I remember growing up in a post-financial crisis country (this was before 2008) and seeing banks advertising as "we have a AAA rating". I asked my mom what that meant and she told me that they advertised it because it would tell people that they would be able to pay even if the economy went downward. Child me couldn't understand how a bank that couldn't pay the money you deposited back be allowed to even call itself a bank.
Later in life, in a finance course, I realized that putting your money in a savings account is the equivalent of buying an easily fungible, low-return bond, or other kind of debt. I think we forget that when we deposit money in a bank.
Only for individuals with < $250k in assets in that bank. It also has knock on effects of making banks compete to provide the highest rate of return to creditors (since the risk to individuals is basically zero, as you pointed out). This leads to banks taking riskier and riskier bets in search of those returns, because if they don't then their users will inevitably swap to one that does.
I wasn't in the US, and during that financial crisis the equivalent government mechanism to insure peoples' savings failed because of the amount of people requesting it to pay for their livelihood.
To this day people prefer stuffing cash under their mattress than putting it in a bank, because they don't trust the banks or the government to give them their cash back.
I remember growing up in a post-financial crisis country (this was before 2008) and seeing banks advertising as "we have a AAA rating". I asked my mom what that meant and she told me that they advertised it because it would tell people that they would be able to pay even if the economy went downward. Child me couldn't understand how a bank that couldn't pay the money you deposited back be allowed to even call itself a bank.
Later in life, in a finance course, I realized that putting your money in a savings account is the equivalent of buying an easily fungible, low-return bond, or other kind of debt. I think we forget that when we deposit money in a bank.
If it's FDIC insured, the difference is just some paperwork if things go under isn't it?
Only for individuals with < $250k in assets in that bank. It also has knock on effects of making banks compete to provide the highest rate of return to creditors (since the risk to individuals is basically zero, as you pointed out). This leads to banks taking riskier and riskier bets in search of those returns, because if they don't then their users will inevitably swap to one that does.
I wasn't in the US, and during that financial crisis the equivalent government mechanism to insure peoples' savings failed because of the amount of people requesting it to pay for their livelihood.
To this day people prefer stuffing cash under their mattress than putting it in a bank, because they don't trust the banks or the government to give them their cash back.