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Comment by hn_throwaway_99 | Hacker News Reader

I thought this was a great post. I've commented elsewhere that I'd be pissed at the moral hazard of unsecured depositors getting a federal bailout (though not if the feds just assist in finding a buyer or do as much as possible to ensure depositors can access their funds quickly), but at the same time I'm saddened by so much of the gleeful tribalism I see online (but not too saddened - many of the "dancing on your grave" posts stand out primarily for their stupidity).

SVB was uniquely positioned to help the startup ecosystem in a way that larger banks were not. I hope something similar replaces them (albeit with better risk controls for their asset portfolio).

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The moral hazard of trusting a licensed bank? Do we want depositors to be hesitant to do that? The Fed won’t even allow “narrow banks” (that keep a 100% reserve ratio and cannot fail) because they think it’s crucial for our deposits to be available for loans and bonds.

> The moral hazard of trusting a licensed bank?

With deposits in excess of FDIC limits? Yes, absolutely. There are a number of options to manage cash more securely than just putting it all in a single bank.

Either one of 2 things must be true:

1. The FDIC 250k limit is real, and so deposits in excess of that limit must be subject to the risk of failure.

2. The FDIC 250k limit is fiction. If that's the case, then we should be honest and acknowledge that, and price any additional insurance accordingly.

Everyone clamoring for a bailout now wants to have their cake and eat it, too. They want the luxury of pretending like their deposits are insured without paying the premiums.

There's option 3: The limit is in practice "At least 250k" and the value of "At least" varies depending on the nature of the deposit, the institution it's in, and its failure mode.

There are no doubt certain banks that would be more palatable politically to backstop further. I could imagine a national bank with mostly retail depositors and few over-250k accounts is "prettier" politically than if you had a tightly focused regional player that had mostly corporate accounts. I could see politicians saying "Why should Iowa bail out the bad decisions of Bay Area investors? Nobody in Dubuque actually has an account there."

> There's option 3: The limit is in practice "At least 250k" and the value of "At least" varies depending on the nature of the deposit, the institution it's in, and its failure mode.

Well, option three is basically what we have now, and my argument is that it's supremely fucked up. As you point out, it highlights how vague, unclear laws or backstops are ripe for corruption and political cronyism.

It also adds a new form of moral hazard: if you're going to blow up, make sure you blow up big. Some small little bank that is pretty contained? Sorry depositors, you're all screwed. But scream "contagion" enough times and use the "nice economy you got there - be a shame if someone were to ruin it" tactic, and get Washington to come to your rescue.

Depositors who hold more than 250k in checking? The probably should be expected to be sophisticated capital managers rather than kept on safety wheels.

The alternative is scarier: infinite deposit insurance exposes government to larger and larger defaults requiring them to regulate banks down to which industries and loans they can work with or not.

It is crucial because new loans generate growth and economic activity. The economy would seize up and enter a deep recession if regular savers stashed their money in 100% reserve ratio bank. (Many would if there was no government-backed deposit insurance for regular-sized amounts.)

I think the reason such institutions don't exist is that they are very unprofitable compared to regular banks and would be expensive to keep deposits in them.

The problem with narrow banks is that it would expose the fact that the Fed raising interest rates is causing significant instability.

I mean, if banks offer 5% interest and the fed raises interest to 4%, then there is no problem but if the Fed goes to 6%, it becomes a problem because people switch to the narrow bank. In other words, the banks in the real world cannot compete with banks that take government subsidies, so the subsidy must be carefully chosen instead of being raised arbitrarily.

It seems to me like too much of the current situation has jurisdictional gaming. We complain that banks no longer want to take the risk of their traditional role in small business loans and have a lot of economic distortion from that.

Silicon Valley apparently had better access to a bank that took risks and SVB seems to be the bank of over half of tech and public health startups..

Other jurisdictions should feel a bit cheated if their regulators didn't help their small business get the most out financing and FDIC bailouts.. Internationally, other countries have to question why they aren't giving some kind of handouts to gain more of the startup scene for occasional crises.

Really a fine mess.

> I've commented elsewhere that I'd be pissed at the moral hazard of unsecured depositors getting a federal bailout

This is a very strange take that I disagree strongly with. There is no such moral hazard, and I would not call depositors being made whole any sort of bailout.

I would argue that one of the most important functions of the government, right alongside national security, is maintaining the illusion that bank deposits == money, and that they are callable on demand at par value for any individual or firm in the country.

If that's the case, then the FDIC should get rid of the depository limit then, and price their insurance accordingly.

The point is, right now, and in previous failures, uninsured depositors were not made whole. And, if the feds weren't worried about contagion, then they absolutely would not bail out depositors. So the moral hazard is "if you're going to blow up, make sure you blow up big, and get enough powerful people to contact your congressmen, otherwise, you're screwed".

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