SVB investors were wiped out 100%, this includes most of the net worth of the leadership team. Moral hazard is definitely still in play.
All we need to see after this is is Basel III and Fed regulation extended to cover all banks of any size, not just those with over 250B in assets.
Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future).
The only people that lost here are investors in SVB and temporarily the other FDIC members will lose a small amount of money to additional FDIC special payment to replenish the insurance fund (but they will "get it back" later).
> Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future).
This is completely ignoring the time value of money. Money today is worth more than money in the future. We are transferring real value today and thus making the public, through the other less risky banks, eat the haircut that will happen no matter what. The losses are real.
What this has done is create the following incentives:
For depositors:
1. Bank with the riskiest bank possible since all deposits are covered.
For banks:
1. Become super-risky and extract value as soon as possible through dividends and bonuses. Depositors are covered either way.
The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead.
The simplest, and first thing to do is to lower the threshold for systemically important banks back down to the original $50Bn before it was raised to $250Bn in 2018.
> 1. Become super-risky and extract value as soon as possible through dividends and bonuses. Depositors are covered either way.
Depositor risk has never been a consideration of the bank except as far as it relates to the banks ability to grow shareholder value (if investors are wiped out, the bank doesn’t give a shit whether depositors are also wiped out)
> The banking system has lost the risk side of things, and it is now a 100% regulated industry. We could remove the banks and have everyone deal with the Fed instead.
Strongly agree tbh. There’s social reasons why it won’t happen but I’d much prefer this
Your incentive for depositors doesn't follow. What incentive do I have to seek out a risky bank? That I won't lose my money? If I have a safe one, I also won't lose my money. And if I have a risky one, I have some possibility that next time the powers that be will decide that the rules are different. Even if they don't, I still have the possibility that my money will be unavailable for a certain amount of time, and that I will have to deal with bureaucracy to get it back. Why would I deliberately choose that? What's my upside?
Your incentive for banks doesn't follow either. Shareholders got wiped out. This sure wasn't in their interest, previous dividends or no. Management may get bonuses clawed back, and even if they don't, they're not going to find a job that pays as well ever again.
Well, and did they? Did SVB provide higher rates than other banks? I don't think so; I recall reading that part of their problem was that they lost tens of billions of dollars of interest free deposits over the last year or so.
I think that the risk went into higher profits, not higher rates to depositors. So, not really an incentive to depositors.
Management of all sorts of that run companies into the ground usually make out with their salary and bonuses.
Unless we change the status quo about rewarding CXXs with huge amounts of stock AND giant salaries AND allow them to cash those stock grants out before retirement I don't see that changing.
You mean the people who no longer have a job, have an asterisk on their resume, had all their RSUs/options wiped out, and have to find a new job in a down market? Are those the ones who will not be held responsible?
Oh maybe you meant the shareholders who funded this activity? Oh, the ones who were wiped out?
> These billionaire VC's started a bank run on their own bank and then immediately pivoted to screaming for a government backstop. Incredible stuff.
> It's really not even clear SVB was in such terrible shape on the merits. Was def squeezed, for sure, but really looks like their little group chat knocked it over!
This is the most problematic part to me because not only did the VCs exacerbate the run on SVB, they threatened to start runs on other regional banks.
Several said that if SVB didn't get 100% depositor coverage that they would assume any regional bank could fail, and thus everyone should move to something safe like JP Morgan. By the time they started to say this publicly they already instructed portfolio companies move out of regional banks. Many were in the process of doing so.
The Fed / FDIC can see this happening and now are over a barrel. So the VCs managed to start one run, then jump up and down yelling to be saved OR ELSE we are going to actively start a series of runs by undermining trust. It's super cynical, and basically allowed the banking system to be held hostage.
Now I am not someone who thinks there shouldn't be some kind of action to help out depositors. For me the biggest issue is cash flow, and if uninsured depositors can be helped very quickly to make sure their businesses don't fail (because they can, SVB has the assets) then the government should make that happen. But somehow that wasn't good enough for the VCs. They yelled that its 100% secured deposits or nothing. And it's really uncomfortable that we allow them to have that kind of leverage.
I think this is the place where legislation proposed in some countries against bank runs would be good thing. Essentially when you are one manufacturing whole scenario, you should risk some blame...
You and I both know that as messed up as this was, nothing will be done to reign in the power of these VC's. I always vaguely knew that the billionaire class has the government over a barrel, but now they know, concretely, with real world evidence, that this is the case.
> The Fed / FDIC can see this happening and now are over a barrel. So the VCs managed to start one run, then jump up and down yelling to be saved OR ELSE we are going to actively start a series of runs by undermining trust.
You have to wonder if any financial authority will step in order to investigate this. After all screaming "fire!" in a crowded theatre should be punishable, especially if you end up financially profiting from said action of screaming.
>The Fed / FDIC can see this happening and now are over a barrel. So the VCs managed to start one run, then jump up and down yelling to be saved OR ELSE we are going to actively start a series of runs by undermining trust. It's super cynical, and basically allowed the banking system to be held hostage.
That's the risk you run investing in a bank. Better this than the 2008 bailouts when the banks ran themselves into the ground for profit and were still made whole. And, better this than spooking the entire financial system by not protecting deposits.
This seems to miss the point by a mile. The reason this backstop is necessary is because without one, pulling your funds is the rational decision as soon as it's "not even clear" whether the bank is in good enough shape to back everyone's deposits - the sooner the better, and anyone who ignores the warning signs and waits until it's definitely clear that the bank is bankrupt is going to get screwed.
You are describing the unbridled panic of a hundred extremely frightened VCs and startup CFOs as “rational” behaviour. The bank did not have to collapse on Friday. If it had not collapsed then none of these people would have had their funds locked up in the bankruptcy settlement. I’m not saying it’s all their fault, but they engaged in a big discussion in which they could have agreed on some collective action, and then somehow decided to each act in their own interests and withdraw at full speed, seeing (and I quote Alexander Torrenegra https://twitter.com/torrenegra/status/1634573234187407369), “only upside, no downside” to that approach.
If everyone was talking to each other, and they’re so smart and rational, why didn’t they decide to have everyone take out a small amount to cover essentials like payroll? Was it maybe… greed? Lack of ingenuity? To be fair, bank runs do happen, but everyone who caused this one was in a big old group chat and they could have prevented it, and nobody had the idea.
If it was so rational, why did they continue to demand a bailout even after it became clear the FDIC would get them nearly 100% back? Was it maybe… greed? God forbid that anyone lose even a few cents of uninsured deposits. What happened to paying for extra insurance? Now they complain about contagion to get a bailout, contagion which they began and continued.
You're right that without the bank run SVB probably wouldn't have collapsed on Friday and might well have held on for a few more weeks or months. That's not really enough though; in order for pulling your money early and parking it safer not to be the sensible choice everyone would need to know that it wouldn't collapse at all, and the best anyone's been able to offer is that it might have survived. There's this weird sentiment that it's all the fault of stupid Silicon Valley startup bros for not keeping their money in a bank that was flashing warning signs, and also that keeping large amount of money in a bank that's showing signs of failure is such a bad decision that making people and companies who do it whole causes moral hazard. You really cannot have both those things at once.
If the bank is being mismanaged, it should still collapse. The FDIC steps in, bankruptcy courts are really good at distributing funds or someone buys the assets and the debt & underwrites it & boots it all up again, the original bank dies and it’s operators suffer reputational damage, and everyone learns a bit about banks, insurance premiums get adjusted and life goes on. If the bank was so bad at its job, then this should happen. It could even have happened on Friday, if people came to an agreement and got enough money to survive out before accelerating withdrawals.
I am talking about the period just prior to when the bank ceases normal operation, when everyone is panicking and deciding whether to withdraw everything. People in bank runs are judging the behaviour of other participants. If you think everyone else is going to do that, then yes, it’s rational to do that ASAP. If you have all day to talk about it, and everyone relevant is in the room, then if possible you don’t do that. Because bank runs are bad! You might try to soften the blow, even out the damage, ensure nobody’s left behind, and then get the bank to go down gracefully. The people here acted as if they thought the bank run would go on until all the money was drained, or worse, as if bankruptcy meant getting pennies on the dollar. Of course that wasn’t going to happen. Maybe 20% got out, which amplified losses slightly for the slower reactors. Was the risk of a few percent worth causing a panic and threatening a larger one? No!
But no, it had to be run run run, full speed, and then threaten the government with more panic if they didn’t bail it out. This path is greedy and needy, and it will not make big tech any less of a pariah in the American psyche.
PS, I think much of this irrational behaviour may be attributable to the 250k insurance cap. Everyone sees that figure and sees the absolute worst case scenario, blinded to the actual likely amount they’ll get back from someone selling off the assets. When you have $10 million in there it looks really bad even if it’s really fine. If you have to force people to pay for 100% insurance coverage just so they don’t all act like idiots in the face of a run, then maybe that is worth it.
Oh, something I missed… Torrenegra claims in that post that not only did he and his friends start the run, he bought SVB shares on Friday hoping to profit from the run. Sounds totally rational. He apparently thought assets were less than liabilities so needed to get his funds out lest he be left with nothing, but also thought assets so far exceeded liabilities that the shares were undervalued. Very smart man! Few are familiar with this branch of financial quantum physics.
I don’t know if you noticed, but everyone withdrawing at once is what caused the bank to collapse. Some of them got all their cash out, many of them got locked up and risked not have enough uninsured funds to continue doing business for another week. Agreeing not to withdraw all at once can get to an outcome where nobody has 100% of their funds accessible, but nobody is in that bad position. Since most participants would be happier with that than a risk of not making payroll, the goal was to agree on collective action to find the latter outcome. Lots of financial transaction competitions end up with optimal game-theoretic solutions because the participants are actually rational. Here, they failed, and are now whinging like little babies.
> If it was so rational, why did they continue to demand a bailout even after it became clear the FDIC would get them nearly 100% back? Was it maybe… greed?
People hate this when I say it but ideology makes you a dummy. And that's what they were being because of their paranoid libertarian ideology.
> The reason this backstop is necessary is because without one, pulling your funds is the rational decision
Have you considered that rational decision may actually be a rational decision?
As in, something is actually wrong there, with the way banking is done?
It seems your thinking stops at "Rational actors would expose a problem with the current style of banking. Therefore, stop rational actors from acting, in order to PROP UP that same style of banking."
The moral hazard is real. People who point to it are simply one step ahead of you in how such actions necessarily pan out over time, not "missing the point by a mile".
They are talking about VCs that pulled their fund capital + advised portfolio companies to move all their deposits to Big 4 banks. i.e inciting a bank run.
It's surprising to me that a 90% backstop wouldn't have been sufficient. Make 90% of balances available today and commit that any residue will first be paid to those that leave their money behind.
Having no consequence for those with a $3.3b balance creates too much moral hazard.
SVB should have learned from some of their depositors - just throttle withdrawals and blame "technical difficulties" or "systems update" or "scheduled maintenance".
A insurance tax should be setup for banks that are to big to fail. If it‘s clear that it needs a public bailout, the state acts as an insurer and needs to pe paid accordingly.
I don't see the moral hazard in making the depositors whole as long as they weren't given juicy rates for putting their money in the bank, it's not that they stood to gain anything from the mismanagement of the bank. When the alternative is that a lot of deposits in smaller banks flee to the huge banks that would have to be backstopped anyhow, starting fires all over the place, it seems downright attractive to signal that depositors don't have to worry.
> it has created a huge moral hazard by signaling that the $250,000 FDIC limit on deposit insurance does not exist in practice. The clear signal it sends is that when financial institutions make poor decisions, the government will swoop in to clean up the mess.
It sounds like they have swooped in to protect customers and give owners/shareholders the boot. Isn't this a sign that future banks can't be reckless without consequence?
Of course it does - you just put your money with whatever fraudster offers the highest interest, when the gravy train eventually stops, well its no loss to you. See also: Icesave.
I mean, did svb offer higher rates/lower costs than average banks? If yes, depositors of more than 250k have to take a haircut, proportional at what was left in the bank (and honestly it seems like all deposit were backed, so even if founds aren't available now, there will be no losses)
Ideally the idea of an FDIC limit is just removed and banks are just further regulated to ensure that risk is kept at acceptable levels such that FDIC insurance fund is always capable of absorbing any failures in full.
Im not sure thats possible. Like all regulation, it’s impossible for the regulator to truly know the full situation. It would take a massive army of regulators to go through the financials of thousands of banks in the US. Plus the banks can lie, put things in their best light, or structure transactions to make it look like a lower level of risk than there really is.
And of course, by the time the regulator finds out, the damage is done.
I think its far better to cap the risk protection. That way you have customers doing their own risk management as well - avoiding what they perceive to be risky banks, diversifying deposits across banks, choosing alternative assets to store wealth, etc.
“In fact, it isn’t even clear that depositors were going to be wiped out, absent federal intervention. When SVB was shut down, it still had real assets that were worth money, which can be sold to pay back investors. ”
Would conservatives suggest investors really should be paid back first? Unlikely to be popular.
SVB investors were wiped out 100%, this includes most of the net worth of the leadership team. Moral hazard is definitely still in play.
All we need to see after this is is Basel III and Fed regulation extended to cover all banks of any size, not just those with over 250B in assets.
Covering all the deposits out of the FDIC fund when none of the assets are bad debt just makes sense. The shortfall will be assessed from banks next quarter and the assets will be held to maturity by the Fed most likely and the proceeds returned back into FDIC (which will subsequently lower insurance premiums by the banks in the future).
The only people that lost here are investors in SVB and temporarily the other FDIC members will lose a small amount of money to additional FDIC special payment to replenish the insurance fund (but they will "get it back" later).