Is SVB taking a loan from the new program to cover the uninsured depositors or is the gov just bailing out the uninsured? Is it a bailout or a liquidation?
Stock holders are not creditors.
Bond holders and other creditors know that they are behind all depositors, and stock holders know that they are being bond holders and other creditors. So it is not a surprise that they lose when a bank fails, and they largely do not expect to be bailed out in this situation (which for them is the realization of a potential investment risk that they took when investing in the bonds or stock of the bank).
1 Like
Investors were bailed out in 2008. Yellen is choosing winners and losers: the investors lose and the depositors win and guaranteed the taxpayers are paying regardless of what the fed says. Or they’re just printing more money which screws the taxpayers too. They lie quite often.
This is a bailout.
https://www.cnn.com/2023/03/12/investing/svb-customer-bailout/index.html
In a joint statement Sunday, Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg said the FDIC will make SVB and Signature’s customers whole. By guaranteeing all deposits – even the uninsured money that customers kept with the failed banks – the government aimed to prevent more bank runs and to help companies that deposited large sums with the banks to continue to make payroll and fund their operations.
1 Like
The bank is in receivership, so unless there is a buyer, it will be liquidated. IMO they won’t let the current ownership try to reorganize. Why? This closing happened as an emergency on a Friday morning (and the second one on a Sunday). It doesn’t seem like the regulators (Cal/NY) thought there was any hope of saving the banks.
I’m not sure how much bad debt there is at SVB or Signature. Signature has $200B in deposits and assets. Yellen may have done a ‘back of the envelope’ calculation that the assets would cover the deposits. The deposit banking side of the house may not be in bad shape. Maybe it was the non-insured side that was the issue?
"What Products Are Not Insured?
There are a number of non-deposit investment products that are not insured by the FDIC, even if they were purchased from an insured bank. These include:
Stock investments
Bond investments
Mutual funds
Crypto Assets
Life insurance policies
Annuities
Municipal securities
Safe deposit boxes or their contents
U.S. Treasury bills, bonds or notes*
*These investments are backed by the full faith and credit of the U.S. government. "
Practical question: so can we all now ignore the 250K limit? Is it a limit in theory only? Or am I missing something.
1 Like
Bad debt (credit risk) could be one reason why some hold-to-maturity assets are really worth less than they are listed on the books. But rising interest rates (interest rate risk) also devalue such assets. When a bank facing fleeing deposits needs to sell assets and runs out of assets-for-sale to sell, it has to realize the losses on hold-to-maturity assets by marking them to the market when selling them.
Perhaps the marked-to-the-market values of the assets do not fall short by that much. Perhaps they fall short by more. But the assessment of “systemic risk” suggests that they fear that the aggregate cost (to both the economy as a whole and to the government) will be greater if the uninsured depositors have to wait until the liquidation process goes on for a while to get their money. I.e. if a bunch of businesses fail and employees lose their jobs, the loss of tax revenue would be greater than the possible cost of covering all of the uninsured deposits beyond what would be covered otherwise.
Seems like the answer is yes. The guarantee is now unlimited. They’ve set the precedent.
Not exactly. Depends on whether you can guess correctly whether the bank would be seen as a “systemic risk” if it failed and prevented uninsured depositors from getting their money.
2 Likes
I’ve been learning a lot about risk analysis recently (much to my dismay and not related to the banking industry but to engineering design and failure) and I can’t help but speculate (see what I did there) that whoever was doing risk analysis for SVB was not very good.
No, the feds have set the precedent. They’ll be forced to bail out all failed bank depositors otherwise they’ll be excoriated for only helping the wealthy…which is pretty much what they’re doing. They haven’t identified any specific factors as to why these depositors deserve special treatment (payroll isn’t special since most if not all banks have some business accounts that exceed $250,000). And it’s not just the businesses that are receiving the bailout. The overarching concerns seem to be system stability and consumer confidence which are pretty generalized factors.
1 Like
Of course the alternative then would have been to let them fail, leaving the government to continue to operate them while sorting out the troubled asset mess (most likely, the government would have continued to operate them instead of liquidating them, since they were so large that they were seen as “necessary” to have them continue operating to keep the financial system running smoothly). That would have effectively turned some of the largest banks into socialist government-owned businesses. Some might have preferred that outcome, but others might have seen it as too socialist for their political preferences.
I had no issues with the bailout because it helped everyone, investors and depositors. And the money was repaid with interest for the most part. The SVB solution is only helping one group at the expense of another. I wonder if the investors have grounds to sue?
Some were. Many were not.
I think you ignore the $250k limit at your own risk. Those who had only a $250k account (or up to 5 of them) really had a much better weekend than those with $10M in a deposit account (and I’m not sure how many of those claiming they have $10M or $200M have it all in deposit accounts).
The guarantee to have the accounts of 2 banks available on Monday does not change the law. If next week another fails and Yellen doesn’t feel there will be a run on the banks, she may not promise to pay over the $250k limit. If the depositor sues, the law says $250k.
Why risk it? You now know how to balance your portfolio and remain insured.
2 Likes
The risk of contagion with these banks seems pretty clear - one failed on Friday and the other 2 days later. Nobody wants to see another dozen or two banks fail suddenly over the next week or two (possibly an overly broad assumption on my part).
If the situation were something like the CFO embezzled money or the CEO was reckless with investments and that made the bank go bankrupt, then I expect the Fed probably would be a lot less inclined to take similar measures.
You make it sound as if the CFO snd CEO in this case were blameless. Were they?
1 Like
I think the fact that SVB is/was that large caught a lot of people by surprise. I think many thought it was a mid-sized niche lender in the start-up space. Frankly, I didn’t know it was that big either.
All those treasuries purchased during Covid at near zero have taken a big, big hit. Not a problem if you can hold to maturity, but if you have to sell …
1 Like
Here’re my questions:
-
SVB is now deemed “systemically important” after it failed. Why wasn’t it deemed as such before its collapse?
-
Signature Bank is also now deemed “systemically important” (the exception allowed under Dodd-Frank) in order to make its depositors whole. What is it about Signature Bank that makes it “systemically important”? By labeling it as such, wouldn’t most banks be “systemically important” from now on?
4 Likes
Do you suppose have the “Frank” of Dodd-Frank on the board of Signature Bank had anything to do with the outcome being afforded the bank?
1 Like