5 ms·

Imagine a world where this splitting is normal. If SVB depositors had split their deposits up and stored them at other banks, other banks depositors would have

Imagine a world where this splitting is normal. If SVB depositors had split their deposits up and stored them at other banks, other banks depositors would have done the same and split their deposits up - and stored some of them at SVB. So from FDIC's perspective, the total amount of deposits at every bank (and so the risk they take as an insurer) after this splitting is the same. FDIC insurance limited to 250k and a banking system where everybody splits their deposits up into 250k/bank is the same risk profile for FDIC as unlimited FDIC insurance and no splitting up of accounts, assuming the same deposit distribution between banks.

em500 4y ago
Ok, but since they now only have a small fraction instead of everything stored at SVB, they wouldn't have to withdraw all their deposits from all their different accounts when word gets out that SVB is unsafe. An being explicitly fully insured, a lot of them might not even have bothered to withdraw from SVB. How would that result in the same risk profile?
- initplus 4y ago
  It's the same risk profile to the FDIC (risk as in the the risk that they have to pay out on the insurance). Unless you change the overall weighting of deposits between banks the total covered deposits at risk per bank is the same in both cases. If every single depositor split their accounts up to always stay under the 250k limit at each bank, FDIC has to insure 100% of deposits at each bank. If there was no limit, and customers didn't split accounts, FDIC has to insure 100% of deposits at each bank. For any individual bank failure the amount paid out by the FDIC will be the same under 100% deposit insurance vs 250k split deposits. The total deposits insured per bank is the same The behavior change (businesses less likely to panic in a run) is the same. So it seems to me there isn't a meaningful risk difference to FDIC between this theoretical 250k split deposits world and a 100% deposit insurance world.

em500 4y ago

Ok, but since they now only have a small fraction instead of everything stored at SVB, they wouldn't have to withdraw all their deposits from all their different accounts when word gets out that SVB is unsafe. An being explicitly fully insured, a lot of them might not even have bothered to withdraw from SVB. How would that result in the same risk profile?

initplus 4y ago
It's the same risk profile to the FDIC (risk as in the the risk that they have to pay out on the insurance). Unless you change the overall weighting of deposits between banks the total covered deposits at risk per bank is the same in both cases. If every single depositor split their accounts up to always stay under the 250k limit at each bank, FDIC has to insure 100% of deposits at each bank. If there was no limit, and customers didn't split accounts, FDIC has to insure 100% of deposits at each bank. For any individual bank failure the amount paid out by the FDIC will be the same under 100% deposit insurance vs 250k split deposits. The total deposits insured per bank is the same The behavior change (businesses less likely to panic in a run) is the same. So it seems to me there isn't a meaningful risk difference to FDIC between this theoretical 250k split deposits world and a 100% deposit insurance world.