Session 8 - Discussion Session — TBTF, Stablecoins, “Start a Bank?”, & If My Bank Fails
Pick a side. Then see both sides explained, why the instructor supports one side, and the final judge verdict. Animated colors make the win/lose obvious (and fun).
Debate 1 — Too Big To Fail (TBTF)
Side A — “Big banks will always be bailed out”
Systemic risk is so dangerous that the government must rescue large banks to avoid collapse.
Evidence they point to
- Past emergency guarantees during crises.
- Interconnected payment systems and panic dynamics.
Weak spots
- Post-2008 tools target resolution without taxpayer loss.
- Equity and certain debts designed to absorb losses first.
Side B — “Failure allowed; services preserved”
Modern frameworks aim to let a big bank fail while keeping deposits/payments running. Investors take losses first (bail-in/TLAC).
Evidence they point to
- Resolution planning (“living wills”), TLAC/bail-in structures.
- Supervisory stress tests and higher buffers for GSIBs.
Weak spots
- Extreme, fast-moving crises may still push extraordinary measures.
- Cross-border coordination can be messy.
Debate 2 — Stablecoins & Banks
Side A — “Stablecoins will kill banks”
Deposits move to stablecoins, banks lose funding, and banking becomes obsolete.
Evidence they point to
- Rapid growth during crypto upcycles.
- Fast settlement on some chains vs legacy rails.
Weak spots
- Most stablecoins still depend on banks/custodians or money funds.
- Run/regulatory/custody risks; on/off-ramps require banks.
Side B — “Coexistence & adaptation”
Asset-backed stablecoins interact with banks and Treasuries. They shift funding mix/pricing and push banks to innovate (tokenized deposits, faster rails).
Evidence they point to
- Custodial banks and money funds hold reserves/collateral.
- Upgrades to bank rails (RTP/instant) narrow UX gaps.
Weak spots
- Large scale could pressure low-cost deposits at the margin.
- Operational and regulatory clarity still evolving.
Debate 3 — Start-a-Bank?
Side A — “Easy to start a bank”
Just raise money and open; tech makes it cheap and fast.
Evidence they cite
- Visible front-end launches in months.
- Bank-as-a-Service (BaaS) partners reduce build.
Weak spots
- Front-end ≠ charter. De novo approval needs governance, risk, compliance track record.
- Ongoing supervision and capital planning are continuous, not one-off.
Side B — “Hard, heavily regulated”
Requires charter, capital, experienced management, strong compliance, and often years of review.
Evidence they cite
- Multi-year de novo timelines in many jurisdictions.
- Capital and liquidity planning, stress testing, resolution thinking.
Weak spots
- Partner models can deliver products without full charter (trade-offs apply).
- Some regions have sandbox/limited licenses that shorten time.
Mini Tool — De novo vs Partner (toy)
Results:
Toy math: de novo burn ≈ team × $180k/yr × (months/12) + 15% overhead + compliance setup; partner ≈ fee × users × 12. Not advice.
Debate 4 — If My Bank Fails Tomorrow, What Should I Do?
Side A — “Panic: withdraw everything immediately”
Assume catastrophe: rush to withdraw cash and move funds, even if insured.
Evidence they cite
- News of runs where access was briefly disrupted.
- Concerns about uninsured balances and payroll timing.
Weak spots
- FDIC typically restores insured access next business day via assuming bank or FDIC payout.
- Panic withdrawals can deepen losses and create personal safety risks.
Side B — “Follow the FDIC playbook: insured stays calm”
Verify insurance, keep records, and use FDIC/assuming bank channels. Focus on uninsured exposure and diversification.
Evidence they cite
- Standard practice: insured funds available next business day in most resolutions.
- Purchase & Assumption deals move accounts to a healthy bank seamlessly.
Weak spots
- Short operational delays are possible; wires/ACH may pause briefly.
- Uninsured balances may face haircuts or delayed recovery.
Mini Tool — FDIC Insured vs Uninsured (toy)
Results:
How to lower uninsured exposure quickly
- Spread funds across ownership categories (individual, joint, trust) and institutions.
- Use sweep/MMDA programs at brokers (understand underlying banks).
- Keep documentation (titles, beneficiary designations) current.
Sweeps / MMDA at Brokers — What It Means
Definition: A broker “sweep” moves idle cash into one or more partner banks as Money Market Deposit Accounts (MMDAs). This can multiply FDIC coverage by splitting cash across several banks automatically.
- At the broker: Uninvested cash is swept at day’s end into program banks.
- Coverage: Each bank provides up to $250,000 FDIC per ownership category; multiple banks → higher aggregate coverage.
- Yield: Sweep/MMDA rates are often lower than top money market mutual funds, but you get FDIC insurance.
Important: MMDA vs Money Market Mutual Fund
| Feature | Bank Sweep / MMDA | Money Market Mutual Fund |
|---|---|---|
| Where money sits | Bank deposits (via broker program) | Shares of a fund holding short-term securities |
| Insurance | FDIC per bank/category | Not FDIC; brokerage has SIPC (broker failure protection, not market loss) |
| Typical yield | Often lower | Often higher |
| Liquidity | Daily; subject to broker rules | Daily; prospectus may allow gates/fees in stress |
Reminder: SIPC ≠ FDIC. SIPC helps if the broker fails, not if a bank fails or a fund loses value.
Debate 5: How to Make Your Stablecoin Account Safe?
Scenario: You hold $5,000 in stablecoins (like digital dollars) for tuition and bills. What setup best balances security, ease of use, and peace of mind?
Choose a Stance
Your vote is saved only in your browser. Share why you chose it.
💡 Everyday Examples
- Exchange account → like money in your bank app: easy, but the company can freeze it and hackers target accounts.
- USB-like wallet → like cash in a home safe: only you control it; lose the key/backup and it’s gone.
- Split method → like carrying $100 for daily use, rest in a safe deposit box.
- Lockbox (2 keys) → like needing two signatures to access savings: safer, more steps.
Pros & Cons
A) Exchange account
- Very easy, like PayPal/bank login.
- Company failure/freezes can trap funds.
- Use app-based codes (not text messages).
B) USB-like wallet
- Only you control it—no company blocks you.
- Lose the paper backup = money gone.
C) Split method
- Daily spend in app; savings offline.
- Takes planning to move money.
D) Lockbox (2 keys)
- One lost key ≠ lost money.
- Setup is harder; not all apps support it.
Stablecoin vs Visa Card
Visa card: If someone steals your card, the bank usually refunds you. You can call customer service to fix mistakes. It’s safe because the bank takes the risk.
Stablecoin: If someone steals your wallet code, the money is gone. There’s no help desk. You’re the bank. It’s safe if you back up your code on paper and keep it hidden, but it takes more care.
Visa = safety net (less control). Stablecoin = like cash (more control, more responsibility).
Safety Checklist
Instructor Verdict
Default for students: C) Split hot/cold or D) Lockbox if holding for months.
- Keep 1–2 weeks of spend in an app wallet; store the rest offline.
- On exchanges, turn on app-based login codes and withdrawal limits.
- Never keep your secret backup online or in photos.
- Losing your phone ≠ losing money if you have the backup code.
Goal: fail safely — one mistake shouldn’t wipe out everything.
Live Poll (local):
Discussion: Could Another “SBF” Happen?
Scenario: Sam Bankman-Fried (SBF), founder of FTX, ran one of the largest crypto exchanges. In 2022 it collapsed, losing billions of customer deposits. Students debate whether something like this could happen again.
Vote Your View
Local results only (saved in your browser).
Points to Consider
✅ Reasons it could happen again
- Some exchanges still hide how much money they actually have.
- Crypto rules are weaker than bank rules in many countries.
- People trust too easily and don’t spread risk.
❌ Reasons it’s less likely now
- After FTX, regulators and investors are more careful.
- Some exchanges show “proof of reserves” or get audits.
- Users are more alert and spread funds across wallets.
🤔 Middle ground
- If rules improve and users are careful, risk is lower.
- If people chase quick profits without checking safety, risk stays high.
Simple takeaway: FTX was like a bank suddenly vanishing with deposits. Don’t keep all funds in one place. Always have a backup plan.
📝 Homework
Pick one of the debate topics from Session 8 (Too-Big-To-Fail, Stablecoins vs Banks, Start-a-Bank, or What-To-Do-If-Your-Bank-Fails). Write a short essay (≈300–500 words) with:
- Your side clearly stated (affirmative or negative).
- 3–4 main points supporting your side, explained clearly.
- Show why the other side’s points are weaker — address at least one counterargument.
- Finish with a conclusion that sums up why your side “wins.”
Due with the second midterm exam.