>It's basically the exact opposite of the VCs telling each other to get their money out of SVB; it's a bunch of banks putting their own money into FRB. A "hold the line" move.
It's interesting to remember that banking, at least from the perspective of the commons (depositors), is an issue of trust.
The more the commons say to withdraw their deposits, the more deposits will be withdrawn and the more banks will collapse; and the more banks will collapse the more the commons will say to withdraw their deposits, the more deposits will be withdrawn and the more banks will collapse.
The opposite also holding true.
Objectively, there is simply no value in giving one's money to a bank other than the ostensible claim that they will keep your money safer than if you just stash it under your bed.
Given that, the FRB, FDIC, and banks et al. pulling out all the stops to reinforce depositor confidence is not surprising. It's a natural response to fear making the rounds in the commons.
> That’s the thing though, they could lend out and pay interest on “savings” with the understanding that the money might not be immediately available for withdrawal as it’s “in the wild”.
Those are Certificates of Deposit.
> they didn’t seem to get in trouble due to fractional reserve lending but from the liquidity of their assets.
It was the opposite. SVB had over-invested in long-term US treasuries, which are extremely liquid, but were falling in price due to the rapid increase of interest rates. If not for withdrawals squeezing their reserve, SVB could hold onto those treasuries until maturity and get back 100% of their principle.
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I think the disconnect is that savings accounts are not popularly well understood. People are shocked when they understand that the money they deposited is not sitting in a big vault.
You could tweak fractional reserves to be 20% (or 80%) of deposits, but that comes at a cost too. For example, it would create scarcity of money available for lending, which in turn would make loans more expensive (e.g., higher interest rate mortgages could double the cost of home ownership.)
The current system prevents the worst of bank runs by covering a good chunk of assets with insurance (FDIC in the US). It's a system that allows banks to fail and protect customer deposits.
The collapse of SVB was not a "catastrophe" because the banking system is intended to let banks fail. The alternative is far worse.
> People thought depositors should lose their money because they made the “irresponsible” decision to bank with a large, stable, well-known public institution.
It's always irresponsible to put all your investments into one location.
I once asked my dad where our family record player came from (it was a nice machine). He said it was what he got when a bank went bust.
You've heard the advice - diversify, diversify, diversify. It's the responsible thing to do.
I have a friend who uses a password manager, so he only has to remember one password. I tell him if that password gets compromised, or the manager gets compromised, he loses everything. He's unfazed by that risk - "can't happen", he says.
SVB put all their assets into T-bills. Then the Fed raised interest rates, the value of the old T-bills sank, and SVB couldn't cover its liabilities. It's just as irresponsible of SVB to put all in one as it is depositors to put all in one.
> The reason SVB is in receivership is because they don't actually have the ability to make all their depositors whole.
No, SVB is in receivership because they can make their depositors whole right now. They have most of the assets, it’s just that liquidating them immediately would result in losses far greater than SVB can afford, but that’s what a bank run demands.
The feds can take over, make depositors whole now by funding deposits from federal funds, while taking on SVBs assets and liquidating them on a timeline that maximises the value, ideally a value that covers all depositor funds.
In effect the feds provide a loan to SVB depositors, backed by SVB assets. Which is far better than either forcing the FDIC to actually payout the insured amount, because depositors get their funds, and the fed avoid having to handover cash to SVB to keep them afloat. Meanwhile shareholders take a bath, because their shareholding value drops to zero.
> In some cases they were forced to used this bank by VCs.
Hmm it definitely wouldn’t have anything to do with SVB executives wooing VCs with lavish perks and favorable terms to increase deposits though right? That’s definitely not how the industry works.
Anywho - they are still victims and they should be made whole with remaining assets after FDIC makes depositors hole (which is a tiny percentage of deposits at SVB) - no doubt about that, but beside that these businesses and VCs are sophisticated and able to take on and assess risk. They were all calling to remove assets and urging portfolio companies to do the same because they understand the game. Not a lot of regular folks at SVB were. There’s a clear difference in sophistication. Next time maybe they’ll bank across a few organizations to reduce risk. Or maybe ask questions even.
If you’re going to use taxpayer dollars to bailout these businesses in excess of remaining assets you may as well pay lifetime salaries for the employees who worked at SVB. Don’t see a big difference there. I wouldn’t support either action.
> The depositors “took risks” by literally keeping their cash in a bank? This is ridiculous
Its not ridiculous. Its how the free market works. Its a choice. There were other banks that were compliant with the regulation that !protects! the bank and its depositors. This bank wasn't one of them. People put their money in this bank anyway. It makes little difference if many startups were forced by their VCs to put their money in that bank - they chose to go with those VCs.
> What was the safe, responsible thing to do? Put it in one of the “too big to fail” banks instead, given that those are guaranteed to be bailed out should they encounter difficulties?
The first thing to do was to put their money in banks that have not lobbied for exemption from the regulations that protect the bank and its depositors' money from exactly what is happening right now.
The second thing would be to put it in multiple banks that are not exempt from that regulation to spread around the risk.
The third thing would be to spread the risk around many investment tools and banks.
It turns out that there ARE startups that did precisely that, and they were not affected by the SVB thing in the slightest manner.
> Let’s not pretend that literally keeping cash in a savings account is irresponsible risk taking.
It is unless it is a state run bank, period. This is the free market, and if the organization that you are putting your money into is a private organization, you are simply taking a risk. If that does not sound good, then it means that all the rhetoric about free market vs government should be revised.
> Don’t you think there is a huge difference between the bank shareholders getting bailed out and depositors getting bailed out?
Of course they're different. But they're both bail outs.
If my house burns down and I have $250K of home owners insurance, do I get the rest covered by the Feds?
> Let’s think about the risk of “morale hazard” in these case: Bail out the shareholders: we can throw more money into the stock and never lose money! Risk free returns, I better pump this bubble up! Bail out depositors: I feel safe having my money in a reputable bank! I can operate my business and pay vendors/employees, I can keep doing my job without interruption.
SVB, and banks in general, offer incentives for people to deposit money. It can be anything from account bonuses to non-monetary perks like access to other sources of capital. To say that depositors had nothing to do with the losses is extremely naive.
> Bailing out one group makes them greedy, bailing out the other makes them productive.
They're both greedy. Or stupid. Or both. Either way, no hand outs.
> This is not old testament judgement, this is a financial war and our gov has to use every appropriate tool to fight it.
The government does work solely for the depositors or investors of SVB. It works for all of us and we've established rules for when it is authorized to step in and provide both liquidity and direct bail outs.
Romanticizing a specific customer base does not earn them special treatment.
> It seems to me that there is a considerable amount of risk to the participating banks if FRB fails. "Hold the line" is right - if more banks fail, these participating banks will lose a lot more than their $1B each.
>The Fed / FDIC can see this happening and now are over a barrel. So the VCs managed to start one run, then jump up and down yelling to be saved OR ELSE we are going to actively start a series of runs by undermining trust. It's super cynical, and basically allowed the banking system to be held hostage.
That's the risk you run investing in a bank. Better this than the 2008 bailouts when the banks ran themselves into the ground for profit and were still made whole. And, better this than spooking the entire financial system by not protecting deposits.
> Having your bank account randomly disappear isn't one of the risks that anyone should have to take.
Not only is it a risk many take, but many end up losing a significant amount. The FDIC actually has a list of the numerous failed banks they've helped depositors recover assets from here[1]. You can see that depositors often lose a lot when banks fail.
Now I don't think this is a good thing, and I think it would be worthwhile to have a conversation about a systemic way to avoid this. But it was eye-opening to see so many not advocating any systemic approach, and instead just saying "the government should do whatever it can to cover all SVB loses because people like us are special."
>
I think where we disagree here is on whether it should be the bank's business how and when their depositors deposit and withdraw their money.
A bank's entire business model consists of borrowing money for variable-length terms from depositors, and lending it out at fixed-length terms to borrowers.
This question is absolutely the bank's business. In fact, it is the most critical question that a bank needs to be asking itself every single day, if it wants to stay solvent, and actually be able to honor customer withdrawals.
SVB, and its shareholders have been wiped out because it didn't have a good answer to that question.
> not enough to spark a mass exodus from small and regional banks into the "systematically important banks"
This line needs to stop making the rounds. It’s a part of the political game playing for a bailout.
Nothing fundamental about deposit risk has changed this weekend vs the last few decades. The rules have been established, well known, and integrated into the market as it currently stands. Those small and regional banks got wherever they are in that market and the collapse of SVB doesn’t change that any more than the collapse of the other 576 banks in those decades.
There are well-established practices for managing the risks associated with your deposits. People like Ackman and other vocal VC folks just thought they could get away with cheating the system (disruption!) and are now crying for the taxpayer money they built into their risk strategy.
> But when it comes to depositors, I think it makes a lot of sense to make them whole, especially in the case of SVB where the bank likely has pretty close to enough assets to cover the liabilities (deposits), but its tied up in such long term investments that it could take a long time to get it out.
If anybody gets an extra penny more than $250K from the Feds than that is by definition a bailout.
> But moreso, when we invest in companies, we deep down know there is a possibility of the investment going to 0. We often don't think when I put money in a bank it can go belly up, this would obviously hurt the trust in our banking environment if depositors not made whole.
FDIC insurance is not infinite. Not understanding that is no fault of the rest of society.
And who knows what perks, direct or indirect, those depositors were getting for having that cash at SVB?
Whether it’s stupidity or greed doesn’t matter. No hand outs.
> This is about as strong as a signal they could put out to stop a possible run.
Or a desperation signal, which might actually trigger a run. Like what happened with SVB.
The minute the CEO of SVB tried to reassure investors and told them everything would be ok if they just kept their deposits with them, immediately everyone started withdrawing.
Are the “safe” banks all putting out statements about the strength of their financials? They probably don’t feel like they really need to say anything. They feel safe, and that’s what keeps them safe. The moment they panic, their clients panic.
Not to me. All I see is corporations that accept money, do god knows what with them and cause the money to evaporate into thin air. It doesn't really matter how much the government "approves" of the reserves and investments of banks. They're still all the same: literally one bank run away from insolvency.
> Would love to know what law/regulatory framework she is referring to.
This is not some conspiratorial secret. Banks pay premiums to the FDIC for their insurance, and it's a requirement of all chartered banks. The FDIC has the right to backstop deposits in excess of the deposit limit by invoking a "systemic risk" clause (I'm not sure exactly which law this comes under, whether it's some of the original laws that created the FDIC, or more recent post-financial crisis updates). When the FDIC fund gets depleted, they have the right to invoke a special assessment against banks.
> Now expect a contagion effect it next week
The whole point of doing this is to prevent a contagion. The reason there was a bank run against SVB was a mix not just that their asset values had deteriorated (that was well known for some time), it's that their non-diversified deposit base of VC-funded start ups have gradually needed to up their withdrawals since early 2022. SVB would have survived if there wasn't a run on the bank, and the whole purpose of this action was to prevent further runs by saying that deposits will be protected.
> > If depositors are confident that the government has their back, there's no reason to pull money out.
There is also no reason to put the money in.
You go through the trouble of protecting your money because you deem them scarce and irreplaceable.
If tomorrow a commercial bank insured with the FDIC starts offering a product promising 20% interest, then by all means people should get together and apply in mass, get a couple of big political donors on board and all of a sudden there is no downside.
If the wacky bank keeps its promise then it's a 20% gain, if not then the FDIC will have depositors backs anyway to the full amount
> So they got exposure to the upside of the bank's risk, but were bailed out of the downside.
The fastest way to cure the risk of banks like SVB would be to make it illegal to pay interest on demand deposits and have those that want to earn interest to either purchase certificates of deposit or invest in some kind of mutual fund. There are hundreds of money market mutual funds that are safer than making an uninsured deposit at (read: loan to) a mid size commercial bank.
It would also be necessary to require all deposits to be insured and have banks pay appropriately risk adjusted deposit insurance premiums of course.
> A bank should keep the money secure. Anything >0% loss is unacceptable.
You're wrong about this part at least. Borrowing short and lending long is what banks do (among other things). The alternative is either:
- banks asking for 10+ year time deposits to match your 10+ year mortgages , or
- banks only willing to do mortgages that are < 1 year
The risks can be managed somewhat, and SVB *definitely* were too greedy (and stupid), but you're mistaken if you think the other banks are qualitatively different than SVB in their exposures to interest rate risks...
That's why most bank's stocks are down. Most people don't think they will fail, but recent events do highlight that they have a bunch of long term securities that lost value.
> Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway".
Because they don’t want the stock to go to 0?
I think most businesses and investors would not want that.
We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.
It's interesting to remember that banking, at least from the perspective of the commons (depositors), is an issue of trust.
The more the commons say to withdraw their deposits, the more deposits will be withdrawn and the more banks will collapse; and the more banks will collapse the more the commons will say to withdraw their deposits, the more deposits will be withdrawn and the more banks will collapse.
The opposite also holding true.
Objectively, there is simply no value in giving one's money to a bank other than the ostensible claim that they will keep your money safer than if you just stash it under your bed.
Given that, the FRB, FDIC, and banks et al. pulling out all the stops to reinforce depositor confidence is not surprising. It's a natural response to fear making the rounds in the commons.
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