FDIC protects against bank failures (like the bank goes bankrupts and looses all the deposited money). It has nothing to do with unauthorized transactions as far as I know.
Why? When the FDIC steps in, the bank doesn't get to go on operating like nothing happened. They're shut down, the owners of the bank lose their money, and management is fired. It's the depositors who are bailed out.
The FDIC isn't letting the bank fail. Quite the opposite. The FDIC stepped in and stopped the bank from failing. Otherwise, the bank's deposits would have been completely wiped out the other day.
Is it not? Most of the time the FDIC will find a buyer and guarantee some percentage (usually ~80%) of all losses to the purchasing bank (plus the very low upfront purchase price, of course) in exchange for them honoring all deposits. So ensuring most deposited funds are safe, at least in the long term, seems to be in line with their usual playbook, even if the unusual circumstances around this particular failure might make that less likely.
FDIC insulates customers, but it does not at all insulate the banks; if a bank fails, it fails, FDIC or no. So it doesn't at all remove the incentive for banks to avoid failure by not making poor investments in the same way that, say, a bailout might.
> Banks were basically shifting risk off of themselves.
FDIC means that banks are not held responsible for losing depositor money, and depositors no longer pay attention to how risky the bank's financial practices are.
There is a vary specific exception. When a lot of FDIC ensured bank fail at the same time the FED create money out of thin air to pay some of the depositors. However, while you may have added a new line in a database somewhere there is a large audit that takes place and you may or may not get though that audit. Though in most cases when a bank fails it's paid out of FDIC funds which are just another form of insurance.
Actually, what the FDIC does is give the small depositor some confidence that his money will be there, even if the ban fails. This reassurance is enough to keep him from running to the bank when ever he is scared and pulling out all of his money and putting it under a mattress or something. At this, it is quite effective (even during the mortgage meltdown there were no large groups of withdrawals at banks by retail depositors).
It’s a nice theory, but unsupported by evidence. In the US since the FDIC was set up there have been far fewer bank failures than there were before then. In fact, having that oversight short-circuits the mechanism that makes bank runs happen, since getting your money back is no longer a function of your place in line.
It sounds fine to me to have small banks failing with FDIC around. People don't lose their money, and someone with better business sense starts a new branch.
I don't understand, the bank is having a massive run on it and collapsing. Thus the FDIC steps in per the norms of the last 50 years and fixes it. The system works like a charm?
How is this bank fine? They have lost confidence and everyone is pulling their money out. They would collapse if not for FDIC insurance and the system stepping in.
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