[cwilkes]

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.

[arcticbull]

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.

[tripletao]

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.

[8ytecoder]

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.

[tveita]

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.

[phoehne]

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).

[bagacrap]

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.

[kasey_junk]

Large deposit holders audit bank balance sheets as a matter of course. It’s a standard risk management function for corporate treasuries.

That it’s apparently news to a bunch of cash heavy depositors at SVB is one of the more revealing parts of the crisis to me.

[phoehne]

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.

[watwut]

You can insure larger deposits. It costs a bit more and that is about it.

[chimeracoder]

> 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.

[dilyevsky]

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

[bagavi]

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

[phoehne]

That's why managing those insured deposits is automated.

[HWR_14]

You mean spread you 100MM into 400 individual banks so we have diversification when a single bad bank CEO decides to take stupid high-risk positions?