The difference is that SVB had a high concentration of money/deposits for some of the richest people in the country and the companies they control or have an interest in.
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Of course, if banks want small businesses to keep all of their money in the one bank, then the small businesses whose accounts exceed $250,000 need to have the finance and accounting expertise to evaluate bank financial statements for risk of bank failure. But how many small businesses have that expertise?
Or they can just open multiple accounts. That doesnāt take much expertise. If there are multiple owners, just open a joint account and then a savings account and then individual accountsā¦ easy to get $2.5M in coverage. More than $2M needed in a liquid account per month? Then probably not that small a business and hiring an expert might be needed.
Even the ABC News finance experts were giving this advice today (going so far as to suggest small business owner even list their kids on accounts, their parents, etc if they need more coverage). EVEN IF you now think the FDIC will always insures accounts at more then $250k, take the easy route and just open multiple accounts.
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The startup companies in computing may be corporations (not proprietorships or family companies which can more easily game the account ownership rules) with (for example) 30 highly paid employees paid $10k+ per month. So the payroll account will exceed the FDIC limit. Then they need more ready money for other needs.
Just because the FDIC didnāt close a lot of banks in the last few years doesnāt mean some banks didnāt āfail.ā Banks have been closed, combined, sold. If the bank does it themselves, they donāt get the FDIC powers to excuse debts and cancel contracts, but the stock holders do get to keep any overages.
The savings and loan failure in the late 1988-92 and the 2008 bank failures were different than the current problems. Those older institutions had a lot of real estate securing loans and investments. A lot had been over assessed when the loans were made and there werenāt always adequate underwriting. All that real estate had to be sold (and maybe foreclosed first), usually at a loss. SVB and Signature donāt have that many real estate assets, and it may just be profits that they are losing. I havenāt read anything that said their loans are in default.
First Republic may be a different story as it is more of a consumer bank with a more typical portfolio of personal loans.
While SVB may have avoided credit risk in its assets, it may have lost due to interest rate risk. Longer term loans or bonds lose value when interest rates rise.
Just thinking out loud because I am not a banking expert, but what is the reason for making people split all their accounts?
Just hypothetical-ing, but if you have ten people, and they split their accounts between ten banks, then one bank fails, the lost deposits of the ten/tenths would be the same amount as if one person had just left all their money in that one bank. Iām wondering how making everyone split accounts, which is obviously more complex, especially when things like large payrolls have to be regularly paid out, materially makes a difference in the system and its machinations?
Like, where do governments keep their money? A city or a board of ed or a state has to pay out very large sums every pay period. Do they pay people from ten (or whatever) different accounts? Seems like things are bound to get more bolloxed that way.
Honestly Iām asking from a possibly naive point of view, since it never occurred to me before to wonder how these kinds of systems work.
If they split their accounts among 10 banks, it is less likely all 10 banks will fail, or at least fail at the same time.
I donāt have $1M in the bank. In fact I have so little I can tell if there is a mistake by quickly looking at my checking account.
FDIC was started to encourage the little guys to put their money back into banks in 1933. Big Businesses had to look out for themselves. Things have changed and now a āsmall businessā can have $5M in the bank, but they still have to pay attention and look out for themselves. I donāt think splitting the funds to spread the risk is too much to ask to have full coverage.
Iām no expert on this but why do you need separate accounts anyway? If the rule is you can be insured for up to $250k in āNā separate accounts, why canāt you just have a single insured account for Nx$250k ?
Pardon me if this has already been asked/answered.
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The N accounts have to be in different banks. Ideally they donāt want you to game the system.
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I just read Clyburn wants Congress to raise the $250,000 limit. Funny since practically speaking Yellen already raised the guarantee to 100% of all deposits.
I donāt believe this is true. You should really make sure.
Checking, savings, money market are treated together if they are owned by the same legal person.
They left some fuzziness in there.
It is not unlimited for uninsured ex-ante. They need to deem it to be systemically important ex-post. Otherwise Congress would have to bless the large change in ownership structure, and that is not happening.
I stand corrected. Thank you for the link!
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Each person can have 5 accounts at one institution so $1.25M in coverage. The accounts have to be distinct, like an individual checking account, a joint checking (each person would have coverage), etc.
FDIC: Are My Deposit Accounts Insured by the FDIC? describes how bank accounts are insured.
The way to increase FDIC coverage is through multiple ownership types, as opposed to multiple account types.
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I said practically speaking. Yellen set the feds up to cover everyone. Iād like to see the political fallout from refusing to cover depositors in full after doing do so for SVB and Signature (and Barney Frank is on Signatures board). And has there been a situation where the FDIC did not cover all deposits in a bank failure in the last 25 years or so?
This opinion from 2014 sounds eerily familiar.
Yellen has been a problem for a while. One wonders why she still has a job.
This seems to be in question.
:-). Weāll see what sheāll say the next time. This tax payers not paying business is nonsense. Any assessment to the banks will be passed on to the depositors. And depositors are tax payers by another name.
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Iām not sure that is necessarily the case. We donāt know much about SVBās loan book. Presumably, it loaned to the same startups. These loans may be inherently risky credit-wise, and in the current environment, even more so. Credit impairment may take time to be recognized. That may be why no buyer has stepped up to buy SVBās assets (other than the bond portfolio Goldman bought a little over a week ago, and the SVBās UK business HSBC bought for only Ā£1). Its bond portfolio is easy to evaluate and liquid, but not so with its loan portfolio. The other shoe may drop at some point.