More and More Americans Are Gaming the Deposit-Insurance System (economist.com) 49
A new report looks at the firms that quietly move billions around the banking industry each day. Reciprocal deposits enable banks to place deposits with another bank and receive the same value back through technology firms, reshuffling approximately $1 trillion through their platforms. This deposit-swapping allows banks to offer customers more insurance, a priority after Silicon Valley Bank's failure, where 93% of deposits were uninsured. At the end of last year, around 45% of deposits in the American banking system were uninsured.
Invented by Eugene Ludwig in 2002, reciprocal deposits help banks offer greater deposit insurance without forgoing deposit funding. Ludwig's firm, IntraFi, allows banks to place insured deposits around the system while receiving the same value from other locations. IntraFi, the largest firm with 3,000 banks on its platform, has been joined by r&t Deposit Solutions, ModernFi, and StoneCastle Cash Management. These firms are experiencing rapid growth, with reciprocal deposits' value increasing significantly since March.
The story asks: All this deposit-swapping raises the question of whether it makes sense to maintain the federal cap. The private sector has come up with a clever workaround to offer more deposit insurance than mandated. It is conceivable that, with several thousand banks in the network, an account could offer deposit insurance for hundreds of millions of dollars. Indeed, StoneCastle offers an account with $125m in deposit insurance. But there is a difference between a private-sector workaround and a public-sector mandate. It is currently difficult to match banks so that all are able to offer such high limits (most offer just a few million dollars' insurance), and reciprocal-deposit firms levy fees, too. They apply on top of the charges, of between 0.05% and 0.32% of the value of total liabilities, that institutions pay for federal-deposit insurance.
Abolishing the cap would make insurance pricier across the system; these higher costs would almost certainly be passed on to customers in the form of lower interest rates. Still, if enough depositors seek insurance by spreading deposits around, higher costs might be the result anyway.
Invented by Eugene Ludwig in 2002, reciprocal deposits help banks offer greater deposit insurance without forgoing deposit funding. Ludwig's firm, IntraFi, allows banks to place insured deposits around the system while receiving the same value from other locations. IntraFi, the largest firm with 3,000 banks on its platform, has been joined by r&t Deposit Solutions, ModernFi, and StoneCastle Cash Management. These firms are experiencing rapid growth, with reciprocal deposits' value increasing significantly since March.
The story asks: All this deposit-swapping raises the question of whether it makes sense to maintain the federal cap. The private sector has come up with a clever workaround to offer more deposit insurance than mandated. It is conceivable that, with several thousand banks in the network, an account could offer deposit insurance for hundreds of millions of dollars. Indeed, StoneCastle offers an account with $125m in deposit insurance. But there is a difference between a private-sector workaround and a public-sector mandate. It is currently difficult to match banks so that all are able to offer such high limits (most offer just a few million dollars' insurance), and reciprocal-deposit firms levy fees, too. They apply on top of the charges, of between 0.05% and 0.32% of the value of total liabilities, that institutions pay for federal-deposit insurance.
Abolishing the cap would make insurance pricier across the system; these higher costs would almost certainly be passed on to customers in the form of lower interest rates. Still, if enough depositors seek insurance by spreading deposits around, higher costs might be the result anyway.
Re:Clickbait title (Score:5, Informative)
FDIC allows banks to purchase insurance for their depositors up to $250,000 per depositor.
Banks have a lot of depositors with more than $250,000.
Banks have figured out that by re-depositing the money in multiple other banks they can effectively increase the amount of insures funds since they can get up to $250,000 of insurance for each other bank they put their funds into.
Banks maintain neutral balance sheets by cooperating; I deposit $250,000 in your bank, you deposit $250,000 in mine.
Some people think maybe the FDIC should just increase the amount that can be insured.
Side note: Moving money around like this in any other context would probably be considered a criminal act...
=Smidge=
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Re: Clickbait title (Score:2)
Inflation isn't always a good indicator because it always fluctuates so wildly. Some government systems set their thresholds based on numbers relevant to whatever it is they're supporting for exactly this reason. For example, Medicaid works based on a coefficient of the federal poverty level.
Re: Clickbait title (Score:2)
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Realistically congress via FDIC should have pegged that amount to inflation, but for some ungodly reason the government loves to just set static levels for monetary legislative points without factoring in the entirety of history of currency and humanity.
The problem on things like this is generally the left wants to raise the limits, the right would rather eliminate the program entirely, and the moderates propose indexing it to inflation, but starting the index from a level that's already really out of date.
This ends up with the indexed proposals generally being unacceptable to both sides. It's usually a lot easier to find a new fixed number that can get enough votes than it is to come up votes for an indexed value with a reasonable starting point.
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The question I would ask is why does this even work. Surely if a bank deposits $250,000 in another bank multiple times, the bank's deposits in the other bank would only be insured for the first $250,000.
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It's a "per account" thing. Besides which, services that provide this are often technically not banks.
So what they do if you want FDIC insured deposits for, say, $2.5M, you contract with a company, that then opens accounts with 10-12* banks, in the customer's name.
So if, say, Chase bank is working with a customer to do this, Chase will open an account with Wells Fargo or such, so it gets full coverage as it's a different customer.
*Make it so that you don't need to have exactly $250k per account, which can
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Wouldn't it be easier to just make shell corps for each increment of $250k and deposit the money in themselves?
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Not really, a shell corporation costs a fair bit of money and paperwork to set up - you need to register it, after all, and there's paperwork to be done.
With the accounts in the person/company's name it's merely a "on behalf of" line.
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Because each $250k is an INDIVIDUAL'S deposit, not 'the bank's' money. The banks just arrange to 'swap' customers (in a sense).
Joe has $500k at bank A, Bill has $500k in bank B. Joe and Bill are only insured for $250k of their $500k
Bank A moves $250k of Joe's money to bank B, and bank B moves $250k of Bill's money to bank A. The amount of deposits at bank A and B are the same, but Joe and Bill are now insured up to $500k.
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Banks have figured out that by re-depositing the money in multiple other banks they can effectively increase the amount of insures funds
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If individuals have so much money that they need more bank accounts than they can reasonably manage by themselves then they are rich enough that they can pay someone to do that for them...indeed they are probably wealthy enough that they already doing that.
Congratulations, you've discovered the subject of this story. It's about the, as you said, "someone to do that for them" because you are correct, they are (as you pointed out) "already doing that" and you've just posted to a Slashdot story about it.
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I think you misstated that first sentence: US banks are REQUIRED to be insured by the FDIC.
And exactly who are these "more and more Americans"? Given that the median income in the US is about $60k/yr - no, Harvard or Wharton MBA candidates, that's not $600k/yr - most American are never going to vaguely approach that $250k in the bank.
Which means it's the wealthy, and crooks, who are gaming the system.
Yes it makes sense to maintain the federal cap (Score:5, Insightful)
I wouldn't have expected this kind of trash from the economist.
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The Economist is /the/ place for this kind of trash...
The Economist wasn't nearly as exciting as John Wayne's followup (and final) film The Shootist [wikipedia.org].
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Every time the banks try to come up with a workaround or the government relaxes / removes barriers, the banking system crashes.
No, it is just a complex and developing system. Regulating the economy requires making numerous risk assessments and trying to balance that against desirable features like liquidity, innovation, and competition, and any time there's a problem you can always say "oh we got something wrong" but that doesn't mean you shouldn't have been trying. Yes, every time it breaks you can go back and point to something. But it's a bit like saying developers writing code causes bugs.
The results of overregulation are argua
I wouldn't call it "gaming the system" (Score:3, Interesting)
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Spreading the accounts out like this is going to massively increase the overhead at all the banks involved. Costs are already up to cover this. Might as well cut out all the extra layers of complexity and just increase the FDIC limits and premiums. It'll have the same net result in the end, but less overhead and less costs to manage everything.
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Um, this is a *good* thing (Score:2)
Spreading your deposit across multiple banks greatly decreases your exposure to bank failures, which generally happen one at a time.
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"If your deposits at any single bank are kept below $250K, you have zero risk due to bank failure. How are you missing this?"
I'm not. But if deposits are insured only to $250K and this causes the depositors to spread their deposits around, this imposes much less risk on the deposit insurer than if they agreed to insure deposits regardless of amount (as some people have proposed) and this causes people to pile into one bank--once again the larger picture is at risk from a single failure.
Entire system comes down (Score:2)
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The banking system is malicious.
Re: Entire system comes down (Score:5, Insightful)
They aren't trying to bring down banking, they are trying to get rid of the cap in FDIC insurance. Doing so will mean that huge depositors will do even less due diligence than they did when choosing SVB.
This will weaken the market forces that make banks careful with depositors money (who cares, is all insured) meaning that banks can do whatever they like with your money, as long as regulations permit it.
But those regulations will make it harder to make money. So banks will sponsor a study/thinkpiece on how Regulation X is a vestige of an earlier time and it is now counterproductive.
Ok, you're right, they are trying to bring down banking.
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Title sucks... (Score:5, Interesting)
More and More Americans are not gaming anything with the Deposit Insurance System.
I'm not seeing a single thing in the article which shows average Americans gaming anything.
I see big banks working together to insure each other while still being able to put the cash to work, but there's nothing there for the average American to game.
Heck, you don't even need to read TFA to know that the title is very much out of line with the actual content of the article...
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Heck, you don't even need to read TFA to know that the title is very much out of line with the actual content of the article...
So... no different than most other Slashdot submissions?
Most banks are not gaming the system (Score:2)
More and More Americans are not gaming anything with the Deposit Insurance System.
I'm not seeing a single thing in the article which shows average Americans gaming anything.
This graph [statista.com] indicates that most large banks are not gaming the FDIC limit. In fact, this non-gaming of the system was part of the problem with Silicon Valley Bank and Signature Bank.
I have a different solution (Score:2)
Make the insurance per citizen, nothing to game any more.
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It does make sense maintaining the cap (Score:2)
Insurance is great in theory (Score:2)
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Glass-Steagall (Score:4, Interesting)
I realize this is somewhat of a tangent, since most of the balances over a quarter mil probably belong to companies, rather than individuals, but if it *is* a case where actual individual people are depositing more than $250,000 in a single "SAVINGS" bank (e.g. a checking account or savings account), why not just make that literally not allowed, and/or make all these money shuffling shenanigans illegal. That should be what "INVESTMENT" banks are for, though even then, I'd think the smart money would want to be as diversified as possible, but what do I know. Anyway, I guess this is (one of the many reasons) why we need Glass-Steagall back.
Further: if multi-millionaires and billionaires want to have their deposits over $250,000 insured, let them buy their own fucking insurance. Raising the cap would essentially be a regressive tax, since 90%+ of Americans probably don't have $2,500 in a bank account, much less $250,000.
The financial landscape is *completely* different now compared to when the FDIC was created, since back then, many people actually *had* savings, so a good chunk of the money in banks was held by "regular Joes", so a "run on the banks" could actually happen if a lot of people were to withdraw their savings, whereas now almost all of it is held by the extremely wealthy, so they're the only ones that can create a meaningful "run on the banks" anyway.
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Let the market decide (Score:2)
Abolishing the cap would make insurance pricier across the system; these higher costs would almost certainly be passed on to customers in the form of lower interest rates. Still, if enough depositors seek insurance by spreading deposits around, higher costs might be the result anyway.
Currently, its higher costs for those who need to use a private product or service to hedge their risk. Same costs for the smaller depositors. There are things like credit default swaps (CDS) which allow a wealthy investor/depositor to insure against defaults. You want one? Buy it yourself. Abolishing the cap puts that insurance cost on all depositors.
You rich folks want something? Pay for it yourself.
FDIC cap should be moved up but not unlimited (Score:1)
Fed won't make the cap unlimited (Score:2)
All this deposit-swapping raises the question of whether it makes sense to maintain the federal cap. The private sector has come up with a clever workaround to offer more deposit insurance than mandated. It is conceivable that, with several thousand banks in the network, an account could offer deposit insurance for hundreds of millions of dollars. Indeed, StoneCastle offers an account with $125m in deposit insurance. But there is a difference between a private-sector workaround and a public-sector mandate.
There's also a substantial risk difference between the liability of allowing people to "game" the system by using private services to spread their accounts among hundreds of banks and insuring each one for a small amount, versus insuring the full amount as a lump sum.
I don't see why the Fed would ever want to insure huge lump sums since they'd then be on the hook if one bank failed, whereas in the current situation they only have to pay out $250k for each bank that fails. That means if you spread your mone
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I don't see why the Fed would ever want to insure huge lump sums since they'd then be on the hook if one bank failed, whereas in the current situation they only have to pay out $250k for each bank that fails. That means if you spread your money with these services the Fed is likely never going to have to pay you anywhere close to your full amount unless the entire banking system fails, which is preferable to one bank failing and them owing depositors millions of dollars each.
I think it ends up being a wash, personally.
Think about it. If customers are spreading their money around in different accounts, that means each bank is going to have more accounts on average.
What you seemed to miss is that it isn't $250k for each bank, it's up to $250k for each account at that bank.
So if banks have 10% more accounts from people keeping their money in multiple accounts to stay under the limit, that means that the FDIC is on the hook for up to 10% more money.
Or we could just increase the li