Complex Systems with Patrick McKenzie (patio11) How deposit insurance actually works
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Nov 6, 2025 Discover how deposit insurance operates as a crucial safety net, ensuring you don’t lose money when banks fail. Learn about the risks that aren’t covered and the often-overlooked realities of counterparty risk in fintech. Dive into the intricate process behind bank failures, from liquidity issues to the FDIC's strategies for maintaining stability. Patrick sheds light on the costs associated with bank failures and the deeper government backing that keeps the system intact. This knowledge is vital, especially in uncertain economic times.
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What Deposit Insurance Actually Covers
- Deposit insurance only covers losses to depositors caused by the failure of an insured bank.
- It does not cover investment losses, bank transaction errors, or failures of non-bank platforms holding customer funds.
Verify Fintechs' Actual Coverage
- Do not assume fintech product claims mean your funds are FDIC-protected against platform failure.
- Check whether the fintech is itself an insured institution or merely holds funds at an insured bank.
Failures Grow Slowly Then Explode
- Bank failures are auto-catalyzing processes that start slowly and then accelerate.
- Deposit insurance aims to limit cascading failures by containing damage at the individual bank level.