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Comment by nico | Hacker News Reader

If a “healthy” bank had a run, would it still survive?

In other words, are any banks solvent if a run happens to them?

If not, then at what point are banks considered solvent.

Also, if no bank can survive a bank run, would the CEO be at fault here for kind of inciting one (by essentially saying in the call “we’ll be alright, as long as you guys don’t run”)?

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> are any banks solvent if a run happens

You're asking more about liquidity, than solvency. All banks in the US that are following regulations should be solvent. But, most banks in the US would not be liquid enough to survive a run.

> If not, then at what point are banks considered solvent.

Solvency is basically: "does the long-term value of your assets exceed your liabilities". Liquidity is: "can you sell assets right now to meet your outgoing liabilities right now".

The problem for banks is, in almost all cases some loans will have longer-term time-frames, while almost all depositors can theoretically ask for their money back at any given time. So, for almost any bank a strong enough run will cause them to fail a liquidity test (even if they are solvent).

Genuine question: If a bank invests all customer deposits in 10y treasury bonds, and then interest rates rise, is it solvent? It seems this is essentially what made SVB insolvent.

They are solvent unless they have to suddenly sell the bonds, in which case they are worth less now than at maturity.

Even a healthy bank had a run they would not survive, because fundamentally banks borrow short (deposits) to lend long (loans, bonds, etc). The old Bagehot quote comes to mind: "Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone..." Anything that would cause depositors to worry and demand their money back quicker than the banks' investments mature would run into this problem.

Silicon Valley bank was a healthy bank so you have your answer there. It is well known that no bank can survive a run on it, even if it is healthy. That is why the FDIC was started.

Regarding the CEO, one has to keep in mind that the CEO is responsible for being honest towards the shareholders as well as for keeping his bank solvent. He also has to disclose any material risk to the shareholders in a timely manner. Well it is easy to see this was a material risk. It is difficult to say what the CEO could have done better. If he said the bank is absolutely fine and it was impossible for it to fail to pay depositors, and the bank still failed, then the shareholders would have sued him.

I think he got in trouble when he tried to call on the community spirit of silicon valley. When he said that his customers should support the bank as the bank has supported them. He should have known that kind of call for community spirit and non-contractually obligated decency would ring alarm bells in the minds of a bunch of silicon valley CEOs. And Peter Thiel.

I think the lesson to learn here is that perhaps the FDIC insurance limits should go up. The FDIC has done a great job in ensuring ordinary people that their bank accounts are safe, as ordinary people usually keep less than 250K in their accounts. But, businesses tend to keep much more. And some venture funded tech businesses tend to keep even more. And silicon valley bank was unique in that most of its deposits were from venture funded tech businesses.

So while the FDIC insurance does generally prevent runs on banks by ordinary people, it does nothing for businesses. As far as a business with 20 million in the bank was concerned, most of their money is at risk and the situation is not that different as it would have been 100 years ago in the 1920s. And thus, the very painful process of a bank panic happened to silicon valley bank just like it used to happen to old US banks back in the 20s and 30s, before FDR created the FDIC.

So I think the government should seriously consider expanding the FDIC insurance to higher levels, perhaps in exchange for additional fees.

> I think the lesson to learn here is that perhaps the FDIC insurance limits should go up.

100% this. $250k is reasonable enough for most individuals, but it's far too low for businesses. You don't want people worrying about if their paycheck will clear and companies going under because a traditional bank failed.

Yeah, probably the best way to prevent this from happening would be to have the FDIC guarantee up to 40 million for businesses, or something on that level. Going from having >95% of your cash uninsured to even like 30% uninsured (for a huge company) would be a massive change.

FDIC should just offer unlimited insurance for depositors. Bank runs are relatively rare events during normal times, so the current fee structure can support handling those instances. During a systemic crisis, the taxpayers have to backstop the depositors anyways. Feels like a no-brainer to me.

That seems like a terrible moral hazard for the bank to just go and gamble any deposits

Not really... If the executives make terrible decisions then they'll still drive their institution to receivership which means they'll lose their jobs, and the stockholders will lose everything. Maybe an acceptable compromise would be: if you accept unlimited FDIC insurance at your financial institution you agree to executive compensation clawbacks, and more severe penalties if you mismanage funds (e.g. jail time).

In exchange, unlimited FDIC insurance would prevent runs like we saw at SVB. There would be no reason to rush to withdraw if you know that you'll be made whole at the end of the day.

I think the lesson to learn here is that perhaps he should have known that kind of call for community spirit and non-contractually obligated decency should not be expected from a bunch of silicon valley CEOS. And VCs.

At least in the modern economy, people aren't running to withdraw cash. They just transfer it to another bank. So the strongest major banks are probably impervious to runs, because if there is a general panic (rather than a panic at a specific bank), it will result in a dilution of funds between a number of major banks, rather than a net exodus of funds from the banking system.

From the point of view of an individual bank it doesn't matter if the money stays "in the system."

The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes.

For any large bank, there is an amount of withdrawals that can take it out. And that amount is nowhere near 100% of deposits.

> The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes.

As I specified in my original comment, a systemic panic, rather than a specific panic at a single bank would result in mass withdrawals, but a roughly equal number of deposits (from panic withdrawals from other banks), because we live in a largely cashless society. That is the point. The system isn't crashing down.

A niche bank like SVB was always more liable to have a run and should have been better capitalized than a normal bank. This is because probably close to 100% of their clients had other primary bank accounts that they could instantly transfer funds to, whereas an exodus from something like Wells Fargo would require tons of people to set up a new bank account.

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