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0 pointspyalot212y ago0 comments

The FDIC covers up to $250k for each account. It does so using a fund that's about $50b, for a depositor liability of around $5t. If you do the math, that means around 1% of depositor liabilities are covered. There are over 5000 institutions covered, however JP Morgan Chase holds around $1t in deposits (20%), BofA holds around $2t (40%) and then the rest is divided up in the long tail of decreasing market share.

This means that, if for instance BofA or JP Morgan Chase fails (that'd never happen, right?) that the liabilities alone of these banks are already 20x to 40x bigger than the entire FDIC fund.

Please tell me you see the problem there.

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cperciva12y ago

This means that, if for instance BofA or JP Morgan Chase fails (that'd never happen, right?) that the liabilities alone of these banks are already 20x to 40x bigger than the entire FDIC fund.

Note: If BofA or JP Morgan Chase went bankrupt, it wouldn't necessarily mean that they have zero assets. More likely they'd be able to pay 99 cents on the dollar and the FDIC would pay the last cent.

arethuza12y ago

"More likely they'd be able to pay 99 cents on the dollar and the FDIC would pay the last cent."

How long would that take take and what about the overheads of winding up a bank? Also, what about the ranking of different kinds of creditors - depositors would only be kind of creditor if a bank was wound up?

pyalot2OP12y ago

The 2008 collapse saw initial bailouts of $500b.

A subsequent $700b was approved and executed, and later on over $7t where commmited (but not all used) for bailouts.

That easily puts the bailouts that banks needed in order not to go under at $2-3t. That's nearly 40-60% of depositor liabilities.

If the bailouts don't happen if JP or BofA go under (for whatever reason), then I don't think the 99c to the dollar theory holds up.

ChuckMcM12y ago

Actually, what the FDIC does is give the small depositor some confidence that his money will be there, even if the ban fails. This reassurance is enough to keep him from running to the bank when ever he is scared and pulling out all of his money and putting it under a mattress or something. At this, it is quite effective (even during the mortgage meltdown there were no large groups of withdrawals at banks by retail depositors).

Tuna-Fish12y ago

FDIC is backed by the full faith and credit of the US government. This makes the holdings of the fund itself irrelevant -- if BofA fails, Congress will make the depositors whole with Treasuries.

taylorwc12y ago

Exactly. The only reason to be afraid of that is if you have zero faith in the Dollar and thereby the Treasury/US government. And while I can somewhat empathize with the sentiment, if the US government collapses, we have bigger fish to fry here in the US.

pyalot2OP12y ago

Why would the FDIC need a $50b fund, if it's backed by "the full faith and credit" of the US?

They wouldn't need any funds at all. Whenever they needed money, they'd just ask the Fed.

So, what's the $50b for, really? Or maybe, "full faith and credit" doesn't really mean what you think it means, maybe it means: "full faith and credit... maybe, in the meantime use this $50b fund while we make up our mind"

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Mtinie12y ago

Thankfully, that assertion has never been fully tested. I'm not so optimistic.

Tuna-Fish12y ago

I actually think that if the government collapses, the FDIC is the absolute last thing to fail. Every politician understands how much of a political suicide it would be to directly fail the voters so they lose something they own in a very personal way. (As opposed to the typical government malfeasance, where the losses come from large, impersonal pools.)

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hueving12y ago

>Please tell me you see the problem there.

No, you are being dramatic. Big banks don't fail when they have no assets. They just fail when they become insolvent. They will still likely have all of their deposits to meet the capital reserve requirements. It's when they get caught with illiquid assets that they fail. Look at the 2008 financial crisis and the banks that failed. There was nobody that got short changed that had a regular bank account.

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cperciva12y ago

This means that, if for instance BofA or JP Morgan Chase fails (that'd never happen, right?) that the liabilities alone of these banks are already 20x to 40x bigger than the entire FDIC fund.

arethuza12y ago

"More likely they'd be able to pay 99 cents on the dollar and the FDIC would pay the last cent."

pyalot2OP12y ago

The 2008 collapse saw initial bailouts of $500b.

A subsequent $700b was approved and executed, and later on over $7t where commmited (but not all used) for bailouts.

That easily puts the bailouts that banks needed in order not to go under at $2-3t. That's nearly 40-60% of depositor liabilities.

If the bailouts don't happen if JP or BofA go under (for whatever reason), then I don't think the 99c to the dollar theory holds up.

ChuckMcM12y ago

Tuna-Fish12y ago

FDIC is backed by the full faith and credit of the US government. This makes the holdings of the fund itself irrelevant -- if BofA fails, Congress will make the depositors whole with Treasuries.

taylorwc12y ago

pyalot2OP12y ago

Why would the FDIC need a $50b fund, if it's backed by "the full faith and credit" of the US?

They wouldn't need any funds at all. Whenever they needed money, they'd just ask the Fed.

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Mtinie12y ago

Thankfully, that assertion has never been fully tested. I'm not so optimistic.

Tuna-Fish12y ago

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hueving12y ago

>Please tell me you see the problem there.

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