The first few banks to fail did have some consequences on those responsible, but all the actions to make deposits whole are, in practice, making it it far harder for the next layer of unsafe banks from getting wiped out.
Imagine that the Fed guarantee for SVB had been put forward two weeks before it was. Would SVB shareholders and managers had received the same level of consequences? Any consequences at all? I am not sure of how big the difference would have been, but I would be surprised if it wasn't significant.
Not really. If 5 or 6 more regional banks fail next week due to depositors seeking the safety of big banks there won’t be enough money to guarantee deposits for more banks.
If they didn’t guarantee the SVB depositors that outcome would have been almost guaranteed, the train wreck would have impacted de-risked companies too, because the entire regional banking system would implode.
Not acting now to stop contagion because of some idea of fairness is short sighted.
not reaaaally one of these outcomes. this actually just streamlines the same outcome that was already going to occur. I would say everyone would have gotten 90% of their deposits back, at some unknown time in the future, regardless. this just makes it faster, predictable, and at 100% of the deposits.
it really just comes down to the bank's portfolio. the bonds that these exposed banks had were US government bonds and held at a loss. A probably 10% loss.
if the Federal Reserve winds up owning those government bonds, it actually is destroying the dollars it receives from the treasury. which is actually the Federal Reserve's entire plan in tackling inflation.
I appreciate the complexity of the unwind, and that many employees may not have had a direct hand in the risk that SVB accrued, but I think there's a bigger picture at play.
Banks are supposed to be one of the bedrocks upon which the economy rests and they are given certain privileges (like access to low interest rates ordinary people cannot get) as part of that role. Its clear the financial sector needs to have an extremely close eye on it to not cause all sorts of destruction across the economy, which it still manages to do pretty regularly out of a fun mix of short-termism, stupidity, and greed.
So from a signaling perspective, if the org is sitting on a lot of risk and employees may have benefitted during the accrual of that risk, shouldn't they also face consequences? Wouldn't that cause each employee in a bank to pay some more attention to the fundamentals of the org, to put pressure on any situation where large risk accrual happens? Wouldn't that cause the internal structure of banks to change so that more eyes were on these large risk accrual moments, because talented people wouldn't join unless they knew their livelihoods weren't at risk by one bad decision? Regulations can't be the only form of pressure for banks to not fuck up.
By "banks", I mean 90% of the other banks in the country that would've failed, absent the SVB depositor bailout.
If the FED didn't step in, every regional bank in the country would experience a bank run as people would withdraw everything and deposit in the "too big to fail" banks for safety.
Why I think the depositors should've suffered a haircut:
What the FED did, was implicitly guarantee the deposits, this incentivize banks to become even riskier with deposits as they get to keep the profits if their risky bets payoff and get bailed out if they fail. This is like a real life cheat code for bankers and unfair to the rest of us regular folks who has to suffer the consequences of our actions.
Okay, but how does punishing the depositors for management mistakes fix that? It definitely increases the damage, though.
The shareholders lose it all if the bank goes bankrupt. They should have incentive enough to watch over management. If they don’t notice, how does it help for depositors to have their money at risk too?
Except that it encourages banks like SVB to specialize instead of distributing depositor risk. I can imaging a scenario where specialized bank failure can lead to contagion where it wouldn't if all banks distributed risk.
E.g. The companies keep their payroll funds in Industry Payroll Bank (IPB). IPB fails the same way SVB did, and suddenly everyone working for the industry companies are short for a week on their pay. A bunch of these people bank with Local Bank and Credit Unions (LBCUs). Instead of getting expected deposits suddenly many of their depositors are borrowing from their lines of credit.
Now probably, given the short-term nature of the contagion, the LBCUs can survive this by temporarily borrowing capital. And at the very least, if they did fail, it would probably be due to liquidity instead of being underwater, so shouldn't hit the depositor's insurance funds much, if at all. But maybe there's a scenario I can't think of in which something like this could be bad.
You seem fairly mixed up about who would face which consequences from a bunch of bank runs vs what happened here with the management replaced and shareholders wiped out but depositors backed up.
If there's any ground for further actions against the management of the banks, I'm fully supportive of that, but a bunch of bank runs would've hurt everyone but them more than them.
If this had happened in 2008 I don't think the government would have reacted as quickly or as well. We would have seen a wave of bank failures.
One of the lessons learned from 2008, especially after the collapse of Lehman, is that acting too late or sending mixed messages can make the problem worse.
The SVB run started on a Thursday, and the government announced a plan to stabilize the banking system the next Sunday before the markets were about to open. It was a pretty fast reaction all things considered.
What we didn't learn well enough from 2008 was the extent to which small bank failures can create systemic risk for the entire system. It's not like SVB was the only bank with long-term investments that lost market value after rates rose. When people realized that, they freaked out.
The other thing people realized too late was that we have had a two-layer system of deposit insurance since 2008: the too-big-to-fail banks effectively have infinite insurance (because they can't fail) and smaller banks didn't. That creates an incentive for depositors to run on the small banks and move all their money to the ones that cannot fail. It seems like nobody understood that until a few weeks ago, including the regulators.
Another problem, which is older than 2008 but needs to be fixed, is that our current system of deposit insurance doesn't make sense for the way businesses use banks. If it did, we wouldn't be in a situation where only 60% of deposits are insured nationwide. That blunts the effectiveness of deposit insurance for preventing bank runs. The solution may not be more insurance, but perhaps caps on account balances or limits to the percent of uninsured deposits at a given bank.
So, first off, I am not very literate when it comes to the comings and goings of banking procedures, so forgive me if this is a dumb question.
Would an incident like this make other banks shore up their defenses about this sort of thing happening to them, or will more banks fall due to market conditions in general?
No everything would NOT have been fine. There was a real fear in the market.
By 100% backing any bank that failed, the FEDs allowed the flow of money to continue through the economy and it said a very clear message that everyones money is safe.
Imagine if everyone thought their money was not safe in their bank accounts. That everyone started taking out all their money. The system would have collapsed.
It seems like whenever a bank fails, there are custom rules as to what happens made up on the fly. In this case, surprisingly, bondholders were wiped out. Does this have long-term implications on how bankers will act? If so, what?
This is really more of an embarrassment for the banking industry and bank regulators. The immediate threat is also to the banking system itself, as the question on everyone's mind is which bank will have a run on it next. That is definitely not the kind of situation that the world needs to wake up to on Monday. I'm really hoping they'll announce that a collection of some banks (or ideally all US banks with Fed accounts) has pooled resources together into a fund that will bail out SVB and any of its peers that might need bailing out. Since bank runs psychological, the act of announcing that a bank on the brink of a run will be bailed if a run happens would hopefully prevent the run from happening. After the banking industry is done bailing SVB out, US banking regulators should require banks like SVB to better manage their concentration risks.
If we don't wake up to a situation on Monday morning where every SVB depositor has been somehow promised that they'll made whole, then the Fed will be repeating the exact same experiment it tried when it allowed Lehman Brothers to fail. The lesson from that little episode was that if you allow the first bank to fail instead of bailing it out, then you'll set off a chain reaction where you'll be forced to bail out multiple banks instead of just ones and your economy will be left a smoking ruin as a result.
If the shareholders were wiped out (as I understand they were), then the moral hazard seems limited, no?
The main remaining moral hazard would be that customers would be incentivized to choose banks that offered higher rates as a result of taking on unsustainable risk. But this moral hazard is checked by investors who are directly incentivized to remain solvent and liquid, because otherwise they will lose everything.
This leaves me with two questions:
1. Did investors of the bank literally lose everything? Or did they get bought out by the government at pennies on the dollar? If indeed this was a liquidity crisis, rather than a solvency crisis, it seems like the shares would still be worth something. Did the shareholders have to agree to give up their ownership, and were they compensated for that?
2. Why didn't the 2008 bailouts follow this model? The way this bank failure was handled makes much more sense to me than the 2008 model. It seems right to me that shareholders should lose everything if the institution fails. Why did shareholders get to keep their companies in 2008?
It's a cheap price to pay. Imagine if the FDIC had said "fuck you", All the companies and individuals with big deposits in the weaker banks would have started bank runs on them immediately after the weekend (farfetched? SVB showed how fast these things happen these days). And the more banks that fall, the more vulnerable would the remaining ones be, because the failure of one bank would affect the others balance sheets.
That's if you ignore the secondary effects: "moral hazard," knowing that if you become big enough to create political waves in the event that you fail you can continue to gamble with depositor money, make your annual bonus, and safely be rescued by Federal depositor backstop / bailout in the event that you eventually go tits up. I wonder if that'll ever happen again after 2008...
A lot of the people who could suffer because of this are not the people who caused the problems.
The biggest risk is that this leads to runs on other banks. People are already looking pretty closely at a few others like First Republic. Deposit insurance exists to reassure people that they won't lose their money, to reduce the temptation to start a bank run.
The workers who might not get their next paychecks or could lose their jobs entirely are not to blame for the problem either.
VCs will be fine no matter what happens, because they are billionaires. Trying to hurt them will fail and will result in other people getting hurt too. Moral outrage shouldn't be used as an excuse to make a bad problem worse.
Imagine that the Fed guarantee for SVB had been put forward two weeks before it was. Would SVB shareholders and managers had received the same level of consequences? Any consequences at all? I am not sure of how big the difference would have been, but I would be surprised if it wasn't significant.
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