A very measured explanation without the rhetorical panic I'm seeing everywhere. Thank you for not pulling on heartstrings with evocations of the plight of low salaried workers not to blame for this mess. I am continuing to wonder about what audits were done and what they said.
On a purely vibes level, I wouldn't object to an outcome in which deposits are guaranteed but David Sacks and Jason Calacanis in particular get 100% wiped out
They also don't have a friendly startup bank they can use anymore. Many of those founders were in SVB because regular banks wouldn't deal with their business, or worse, wouldn't even deal with them personally after doing a startup.
(There's stories of banks refusing to give founders car and home loans after their first startup failed, even when they weren't personally liable for it.)
The Company I work for would be directly impacted if deposits flowed from regional banks to The Big 4 Banks, which could result in layoffs and I'm fine with that so long as David Sacks gets 100% wiped out.
I agree -- a very measured and clear explanation. However, it leaves out one, very important item -- how did the regulators who were supposed to have been monitoring this bank miss the imbalance between their risk profile and their asset profile? SVB was a "state bank" chartered by California and, I believe, a member of the Federal Reserve System. Thus, California's Department of Financial Protection and Innovation (DFPI) and the Fed shared responsibility for overseeing the bank's risk management. News reports indicate that SVB's risk profile was unique in that it was exposed to billions of dollars of short term risk -- the payroll and other cash needs of tech start-ups -- but backed these risks largely with illiquid securities, mostly long term government and corporate bonds. It will be interesting going forward to learn how DFPI and the Fed failed to detect SVB's vulnerability and direct the bank to take timely corrective action. The interest rate inflation that ultimately undid SVB has began in 2021. Two years seems like enough time to have detected SVB's exposure and taken action.
They knew about it. Just did nothing about it for too long (it wasn’t illegal). Looks to me like the Fed encouraged them to pay up for term deposits in H2 of 2022 (they paid over 2pct, against a bond portfolio yielding 1.8) and had $16 billion of these on then balance sheet at year end, and obviously the talk of raising equity this quarter had to be pre-cleared with tbe Fed. All the more reason to guarantee deposits- the Fed knew of the issues.
Still not sure I follow -- how is the decision today that all of SVB's deposits are effectively insured not also implying that all deposits basically everywhere are actually insured into the future? If small banks have most deposits under 250k, and too-big-to-fail banks are effectively insured, and now SVB-scale uninsured deposits are effective insured, what is left? Won't we need to raise the FDIC insurance premiums, or risk not being able to do this again? Or if something similar happens again, we'll just maybe be able to do this if there's a lot of money in the pot, otherwise too bad?
Wouldn't it be a more consistent solution to, say, just raise the insured deposits up to $10M or $20M or something? Then a) all the small companies who maybe shouldn't be expected to know better get insured, b) giants like Roku who should have known better get a haircut and can't hog proportionally large amounts of deposit insurance c) this pattern can be extrapolated without implying that you might be willing to insure any deposits in the future.
All banks are going to be paying more into the insurance funds. The big banks will likely pay the same pro-rata, even though they are safer as they are obligated by regs to hold more short-term investments against deposits
An excellent read and have to say reassuring as well. Been hearing all sorts of horror stories since certainly gets u thinking....Also reminds us to check out any banks we sign on with, especially today with the higher savings and CD rates.
What is the best site to do a bank financial check up?
If you have less than $250k in assets in the account there is absolutely no need to ever worry about it. That's the point of the FDIC (or NCUA for credit unions).
It's still useful to look up bank reviews for things like fees and customer service. Nerdwallet is okay.
Yes, are aware of course and the average person assumes that just adding another co-owner would be easy today if over the 250 mark but not so with some banks. Mostly bc of security reasons today but either way....
I have an account with Nerdwallet and agree they do offer some valuable information such as competitive rates on all sorts of savings.
Mar 12, 2023·edited Mar 12, 2023Liked by Noah Smith
Wouldn't a vote by the fed saying that SVB's collapse represents a threat to the stability of the financial system kinda be in tension with any message saying this isn't a reason to worry about deposits at other banks?
Is there no option for the FDIC to front the money to customers based on its view of what the assets will likely fetch when sold off gradually? This seems like an ideal compromise where depositors can get back most of their money immediately, the risk to the FDIC is limited to the difference between their prediction of asset value and the ultimate selling price (but not the whole value of the account balances).
Yeah this is what I'm curious to understand better.
At one extreme, does SVB hold bonds with par value (NOT market value!) that cover all deposits? Could the FDIC (or other govt entity?) do something that basically fronts the money to depositors while waiting for the bonds to mature, then just asserts they have not lost money (which is kinda true - except opportunity cost of earning proper interest)?
Par value covering deposits isn't quite enough (unless it's a TIPS (inflation protected) security). I mean if you have a bond that matures in 10 years with par value $100 but the projected inflation rate over those 10 years (compounded) means that the value of that $100 in 2033 dollars is only $80 in 2023 dollars you can't cover $100 worth of deposits today.
Besides, this doesn't materially differ from just a direct government subsidy/depositor bail out. I mean if the government is willing to loan me a bunch of money interest free that I can (only) use to buy T bonds that's worth a certain amount of money. Essentially you are suggesting that the government offer the depositors that kind of loan so it's just relabeling a bail out. That's not to say it's bad but it's still a bailout of depositors by another name.
"The second difference is that a deposit guarantee wouldn’t cost taxpayers any money. It would be paid for by a new deposit insurance fund that banks pay into. So regular folks won’t be on the hook for some Silicon Valley billionaire’s mistakes. Again, not a bailout."
This is not economically accurate; at least it requires some more support. The incidence of the cost to the deposit insurance fund, banks, and ultimately bank shareholders or customers is not necessarily zero. Unless you are now asserting that banks are in perfect competition and unable to pass on any cost increase like this to their customers.
Also let's be a little clearer, saying customers confuses the fact that we are talking about depositors/creditors getting a guarantee. You can be a bank's customer without being a depositor/creditor.
All SVB depositors going to be made while on Monday and all the smaller banks now have access to a funding window (with safe collateral taken at par) so essentially making all the deposits here sort of insured as Noah explains well. Fed announcement here. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
The banks, which means lower profits or fees from customers.
But it's a bluff - if this means customers don't withdraw funds from the bank because of this, there is no need to pay out anything, and no money spent.
Let’s say there was a massive oil refinery enviro disaster. The company couldn’t pay because it went bust. Government didn’t want taxpayers to pay for the cleanup so instead they added 50 cents a gallon to the price of gasoline.
See? Free to the taxpayers! At least if they don’t have a car (or in this case, don’t use any banking services)
"The only worry regarding a deposit guarantee is that it would create moral hazard. Some people will fret that this sort of move would effectively make all uninsured bank deposits FDIC insured, which will encourage people to put their money in crappy banks in the future."
No. No. No. Vehemently disagree. You've totally missed the moral hazard - It's not the depositors that are a major worry, it is the moral hazard of the regional banks themselves. If all deposits are insured, banks, particularly the regionals, can happily pick up pennies and nickels in front of a steamroller, knowing full well that an incredibly poor bet that "interest rates are fixed" is somebody else's problem.
Absolutely right, Carl. The core issue here is the Fed and Treasury refuse to acknowledge that fighting inflation will cause serious pain. The longer they stay in denial about that, the more concerned I become about unintentional and unforeseen damage that can't be easily controlled. This action may have quelled the contagion, but it does ZERO to actually fix the underlying financial crisis, which will only get worse when the Fed inevitably has to continue raising rates to fight inflation that won't go away. It CAN'T go away when they keep printing money to shield banks from consequences and when our government won't stop printing, borrowing, and spending.
It may be true that few banks are currently sufficiently underwater with their bond holdings to warrant a legitimate banking crisis. But what happens when the Fed inevitably has to raise rates another 1.0, 1.5, 2.0+ basis points to fight inflation? All these banks will sustain unrealized losses in their bond holdings. They'll sustain losses in equity holdings. The weaker banks won't be able to match interest rates and depositors will flee. This is what I mean when I say that the underlying risk is real and remains totally unaddressed by this bandaid. And what happens when the FDIC has to face hundreds of billions more in lost deposits? More special assessments on even fewer banks? It feels like we're chasing our tail down the drain.
"The bank executive lobbying in this instance, is the same Greg Becker who “sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. The sale of 12,451 shares on Feb. 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on Jan. 26.”
The federal reserve is not federal, nor does it have reserves. The banks have been pulling this shit for hundreds of years. Fractional reserve banking...grab a f'ing clue.
“Unless our economic officials are extraordinarily stupid, I don’t see anyone’s deposits going up in smoke.” Translation, judging by the track record of oir economic officials - we’re screwed.
Besides, I didn't think our *economic* officials acted all that stupidly in 2008. Didn't they manage to both stop general system collapse and make money? Wasn't it our political leadership who could be accused of non-optimal behavior?
Now that your prediction has been proven false are you going to ever update your prior beliefs, since you were clearly wrong? Or are you going to keep your previous beliefs unchanged, despite evidence to the contrary?
A very measured explanation without the rhetorical panic I'm seeing everywhere. Thank you for not pulling on heartstrings with evocations of the plight of low salaried workers not to blame for this mess. I am continuing to wonder about what audits were done and what they said.
Thanks!!
On a purely vibes level, I wouldn't object to an outcome in which deposits are guaranteed but David Sacks and Jason Calacanis in particular get 100% wiped out
Instead they'll just have to face years of new regulatory scrutiny.
They also don't have a friendly startup bank they can use anymore. Many of those founders were in SVB because regular banks wouldn't deal with their business, or worse, wouldn't even deal with them personally after doing a startup.
(There's stories of banks refusing to give founders car and home loans after their first startup failed, even when they weren't personally liable for it.)
I'm optimistic that this is a niche that will be filled.
The Company I work for would be directly impacted if deposits flowed from regional banks to The Big 4 Banks, which could result in layoffs and I'm fine with that so long as David Sacks gets 100% wiped out.
I agree -- a very measured and clear explanation. However, it leaves out one, very important item -- how did the regulators who were supposed to have been monitoring this bank miss the imbalance between their risk profile and their asset profile? SVB was a "state bank" chartered by California and, I believe, a member of the Federal Reserve System. Thus, California's Department of Financial Protection and Innovation (DFPI) and the Fed shared responsibility for overseeing the bank's risk management. News reports indicate that SVB's risk profile was unique in that it was exposed to billions of dollars of short term risk -- the payroll and other cash needs of tech start-ups -- but backed these risks largely with illiquid securities, mostly long term government and corporate bonds. It will be interesting going forward to learn how DFPI and the Fed failed to detect SVB's vulnerability and direct the bank to take timely corrective action. The interest rate inflation that ultimately undid SVB has began in 2021. Two years seems like enough time to have detected SVB's exposure and taken action.
They knew about it. Just did nothing about it for too long (it wasn’t illegal). Looks to me like the Fed encouraged them to pay up for term deposits in H2 of 2022 (they paid over 2pct, against a bond portfolio yielding 1.8) and had $16 billion of these on then balance sheet at year end, and obviously the talk of raising equity this quarter had to be pre-cleared with tbe Fed. All the more reason to guarantee deposits- the Fed knew of the issues.
A clear explanation of a complicated situation.
Thank you for a great article. One question: if there is very little downside for insuring all deposits, why do we hvae uninsured deposits at all?
Because it costs a lot to insure deposits; banks have to pay in to the FDIC!
Still not sure I follow -- how is the decision today that all of SVB's deposits are effectively insured not also implying that all deposits basically everywhere are actually insured into the future? If small banks have most deposits under 250k, and too-big-to-fail banks are effectively insured, and now SVB-scale uninsured deposits are effective insured, what is left? Won't we need to raise the FDIC insurance premiums, or risk not being able to do this again? Or if something similar happens again, we'll just maybe be able to do this if there's a lot of money in the pot, otherwise too bad?
Wouldn't it be a more consistent solution to, say, just raise the insured deposits up to $10M or $20M or something? Then a) all the small companies who maybe shouldn't be expected to know better get insured, b) giants like Roku who should have known better get a haircut and can't hog proportionally large amounts of deposit insurance c) this pattern can be extrapolated without implying that you might be willing to insure any deposits in the future.
The FDIC will raise the premium from other banks should more $ is needed.
All banks are going to be paying more into the insurance funds. The big banks will likely pay the same pro-rata, even though they are safer as they are obligated by regs to hold more short-term investments against deposits
An excellent read and have to say reassuring as well. Been hearing all sorts of horror stories since certainly gets u thinking....Also reminds us to check out any banks we sign on with, especially today with the higher savings and CD rates.
What is the best site to do a bank financial check up?
If you have less than $250k in assets in the account there is absolutely no need to ever worry about it. That's the point of the FDIC (or NCUA for credit unions).
It's still useful to look up bank reviews for things like fees and customer service. Nerdwallet is okay.
Yes, are aware of course and the average person assumes that just adding another co-owner would be easy today if over the 250 mark but not so with some banks. Mostly bc of security reasons today but either way....
I have an account with Nerdwallet and agree they do offer some valuable information such as competitive rates on all sorts of savings.
Well written!
Wouldn't a vote by the fed saying that SVB's collapse represents a threat to the stability of the financial system kinda be in tension with any message saying this isn't a reason to worry about deposits at other banks?
Of course, which is why they'll probably do it only if other banks fail on Monday or are in danger of failing.
Is there no option for the FDIC to front the money to customers based on its view of what the assets will likely fetch when sold off gradually? This seems like an ideal compromise where depositors can get back most of their money immediately, the risk to the FDIC is limited to the difference between their prediction of asset value and the ultimate selling price (but not the whole value of the account balances).
Yeah, this would allow them to do that.
Yeah this is what I'm curious to understand better.
At one extreme, does SVB hold bonds with par value (NOT market value!) that cover all deposits? Could the FDIC (or other govt entity?) do something that basically fronts the money to depositors while waiting for the bonds to mature, then just asserts they have not lost money (which is kinda true - except opportunity cost of earning proper interest)?
Par value covering deposits isn't quite enough (unless it's a TIPS (inflation protected) security). I mean if you have a bond that matures in 10 years with par value $100 but the projected inflation rate over those 10 years (compounded) means that the value of that $100 in 2033 dollars is only $80 in 2023 dollars you can't cover $100 worth of deposits today.
Besides, this doesn't materially differ from just a direct government subsidy/depositor bail out. I mean if the government is willing to loan me a bunch of money interest free that I can (only) use to buy T bonds that's worth a certain amount of money. Essentially you are suggesting that the government offer the depositors that kind of loan so it's just relabeling a bail out. That's not to say it's bad but it's still a bailout of depositors by another name.
"The second difference is that a deposit guarantee wouldn’t cost taxpayers any money. It would be paid for by a new deposit insurance fund that banks pay into. So regular folks won’t be on the hook for some Silicon Valley billionaire’s mistakes. Again, not a bailout."
This is not economically accurate; at least it requires some more support. The incidence of the cost to the deposit insurance fund, banks, and ultimately bank shareholders or customers is not necessarily zero. Unless you are now asserting that banks are in perfect competition and unable to pass on any cost increase like this to their customers.
It is a shell game. Instead of taxpayers paying, depositors (taxpayers) will pay
Yeah that’s how insurance works.
"Maybe that was a little negligent, but it wasn’t greedy — they didn’t get rich by having a checking account at a badly run bank."
Did they get rich? No, but they certaily got a lot of benefits that a boring diversified bank didn't offer. There are reasons so many start ups used SVB (https://twitter.com/jonwu_/status/1634250770555219970).
Also let's be a little clearer, saying customers confuses the fact that we are talking about depositors/creditors getting a guarantee. You can be a bank's customer without being a depositor/creditor.
All SVB depositors going to be made while on Monday and all the smaller banks now have access to a funding window (with safe collateral taken at par) so essentially making all the deposits here sort of insured as Noah explains well. Fed announcement here. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
So if the taxpayers are not the ones paying, where does the money come from ? Printing ?
The banks, which means lower profits or fees from customers.
But it's a bluff - if this means customers don't withdraw funds from the bank because of this, there is no need to pay out anything, and no money spent.
Let’s say there was a massive oil refinery enviro disaster. The company couldn’t pay because it went bust. Government didn’t want taxpayers to pay for the cleanup so instead they added 50 cents a gallon to the price of gasoline.
See? Free to the taxpayers! At least if they don’t have a car (or in this case, don’t use any banking services)
"The only worry regarding a deposit guarantee is that it would create moral hazard. Some people will fret that this sort of move would effectively make all uninsured bank deposits FDIC insured, which will encourage people to put their money in crappy banks in the future."
No. No. No. Vehemently disagree. You've totally missed the moral hazard - It's not the depositors that are a major worry, it is the moral hazard of the regional banks themselves. If all deposits are insured, banks, particularly the regionals, can happily pick up pennies and nickels in front of a steamroller, knowing full well that an incredibly poor bet that "interest rates are fixed" is somebody else's problem.
Absolutely right, Carl. The core issue here is the Fed and Treasury refuse to acknowledge that fighting inflation will cause serious pain. The longer they stay in denial about that, the more concerned I become about unintentional and unforeseen damage that can't be easily controlled. This action may have quelled the contagion, but it does ZERO to actually fix the underlying financial crisis, which will only get worse when the Fed inevitably has to continue raising rates to fight inflation that won't go away. It CAN'T go away when they keep printing money to shield banks from consequences and when our government won't stop printing, borrowing, and spending.
It may be true that few banks are currently sufficiently underwater with their bond holdings to warrant a legitimate banking crisis. But what happens when the Fed inevitably has to raise rates another 1.0, 1.5, 2.0+ basis points to fight inflation? All these banks will sustain unrealized losses in their bond holdings. They'll sustain losses in equity holdings. The weaker banks won't be able to match interest rates and depositors will flee. This is what I mean when I say that the underlying risk is real and remains totally unaddressed by this bandaid. And what happens when the FDIC has to face hundreds of billions more in lost deposits? More special assessments on even fewer banks? It feels like we're chasing our tail down the drain.
Via Adam Tooze at Chartbook
"The bank executive lobbying in this instance, is the same Greg Becker who “sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. The sale of 12,451 shares on Feb. 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on Jan. 26.”
As reported by Business Standard
https://www.business-standard.com/article/international/svb-chief-greg-becker-sold-3-6-mn-in-stock-days-before-bank-s-failure-123031100067_1.html?utm_source=substack&utm_medium=email
I need to get a better understanding of the law about material non public information.
The federal reserve is not federal, nor does it have reserves. The banks have been pulling this shit for hundreds of years. Fractional reserve banking...grab a f'ing clue.
Actually fractional reserves not at fault in this case at all. They took 100 pct of deposits and bought 100 percent bonds
“Unless our economic officials are extraordinarily stupid, I don’t see anyone’s deposits going up in smoke.” Translation, judging by the track record of oir economic officials - we’re screwed.
Unlikely. The Covid episode demonstrated that we learned from 2008.
Besides, I didn't think our *economic* officials acted all that stupidly in 2008. Didn't they manage to both stop general system collapse and make money? Wasn't it our political leadership who could be accused of non-optimal behavior?
Lehman was fairly stupid, but other than that they did OK.
Well. Maybe 2020 did. 2021 and 2022 was more a case of our not learning from the 1970s
Now that your prediction has been proven false are you going to ever update your prior beliefs, since you were clearly wrong? Or are you going to keep your previous beliefs unchanged, despite evidence to the contrary?
Your comment is already aging poorly
Just once in my life I want to be „systemically important“.