Finance regs are far reaching in a
| "viral" sort of way; they don't just restrict how you do
| business, they also typically restrict whom you can do what
| business with based on how and what kind of business they
| do. The result of this is that you end up under the purview
| and subject to the approval of regulators one way or
| another, at which point they disallow your business.
|
| As a simple example, if you want to make it so your
| customers can easily send or receive money, you'll probably
| want to be able to process ACH and wire transactions, at
| which point you fall under extensive regulation
| administered primarily by the Treasury and the Federal
| Reserve. I imagine the same will be true for things like
| debit cards on the standard networks since they're already
| subject to regulation of a viral nature and so on and so
| on.
| acover wrote:
| Interesting, thank you.
|
| Tldr: narrow banks could break traditional banking and
| monetary policy so the fed doesn't let it exist.
| patmcc wrote:
| Fun fact: credit unions in my province (BC, Canada) insure 100%
| of deposits, with no limit. See https://www.bcfsa.ca/public-
| resources/credit-union-deposit-i...
|
| This, thankfully, has never been tested in a significant way, as
| they are not backstopped by the federal government.
|
| (It also suggests a rather lucrative arbitrage opportunity.)
| rkagerer wrote:
| In practice, are they perceived to be safer or riskier than
| banks as a place to store deposits?
| patmcc wrote:
| About the same, in that the vast majority of Canadians
| perceive both to be incredibly safe. Which they probably are,
| the biggest risk would be a huge housing crash, which the
| government has a lot of incentive to prevent.
| advisedwang wrote:
| Is it backstopped by the provincial government?
| patmcc wrote:
| No, not really (the law says they "may" provide support to
| the deposit insurance fund), but even if it was, the province
| can't mint money, so that could only get so far.
| ceejayoz wrote:
| > Section 271 of the Financial Institutions Act provides that
| the Provincial Government may provide financial support to
| the CUDIC Fund if the CUDIC Fund is impaired (see the CUDIC
| Fund Target Policy for further details about the CUDIC Fund).
| JumpCrisscross wrote:
| > _the Provincial Government may provide financial support
| to the CUDIC Fund_
|
| Know nothing about Canadian law. But that doesn't sound
| like an obligation.
| acover wrote:
| The federal deposit insurance in Canada is the same
| (cdic). The relevant legislation explicitly says the
| government has no obligation to bail out the insurance
| fund.
|
| Practically the fund doesn't have sufficient funds to
| bail out a big bank failure - let alone multiple - and
| everyone expects a government bailout.
| rkagerer wrote:
| The Federal government can rely on printed money to cover
| Big Five bank failures.
|
| In BC, how would the government fund a bailout if several
| Credit Unions collapsed at the same time?
| acover wrote:
| Where there is a will, there's a way. The us federal
| reserve bought corporate bonds during the covid crisis.
|
| Can you imagine the fallout of a bank run on all credit
| unions? The federal government would find a way to
| prevent that.
| chollida1 wrote:
| > (It also suggests a rather lucrative arbitrage opportunity.)
|
| What is this lucrative arbitrage opportunity we have to make
| money with this setup?
| maxbond wrote:
| I don't think this actually monetizable but if they're giving
| you unlimited free deposit insurance, while other banks
| aren't, then you could keep a bunch of money there & resell
| the deposit insurance.
|
| Of course, if you actually pitched someone on this, their
| first question would be, "who insures you?" At which point
| you either didn't tell them (and lose their trust and they
| don't give you their money), tell them and they don't trust
| the coops (in which case you don't get their money), or tell
| them and they do trust the coops (in which case, they'll cut
| you out as a middle man and bank with these coops).
| chollida1 wrote:
| How would you sell the insurance?
|
| All the insurance does is make sure you get your money back
| if the credit union ogoes under.
|
| If I put $500,000 of my own money in the credit union I
| can't see how I can sell my "insurance" to someone else as
| I need it to protect my own money.
|
| If someone else wants the insurance they have to put their
| own money into the credit union. I can't sell my insurance
| to someone else unless I hand them my money but I cant see
| why i'd do that as it wouldn't make any sense and its
| certainly not an arbitrage opportunity as the OP suggested.
| maxbond wrote:
| You'd either write an insurance contract and pray you
| have enough money in your account when the redemptions
| come or you'd accept their deposit and put it into your
| account & basically be a bank with a negative interest
| rate (that negative rate being your insurance premium).
|
| The arbitrage is that in some places, universal deposit
| insurance costs >$0 but these banks are giving it out
| free. So there is a difference here that's exploitable on
| paper, but presumably the reason it exists is that it
| isn't in practice.
|
| It fits the strict definition of an arbitrage opportunity
| in that there's a difference in pricing that you could
| exploit without taking on market risk, in a frictionless
| vacuum where wires clear instantly and carry no
| transaction fees and a bunch of other unrealistic
| assumptions.
|
| I don't view it as real, but it gave me a chuckle, like
| when people turn DNS into an ersatz file system or
| similar hackery. Like a pun in the financial system.
| patmcc wrote:
| >>>I can't sell my insurance to someone else unless I
| hand them my money but I cant see why i'd do that as it
| wouldn't make any sense and its certainly not an
| arbitrage opportunity as the OP suggested.
|
| It's not an opportunity for an individual, it's one for a
| bank.
|
| You start SVB2, and say "we charge significant fees and
| insurance premiums, but also offer 100% deposit
| insurance, no cap". And then your entire existence as a
| bank is just as a front-end to those credit union
| deposits.
|
| edit: and yah, maxbond hit the nail on the head, it's not
| a real suggestion, it's a joke.
| idiotsecant wrote:
| An assurance of 100% backing with no limit is only as valuable
| as you think the aggregate institution is stable, which you
| should read as 'not very' on a long enough timeline. The CUDIC
| does not have a 1 to 1 backing for these assets and it can't
| print more, so there's risk there.
| patmcc wrote:
| I agree completely.
|
| I will say the Canadian banking system (as well as credit
| unions, which are regulated differently) is generally quite
| healthy and stable, I don't think it's imminent risk of
| collapse. But I would certainly not count on this guarantee,
| it's very silly.
| prottog wrote:
| I don't live in Canada but as your (very) southern
| neighbor, it seems that banks could be in trouble with the
| real estate market having been so out of control. As
| interest rates rise, isn't there a real risk of forced
| liquidations by leveraged property speculators resulting in
| banks sitting on a lot of losses?
| patmcc wrote:
| It's possible; there really have to be two pieces for it
| all to come crashing down. The first is rising interest
| rates leaving people unable to pay, and the other is
| prices falling enough that mortgages would be underwater.
|
| I think the first is pretty likely, but not sure how many
| people that will hit. There are decent stress test rules
| so anyone who couldn't afford a 1 or 2 percent jump
| shouldn't have qualified. The second is less likely, I
| think. We've got an absolute minimum 5% down payment, and
| almost always more like 10%, and anything under 20%
| requires default insurance. So I think pretty low chances
| unless the housing market craters ~30% or more. Which
| might be what it actually should fall by, honestly, but
| the government will probably intervene way before that
| happens.
| tiffanyh wrote:
| Anyone else disappointed in patio11 blog posts on payments &
| banking in general?
|
| They either paint an inaccurate picture of the situation or try
| to frame something old as new.
| sdfghswe wrote:
| I like reading patio11 just because the alternative writers on
| the subject are by comparison so bad. But even patio11 could be
| better.
|
| For example
|
| > Many financial service providers have so-called treasury
| management solutions which they sell against these needs.
|
| What does "sell against" mean?
| sib wrote:
| "sell to customers who have these needs"
| empathy_m wrote:
| What were SVB customers getting in exchange for encouraging every
| company to keep their $ in uninsured deposits earning low
| interest?
|
| Was it 2.5% 30yr mortgages for founders? Was it liquidity, in the
| form of loans against illiquid pre-IPO stock?
|
| Were the interests of the companies aligned with those of the
| people who were getting the perks? (At 4-5% for parking excess
| cash in simple T bill it seems like a pricey perk)
| indymike wrote:
| > What were SVB customers getting in exchange for encouraging
| every company to keep their $ in uninsured deposits earning low
| interest?
|
| Sometimes the issue is that there is _nothing better, that is
| known to be available_.
|
| I can't recall being in a treasury management meeting where the
| CFO or VP of finance raised a concern about maxing coverage by
| FDIC insurance. In fact, many transactions that even a $2-3M
| per year company does require pooling more than FDIC covered
| amounts in a bank account just to cover receiving payments or
| making payments.
|
| Incidentally SVB did have very comparable treasury management
| feature to other banks.
|
| Finally, to address the perk part of the post, at no time did I
| see SVB offer anything other than market rates for mortgages -
| the difference is that they would not reject founders
| immediately because they were a business owner with no W-2
| income.
| JumpCrisscross wrote:
| > _can 't recall being in a treasury management meeting where
| the CFO or VP of finance raised a concern about maxing
| coverage by FDIC insurance_
|
| This is standard issue for corporate America. People who cut
| their teeth in the last decade's tech boom didn't learn it.
| But managing counterparty risk is one of the core jobs of
| corporate treasurers.
| whodidntante wrote:
| I am very curious about this:
|
| "Sometimes the issue is that there is nothing better, that is
| known to be available."
|
| Where SVB customers money in a money market fund that failed,
| or was it simply a "bank deposit" ?
|
| There are plenty of money market funds that are ungated and
| that are based on very short term treasuries that can be used
| as cash: write checks,ue credit cards, wire money, schedule
| payments, use autopay, etc, etc.
|
| This is what I do - I keep $0 in the "bank", have almost all
| the services a bank can provide, and all my "cash" is
| guaranteed by the federal government.
|
| Maybe I am misunderstanding something here. I am not, and
| never have been, a CFO.
| empathy_m wrote:
| Frankly I don't think the deposit insurance thing is a big
| deal -- It's really really hard to imagine a world where a
| big enough bank fails and people don't get $1.
|
| But the interest rate spread ... Seems like a lot now?
| Wasn't, for a long time?
| [deleted]
| fundad wrote:
| How could they ever enforce a limit on deposit insurance after
| SVB? Any shred of legitimacy around that limit has faded.
| nonethewiser wrote:
| I'm still confused by this. Aren't they making depositors
| mostly whole by selling all the banks assets? I believe they
| are at least doing that. But are they also injecting money to
| make up the difference?
| kasey_junk wrote:
| The fdic estimates it will cost the fund ~20B
| https://www.fdic.gov/news/press-releases/2023/pr23023.html
| Animats wrote:
| It's important to make sure that at no point in the process does
| any uninsured entity have custody of the money. That's the
| trouble with some "fintech" firms trying to do this. Remember,
| none of this matters unless the financial system is in severe
| trouble. Then it really matters.
|
| From the article: _"We represent 1,728 insured depositors at the
| now-failed bank who will really need their money Monday morning.
| Most had precisely $250,000 on deposit. We live to serve your
| mission of getting these insured depositors their statutorily
| mandated money back and after you cut one wire to us you're done
| with them; we'll take it from here. "_.
|
| What could possibly go wrong with that?
| sclarisse wrote:
| This is why real businesses with real money have their bank use
| ICS or CDARS to get insured deposits, or liquid, short-term
| CDs, at N different partner banks. No leaving FDIC-insured-
| land, and it gives you easy withdrawals, too. It's just a
| service offered as part of the banking network.
|
| https://www.intrafinetworkdeposits.com/
| prottog wrote:
| Even small businesses that exceed FDIC-insured balances can
| also roll short-term T-bills, through various brokerages
| (most of which don't charge fees on Treasuries) or
| TreasuryDirect (which is free). That combined with a line of
| credit should make for decent cash management.
| cypherpunks01 wrote:
| I'd think logically, in this hypothetical scenario, that money
| from the FDIC receivership would be deposited into a new bank
| such that there is continuous coverage of deposit insurance on
| all the customers. But yes, reality is that fintech firms don't
| do everything perfectly, and there are complex constraints that
| I'm sure we're not aware of.
| lbwtaylor wrote:
| One key problem is bankruptcy. If the fintech ever touches
| the money and then goes BK, the court can and will pull back
| that money and likely pay some to folks who are not the
| customers, like employees who have senior BK claims.
|
| In the linked hypothetical, fintech never touches the money,
| but the devil is in the implementation details and shortcuts
| happen.
| Asparagirl wrote:
| This is important: FDIC insurance protects you if the
| _bank_ goes bust, but it doesn't protect you if the company
| /fintech/exchange you're using goes bust, even if they use
| an FDIC-insured bank.
|
| This exact issue came up repeatedly in the past few years
| with crypto companies whose FAQs and even executives
| falsely told people their deposited money was FDIC-insured
| simply because the company itself banked with an FDIC bank.
| That's not how it works.
|
| One of many recent sad examples: https://mobile.twitter.com
| /Frances_Coppola/status/1543279013...
|
| Another one: https://mobile.twitter.com/Frances_Coppola/sta
| tus/1640909892...
|
| (Frances Coppola is a great person to follow on Twitter.)
| Animats wrote:
| Consolidating FDIC payouts into one big wire transfer
| introduces a single point of failure.
| Spooky23 wrote:
| I don't understand what the fintech is adding to the equation.
| Brokered CDs have been a thing forever.
|
| If you're holding millions in cash shouldn't you be using
| T-Bills and lines of credit for treasury management? DIY
| finance at scale is dumb.
| [deleted]
| rkagerer wrote:
| The author says you pick a "Too Big To Fail" Custodian, and my
| take is their tone is intended as serious advice (beyond just
| tongue-in-cheek) while also being an observation about
| groupthink in the industry:
|
| _What happens if Custodian fails? Well, ahem, plausibly the
| world ends in fire and blood. This is why Custodian was
| specifically chosen from the ranks of a count-on-your-hands
| number of the largest financial institutions in the world. This
| isn't even the thousandth most important thing that breaks if
| Custodian breaks. Custodian cannot be allowed to break.
| Custodian is Too Big To Fail._
|
| Realistically, Sweep customers are counting on the Custodian to
| properly maintain all the contracts, diligence, etc. that keep
| their deposits correctly segregated and protected.
|
| Genuinely curious: How else could you mitigate risk here aside
| from obliging them to maintain diversified insurance, or using
| multiple Custodians (which puts you back at having to deal with
| multiple institutions)?
| [deleted]
| hartator wrote:
| What's the point of doing this anymore? It seems FDIC will insure
| anything too big to fail. You might incurs more risks by
| spreading your money like this.
| Scalene2 wrote:
| If I was a billionaire I would readily pay 1-5 million dollars a
| year to a bank that would guarantee an entire 100 million dollar
| account by not lending out any of the money. This would of course
| have to be a bank that didn't lend out any money at all and
| existed entirely to server individuals that didn't want their
| money held in a bank that used fractional reserve banking.
| drinkzima wrote:
| I don't understand why you would do this when short term
| Treasuries or money market funds exist. There are far better
| solutions than what you suggest.
| prottog wrote:
| Who keeps $100mm in cash? This is a solution to an imaginary
| problem.
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