I think you need to separate or better analyze who made the “bad corporate decisions”. Yes, there should not be a bailout for SVB or it’s shareholders for the bad decisions, but what about the innocent customers in excess of 250K? What if it’s a small startup with $5M? Maybe they sell a better mousetrap they just invented and patented. They employ people. They have to make payroll. They aren’t financially sophisticated and aren’t large enough to hire a dedicated corporate treasury employee. They are running lean, not paying themselves much pursuing their dream. They need someone to manufacture the mousetraps and they carry inventory costs, stocking fees, and accounts receivables. Are you saying they should have opened 20 banking accounts to spread the $5M working capital to be under $250K insurance limit? What if SVB extended the startup a line of credit and offered startup business advice? So now the better mousetrap company is messed up. The employees can’t be paid and will be laid off. The manufacturers won’t make the mousetraps, yada yada yada. All because the entrepreneur had one close banking relationship. Should they be punished for this “bad corporate decision”? If not then you need a bailout of some type. Bank runs suck. Nobody is winning. “Bailout” sounds like a terrible socialization of failure, but the consequences can be much worse.
Until 2008, the limit was $100k. That covered MOST individual depositors, especially when they properly divided their funds into the 5 accounts allowed (savings, checking, joint checking, etc). When the banks were failing in 2008, it was decided they needed to up the coverage to $250k per depositor, per account.
It is an insurance policy and the banks pay for the coverage. (The FDIC is not funded by the government but by premiums paid by the banks) The FDIC could up the coverage amount, but then banks would have to pay for that coverage, just like you pay more for a $1M life insurance policy than you do for a $100k life insurance policy. Do you, the average depositor, want to lose interest earnings to cover the higher premium amounts needed to cover the highest depositors? The banks pass this charge on to depositors in the form of lower interest rates; it is just a cost of doing business, just like the cost of employees is past on to customers, the cost of the physical facilities, the cost of that ‘free coffee’ in the lobby, etc.
Only deposit accounts are covered, so many of these big investment accounts are not insured at all. That’s a business decision - bigger gains in investments, bigger risks.
While accounts at 20 accounts at 20 banks to stay under the FDIC insurance limit would be too much of a hassle to manage, putting all of the money in one bank may be unnecessary risk, compared to having it spread across (for example) two banks and a money market fund, so that even if some of the over-FDIC-insurance-limit money is temporarily inaccessible (and some of that is lost) in a bank failure, the money in other places can be used to continue business operations.
With all due respect, that’s called capitalism. Yes, nefarious consequences for the ill-advised, but part of the ‘game’. Years of zirp, QE, a whole generation that doesn’t know the cost of money, yield-starved investors who speculated on anything with a pulse (NFTs, doge this, crypto that, real estate… It’s all coming due. System needs cleansing, and unless FED reverses course (aka, the infamous ‘pivot’), it will be a different world out there. My 2 cents,FWIW.
The asset threshold for the most stringent stress tests was raised from $50B to $250B in a revision to Dodd-Frank (which means banks like SVB didn’t have to perform such tests). The tests would force the banks to run economic scenarios where issues related to the sector may be revealed. Higher capital reserve would mean better (not infinite, of courses) ability to absorb losses. SVB’s announcement last week that it had suffered initial losses is what triggered the bank run.
You are correct about the threshold for more stringent regulatory regime but all banks have to undergo stress test review and run them internally.
I agree that greater supervision might have helped avoid this outcome but I am virtually positive that SVB had already seen alarm bells going off.
I think this is certainly a debatable conclusion. I however think the statements by numerous government officials declaring in no uncertain terms that a bailout isn’t coming are misguided.
Fear and greed drive markets. These statements remove perceived risk from taking a run at banks that are viewed to be vulnerable. I am not suggesting a bailout but it serves volatile markets well to have hope of the possibility of government intervention to maintain stability. Sometimes saying nothing is the best course of action.
All great points with which I agree except the innocent burned by the bank run. No sympathy for what would have been the inevitable failure of investments in negative cash flow startups dying a natural death without investor lifelines. Burning their cash reserves via steady draw down of deposits in due course. The VC investors would have lost their speculative money. That’s capitalism at work.
Hopefully it works out in the end for depositors. I read that Roku (whose service I love) had 26% of its cash reserves there. Meaning they had 74% elsewhere but could still get burned.
The problem with banking and finance is that they are essential to a well running economy, and the failure of a bank often has significant negative external effects on the rest of the economy. Hence, the losses of bank failure get socialized whether it is in the form of government FDIC insurance or a larger government bailout, or in the form of losses by depositors who did business with the now-failed bank.
Obviously, firms in an industry where gains are largely privatized but large losses are heavily socialized creates a temptation to take more risks or ignore existing risks (beyond the inherent risk of borrowing short and lending long when interest rates increase). Hence the need for regulatory oversight to keep the banking and finance industry “safe” for the sake of the rest of the economy. But sometimes, regulatory oversight does not notice the risks before it is too late.
But any small business can make a bad decision that results in failure - bad insurance that results in lost inventory in a fire, an employee who steals all $5M, a CEO who is the only one who knows the business but dies of a heart attack. All those businesses have employees who need rescuing but the government doesn’t rescue them. And the government doesn’t take their insane profits when they do well and the bank doesn’t fail, the CEO doesn’t die, the fire doesn’t destroy the warehouse. Risk and reward. The FDIC is an insurance policy to insure deposits in a limited amount. It is not going to cover all losses, as that would be too expensive for the ‘little guy.’ Want an insurance policy for sky diving or swimming with sharks? Those exists (Lloyd’s of London) but they are too expensive for most to buy.
Is the start up to have no risk, not have to learn safe banking practices, not have to set up tiered deposit accounts and just wait for the feds (not the FDIC) to bail them out? Then they should buy a policy from Lloyd’s. Personally, I think Venmo is too risky as it is not FDIC insure so I don’t use it. Old school, I write a check.
In Colorado, the marijuana industry is basically ‘unbanked’ because the companies can’t use federally chartered banks for payroll, for investing profits, etc. They can’t take visa or American Express as forms of payment. That is the risk they take in doing business and they are willing to take that risk for high profits. They don’t, and can’t, rely on a bank or the FDIC to shield them from risk.
Do the owners of these start ups have personal liability for the $5M or the $200M? Probably not. Yes, people are out of their jobs, but having a bail out is not going to replace those jobs. The bailout in 2008 did not save the jobs of Washington Mutual employees or INdy Mac employees. Many of my friends working at Lehman bros. had to find other jobs (although about 8 years later some of their pension money was recovered). The start up employees might be out their current salaries, some vacation time, bonuses, etc. Those amounts were NEVER insured by the FDIC. The ‘D’ in FDIC is for DEPOSITS. Only Deposits are insured. Anyone working for any business runs the risk of the business failing and losing their jobs, their vacation pay, and in some cases even their 401k contributions (although there are laws to protect those)
Congress can pass a bailout if they want to, but it is unlikely for one institution. The FDIC closed 465 banks from 2008-2012, plus there were Wall Street investment companies involved too (the banks may have held the paper, like for Countrywide). Many more ‘citizen depositors’ than at mostly commercial SVB.
" The Federal Deposit Insurance Corporation (FDIC) closed 465 failed banks from 2008 to 2012. In contrast, in the five years prior to 2008, only 10 banks failed."
Since then, it only closes a handful per year. No talk of bailouts, even though employees and customers lost jobs and money.
Hopefully no contagion, but the lesson for depositors could be to flee first and ask questions later. The early bird (fleeing depositor) got the worm at SVB and the rest were left holding the bag. Perhaps it’s time to flee regional and community banks and crowd into Systemically Important Banks. I hope not.
Of course, that means greater industry concentration into an oligopoly situation for banking, so that, for banking customers, fees are likely to be higher while interest rates for both deposits and loans will be worse, due to less competition.
But that would not be unique to the banking sector in the US, since many industries have seen greater industry concentration and less competition over the past few decades.
According to Fortune, the CEO of SVB lobbied for the stress test threshold to be raised, enough that it was not included in the mandate, in 2018. In hindsight, looks like a bad idea.
We’re far from that scenario. If anything, we have too many banks in this country. There’re nearly 5,000 banks in the US (there were even more before the '08 financial crisis), about the same number as the rest of the world combined. Smaller banks can, and often, offer better products to attract customers and to differentiate themselves. But they should be subject to the same risk management standard if they expect taxpayer bailouts when they fail.
What kind of better products do smaller banks offer? They may offer better rates but better products?
They vary. Better products could mean better rates, better terms, more tailored underwriting, etc. For SVB, it found its own niche in the startup and VC communities (capital introduction and so on). That niche, however, carried with it additional risk that should have been accounted for.
They usually offer better service to the customers. Personalized loan review, knowing the businesses better (farming, small business fluctuation, a call when something isn’t right with the account). The biggest complaint with Bank of America is you can’t find anyone to help you if you have a problem (or waive the charge if your payment is a day late).
People may not realize their small community bank is really part of a big bank holding company.
Jesus, you are making it sound like this is difficult. I have far less than they do and am wise enough to stay under 250k and put the rest in a ladder of tbills.
All they had to do was open a brokerage account at Fidelity or even at Treasury Direct. It is very simple and quick. I have zero sympathy for these guys and do feel we need to quit bailing eveyone out.
I think they need to better analyze how to invest your money and take minimal risk in doing so.
I think this is my last post on the subject and my lesson learned is to avoid emotional issues and only stick to posting where I feel I’m clearly helping someone and hopefully only generating positivity. That’s not the case here as I’ve stirred some emotions. For that I sincerely apologize.
I’m exiting with a couple quotes from WSJ articles:
“It was around that time that Mr. Badhwar decided it would be prudent to secure a credit line—an insurance policy that could help keep his company afloat for another year if needed. SVB was willing to lend to Endor, so long as the company moved all of its money to the bank, he said.”
“Ms. Mauskopf, CEO and co-founder of a child-care marketplace Winnie, said she needs to have funds available by Monday for next week’s payroll. She said the terms of a loan Winnie had with SVB required the startup to do all of its banking there. As a result, it didn’t keep funds with other financial institutions.”
Business banking is a relationship business. I’m sorry to say that comment will probably spur more anger. That’s not my intention. Please look for me elsewhere, and let me know when I stray from my new rule to only generate positivity! 