[unityByFreedom]

Yes, now I wonder if anyone is allowed to fail. David Sacks complained that if the regionals aren't protected, then everyone will only bank with the big four. Yet if everyone is protected even when the bank makes poor decisions, that's a run on the FDIC itself. So as you say, where is this new line, and who can be trusted to allow those who cross it to fail?

[A4ET8a8uTh0]

<< Yes, now I wonder if anyone is allowed to fail.

That was one of the questions on the call/presentation I was recently on and no one has a clear answer at the moment ( I suppose it is not a surprise since we can't take Yellen at her word ). Some clarity will be needed and sooner rather than later if stated policy and rules are to be believed to be real policy and rules.

FWIW, odds are, just about every bank by now has either reviewed or scrambling to review their exposure.

I do not envy the weight of Yellen's decisions, because from where I sit it is still hard to tell if it was a 'less bad choice' available.

[unityByFreedom]

> odds are, just about every bank by now has either reviewed or scrambling to review their exposure

The lesson they learned is to shout global emergency when your regional bank can't meet withdrawals due to poorly managed finances.

Banks will not be more prudent, in the long run. They've just been taught that the government will protect depositors beyond federally insured limits. So now they can make riskier bets.

[zaroth]

Keep in mind that SVB equity was totally wiped out. Everyone most certainly was not protected.

The people who make the poor decisions absolutely took a hit. The Board and management of the bank all took a hit and lost their jobs.

I don’t see a big problem with depositors being made whole. The bonds that backed their deposits are fully intact.

[UncleEntity]

> The Board and management of the bank all took a hit and lost their jobs.

Right after they cashed out significant amounts of SVB stocks.

[webmaven]

Don't be too surprised if the FDIC (or perhaps the SEC, since we're talking about equity) forces clawbacks of those payouts, not to mention salary and bonuses in general after December 2021.

[unityByFreedom]

What is the case against them? You can't claw back without demonstrating some law was broken. Making a bad financial decision that causes a business to fail isn't against the law unless you somehow profited from it. And, from what's publicly known, SVB's CEO didn't come away with more money from the bank's closure than he would have had he continued running the bank.

[benmmurphy]

It’s possible for the bank to capture a % of the deposit insurance by taking profit neutral risks. This is achieved by just increasing the risk. For example the profit neutral bet:

  0.5: 1
  0.5: -1

And the bet is made of 80% deposits 20% capital.

For the bank the profit before paying interest to depositors:

  0.5 * 1 - 0.2 * 0.5 = 0.4

The bet is profit neutral but the banks profit comes from increasing the risk of triggering the insurance.

For the insurer the cost is: 0.5 * -1* 0.8 = -0.4

If you want to run a ‘scam’ bank that makes money from looting the FDIC fund then having your capital going to zero sometimes is part of the cost of doing business. This is why it’s important for the insurer to try and control risk and insure there is enough capital so the loot equation does not work.

[unityByFreedom]

The question is, what would it take for a bank to be allowed to fail? The FDIC insurance line of $250k must've meant something.

[Rapzid]

SVB failed. You should look up the FDIC mission statement; it has nothing to do with drawing lines in the sand.

[unityByFreedom]

> The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation's financial system.

I see nothing there about "we will guarantee deposits of any amount over $250k."

The decision to guarantee SVB may wreak havoc on the financial system as banks feel comfortable continuing to make risky bets and thus attracting more customers, knowing that the fed will rescue the customer deposits that backed those bets.

Greg Becker isn't going to jail, and he isn't going to be financially ruined. There are thousands of people willing to fill the role of extracting money from the government. The trick is to not give into their attempts to bend the rules.