I know less about FRB's failure. It was likely due to a domino effect from SVB's - specifically, FRB has a high uninsured ratio of deposits (they service rich people).
The FDIC has announced that they will not do a repeat of what they did for SVB - insure the full deposit amount rather than just the $250k. Therefore, anyone with a large deposit in a small bank is going to want to move their money out into a "too big to fail" bank.
Unfortunately for FRB, this is what happened to them. No bank can survive a real run, no matter how carefully balanced they are with risk (after all, they _do_ take on some risks in order to make a profit).
In my opinion, the FDIC's announcement of what they will not do (insure the full deposit, even if above the $250k limit) after doing it for SVB, while have good intentions, is what backfired.
They should've just lied, and said that they'd do it for another bank, if there's a need to; this would've stopped any fear of a run, and thus stop the run before any more dominos collapse.
SVB's fail was because of radical speed in deposit inflow, which was invested in fixed rate bonds just at the moment that the Fed was on a rising rate ratchet. Because of an affluent clientele, they had unusually high % of uninsured deposits. Very unlikely that a small bank would have had the need to layoff so many deposits in such a short time span. Very unlikely that a smaller bank would have had the high % of uninsured deposits. These are the funds that jump ship immediately.
First Republic fail was because of large pool of fixed rate assets....(jumbo low-rate mortgages and Treasury Notes) in a rising rate context. They also had an affluent clientele and thus a high % of uninsured deposits. The fixed rate assets lost so much value while rates rose, that they had no tangible equity. Thus, the hot money deposits raced out of the bank.
Smaller banks typically don't have such a concentration of affluent customers, which means that more of their clientele would be under the threshold for FDIC insurance. Smaller banks probably have a good book of commercial loans which are commonly priced at a variable rate.
I am baffled that SVB and FRB did not hedge their fixed rate portfolios with interest rate swaps....Maybe their mind was on staying abreast of the white-hot tech sector instead of wringing their hands about the next Fed rate decision.
This really sheds clarity on the situation. SVB was in bad shape long before the run, and there is no apparent next domino to fall. FDIC limits are very well understood and relatively easy to work with (despite the rampant FUD about “who’s going to use multiple bank accounts”, deposit sweep programs are highly available and convenient). This is a risk management failure by depositors (in addition to the bank of course), and should be treated as such.
The FDIC and Fed made policy changes in response to the SVB's failure--the FDIC is insuring all the SVB's deposits, including those >$250k, and the Fed is allowing all banks to borrow more than the FMV against certain assets that lost value when interest rates increased.
Without these changes, the SVB's depositors would have had access to maybe 50% or more of their uninsured money immediately, and maybe 90% or more eventually. They'd maybe have been made whole eventually; but the FDIC's inability to find a buyer over the weekend suggests that the SVB's assets weren't obviously greater than its liabilities to depositors, so maybe not.
The SVB's depositors have been made whole now only because regulators intervened with emergency policy changes to rescue them. That might have been a good idea, since it stopped contagion; or it might have been a bad idea, since it encouraged future risk-taking in anticipation of a similar ad hoc rescue. It certainly wasn't any kind of rules-based system working, though.
The SVB had been insolvent on a mark-to-market or NPV basis since around September. Accounting rules on bonds they intended to hold to maturity allowed them to ignore that, but didn't change economic reality.
Yeah, although SVB's failure demonstrates a major shortcoming with deposit insurance (in its role as a deterrent for bank runs). If you have more than $250k in assets, or are worried about short-term liquidity, you're still incentivized to run from the bank.
Somehow SVB avoided this. I don’t see this as systemic at all. The FDIC will make depositors whole and the owners and managers did a bad job and they lose. The worst possible response would be a bailout of any sort beyond ordinary FDIC receivership.
SVB catered to business customers, so the FDIC essentially bailed out businesses. If a regular bank failed with your average-joe customers, I'll wager FDIC won't do anything.
It's always when the rich get screwed, rules get bent. I'll be curious to see when a bank for retail customers get screwed, but I hope it never happens.
SVB saw more than 25 percent of their deposits withdrawn. No bank could handle that. Ultimately the money has to go somewhere (it won’t fit under everyone’s mattress) so a big bank would be unlikely to fail.
Not really, no. Like SVB, FRCs problem was just having too high a percent of uninsured deposits (rich customers, basically). When rumors started that they were next, unlike SVB they were actually a healthy, well run bank. But no bank can handle losing more than half their deposits. It killed them.
My impression of the FDIC action was more that Silicon Valley was lucky for being the first domino that nobody wanted to fall. It could have been any industry or sector facing challenges, but the FDIC was primarily concerned with restoring systemic confidence so that they could avoid a more widespread crisis.
That's more (this bank is) "too triggering to fail" than (this industry is) "too big to fail".
If SVB was a later failure in an ongoing crisis, it doesn't seem like the FDIC would have been prioritizing it because of some Silicon Valley connections.
Read a stat only 2.7% of SVB’s deposits were under the $250k FDIC insurance threshold. Wasn’t sure if this was in $ or customer accounts terms.
If the latter, that’s a good predictor of the probability bank runs at other institutions.
When the VCs started advising their portfolio cos to pull out, it toppled the dominoes very fast. If SVB had a higher retail account mix, this probably would have been a slightly different outcome.
One report said depositors tried to pull out $45B before it went down. It would many HNI retail depositors doing a simultaneous withdrawal to trigger a failure. Not impossible, just much lower probability of that occurring.
SVB is not a typical regional bank taking deposits from middle-class workers, where most accounts are under the 250k insurance limit.
Banks that primarily serve ordinary workers typically have over 50% of total deposits in accounts that are under the limit, and are fully insured.
But for SVB, less than 3% of deposits are in accounts with less than $250k.
The cold, hard fact is that if the bank doesn't have sufficient assets to pay back depositors, no regulatory sleight of hand changes that fact.
There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't co-opt the power of the state to force ordinary people to subsidize them when their bets go bad.
It would be hideously immoral to bail out fabulously wealthy VCs with funds from taxpayers and small depositors.
That's fair--to the extent truly sophisticated depositors believed "there's no need for a bank run, since the FDIC would take extraordinary measures to back the uninsured deposits even if the SVB collapses while economically insolvent", they were exactly right. The cost of moving money out is so small that you'd have to believe that very strongly not to though, or to get a big auxiliary benefit (access to future credit, etc.) from the continued existence of the SVB.
I wish I could downvote you because you didn't read the whole article and just cherry picked one single point.
What happened is that the government bailed out the bank and the depositors. Why? Because "most of the accounts" were over the $250k limit and it would have been catastrophic to so many businesses that they couldn't ignore it. Contagion. Many were still left empty handed...
"However, investors won’t be so lucky. While the FDIC can protect depositors from losses, it can’t do the same for shareholders and unsecured debt holders. In other words, individuals and institutions that owned stock in SVB Financial Group may not get their money back."
Including us tax payers...
"While you may not pay for the losses directly with your tax dollars, some losses could ultimately trickle down. For example, if your bank has to pay more for deposit insurance, it might charge you a higher interest rate on a loan or pay you a lower percentage of interest in your savings account."
This is the most problematic part to me because not only did the VCs exacerbate the run on SVB, they threatened to start runs on other regional banks.
Several said that if SVB didn't get 100% depositor coverage that they would assume any regional bank could fail, and thus everyone should move to something safe like JP Morgan. By the time they started to say this publicly they already instructed portfolio companies move out of regional banks. Many were in the process of doing so.
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.
Now I am not someone who thinks there shouldn't be some kind of action to help out depositors. For me the biggest issue is cash flow, and if uninsured depositors can be helped very quickly to make sure their businesses don't fail (because they can, SVB has the assets) then the government should make that happen. But somehow that wasn't good enough for the VCs. They yelled that its 100% secured deposits or nothing. And it's really uncomfortable that we allow them to have that kind of leverage.
SVB situation is made worse 'coz it seems about 93% of bank's $160B deposits are uninsured as they are above FDIC's $250K limit. So all the more reason for depositors to pull out their money.
Most banks don't experience runs. If they did, there is a federal agency to ensure that customers don't lose their money. That gives depositors sufficient reason to think that they don't need to have a run on the bank.
There are limits to that insurance, and apparently SVB in particular had a lot of people exceed that limit (due to a large concentration of very wealthy people in Silicon Valley). So when a loss of confidence happened, there was a run, and the bank failed. The federal agency is going to ensure that depositors don't lose their money... at least, the first $250,000 of it. Anybody with more than that may be at a loss.
I'm not sure there's really anything more to do than that. There may be a need to review the marketing of SVB to ensure that depositors understood what they were getting into. There may need to be a review of the rules of what things called "banks" are allowed to invest in.
But the overall proposition of banking seems sound. They owe more than they have on hand, but that's a reasonable thing to do. It accelerates the economy overall, by letting individuals and companies make investments faster than they could if the available money were constrained by keeping it locked up.
> There was a run on SVB in part because there hasn’t been a big bank run in a while, and people — venture capitalists, startups — were naturally worried that they might lose their deposits if their bank failed. Then the bank failed. If it turns out to be true that they lose their deposits, there could be more bank runs: Lots of businesses keep uninsured deposits at lots of banks, and if the moral of SVB is “your uninsured transaction-banking deposits can vanish overnight” then those businesses will do a lot more credit analysis, move their money out of weaker banks, and put it at, like, JPMorgan. This could be self-fulfillingly bad for a lot of weaker banks. My assumption is that the FDIC, the Federal Reserve, and the banks who are looking at buying SVB all really don’t want that.
But what it means is, there isn't (or there can't be) "uninsured" deposits, because they would cause unacceptable systemic risk.
Then the next question is, of course: why should there be insured deposits, why pay the premiums, if in effect all deposits are insured by vertue of the necessity of protecting the system?
"Now, SVB, loaded with money, could have tried loaning it like crazy"
It couldn't because that's not how banks works. Banks create deposits by making loans.
When external deposits show up, they show up with the equivalent loan already - to the central bank in the shape of banking reserves.
What SVB did, foolishly, was to do a floating to fixed exchange at probably the worst possible time and at too high a price.
Once a bank's income drops below that required to fulfil its cash letter with the Fed (ie pay the rate of the lender of last resort), it is finished. Hence the FDIC resolution once the cheap money went out the door.
Vulnerability to a bank run comes from not being able to pay the going rate at the Fed.
What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit.
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". Saying that taxpayers won't pay for this is a joke too. The burden of filling the insurance gap won't come out of the pocket of other banks or their shareholders. Even though the FDIC receives no federal funding on paper, they seem to be fully invested in treasury securities and can borrow directly from the treasury, against rates not available to the common Joe. It's a perverse relation which the taxpayer contributes to.
The FDIC has announced that they will not do a repeat of what they did for SVB - insure the full deposit amount rather than just the $250k. Therefore, anyone with a large deposit in a small bank is going to want to move their money out into a "too big to fail" bank.
Unfortunately for FRB, this is what happened to them. No bank can survive a real run, no matter how carefully balanced they are with risk (after all, they _do_ take on some risks in order to make a profit).
In my opinion, the FDIC's announcement of what they will not do (insure the full deposit, even if above the $250k limit) after doing it for SVB, while have good intentions, is what backfired.
They should've just lied, and said that they'd do it for another bank, if there's a need to; this would've stopped any fear of a run, and thus stop the run before any more dominos collapse.
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