People keep saying this, but I don't understand why they don't see the issue. Yes, shareholders got zeroed out of their SVB shares. But since there was no risk to playing with depositors money besides losing the business, which can fail in any number of other ways as well, there is no deterrent to taking on the large risk.
The optimal strategy to beat the competition is to edge toward more risk. And since you can get an edge by playing more risky, other banks will have to do as well to compete.
A traditional business, when edging toward risk, fails when they cannot get their customers to buy from them. Banks fails when they can't get their customer's money back to them. That's the big issue with the risk dynamic.
This is probably less true than you think. If SVB's assets had been anything other than treasuries, I would agree. But liquidating their assets would almost certainly move all of those to a willing buyer. It is everything else that is problematic and likely nobody wants to buy.
The moral hazard is that there isn’t a a limit to the $250k FDIC insurance so people that put money into the bank don’t have to care what the bank does.
So there’s no incentive to work with a bank that took the time and money to pass a stress test — in fact the one that didn’t bother to do any testing can give better terms as they aren’t spending money to be safe.
I don't think it should ever be the depositors responsibility to figure out whether a bank is properly managing their risk backing your deposits. That's both intentionally meant to be opaque to depositors - you get dollars in an account, not share in an MMF for instance - and also, it is incredibly difficult for even professionals to evaluate. This is the responsibility of regulators plain and simple. And I'd argue by the FDIC taking this risk on now, moral hazard is still not a factor.
I'd tend to agree that expecting depositors to police their banks is bad policy. It would be better to make that policy change explicitly though, by insuring all deposits, rather than by slouching into it with ad hoc rescues like here.
I agree there's no moral hazard as to the SVB shareholders, since they got zeroed. There is a moral hazard as to the shareholders of other banks, who will benefit from the new lending program in proportion to the amount of bad interest rate risk they took.
That’s the point IMHO. We want depositors to keep money in the banking system. The inverse of it where depositors don’t trust the system would result in even more bank runs. However well run a bank is, there’ll always be a certain amount of assets in long term that lose value in the short term. We’ll be seeing perpetual bank runs and a new shadow banking system will emerge if this continues unchecked.
They're opaque to anyone with less than $250k in the bank, which is almost everyone.
If you are large enough player to be visible in the "systemic risks" picture you should be helping to stabilize the system, not just throwing your weight around like a drunk elephant to see where money falls out.
It is and it isn't the depositor's responsibility. It's totally expected for a large company to take a long, hard look at their bank. When I was an undergrad in Econ and in Accounting, the issue of insured account limits was literally in the text books. In the accounting/finance/economics area it's already well understood that a CFO (or their office) is responsible for vetting the bank. Moreover, it's the CFO's job to make sure the bank has adequate controls because (unlike consumers) commercial deposits are not indemnified when fraud occurs. If a company's payroll is stolen through fraud, for example, it's likely not recoverable. (Unless the bank failed to follow their procedures or the procedures set forth by the depositor, and you may still sit in court for years.) If your personal Visa debit card gets compromised, you aren't liable for the fraudulent purchases and the processor eats the cost. The health of the bank is less opaque to mid to large businesses, which have access to tools like Lexis/Nexis, Bloombergs, detailed ratings, and let's not forget personal networks. Most large companies also have to run big choices, like what banks to use, by their boards.
. Pending litigation
. Counter party risks (e.g. do they have exposure to a problem bank)
. Financial statements (usually the first stop and contains a lot of information)
. Credit Default Swap rates (what does it cost to insure the debt issued by the bank)
. What rules does the bank operate under (domestic, foreign, state, federal, etc.)
. General reputation in the industry (e.g. go to $CS to launder your cocaine money)
That being said, it's probably beyond a small business to really evaluate their bank risk. And while 250k may have been adequate for the 2010's, it may no longer be sufficient to cover many small businesses (and by small I mean the back office is a handful of people). Should it be 500k? 1 million? I don't know. What I suspect is that making it unlimited, it means that a bank that's hemorrhaging depositors could offer unsustainably higher rates. Less risk-sensitive CFOs might decide that parking 10 million in reserves might be a good deal since it's as safe as an officially insured deposit. It's much more liquid than holding a 90-day CD or 3 month T-bill to maturity. Suddenly, the bank is flush with deposits, but is still going under. This would be kind of like the 1980's S&L crisis. That's why I'm all for raising the cap, but with clear limits and adjustments to the fees charged to member banks for insurance. If we need to expand the FDIC insurance fund by 3x to raise the cap, that's fine. But raising the cap, for an extended period, without adjusting the rules or the price for the insurance could lead to unintended consequences.
Should a VC funded company of 10 people do what GM does when evaluating a supplier or customer? Probably not. What about when it gets to 100 people? At that point I would expect there to be a competent CFO. What about the VC? (I'm just going to ignore all the tweets from the All-In community that showed a profound lack of understanding of banking, confusing a modern bank Gringot's.) Should the VC, as part of their advisory role, maybe recommend a good part time CFO or cash manager? Did regulators screw up SVB? Possibly, there were a lot of issues found when they transitioned to a new regulatory team year or two ago (or so I read). But regulators are not bank managers. And if a bank can show their risk controls are adequate, and those risk controls are being followed, it does not mean they're making good investments. (It's arguable that both lack of controls and following controls were an issue for SVB - as far as I've read).
What's an individual supposed to do, pay for an audit of a bank's balance sheet?
The bank had poor risk management, regulators were asleep at the wheel, depositors are blameless. Although I will say that a startup with millions in the bank should probably have a CFO.
If you bank with publicly traded banks, they publish their financial statements and those statements are audited. They are freely available for you to read and contain a lot of good information. You could watch, for example, SVBs interest expense grow unsustainably, quarter after quarter. That's what the shorts picked up on and why some investors built up a short position on SVB.
That being said, two people running an Etsy store won't do that. Nor should they have to. Maybe the insurance should be bumped up, but for either a very limited time, until you write new, official rules. And yes, the CFO should do an appropriate level of due diligence for a large business with lots of money. It makes you wonder what some of the CFOs did all day.
> So there’s no incentive to work with a bank that took the time and money to pass a stress test
This assumes that there future uninsured deposits are guaranteed (they may be, yes, but this is a bet, not a certainty).
Regardless, you're making the case that consumer choice is not sufficient pressure to enforce safety measures. Which is correct, but we already knew that! That's the purpose of regulations.
Expecting industries to self-regulate in response to market forces is a losing battle.
Right lets all just play silly accounting games breaking up your 100M into 400 individual bank accounts instead of doing something productive and just raising fdic limit to something sensible for a small-medium business
You have to play silly games and try to fix the system simultaneously.
You always keep your foot on the brakes in case someone is drunk driving on the road. At the same time, you'll try to fix those issues via legislation (DUI) and technology
There is absolutely moral hazard for depositors. If uninsured SVB depositors had gotten something like 90¢ on the dollar for deposits, every company with uninsured deposits would start thinking about how reliable their bank might be. More due diligence would happen.
Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larger.
It shouldn't be up to depositors to do "due diligence" on their bank, making sure they're compliant is exactly the kind of thing government is _for_.
Imagine if you had to do several hours of research on every single thing you purchased and investment you made, you'd never have time for anything else and there's still a chance you miss something.
Compare that to experts doing it and spending a lot more time on it, then slapping anyone who is not up to standard. It's a way more efficient system.
If you see a bank offering 4.75 percent on a certificate vs another offering 2.75, which one would you choose? If you always choose the highest, should you not have a stake if the bank was found to take a lot of risk to offer this higher rate?
> Asking depositors to do the due deligence is a strawman.
Except that there are many commenters in this exact thread making that argument.
As for splitting up your deposit into $250k chunks, I agree, companies should do this as much as possible. But it would be hard for some companies. An extreme case is Circle, who says they had $3.3 billion in SVB. To get all of this covered, would require 13,200 different banks. It looks like there are only 4,236 FDIC-insured banks in the US. Add in another 4,853 NCUA-insured credit unions, and we're still left with $873 million uninsured, despite using nearly 10,000 accounts.
Circle is an extreme case with over 100MM USD of revenue each year and whose primary product is memory management. I'm fine saying that they have to do due diligence.
Sure, I don't want depositors to have to do tons of due diligence to manage a small business payroll. But I am also fine saying that a company with over 2 billion in USD should be able to afford to find safe places to stash it.
Why? What is anyone gaining by forcing individuals and businesses to utilize middlemen to split their cash across dozens of bank accounts? Just guarantee deposits for all and skip the performative complicated BS.
Spread 250ks all comes out of the same fdic pool anyway, so why bother?
Exactly. The 250k limit is clearly meant to ensure individuals don't have to fear bank runs. Saying companies should split accounts so that they all remain close to 250k is clearly a hack that goes against the intent of the law.
I think the government should reserve the right to haircut large depositors in cases where there is serious negligence or malfeasance, so it makes sense to have the limit. But it's also a good idea not to do that in cases of mere incompetence, like here.
The alternative is to do like Canada and basically keep around a handful of big banks and make it illegal for them to acquire each other (to avoid further concentration). We don't have to rescue them basically ever... but if we did it would be abysmally expensive. And customer service is garbage.
Spreading the deposits out is the point, it's not a hack at all. If 1/3th or 1/5th or whatever of your deposits are locked out you can still make payroll and carry on while the odd bank hiccup is sorted out, and a haircut will affect a smaller fraction of your deposits. Meaning you don't need to be on a hairline trigger to pull out at the first sign of trouble. Having the big players keep their money in multiple bank accounts adds stability in itself.
The banks don't want you to split the money because they will have to pay higher insurance to FDIC. This will eat into their margins. The business and the customers interests are not aligned in this case.
Until the law changes, you have to look out for yourself and not beg for bailout. Also, this is not complex since software takes care of it behind the scenes. Our company did it from day 1.
Also more than half of deposits by volume are FDIC insured so the system can handle the whole volume if the customers choose to do so
My point was that the existing tools and infra was enough for svb customers to secure themselves. At a high level, they didn't bother getting an insurance and now they beg for bailout.
> It shouldn't be up to depositors to do "due diligence" on their bank, making
It certainly should be if they aren't paying for their accounts to be insured. The government does not exist to prevent private companies from going out of business.
> sure they're compliant is exactly the kind of thing government is _for_.
And if regulations magically remove all risk, then insurance should be very cheap so no reason not to get it.
Ridiculous, how can the average person _possibly_ know if their bank is doing everything properly or not?
Even if they are when you open the account, how often should you check to make sure they still are?
If insurance is necessary then the banks should pay for it, then if they want to have lower insurance premiums it's up to them to lower their risk profile. Yes, they will pass these costs on to the customer, but banks with lower risk profiles will then be cheaper making them more popular, and increasing stability of the entire system.
The optimal strategy to beat the competition is to edge toward more risk. And since you can get an edge by playing more risky, other banks will have to do as well to compete.
A traditional business, when edging toward risk, fails when they cannot get their customers to buy from them. Banks fails when they can't get their customer's money back to them. That's the big issue with the risk dynamic.