Because the set of events that could "wipe away" your (reasonably-intelligently diversified) assets has a large intersection with the set of events that could "wipe away" your saving account in a bank. Things like nuclear war, global pandemic, etc.
Yes, the FDIC does insure savings accounts, but that's only useful so long as the FDIC exists.
FDIC insurance exists for a reason. It prevents runs on the bank. There will be a time of financial crisis in the future and anyone with a Robin Hood account will flee for an FDIC guaranteed account. The run on liquidity will probably destroy the institution.
It protects again bank failure. If the one's assets are drained from the bank, as long as the bank has not failed, it will have to make the account holder whole.
That's why a company would be stupid to hold $200M at Podunk Bank of Littletown, KS but is perfectly fine to hold it in a DDA account at Bank of America, Citi or Chase
The argument I've heard against FDIC insurance encourages a race to the bottom. Banks take more risk to make more profit (combined with the back drop of the feds willingness to bail then out? The more conservative banks either have to loosen up, or lose out to the looser banks.
There was not much money lost relatively speaking to banks not having FDIC insurance in the past. And there can be tremendous upside in researching to make sure your bank is only loaning to reputable investments, homes, etc
This speaks to my latter comment. You can use sweep accounts to increase protection, money market accounts which have different risk profiles, T-bills backed by the USG, etc.
That said, it's all a tradeoff. Increasing FDIC insurance coverage means decreasing the yield on savings accounts, since banks fund FDIC and wouldn't take a cut in profits for it. Not sure what the optimal outcome here really is.
"Here's a parallel example: the FDIC exists to insure bank deposit holders up to $100k (formerly $250k, but oh well). Now, with the FDIC, you have every incentive to ignore your bank and assume that your deposits are safe. What about without the FDIC? Maybe you're more concerned with how your bank invests your money. Maybe you ask to see their balance sheet. Maybe you see how disastrously over-leveraged they are and take your money elsewhere. If that happens enough times, look at all the financial crisis you SUDDENLY DON'T HAVE."
One thing I don't understand, and perhaps you could explain, is why anyone in the US would ever keep more cash in any one bank account than what was covered by FDIC insurance. It's precisely the reason I don't e.g. take my savings to an offshore bank that offers much higher interest rates. Is this just a matter of people taking trust in a bank's solvency for granted?
I think as far as FDIC and the like go, that's probably the intention of the policy. Less money for them to cover if a bank goes bust and the country has diversified its savings.
FDIC covers only up to 200k USD. Many people have lost life savings when banks collapse. Also, not everybody lives in the US or in countries with a semi decent banking system.
But if the FDIC insures all deposits anyway, then there would never be a bank run to begin with because nobody would panic that they wouldn't get their money out, so spreading risk among multiple banks is a "solution" to an artificial problem.
Yes, the FDIC does insure savings accounts, but that's only useful so long as the FDIC exists.
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