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Comment by johnbellone | Hacker News Reader

I wouldn't be too sure about that. 93% of SVB deposits are uninsured.

"Uninsured" doesn't mean "all of your money is gone, sucks to be you", it means "you'll take a haircut proportional to the amount of missing assets from the pool." And yes, if the bank is a Ponzi scheme, then that pool is empty, but SVB's problem is liquidity, not overall solvency. The money is there, it's just locked at a suboptimal interest rate, which may cost you 10 - 20%.

This isn't like FTX where your "assets" are worthless IOUs written to yourself.

May also be solvency - their assets are MBSes whose market value went down with the interest rate rise, that being the proximate cause of the panic that set off the bank run.

Isn't that the definition of uninsured?

No. If I crash my car into a $80,000 BMW and totaling it—and I have no insurance—the other party will still be able to sue me and partially recover their losses. Maybe they get $63k from me and eat the other $17k.

The bank has assets. Just not enough to cover all liabilities. That's why you see the term "haircut" being used a lot in these threads.

I'm super curious why in the world that in 2023, nearly all the deposits in the country's 18th largest bank are not insured ? what?

You can't insure the vast majority of deposits; with what money would you insure all of the world's money?

The issue is in trust. Banking's value proposition is trust. The bank is trusted to hold deposits and to process withdraws. Adding insurance just changes the trusted entity. FDIC insurance exists to increase trust for individual deposits.

1. FDIC insurance only covers $250k. FDIC insurance is mostly to reduce personal risk, so individuals feel comfortable keeping their own money in the bank. This is key to the banking industry because individuals are much more likely to horde physical currency than businesses are.

2. Who would insure the bank for unlimited deposits? If it's a non-governmental organization how would depositors know the insurance company is good for it? If it's a governmental organization then the taxpayer would essentially be a codified safety net for corporate risk taking. The insurance is more political palpable (and affordable) if it's seen as protecting individuals from bad banking practice then if it's seen as a bailout.

3. Banks ideally are the safe organization to hold cash. A bank failing is seen as a failure not only for the individual bank, but for the set of regulations that banks must follow. One bank failing reduces trust in all other banks, so it's in the industry's best interest to accept regulations that prevent bank failures.

FDIC insurance is to protect consumers and small businesses. I think of it as the same concept as accredited investors, once you have a certain amount of money, you get the freedom to dive into the shark pool and responsibility to manage that risk yourself. SVB was a high yield (4.5%!) bank. That comes with some risk.

By the government. Because government insurance is designed to protect individual accounts as that provides the greatest ratio of impacted voters/exposure.

Could be some of these companies have other types of insurance against this, but for a lot of small startups this is way down the list of things you'd get private insurance for.

FDIC is federal insurance and it's for the individual entities that deposited the money. It's capped at $250k per account at the failing bank. It's meant to protect the little guy and not the big guy that failed. It also encourages users to diversify their financial institutions if you are really packing money away in accounts that exceeds $250k.

Otherwise no financial institution is actually insured against it's entire book. That would be insanely expensive and financially complicated at the scale banks operated at. For example, JP Morgan Chase has $3.7 TRILLION in liabilities on the books. Where the hell is an insurer going to get $3.7 trillion to gamble?

FDIC insurance, regardless at which bank, only covers the first 250k per depositor per bank.

...per ownership category, of which their are, I think 14, and sometimes the insured party isn’t the depositor (e.g., “Employee Benefit Plans” are a category, and the plan participants are treated as the insured party for calculations in that category—and since its a separate category, it doesn't effect any single or joint accounts those participants happen to have at the same institution.)

I had it in my comment initially and removed it. When the bank's deposits are several magnitudes more than the limit, I don't think that distinction will do anything but muddy the waters.

Even if each owner had all 14 types, they only get $3.5mil in insurance. And the bank has, allegedly, somewhere around $200bil in deposits.

Because deposit insurance only covers $250,000 per depositor per ownership class, and commercial bank customers often have deposits >> $250,000.

I am more concerned that large VC shops are doing deals with the 18th largest bank because "that's what we've always done".

The FDIC only insures up to $250K per account holder.

Welcome to fractional reserve banking system.

But SVB also has locked in assets to be auctioned off. So it's going to depend on what sorts of haircuts occur on those assets sales.

the assets the bank held are worth some % less than the amount they took in deposits but its not 90% less, its something like 20%. so on average, people will get something like 80% of their money back. I dont think the asset price declines were catastrophic.

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