Maybe in the medium run. In the long run, you just establish that it's okay to make higher risk bets than you can afford to recover from because the government is too skittish to let any domino fall. That's the road to increasingly wild volatility, not a reliable economy.

Bailing out depositors is not the same as bailing out the bank. The bank should go out of business, but that doesn't mean depositors have to lose their funds.

But bailing out depositors here is essentially also a bail out of the next risk-taking bank that will go under sans a bailout. So, to some extent it does encourage long term risk taking by bank execs.

No, because bailing out the depositors will not keep the bank from going under. The bank will still go out of business and its investors will still lose all their money. Same for the next bank that goes under, even if its depositors are also bailed out.

I’m saying that bailing out SVB depositors will prevent First Republic Bank (for example) from experiencing a similar bank run and going out of business. So, a bail out of SVB depositors is also, in effect, a bail out of FRB. And, that dynamic creates a long term incentive for risk taking.

But preventing bank runs is the main point of deposit insurance in the first place.

I feel like investors are taking a calculated risk, though, whereas depositors (not unreasonably, in my opinion) thought their money in the bank was “money in the bank”.

And it was, with the caveat of "up to $250k per entity per bank". I don't think we'll remove all caveats from everything, we're just asked to removed them from something that only affects rich people.

I feel like if you have millions of dollars you should be sophisticated enough to understand FDIC insurance limits. Piling literal billions of dollars into one small bank is a calculated risk, too

What does it mean for the bank to go out of business if everybody gets their money back? That suggests that the bankers themselves did a great job turning high-risk bets with depositor money into no-risk bets. They may as well just reincorporate as another entity and do it again. (And if the have to personally retire because of regulatory "penalty", other bankers can still step in and repeat the same play until they're asked to retire as well.)

Let's say you have an account at Wells Fargo, I've invested in Wells Fargo stock, and Wells Fargo goes out of business. The idea here is that I lose all my money because I made a stupid investment, and you keep all your money because you just deposited your money in a bank.

Maybe the Wells Fargo executives could start another bank, but making you lose all your money doesn't do anything to prevent that.

Why aren't they asking to add another FDIC level with the maximum insured amount at e.g. $5m and increase insurance premiums for banks accordingly? That'd take care of it, if you have $5m in cash and want to put it into a bank account, you just pay more fees, the bank pays a significantly larger insurance premium and everyone lives happily ever after.

This feels like an Ethereum thing. Code is law, but not if it's inconvenient.

There's nothing stopping _you personally_ from purchasing insurance on your $5m at the bank from an insurer (or reinsurer) instead of socializing the cost of insuring higher-valued accounts on everyone else.

The one thing that mandatory FDIC insurance gives you over purchasing private insurance is a) the US Government is guaranteed to not go bust (and if it does, we're all living off canned goods anyway) and b) you avoid the situation where people don't do the responsible thing and then you have to bail them out anyway (this is also part of the argument behind government provided healthcare insurance, but that's another topic for another day)

Buying private insurance leaves you open to the risk of the insurance company going bust, and, it not being mandatory means people can take the risk and then come crying to the US Treasury to solve this unknowable systemic risk that everyone actually does know about--which we're already seeing heavy pressure from people to bail out these depositors who are above the insurance limits

Yeah people keep saying that but as far as I can tell from googling, there's no such thing as buying supplemental insurance for your bank account. Can you link an insurer that offers that?

If I had a personal account from my wage earnings and handful of profitable trades at Wells Fargo, my modest account would be reasonably protected through mandatory insurance and I would know that because of the FDIC sticker on every fricking window and website.

On the other hand, if I managed a large liquid asset portfolio and I considered having Wells Fargo provide banking services, I would know that my deposits would not be implicitly insured and that any substantial deposits were more like a loan to the bank, subject to their own illiquidity and insolvency. Because that's how banks work, except for the specific carve-out for small accounts. Thus, I would practice risk management suitable to my needs by vetting my bank(s) practices, diversifying my holdings, buying private insurance, or just hiring a professional who I could entrust to manage those things for me. Thankfully, because I have a large liquid asset portfolio available, I can afford to do that.

So at the end of the day, any large deposit I make with Wells Fargo is actually a risk-laden investment that I've made a calculation to play, just like that equity share that you bought on the stock market.