The current banking crisis has led to calls for the government to insure all bank deposits, but doing so has significant long term implications.
Reading about what took place in 2008 and now recall this FDIC program - TLGP.
FDIC Announces Plan to Free Up Bank Liquidity
“ The Federal Deposit Insurance Corporation (FDIC) announces a new program—the Temporary Liquidity Guarantee Program—to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non- interest bearing deposit transaction accounts, regardless of dollar amount.
Participants will be charged a 75-basis point fee to protect their new debt issues, and a 10-basis point surcharge will be added to a participating institution's current insurance assessment in order to fully cover the non-interest bearing deposit transaction accounts.“
More on TLGP:
Might write a post on TLGP once I study it further. For now, posting this comment for others who might be doing similar research.
Great article and discussion, here. Thanks.
Charlie Munger was quoted in Jason Zweig’s WSJ article today…
This week, however, Mr. Munger struck a much more serious tone when he told me: “I’d prefer to live in a world where nobody did anything undisciplined or stupid and so forth, but we don’t live in that kind of a world. And therefore the decisions have to be made for the way the world is, not the way we’d like it to be.”
He added: “The way the world is, the government had no alternative but to back all deposits. Or we would have had the biggest goddamn bunch of bank runs you ever saw.”
Excellent interview of Tom Hoenig in todays WSJ. One of the few voices in the wilderness calling out dangers inherent in government policies since the financial crisis.
For more on Hoenig, see my review of the lords of easy money:
Great stuff from you lately sir
I would argue that a business should have 10x the standard coverage. If you look a simple example of a business with 500 employees averaging 100k each you have a bi-weekly payroll more than $2 million (every two weeks). This is not a fortune 500 company. So some suggesting they be careful with FDIC limits is absurd. They would have to keep 9 bank accounts just to cover their payroll account. That is not realistic and as the article alludes to the banking system is a background part of a modern economy that must simply work. You can have regular failures and still have a thriving economy. Besides the first people to suffer if a business goes down will be those employees who cannot get their check.
As a side note individuals are covered per person. If you and your spouse open up a joint account and add 2 payable on death beneficiaries to your account you have $1 million in coverage (there are 4 total owners per FDIC). The business with even 10 signers is covered just once. Who is more likely to have above FDIC limits?
To me this is a clear issue with FDIC that will never be solved unless they have different limits. Businesses cannot be expected to have multiple accounts for payroll just to be safe. This will force everyone into the too big to fail banks.
“More deposit insurance—even if merely implied, rather than written into the rules—means even more regulation, to attempt to counter the moral hazard. More regulation means higher costs, less competition and credit that is harder to obtain, as well as more bureaucracy.”
Heard this insight on a podcast today and thought it was worth sharing. Any bank with its country’s name on it will not be allowed to fail. UBS (Switzerland) has been bailed out previously. BAC (America) has been bailed out previously. Credit Suisse (Switzerland) has been bailed out 2 or 3 times previously.
Disclaimer: I have not fact checked any of this but it made me laugh.
Great article and thanks for flagging the TLGP program!
A piece on bank ratings downgrades could be interesting. With FRC downgrades and others on the watchlist, wondering how this might impair business value and/or create a death spiral.
More broadly, notes on how credit ratings can impair asset/equity value could be helpful. It seems that downgrades can create a spiral where the fundamental business deteriorates. something i'm going to research and wanted to note here, in case of interest to you. Love all the frequent posts!
I am surprised the solvent banks being assessed for this coverage are not more up in arms about having to pay for their peers' imprudence. Instead, they are depositing funds in the next domino (1st Republic).
Unlimited insurance also incentives banks away from more stable longer term funding towards deposits through the release of liquidity requirements under the LCR of at least 10% of the deposit amount for less stable deposits.
I'm now aware that most US banks don't need to comply with the LCR (wtf?) but decreasing liquidity resource requirements leads to less pressure on a banks Leverage Ratio and therefore they can take on more risk. It's rather perverse and only makes the banking system as a whole less stable.