this post was submitted on 14 Aug 2024
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Yeah except it's backed up by the government. So if it all comes due with the exact same time the people are still paying that money either way.
Source: ECB
It works by having a central fund to back the money that qualifies for the deposit guarantee, however said funds only contains 0,8% of covered deposits. Although this might seem small, this is still a large amount of capital (~40 billion euro), and should be able to cover all deposits during a major financial crisis (like 2008) according to this research (ECB funded).
Similar with the US FDIC:
The FDIC is primarily funded through assessments, which are insurance premiums paid by FDIC-insured institutions. These assessments are based on the balance of insured deposits and the risk posed by each bank. Additionally, the FDIC's Deposit Insurance Fund is invested in U.S. Treasury securities, earning interest that supplements the premiums paid by banks.
I didn't understand your second sentence, can you clarify that a bit?
Well who is the government? Where do they get their money? It's it's us it's the people. If the nation suddenly owes trillions of dollars to all its people nobody's getting any money. Best case scenario they just say fuck it nobody's getting anything. Worst case scenario the country literally collapses.
I thought it was some kind of written guarantee that the banks would only invest/divest the money over the 100k threshold, where if the bank collapses there'd still be the fallback of the money it didn't invest, and as I'm typing this I instantly know it's not true and that banks play it all fast and loose and hope that no one finds out...
I see your point.
Banks do have strict risk requirements (i.e. Basel III), in terms of what they are allowed to do with money, and are stress-tested on a regular basis. However, the type of scenario OP is posing would mean every bank would need to write-off their loans, and hope they have capital invested in other places to keep them afloat.
Since banks have these capital at risk requirements, the government feels comfortable to guarantee accounts up to a certain amount, as every bank going down at the same time is generally speaking a very unlikely event. So usually they would cover the account, take over the bank (if needed), put it into administration, and wind-down positions to claw back money to cover the insurance claims.
Ah I see, thanks for the extra context!
... and with the help of inflation hack