Silicon Valley Bank collapses

[Ajay]

Some insight into what is going on vis-a-vis banking oversight. Banking supervision has been throttled back again with the idea that banks, left to their own devices, will manage their own risks appropriately. [timestamped to segment]

 

[thilanliyan]

Why would banks take any deposits then though?

EDIT: I guess everyone would have to pay a monthly fee to the bank for their accounts.

I already pay a monthly fee for my account lol

 

[Exterous]

If that’s the case that’s fine but then the solution is to fully guarantee deposits AND charge the necessary fees to fund that guarantee.

I'm not sure it is. The Fed already has means its shown are capable to resolve situations like these although I do think the removal of their 13(3) powers is a general risk that could bite us in the ass at some point. And, realistically, the banks aren't just going to see a higher fee and say "Oh dang - less profits for us I guess." They'll trim staff\services\add fees\reduce rewards\etc. Granted there is a cost of most regulations so the consideration is where to drawn the line of overall benefit. Pure speculation on my part but I suspect the the public would pay more overall if that were the case via fees\opportunity cost\convenience\etc than occasional influxes of money to the system because they are protecting deposits all the time not just when needed. I also suspect that offering guarantees high enough to cover medium sized companies would require going into the multimillions of dollars of guarantees. While most businesses by number of entities are small businesses with less than 20 people their total capitalization is roughly equal to medium sized business which have 1500-2000 employees. A 1500 person company could easily have over $10M going through a bank every month just for payroll alone. Covering just that would require a 40x increase in FDIC limits. I'm kinda throwing darts with figures but even cutting it in half is a pretty drastic increase. It's probably enough to distort financial markets in all kinds of not fun and unexpected ways. Covering deposits above the existing guarantee once every 15 years or so doesn't seem that bad in comparison - at least in my mind.

We can't move to just having big banks cover big deposits as that will just encourage consolidation. Technically solvable via anti-trust laws but that hasn't really been a thing for far too long. I see that as even less likely to change unfortunately.

We know that, at a certain point, letting a company fail is worse right now. But the truth is that it almost certainly better in the long run. We are in this situation today exactly because we bailed them out in 2008. There is no reason not to gamble big if you can't lose big. Since we have an entire half of our political system that is opposed to regulating the problem, we will just keep having this happen over and over if we keep shielding them from the consequences.

We're in this position today because rates surged quickly to combat historic inflation levels and SVB made some ill advised decisions that overexposed them to rapid interest rate hikes. It's not at all related to the 2008 bailouts - hell SVB was a substantially smaller bank even 2 years ago. They grew by like 250% over the last 2 years or something crazy like that. In 2008 the cliff we were racing towards was worse in relative percentage numbers that what caused the Great Depression. Like significantly worse. There's not a chance in the world we'd be as well off as we are now if we done what we did in 2008. There are a lot of great books on the subject now but I highly recommend The Courage To Act and Stress Test.

Hot take: banks shouldn't be able to touch deposits. All moneymaking endeavors should be done with their own money, and any interest earned on that money. Investments in the bank should be done contractually with the understanding that the investment cannot be withdrawn until the contract expires, at which point each goes their separate ways, or a new contract is negotiated. Yeah, banks won't make as much money. I don't care.

I think you're underestimating how much salaries, real estate, equipment, hardware, and compliance cost. Banks flat out wouldn't exist today if they only relied on their own money. Or the monthly fees would be so high that you'd shove a shit ton of already disadvantaged people out the door. Thats a big enough issue with banking as it is.

 

[[DHT]Osiris]

I think you're underestimating how much salaries, real estate, equipment, hardware, and compliance cost. Banks flat out wouldn't exist today if they only relied on their own money. Or the monthly fees would be so high that you'd shove a shit ton of already disadvantaged people out the door. Thats a big enough issue with banking as it is.

How do you resolve the situation then? Because at present, if enough people decide to pull their money out because they've lost trust in their institution, the entire banking industry seemingly collapses overnight. That doesn't sound sustainable.

 

[fskimospy]

I'm not sure it is. The Fed already has means its shown are capable to resolve situations like these although I do think the removal of their 13(3) powers is a general risk that could bite us in the ass at some point. And, realistically, the banks aren't just going to see a higher fee and say "Oh dang - less profits for us I guess." They'll trim staff\services\add fees\reduce rewards\etc. Granted there is a cost of most regulations so the consideration is where to drawn the line of overall benefit. Pure speculation on my part but I suspect the the public would pay more overall if that were the case via fees\opportunity cost\convenience\etc than occasional influxes of money to the system because they are protecting deposits all the time not just when needed. I also suspect that offering guarantees high enough to cover medium sized companies would require going into the multimillions of dollars of guarantees. While most businesses by number of entities are small businesses with less than 20 people their total capitalization is roughly equal to medium sized business which have 1500-2000 employees. A 1500 person company could easily have over $10M going through a bank every month just for payroll alone. Covering just that would require a 40x increase in FDIC limits. I'm kinda throwing darts with figures but even cutting it in half is a pretty drastic increase. It's probably enough to distort financial markets in all kinds of not fun and unexpected ways. Covering deposits above the existing guarantee once every 15 years or so doesn't seem that bad in comparison - at least in my mind.

We can't move to just having big banks cover big deposits as that will just encourage consolidation. Technically solvable via anti-trust laws but that hasn't really been a thing for far too long. I see that as even less likely to change unfortunately.

Seems like a recipe for moral hazard to me. If banks know they can make huge, irresponsible bets with depositors' money and get paid if they win and be bailed out if they lose then there's little incentive to be responsible.

Also, if the federal government is now insuring all deposits in banks do we even need banks for depository services? Could just make that into contracts for service/transaction facilitation, etc. It's all just numbers on a spreadsheet now anyway so it's not like 95% of people need a vault or anything.

 

[Pens1566]

How do you resolve the situation then? Because at present, if enough people decide to pull their money out because they've lost trust in their institution, the entire banking industry seemingly collapses overnight. That doesn't sound sustainable.

The economy has always been a giant experiment in trust/fear.

 

[[DHT]Osiris]

Seems like a recipe for moral hazard to me. If banks know they can make huge, irresponsible bets with depositors' money and get paid if they win and be bailed out if they lose then there's little incentive to be responsible.

Also, if the federal government is now insuring all deposits in banks do we even need banks for depository services? Could just make that into contracts for service/transaction facilitation, etc. It's all just numbers on a spreadsheet now anyway so it's not like 95% of people need a vault or anything.

And if banks cannot survive without essentially relying on govt assistance when any perturbance is created, the business model needs to change. Dramatically, if necessary.

 

[[DHT]Osiris]

The economy has always been a giant experiment in trust/fear.

Oh trust me, I know. It's far different when the experiment is mostly opt-in (stock market) vs required (banking) though.

 

[JTsyo]

We know that, at a certain point, letting a company fail is worse right now. But the truth is that it almost certainly better in the long run. We are in this situation today exactly because we bailed them out in 2008. There is no reason not to gamble big if you can't lose big. Since we have an entire half of our political system that is opposed to regulating the problem, we will just keep having this happen over and over if we keep shielding them from the consequences.

They lost big though. Bank is gone and stock is worthless. Who didn't lose were the depositors not the owners.

 

[Exterous]

How do you resolve the situation then? Because at present, if enough people decide to pull their money out because they've lost trust in their institution, the entire banking industry seemingly collapses overnight. That doesn't sound sustainable.

There have been 373 bank failures in the US since 2009. How many times has the banking industry suffered significant turmoil because of those failures? Once? And during a time that is already strained for various reasons including the Fed trying to slow the economy enough they're likely willing to cause a mild recession in order to tame inflation.

Seems like a recipe for moral hazard to me. If banks know they can make huge, irresponsible bets with depositors' money and get paid if they win and be bailed out if they lose then there's little incentive to be responsible.

Also, if the federal government is now insuring all deposits in banks do we even need banks for depository services? Could just make that into contracts for service/transaction facilitation, etc. It's all just numbers on a spreadsheet now anyway so it's not like 95% of people need a vault or anything.

Given the above mentioned bank failures over the previous 14 years in 372 times out of 373 times we haven't haven't backstopped bank deposits like this. And SVB investors are still holding the short end of the stick. Those are some pretty long odds if your plan depends on a bailout if you screw up. I'd also point out their 'bet' was stashing too much money in ultra safe US Treasuries and were 24 hours away from a non-government based solution. If everything else was the same but we were a few years back before social media was causing bank runs they would have been fine. I do think we'll see some adjustments because of social media - maybe in the form of tighter daily transfer limits. I doubt we'll see that at the regulatory level though

Edit: More specifically:

The federal government will not bail out the “investors and owners” of Silicon Valley Bank, Treasury Secretary Janet Yellen said

 

[fskimospy]

There have been 373 bank failures in the US since 2009. How many times has the banking industry suffered significant turmoil because of those failures? Once? And during a time that is already strained for various reasons including the Fed trying to slow the economy enough they're likely willing to cause a mild recession in order to tame inflation.



Given the above mentioned bank failures over the previous 14 years in 372 times out of 373 times we haven't haven't backstopped bank deposits like this. And SVB investors are still holding the short end of the stick. Those are some pretty long odds if your plan depends on a bailout if you screw up. I'd also point out their 'bet' was stashing too much money in ultra safe US Treasuries and were 24 hours away from a non-government based solution. If everything else was the same but we were a few years back before social media was causing bank runs they would have been fine. I do think we'll see some adjustments because of social media - maybe in the form of tighter daily transfer limits. I doubt we'll see that at the regulatory level though

If the risk is so low that would mean the cost to insure it is low. Right?

You either need a government bailout or you don’t. If you don’t, great. If you do, pay for what it costs.

This is not complicated.

 

[manly]

We know that, at a certain point, letting a company fail is worse right now. But the truth is that it almost certainly better in the long run. We are in this situation today exactly because we bailed them out in 2008. There is no reason not to gamble big if you can't lose big. Since we have an entire half of our political system that is opposed to regulating the problem, we will just keep having this happen over and over if we keep shielding them from the consequences.

@Exterous wasn't referring to the failure of SVB, which is more or less a nothingburger in the grand scheme depending on what industry you're in. He's referring to all the mid-sized firms that banked with SVB, and how "contagion" would have spread if essentially their money was stuck for weeks. As one example, I believe Roku had $500M under deposit at SVB (if I remember correctly). Roku is a moderately successful firm (albeit never solidly profitable), and it wouldn't take a genius to see they'd probably go under if they didn't have access to their funds.

Other than that, I don't really agree that we should let all banks fail for the greater good. The problem is that there are systemically-important TBTF banks, and Dodd-Frank intended to make it a lot harder for these mega banks to fail and tank the global economy. If you allow banks to get as large as they have (and this is globally, not just USA), there's no real way to isolate the damage if one of them implodes.

IMO we absolutely should've back-stopped TBTF institutions in 2008, and Bernanke/Paulson arguably prevented a worse economic depression. The policy failure is that the federal govt wasn't stringent enough at forcing "bailed out" CEOs to be our bitches, and to absolutely slash bonuses and what not. There should have been a lot more strings attached for a lot longer time period. There's no way to prove it, but an alternate universe where central bankers and governments did not intervene as they did would have resulted in widespread economic disaster.

 

[fskimospy]

This is an annoying thing to me. Entitled fuck faces think that they deserve to be bailed out because they were too stupid to put their deposits in a smart place. Sorry, you were stupid and you should pay the price.

That’s what they say to normal people though. When it’s their money they shit their pants because once the real world comes to them they can’t handle it.

Edit: when these morons win they tell us it’s because they are so smart. When they lose they tell us we have to save them.

 

[Exterous]

If the risk is so low that would mean the cost to insure it is low. Right?

Here are the FDIC assessment calculators if you'd like to find out

 

[fskimospy]

Here are the FDIC assessment calculators if you'd like to find out

Help me out. What does the calculator say for unlimited insurance?

 

[Puffnstuff]

I noticed that First Republic was infused today by major players outside the FR. The fed is afraid of more bank runs which are the trigger mechanism for failure so allowing it to appear that peers intervened will calm the public more than if they did it.

 

[Exterous]

Help me out. What does the calculator say for unlimited insurance?

Why are we talking unlimited insurance? First that isn't a realistic thing that would happen - the government would run out of money at some point. Second SVB wasn't insured\backstopped by the government for 'unlimited' amounts of money. They were backstopped for whatever the gap between assets and deposits is. At present that is up to $25 billion with the exact amount depending on how withdrawals compare to asset values in the near future. Would they have gone higher? Almost certainly. Where is the line? You'd have to ask Powell and Yellen

 

[fskimospy]

Why are we talking unlimited insurance? First that isn't a realistic thing that would happen - the government would run out of money at some point. Second SVB wasn't insured\backstopped by the government for 'unlimited' amounts of money. They were backstopped for whatever the gap between assets and deposits is. At present that is up to $25 billion with the exact amount depending on how withdrawals compare to asset values in the near future. Would they have gone higher? Almost certainly. Where is the line? You'd have to ask Powell and Yellen

So what line are you drawing as a backstop and why should we believe it, considering the previous line was not honored?

 

[Vic]

Bingo

We need to realize it should all be insured on the deposit side. But charge for it.

This is a terrible idea for exactly the reasons we're seeing with SVB right now. It gives high value depositors too much power to collapse a bank through a staged run because they could so without fear of loss.

 

[fskimospy]

This is not complicated. If the country is going to guarantee all deposits that’s fine but then we should set up a regulatory scheme to do that along with fees necessary to fund it.

If we can replenish the fund through the sale of failed bank assets, great. It doesn’t change the fact that the banking industry should pay to insure itself.

This should not be hard to understand.

 

[Exterous]

So what line are you drawing as a backstop and why should we believe it, considering the previous line was not honored?

Why would I draw the line? That is a terrible idea. I'm going to go out on a limb and say the Feds and Treasury have a much better education and certainly privileged insight none of us have to be able to set the line.

Help me understand your ire\stance\etc on this a bit because to recap:
-SVB investors and owners are completely wiped out by this. The value of their ownership and SVB holdings is exactly $0 combined
-Over the past 14 years 0.2% of failed banks banks have been backstopped like this. That seems very unlikely to cause a moral hazard. It also means that 99.8% of the time the system worked without any extra effort required. That seems like a pretty good success rate (not that I'm against some tweaks like looking a lot more closely at HTM vs AFS. I'd also agree that size of impact for the 0.2% matters but this has been pretty mild even as 'bad' bank failures go)
-Companies who held their $ at SVB won't be harmed or struggle to make payroll. Payrolls were processed within 3-4 days of expectations
-The cost of the backstop is - at present- capped at $25Bn. It is unclear to me where that money is coming from at the moment but even if we assume taxpayers for some context - in 2020 the Feds were buying ~$100bn in mortgage bonds per month.
-Becker scheduled a stock sale on Jan 26th for Feb 27th per 10b51 rules.

The last option makes the most sense - but maybe because it also irkes me. I suspect that there was enough knowledge to know something bad was happening. But he has also been regularly selling stock for many years so the sale is in line with that for better or worse (Willing to wait for the SEC investigation into that though). Fortunately the rules have increased from 30 day to 90 day waiting period and actually took effect last month. 90 days seems a lot more reasonable than 30 days

 

[fskimospy]

Why would I draw the line? That is a terrible idea. I'm going to go out on a limb and say the Feds and Treasury have a much better education and certainly privileged insight none of us have to be able to set the line.

Help me understand your ire\stance\etc on this a bit because to recap:
-SVB investors and owners are completely wiped out by this. The value of their ownership and SVB holdings is exactly $0 combined
-Over the past 14 years 0.2% of failed banks banks have been backstopped like this. That seems very unlikely to cause a moral hazard. It also means that 99.8% of the time the system worked without any extra effort required. That seems like a pretty good success rate (not that I'm against some tweaks like looking a lot more closely at HTM vs AFS. I'd also agree that size of impact for the 0.2% matters but this has been pretty mild even as 'bad' bank failures go)
-Companies who held their $ at SVB won't be harmed or struggle to make payroll. Payrolls were processed within 3-4 days of expectations
-The cost of the backstop is - at present- capped at $25Bn. It is unclear to me where that money is coming from at the moment but even if we assume taxpayers for some context - in 2020 the Feds were buying ~$100bn in mortgage bonds per month.
-Becker scheduled a stock sale on Jan 26th for Feb 27th per 10b51 rules.

The last option makes the most sense - but maybe because it also irkes me. I suspect that there was enough knowledge to know something bad was happening. But he has also been regularly selling stock for many years so the sale is in line with that for better or worse (Willing to wait for the SEC investigation into that though). Fortunately the rules have increased from 30 day to 90 day waiting period and actually took effect last month. 90 days seems a lot more reasonable than 30 days

My position is simple. If you’re going to guarantee all deposits then charge depositors the cost of that.

This is not complicated, it’s basic capitalism. Charge people the cost of the insurance. If you want to offer welfare to banks then let’s talk about how much bank welfare we want to pay for.

 

[fskimospy]

It is kind of funny that finance people are mad about the idea of charging finance people the cost of insuring finance people’s mistakes.

That’s life, that’s the world. Grow up and accept it - this is the standard you apply everywhere else.

 

[A///]

You can have accounts at different banks though, right?

Yeah, but slight correction. FDIC insurance is per account category, not overall account. You can have a cd, savings, money market deposit and checking all with 250K in them each and be insured for each one.

 

[Muse]

I got a call today from Etrade, where I have a brokerage account. I also have a savings account there which has a 3.50% annual return at the moment. When I went to cash in August or so, I moved cash from the brokerage account to the savings account, what they call their Premium Savings account. Now, my financial consultant there at the time told me it was insured to 500k. I wanted to make sure, I found some conflicting info, but was assured it was 500k. I know this is possible for joint accounts, but I don't have that.

I can at any time transfer money from the Premium Savings Account to my brokerage account and invest in whatever, stocks, ETFs, etc. If I go to cash, I can immediately transfer that to the savings account and start earning interest (which is paid monthly).

Anyway, today I am called by someone else who tells me they are now my financial advisor at Etrade, I ask what happened to my old one and was told he's no longer with the firm. Seems they closed their S.F. office and she's in Seattle.

I ask about the 500k insurance and she tells me that because Etrade and Morgan Stanley (Etrade's owner) are separate entities they are able to insure my savings to 500k. Well, that's nice. What's even nicer is she told me I can open a 2nd Premium Savings Account at Etrade and get an additional 500k insurance, i.e. on that on top of the insurance on my other savings account. I ask if I can open additional savings accounts, she didn't know, puts me on hold, comes back and tells me there's no limit! Wow! Well, I have to wonder, that does sound too good to be true.

In the interests of pursuing the important questions posed here:

I had business with Etrade in terms of verifying my ACH's with other institutions yesterday and before terminating the conversation I asked about the FDIC insurance limit questions posed in the quoted material above. I was told that the definitive information would be found by searching on FDIC on my Etrade home page, but she said that I am insured to 500k by virtue of the fact that Etrade and its owner as of ~2 years ago, Morgan Stanley are separate. I have essentially two savings accounts, one in each institution. But my coverage is limited to 500k for any one individual, that individual being myself. So, if I had additional savings accounts with them, the total FDIC insurance would still be 500k. Well, this makes "perfect sense." The other scenario was totally pie in the sky.