You seem to think that the world doesn't already work like this. There are tons [1] of [2] products [3] that are offered specifically to make it easy to spread cash around at multiple institutions. And that in and of it self is beneficial, because it is essentially diversifying the risk of those deposits. Now, with what the fed has done, why would anyone bother spreading their risk around?

1. https://www.intrafinetworkdeposits.com/

2. https://www.wintrust.com/maxsafe.html

3. https://www.moneycrashers.com/cash-management-account/

Seems like the FDIC is achieving the exact same outcome with a lot less hassle and overhead for everyone.

I think this is exactly it. More and more this arrangement is starting to sound like the baseless justification used for US healthcare: a bunch of middle men milking value for little actual benefit.

Addressing risk can be more efficient and we can make the system far more efficient by cutting out all of this overhead and red tape. As long as the banks are properly disincentivized in other ways from being over-leveraged and taking too much risk, this arrangement would just be much better overall.

It very quickly devolves to socialism, however. Without the incentive to make money, you lose market competition. Eventually it collapses to a handful of big players, but they are all extremely constrained by the government insofar as they are really one government run operation with different names. Suddenly all market efficiencies are lost and you end up in a worse position than the market originally presented.

I'm not sure why you think the incentive to make money evaporates if deposits are assured.

A bank makes money from deposits by making available a % of them for loan originations. If all deposits are assured, then either the bank cannot take on any risk, or they can take on risk with the knowledge that the gov will foot the bill for any loss scenarios.

If the gov removes the potential for risk, banks will be free to make wildly speculative loans/investments, which will of course fail in time, causing the gov to tighten regulations even more until all profit is driven out of the game. Thus the gov would be the sole regulator of loans centralizing banking.

Sure,maybe you get some banks that pop up and offer assured deposits by only floating operating costs from risk-free assets like treasuries, but then you're looking at pay-to-bank for economic times with unusually low treasury rates.

Maybe I'm being hyperbolic, but it seems like a potential evolution when moral hazard isn't controlled.

So the government regulates how much risk they're allowed to take. They already do that with leverage ratios, for instance. I'm just not sure I see the problem with changing the status quo, but I do see the benefits of assuring all deposits.

Right now every single business of even moderate size has to have dedicated treasurers distribute payroll and other cash across multiple banks to ensure they fall under the FDIC insurance level cutoff. This is a totally unnecessary waste of time and capital, and so reduces market efficiency. If companies could just deal with one bank and offload risk management to people who should be better informed about doing it properly, backstopped by the government who ensures they stick to sane rules, how is this not a net win?

I agree moral hazard is an issue, and much stricter penalties for malfeasance of over risk, both for banks and for credit rating agencies are needed IMO. Moral hazard is already an issue though as 2008 and SVB have shown.