Does the US still back banks against failure?

[OMGWTFBBQ]

The US used to insure US banks against failure. For instance, if a local bank branch was robbed, that money was insured and they would get it back, up to a certain amount.

But there were also fairly open allowances to just generally stupidity as well - if a bank collapsed, they would get the money back in order to protect their customers.

Is this still the case (I am thinking yes, and have a question to follow, but if it is no longer the case, then the secondary question is moot)?

 

[mdd]

i'm pretty sure, up to 100 grand

 

[TheProject]

http://www.fdic.gov/

 

[OMGWTFBBQ]

$100 grand per account. $100 grand per bank would be fairly useless.

Thanks Proj, I'll read that site to figure out if this system is still in place to the extent that I understand it to be.

 

[mdd]

why wouldnt it be bro?

 

[TheProject]

Is this part of your grand scheme to defraud banks?

 

[manny78]

In Canada, banks with a charter are covered up to 50 000$ per accounts in case of bankruptcy but robberies are not covered at all.

 

[mdd]

In Canada, banks with a charter are covered up to 50 000$ per accounts in case of bankruptcy but robberies are not covered at all.

thats bullshit, if i were there i would seriously consider keeping it at home where at least a robber would have to make it trhough me and my lead to get my cash

 

[ViperHMS]

Well when a robbery happens, they just take cash from the bank, so how would the bank say them money stolen belonged to so and so's account??

Viper

 

[OMGWTFBBQ]

Well when a robbery happens, they just take cash from the bank, so how would the bank say them money stolen belonged to so and so's account??

Viper

Your deposit in a bank is a fractional share of their total money.

So the money stolen is basically some fraction of your account - so if the money is going to be returned to your account, it is the fractional amount.

Damn - that was poorly worded, but the concept is there.

On a side note, the FDIC is one inefficient beast - on their "about us" page they say that they have 5,300 banks that they are working with, and 5,200 employees.
That is very nearly 1 employee per bank.

 

[OMGWTFBBQ]

So if you are a bank, the government is going to back you against failure to prevent your customers from getting hurt.

Choosing a bank used to require either blind chance, or some due diligence of sorts to see what sort of risk the bank was. If their interest rates were high, it might mean that they have a poor credit rating and are having to pass on the rates to users.

Today high interest rates don't mean the same thing and choosing your bank largely doesn't matter in terms of your monetary safety (at least for up to $100K in that bank - more in "some cases" but they don't make it entirely clear what those cases are - somewhere they must, but I couldn't find it).

So how about this (ignoring that you can make lots of money via traditional bank methods of loaning out money):
Say you have $200K and you start a bank with half of that - $100K.
You then get 9 people to become customers and deposit $100K each.

That means you as a private entity still have your $100K, and then you as a bank now have $1M, with 9 accounts that are fully insured (and you aren't having to pay that insurance fee because you are passing that cost onto your customers - FDIC claims it doesn't get tax funding, it is all from bank fees... as if the customers of the bank - taxpayers - aren't paying for all of that).

So you can then take that $900K that is the deposit money and "invest" it in any risky manner that you want.
Say you want to gamble it in Vegas, or on the stock market in hot IPOs.

Say you find a venture where you can either triple your money ($900K), or you lose *all* of it.
You would be a moron not to jump on that because the government has got your back.

It doesn't even matter what the odds are on it - as long as the odds are non-zero that you could triple your money (or anything that would make money really), you should take it.

Looking at it, you would either lose all of the $900K, which is the bank deposits, so the insurance kicks in on it, and you then get it all back.
The bank customers still have their $900K and you still have your $200K (half in the bank, half as your own).
So no loss at all.
Or you triple your the $900K (or whatever the end gain is that you want for this example).

Now, in the latter example, the bank is only responsible for holding the $900K for the customers - you should argue that there is an interest fee that they have to pay out, but it is nothing compared to the $2.7M just returned on their risk.
So as the bank owner, on your own $100K that you put in, you got a $2M+ return on that.

So essentially, as a bank owner, the government *wants* you to gamble with your customer's money.

Basically I think I want to own a bank.

 

[WODIN]

You're not looking at this the right way OMGWTFBBQ.

If you have the sufficient funds to start a bank you want to become a lender. With that $1,000,000 in the house you can, by law, lend out $10,000,000.


So in effect your loans if the average out to around 5.5% ROI based upon deposits your reserves from initial investors are hitting 55%. You can't beat that.

 

[OMGWTFBBQ]

Wodin - that is why I said "ignoring the traditional bank methods of loaning out money".

Hell, banks do a ton of things that generate money - they do venture capital, buyouts, mergers, investing, and loans on a person and corporate level among others.

I am just personally amused at the situation where the government claims they are helping and really are encouraging riskier behavior, all the while forcing money to be collected to support this new organization that is going to be poorly run.

I think this, and probably nearly any thought I ever try to express, can be boiled down to just saying "damn, I wish I were rich".

 

[Becoming]

Basically I think I want to own a bank.

Dude- there must be some kind of safeguard against this (ie, minimum number of customers, or minimum amount insured)....

But if not and you ever do this, call me up, I can come work for you cause I have no ethics at all either.....

(I am not kidding)

 

[MattTheSkywalker]

So essentially, as a bank owner, the government *wants* you to gamble with your customer's money.

Basically I think I want to own a bank.

You missed your calling.

While the raise of the FDIC insurance limit from $40K to $100K increased the "risk" banks could take, it also caused the Savings and Loan scandal. You can't become a "bank" like you can become a "corporation".

In short, people have done this already, and the regulation involved is enormous. You have, however, hit upon the fundamental flaw in transferring risk back to the taxpayers, rather than gold (or some other tangible) reserve.

 

[WODIN]

Wodin - that is why I said "ignoring the traditional bank methods of loaning out money".

Hell, banks do a ton of things that generate money - they do venture capital, buyouts, mergers, investing, and loans on a person and corporate level among others.

I am just personally amused at the situation where the government claims they are helping and really are encouraging riskier behavior, all the while forcing money to be collected to support this new organization that is going to be poorly run.

I think this, and probably nearly any thought I ever try to express, can be boiled down to just saying "damn, I wish I were rich".

I wish I were rich too.

Any economic system set upon fractional reserve polocies is there to engage in social engineering and not the promotion of commerce.

 

[javaguru]

The FDIC is not backed by the full faith and credit of the US government and there is enough money in the fund to cover a handful of simultaneous bank failures. Therefore, if there is a major banking crisis in the US you're still SOL unless the government voluntarily steps in. Banks are also heavily regulated by the federal govt when it comes to what they can and cannot do as well as being subjected to audits by the govt. The weakening of regulations on savings and loans was a primary cause of the S&L crisis in the 1980's as it allowed S&L's to issue commercial loans and their overspeculation/business incompetence led to devaluation of properties resultant huge losses which caused them to engage in fraudulent accounting practices to hide the banks failure.

 

[OMGWTFBBQ]

I'm still amused by the nearly 1 to 1 ratio of FDIC employees to the number of banks that it watches.

A corporation would never be able to get away with that, but a government body does it all of the time.

I'm easily amused I guess.

There are also interesting things to note about the internal concepts of transfers between banks and how that relates to money laundering. But I'm still learning about that, so there isn't too much I can say about that other than "it is complicated".

 

[Judo Tom]

inefficient is an understatement.. i work with someone who used to run the fdic (now does bank consulting) and it is a huge mess with 10 people doing the work that 2 could do

omgwtfbbq you scheme would not work because the fdic regulates what type of invesments banks can make.. but there have been scandals where banks lent out money to people who they knew could not pay it back.. so you take in 1 mil of deposits.. borrow from the FHLB loan out huge amounts of cash to people.. they flee th country never pay you back.. the depositors would get there money back by the fdic insurance and then if hte bank is closed the fdic would have to try to get cash back from the loans..

although most people starting banks have enough money where they dont care to bother with risks like this.. they would rather just open up shop get a share of the market and then sell to a regional player.. but even that method wont last too much longer

 

[Mandinka2]

Basel 1 and 2
- greatly reduced the possibility for banks to enter into such risky contracts without holding sufficient levels of regulatory capital (both for operational and financial) . Do a search - piles of info.

 

[eviction]

do you plan on robbing your own bank or somethin, then try to collect on the 100k?

 

[Lumberg]

You're not looking at this the right way OMGWTFBBQ.

If you have the sufficient funds to start a bank you want to become a lender. With that $1,000,000 in the house you can, by law, lend out $10,000,000.


So in effect your loans if the average out to around 5.5% ROI based upon deposits your reserves from initial investors are hitting 55%. You can't beat that.

you got it backwards WODIN. The percentage of deposits you must keep on hand is called the reserve ratio, which is one of the tools the Fed uses to affect the economy. It is generally understood it is a crude tool so it is no longer used.

Anyways the reserve ratio is how much cash you must keep in case your account holders want to cash out. Right now it's 10%. That means if you have 1,000,000 in deposits, you can lend out 900,000.

This is one way that the gov't uses to control the risk in financial institutions. Allowing a bank to be 90% leveraged is pretty risky.

At the end of every day banks have to calculate their reserve ratio. Since banks always try to be as close to the RR as possible, sometimes at the end of the day they may be a few hundred thousand, or a few million $$ short of meeting that requirement. Conversely, other banks might be over. The banks that are short borrow $$ from the banks that are over, just overnight. The Fed regulates the rate banks can charge each other, and it's called the Fed Funds Rate. This is the rate that you hear about when the headline says "Fed Drops Rates." Because it is the most important rate.

Now if for some reason there aren't enough banks around that are over to make up for all the banks that are under, you might have a problem, a BIG problem. Well in this case you can borrow $$ directly from the Fed. In this they act as a "lender of last resort." You're not supposed to ask the Fed for $$ unless you have exhausted all other options. The place you get the money from is called the Discount Window, from when there was an actual physical place you went. The rate the Fed charges is called the "Discount Rate." This is the other rate the Fed changes, and it usually changes in concert with the Discount rate.

So these are the three tools the Fed uses to control the economy: the reserve ratio, the Fed Funds rate, and the Discount Rate.

When 9/11 struck Greenspan was in Switzerland and effectively stuck there. Vice Chairman Ferguson is credited with averting a financial disaster by getting the word out that the discount window was still open and making billions of dollars available for borrowing by banks.

When the Discount rate is low, banks play a little faster and looser with their money cos come the end of the day if they're a little short, it's cheap to borrow to cover. Presumably this trickles through the economy and promotes growth. When the Discount rate is high it hurts more to be short at the end of the day so banks are more conservative.

Sorry for the monologue, this is something I know a lot about so I had to put it out there.

 

[Lumberg]

Your deposit in a bank is a fractional share of their total money.

I think that's only how certain banks like credit unions are set up. Don't think it's true of ALL banks.

 

[OMGWTFBBQ]

I think that's only how certain banks like credit unions are set up. Don't think it's true of ALL banks.

Word.
I was thinking through a mental exercise of a small town local bank for this example.

 

[Lumberg]

I'm still not sure how the insurane works, but I do know that there are seven regulatory agencies that oversee banks:

Federal Reserve
FDIC
OTS
OCC
NCUA
OTS
HUD

they all keep tabs on banks by requiring them to submit quarterly financial reports and examining them on-site. some do a better job than others. there are some very complex requirements as to what you can do with depositors' money.

OMG if you did what you said you would go to jail without a doubt. Hell some people that just made perfectly legal loans, still were punished because they made too many of a certain type and not enough of another, or didn't use due diligence to evaluate borrowers.

 

[Mandinka2]

So these are the three tools the Fed uses to control the economy: the reserve ratio, the Fed Funds rate, and the Discount Rate.

Printing money , ceilings on deposit rates and treasury bond issue prices (they set "discount rates" since they are issued at a discount to par , at which they are redemed)
There are also OMOs (open market operations) and intervention to control currency rates.

 

[Lumberg]

Printing money , ceilings on deposit rates and treasury bond issue prices (they set "discount rates" since they are issued at a discount to par , at which they are redemed)
There are also OMOs (open market operations) and intervention to control currency rates.

You are confused.

The Dept. of the Treasurly Prints money.

Don't know of any ceilings on deposit rates.

Treasury bond issue prices are set by the financial markets through auction. Again this is the Dept. of Treasury, thus the name "Treasury Bonds."

Yes the Fed uses OMOs to affect rates. However the US does not have a policy of controlling exchange rates with other currencies.

 

[Mandinka2]

You are confused.

The Dept. of the Treasurly Prints money.

Don't know of any ceilings on deposit rates.

Treasury bond issue prices are set by the financial markets through auction. Again this is the Dept. of Treasury, thus the name "Treasury Bonds."

Yes the Fed uses OMOs to affect rates. However the US does not have a policy of controlling exchange rates with other currencies.

They are the remit of "Central Banks" - in the U.S. that is the Fed , no?
Ceilings on deposit rates are used to curb banking deposits - less cash in banks - less ability to make loans or trouble with regulatory authorities. You are poorly informed.
Treasury bonds are offered by sale through competitive and non-competitive auction - the market does set them but you are ignorant of the fact that there is SUPPLY as well as demand at play - should the fed decide to flood the market , interest rates would drop in the short term - I was admittedly ignorant on the U.S. issuing authority - they are typically the same.
The U.S. has no policy of intervening in the currency markets? Hmmm... I'll take a look at that one - a simple google search would seem to indicate otherwise - http://news.bbc.co.uk/1/hi/business/1548826.stm

 

[Lumberg]

OK, where in that article does it say that the US Government acted to influence exchange rates?

From the introduction of a paper written by a Fed Economist:

For most ofthe last 50 years, to promote a safe banking
system, the U.S. Congress has imposed interest rate
ceilings on bank deposits. Federal legislation passed in
the wake of the 1930s banking crisis prohibited banks
from paying any interest on checking accounts and
authorized the Federal Reserve Board of Governors to
set upper limits on the rates banks could offer on time
and savings accounts. The rationale for these ceilings
appearedstraightforward. Ifbanks were not allowedto
compete for deposits through interest rates, they would
not be forced to invest in the high-yield, high-risk end
of their portfolio opportunities. Limiting what banks
could pay to their depositors, in other words, would
limit the amount of yield they would need to earn and
hence the amount of risk they would need to bearto be
competitive. Without rate competition, that is, the
chances ofrepeatingthe 1 930sbanking crisis would be
reduced.
By 1980, however, the deposit rate ceilings hadapparently
become more costly thanthey were worth. The
general rise in market rates in the 1970s made bank
deposits subject to rate ceilings considerably less
attractive than competing instruments offered at
market ratesby other financial institutions. Late in the
1970s, this competition began to raise concerns about
the viability of the traditional bank deposit. Furthermore,
the rationale for deposit ceilings had been
attacked. Studies done in the 1 960s found that before
U.S. bank deposit rates were regulated there was little
relationship between these rates and bank risk-taking;
that is, contrary to what had beenthought in the 193 Os,
there was no benefit to regulating deposit rates. Consequently,
in 1980 Congressdecided to eliminate most
deposit rate ceilings, phasing them out over several
years.

 

[Mandinka2]

If you are referring to the article I posted then the last paragraph might satiate you:

"In a statement, the Fed said it would "continue to supply unusually large volumes of liquidity to the financial markets".

That could lead to market interest rates dropping further as the Fed continues to buy securities to ensure orderly trading in New York.

Co-ordinated action?

Earlier in the day, the Japanese central bank intervened in currency markets, and it is widely expected to lower its interest rates further and make more money available to the Japanese banking system.

And last week, central banks moved swiftly to stabilise currency markets in the wake of the attack on New York and Washington.

In an unusual move, the US Federal Reserve said it was making $50bn available to support the European banking system.

The Fed's offer was the largest in a number of multi-billion dollar cash boosts offered by central banks on Thursday and Friday to steady currency markets, totalling more than $190bn.
"

If you'll forgive me I'm shattered here , its just midnight and I have to this shit all over again from 8am tomorow. I think you're one of the more informed posters on the board in any case and are able to reason - not a common feature.
Cool article by the way - they are still used throughout the world btw. , Fed still reserves that right. Look at this portion for example:
"The
general rise in market rates in the 1970s made bank
deposits subject to rate ceilings considerably less
attractive than competing instruments offered at
market ratesby other financial institutions. Late in the
1970s, this competition began to raise concerns about
the viability of the traditional bank deposit. Furthermore,
the rationale for deposit ceilings had been
attacked. " Now as you rightly point out banks are inclined to engage in more risky investment (i.e. offer more risky loans) when interest rates are low (as at present) ,then use of such tools would be an effective way to control credit risk in lending institutions , agreed ? Rite , off home now....

 

[Lumberg]

I repeat my question, where does the article specifically state that the U.S. government acted to influence currency exchange rates?

As far as the rate ceilings, I was refuting your claim that rate ceilings were a tool currently used by the Fed to influence the economy.

Look, all I'm saying is don't call me "poorly informed" when it's clear that I know what I'm talking about. You also obviously know some about finance and economics, you're just wrong on most of the points you made earlier on this thread. Let's leave it at that.

 

[Mandinka2]

I repeat my question, where does the article specifically state that the U.S. government acted to influence currency exchange rates?

You are becoming tiresome. I was respectful in my last post not to tread on your ego (although you made the opening salve with the "confusion" remark). Were you involved in trading?

Ok on to your points:
[/B][/QUOTE]In an unusual move, the US Federal Reserve said it was making $50bn available to support the European banking system. The Fed's offer was the largest in a number of multi-billion dollar cash boosts offered by central banks on Thursday and Friday to steady currency markets, totalling more than $190bn.
Furthermore from the Fed's own website: http://www.federalreserve.gov/pf/pdf/frspf2.pdf
"Determining which level of the exchange rate is most consistent
with the ultimate goals of policy can be difficult. Selecting the
wrong level could lead to a sustained period of deflation and high
levels of economic slack or to a greatly overheated economy. Also,
reacting in an aggressive way to exchange market pressures could
result in the transmission to the United States of certain disturbances
from abroad, as the exchange rate could not adjust to cushion
them. Consequently, the Federal Reserve does not have specific
targets for exchange rates but considers movements in those rates
in the context of other available information about financial markets
and economies at home and abroad."

So while the Fed may not have a specific targeted exchange rate - it intervenes within the currency exchange market to set the rate when it sees that as being appropriate towards its monetary policy. Very clearly ,foreign exchange is a tool by which the Fed can influence the economy , if you cannot see this or refuse to see this then you have no place here.

As far as the rate ceilings, I was refuting your claim that rate ceilings were a tool currently used by the Fed to influence the economy.

Well actually that's a pretty low thing to do - to insert the word "currently" which you will not find in my original post - they ARE a tool and have been used in the past and more than likely will be used again. The fact that you were not aware of the tool says quite a lot.

Look, all I'm saying is don't call me "poorly informed" when it's clear that I know what I'm talking about. You also obviously know some about finance and economics, you're just wrong on most of the points you made earlier on this thread. Let's leave it at that.

My grounding is in international finance and investment , I did not refute what you first wrote since those tools exist , I merely added to it. You took offence at that. I bothered to speak to an American actuary this morning on this topic - most central banks perform the issuing function as well as the regulatory function with respect to interest rates. Since it is the Fed that sets interest rates , then it is the Fed that determines the level and shape of the yield curve along with the markets - the supply and demand equilibrium of which you neglected to mention the supply portion. So effectively it is the Fed that issues instructions to the treasury (or at least that is the core of monetary policy) so it also has responsibility for determining the level of money supply - in other words - the rate at which money is printed.... supply and demand .
On my last point , OMOs , at least you had the guts to mention that I was right , kindly do so with the rest of the above.
Finally i come here to learn (amongst the entertainment issue) so if I am mistaken about the remit of the Fed , in other words , if the Treasury has power to determine monetary supply and hence monetary policy independently of the Fed , kindly explain how this hierarchy works , but respectfully. i trust that you are capable.

 

[Mandinka2]

one more just to make it plain and clear (again):
http://www.federalreserve.gov/pf/pdf/frspf4.pdf

"Since the late 1970s, the U.S. Treasury has financed about half of
total U.S. support for the dollar, and the Federal Reserve has financed
the rest. The Treasury acquired foreign currency resources
partly through its own swap arrangement with the German central
bank but mainly through drawings on the International Monetary
Fund (IMF), sales of special drawing rights, and issuance of
securities denominated in foreign currencies (these securities have
since been retired).2 Moreover, over the post–Bretton Woods era,
Federal Reserve and Treasury interventions have on balance been
net purchases of foreign currencies against dollars; these net purchases,
along with cumulated earnings on the assets, have tended
to build up the stock of U.S. official foreign exchange reserves.
At the end of June 1994, the United States held foreign currency
reserves valued at $42.8 billion. Of this amount, the Federal Reserve
held foreign currency assets of $22.5 billion, and the Exchange
Stabilization Fund of the Treasury held the rest."
Respectfully ,M2

 

[WODIN]

Mandinka2 The Federal Reserve Bank is not owned by the United States Government. Its a private bank. Just like the Central Bank of London, France, Germany and Japan. They are all privately owned. They function in essence as a cartel on the currencies of world through the various mechanisms lumberg outlined above.

Lumberg, I was stating the reserve ratio from an outside view. The other side of the coin if you will.

 

[Mandinka2]

Mandinka2 The Federal Reserve Bank is not owned by the United States Government. Its a private bank. Just like the Central Bank of London, France, Germany and Japan. They are all privately owned. They function in essence as a cartel on the currencies of world through the various mechanisms lumberg outlined above.

Lumberg, I was stating the reserve ratio from an outside view. The other side of the coin if you will.

thanks Wodin , its funny what you don't know huh? But I wonder in that case why for example the Bank of England is often criticised for not being immune political pressure - for example lowering interest rates in the run up to elections. Lumberg's comments address only the domestic activities of central banks , the setting of interest rates of course being a major factor in the currency exchange rate at any time , or better the relative level of interest rate.

 

[Lumberg]

So while the Fed may not have a specific targeted exchange rate...

Thank you. That's all I was trying to get across.


Well actually that's a pretty low thing to do - to insert the word "currently" which you will not find in my original post - they ARE a tool and have been used in the past and more than likely will be used again. The fact that you were not aware of the tool says quite a lot.


This whole thread is based on the present. Also note in my quote that Congress both intituted and repealed the interest rate caps. I remind you that we are talking about tools that the Fed uses to influence the economy.


If the Treasury has power to determine monetary supply and hence monetary policy independently of the Fed , kindly explain how this hierarchy works , but respectfully. i trust that you are capable.

As you've already found out through research, decisions on how much money to print are a cooperative agreement between the Dept. of Treaury and the Fed. The ultimate authority lies with the Treasury but they would be stupid to go againt the recommendations of the Fed.

Also one addition to WODIN's observation:

The Federal Reserve BANKS are technically private entities, though with special powers. However certain banks are required to effectively buy stock in those companies. The Federal Reserve BOARD, or technically The Board of Governors of the Federal Reserve System, IS a government entity, which oversees the Federal Reserve SYSTEM, which is the banks and the Board.

The Board of Governors are the ones who make the interest rate decisions. This system was mandated by Congress I believe in 1916, to even out the boom-and-bust cycle of an agrarian economy, when credit is always short in planting season and always flush in harvesting season.

I know I sound pedantic and assholish, and for that I'm sorry, but I'm also right, which is all I care about.

 

[Apöllo]

Haven't you people ever seen "It's a Wonderful Life"?

Now that was a movie about banks if I ever saw one.

 

[gonelifting]

I know some people that opened their own bank. I know that`s off topic but I think that`s cool to say "I own a bank". lol

These guys were rich to beging with. duh, They just got together and started one from scratch. I don`t know the details really, Just that they have a normal working bank that has loans, mortgages, savings, etc...

These people were making tons of money BEFORE they had this bank, So I`m thinking the bank venture was a step UP for them to even consider it.