I think Yellen is signalling the right approach, frankly. First, the balance between the bank's assets (its loans and the investments it made with depositors money, plus the bank's capital) and its liabilities, is such that SVB has enough holdings to cover nearly all of its deposits. The banks capital (that is its equity, and subordinated debt) should all go toward making depositors whole. That's what bank capital is for. The question then becomes how much of a hole is left in order to make depositors whole? It won't be that big a number, if you assume that the vast majority of the deposits will remain as deposits in whatever bank the Feds find to purchase the corpse of SVB - remember, that SVB failed not because it it had a huge mismatch between liabilities and assets, but because its depositors tried to withdraw all their money all at once - that is because SVB was put in a situation where it had to make good on all its liabilities in a 2 day period. It couldn't do that, because its assets were tied up in loans to other customers which couldn't be instantly recalled, and government bonds which couldn't be sold quickly enough without incurring substantial losses, and its own capital. It became illiquid overnight. But the actual delta between assets and liabilities may well be a few billion dollars, if the deposits are not all yanked out. For the Feds to put up that money as part of a deal to sell SVBs portfolio intact to another bank, makes good sense to me. The right people (investors in the bank) take the haircut, the depositors get their money.
ooc why is unlimited deposit insurance a bad idea? A quick Google search didn't have many results, except some brief articles about section 343 of Dodd Frank (which itself seemed limited in scope).
Normally, depositors have to have confidence the bank they choosewill handle their money competently and responsibly.
With unlimited insurance, depositors will simply choose the bank that offers the best terms.
Banks need depositor, so they will respond to what depositors want. In the first case there is pressure to handle money competently and responsibility. In the second, there is pressure to take risks to be able to provide the best terms.
But Moral Hazard seems more like a risk of Deposit Insurance overall, rather than just unlimited insurance?
Also it's not like FDIC is granted automatically, couldn't there just be much more strict capital requirement and risk limits in exchange for a higher protection?
(1) small depositors, in general, aren't in a very good position to evaluate the risk of a bank very well. So they won't be exerting much positive force on banks anyway.
(2) even if they could evaluate risk well they still wouldn't exert much pressure because that requires an organizing force (even if the aggregate amount of deposits is high)
(3) Understand that the FDIC is a nation-wide program and that the funds the FDIC pays out do not come from tax payers. They come from premiums paid by member banks. Banks get the money for the premiums by reducing the terms they offer depositors. That is, the banks directly, and depositors indirectly pay for the risk taken on by the banks directly and the depositors indirectly.
This breaks down at higher dollar amounts though because banks and depositors aren't really uniform, but at lower levels of money it's a good approximation. At higher levels of money, depositors and banks will apply increasingly sophisiticated measures to shift reward toward themselves and risk away. That is, they will find ways to work the system. At some level the insurance program becomes a way for more sophisticated players to profit less sophisticated players. A cap of $250K puts everyone at approximately the same level of sophistication and makes it harder to run some con at scale.
BTW, insurance for amounts higher than $250K is available. It's not that popular, though, because it's expensive. It's expensive, of course, because of the risk.
That all makes sense, though I would argue that many companies with an order of magnitude more than the FDIC limit aren't really that much more sophisticated, and certainly not enough to evaluate risk of catastrophic failure (as we have seen with SVB).
It seems then the logical alternative to insurance for these companies is to concentrate deposits at large, "too big to fail" type institutions. I'm not sure if that is something that would be good or bad for the economy as a whole, but definitely seems bad for smaller banks?
You're in spirit asking for a state bank, not modified private banks. Thats the only way you would get the 'result' you're looking for.
Many private banks with unlimited deposit insurance would simply play more fast and loose with your money because there's basically no risk. Why wouldn't you choose the bank that offers more % return on your money? You're totally insured.
The state insuring all deposits would effectively make it a giant bank (and it would eventually consume them all, on top of now having the power incentive to destroy them). If you're not aware of the flaws of state banks, look into China's banks if you're curious. 'Tofu Dreg' projects would be a good place to start. I think its obvious why we wouldn't want someone like Pelosi to be in charge of a state bank.
> Many private banks with unlimited deposit insurance would simply play more fast and loose with your money because there's basically no risk. Why wouldn't you choose the bank that offers more % return on your money? You're totally insured.
You overstate the case for moral hazard here. Most of the risk to the bank remains, even if the FDIC covers larger deposits than the normal limit of $250,000. 100% of a bank's capital remains at risk - that is the bank can lose everything it owns and its backers have invested in it, even if its depositors are protected.
And, if what I have been able to read about it is correct, SVB wasn't really playing fast and loose with depositors' money. Any bank can be destroyed by a drastic enough bank run, because a banks assets - it's loans to customers and investments it makes with deposits, are never completely liquid. SVB's situation was worse than that, since its non-loan investments (in the form of purchased bonds) were under water, but by all account, it wasn't by a lot.
If everything else stays the same sure. Bankers would get creative really quickly to put most of their gains somewhere else.
SVB wasn't necessarily playing fast and loose more than anyone else. They were just in a high risk highly liquid sector and had what wasn't high liquidity tied up in securities.
It’s literally a significant portion of America’s economic future you’re killing off, plus wineries, farmers, and VC’s pension fund holdings. It would be insane to let that just go boom.
Mass unemployment in tech is not in national interests. It will lead many foreigners to head home and start/join competitors and strangle future GDP.
You and your tax dollars depend on the USD being strong, and global trust in US banks. It's a worthwhile investment for taxpayers to make depositors whole to maintain that trust.
Capitalist society runs on free markets and good regulation. We let SVB bypass good regulation here, and that's our painful learning lesson that needs to be paid for.
> For the Feds to put up that money as part of a deal to sell SVBs portfolio intact to another bank, makes good sense to me
Honest question: why? I.e. why can't the capitalists invested in this business absorb the reasonable haircut? (I assume it's "reasonable" based on the information we have been provided with until now). Depositors (especially those holding more than 250k) were also investors, they were getting back more money than they had put in.
I make a clear distinction between depositors and investors. The holders of the bank's capital - it's equity and and subordinate bond debt, are at-risk investors, and should, as I said in my original post, take a 100% haircut (assuming the bank in fact has fewer assets than liabilities.) But a depositor - who probably was earning negligible interest for parking their cash in the bank - has a reasonable expectation that their deposit is safe in a regulated bank. And the government has an interest in assuring bank customers across the country that ordinary deposits are safe in regulated banks that are adequately capitalized.
SVB catered primarily to businesses - the last thing we need right now is every business worrying about where their bank deposits are. If they do worry, it may trigger more runs as they all try to move their funds to “safer” banks.
And then why shouldn’t be the whole banking system be nationalized? Businesses are capitalists by detonation (especially those based in the Bay), doing business comes with risks, managing risk is one of the basis of capitalism.
Accounts are worth money to a bank even with no balance. Likely if JPM or someone buys the bank people will continue to use those accounts. So yeah someone will fill the hole and their stock price will probably go up because of it
First, the balance between the bank's assets (its loans…)
Keep in mind those loans are largely being paid by SVB customers that are very likely scrambling to make sure they can pay their employees right now.
It’s pretty assured that more SVB loans will be defaulting in the coming weeks than if their depositors didn’t lose access to about half of their money.
