The way any other creditor issues loans? Investors put money together, loan it out at interest to make a profit and cover losses.

That would be a fraction of the size of depositor back lending which would significantly reduce capital available for all kinds of uses. The current system is better specifically because it supplies guard rails that incentivize private investors and all savers to lend their money.

The venture capital and stock market are not capitalized with bank deposits, and that comprises the bulk of commercial startup capitalization and investment. What percentage of startup capitalization and investment comes from deposit-backed bank loans? I'd guess not much. None of the tech startups impacted by SVB's insolvency were capitalized by loans from checking deposits. Their deposit accounts were lent out to mostly non-business securities (mortgages and government bonds). Fractional reserve banking always will and always does result in bank runs.

The idea of separating deposit and investment banking goes back to the 1930s. It's known as "The Chicago Plan" (full reserve deposit banking). The IMF published a study that estimates no negative impact on economic growth.

https://en.wikipedia.org/wiki/Chicago_plan

https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The...

https://qr.ae/pGQXNx

When a company is capitalized that money gets deposited into an operating bank account. Many start ups used SVB, so all of their capital became a deposit at a bank. It doesn’t matter that the original source was a VC firm and wasn’t from other depositors. Because now the company can’t access its capital to pay employees.

This has nothing to do with separating deposits from investment activities, no one is alleging that SVB was speculating in stock or risky securities. They were placing deposits grade A securities as any regulatory body would sign off on.

By paying interest to attract depositors.

With banks paying almost nothing to depositors, I don’t see why we should be forced to use them. Give us the same deal they get with the Fed.

This isn't actually true in the modern system; loans are generated by the bank taking a loan from the Federal Reserve at that interest rate, and then applying a markup that covers the cost of KYC, due diligence, customer service, and of course the bank's profit.

If the depositors were willing to accept a lower rate than the federal funds rate, the banks make a bigger profit from the loan interest spread.

Therefore, it is always an incentive for a bank to attract deposits.

> loans are generated by the bank taking a loan from the Federal Reserve at that interest rate

This is incorrect. Most bank assets are not Fed financed. (That’s the discount window and reverse repo operations.)

Loans create deposits. Always have always will.

Deposits don’t move banks. What happens is the ownership tag changes.

So when you “move” your money to an account at the central bank, the central bank necessarily takes over your old deposit in the bank you’re moving from. That becomes an asset of the central bank and they create a new deposit for you against that.

That’s how all bank transfers work at root.