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Comment by FartyMcFarter | Hacker News Reader

I'm not sure your founders are as "extremely" prudent as you claim them to be. For example, couldn't they have spread their funds throughout more banks instead of putting their eggs in one basket?

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So anybody who raises money should put a max of 250k into any given bank? My CEO should spend his time managing 20 different bank accounts?

I just think that if we look at it from the big picture - what's best for the country/society/etc. - that we're collectively much better off if a business that puts its money into a decades-old, reputable financial institution can count on it being there the next week.

(Also I do feel like I should clarify that I'm using my company as a kind of general example... I have no idea where our money is stored and I'm on paternity leave at the moment so just going to hang out with my new kid and hope this all works out).

My CEO should spend his time managing 20 different bank accounts?

No, that's silly, and it's not standard practice for a business to have more than 1-2 accounts per country. Anyone here claiming their companies actually did that is just trying to earn internet points for something they didn't actually do.

It's absolutely not believable that guys on here are claiming that they founded "multiple startups" and had 10-20 bank accounts (or more) because they were hedging the risk of bank failure. It would be like someone saying they had 10-20 computers at home because they were worried about their CPU failing. It's so remote a risk that it's not something you fuck up your finances to hedge.

A finance dept is absolutely not going to put up with the BS and hassle associated with maintaining more than 3-4 active bank accounts (checkings, savings, and one or two interest-earning accounts such as a cash sweep that might not be covered by FDIC insurance), because there is a large time and financial cost to constantly moving money around to pay the bills. This practice also replaces the extremely small risk of bank failure with the much greater risk of embezzlement, misplaced funds, delinquent payables, and lost receivables.

The only way to safely store money in excess of the $250k threshold is through government bonds, with the selection of terms based on the forecasted liquidity needs of the business. The other options suggested here (like sweep accounts) aren't any better than FDIC-insured accounts, because in most cases the alternatives aren't insured at all.

There are services that will spread balances across tons of accounts. The problem is that YC made people keep all their startup's money only in SVB instead of spreading it around.

YC doesn’t make you keep your money anywhere, they don’t even suggest any place or even say anything about startup banking (unless you were to ask one of the partners for advice). Even a cynical take would suggest they’d prioritize their portcos who launched banks for startups (like Brex), but even still in my experience they haven’t even done that.

According to Ankit Parasher, Co-Founder of YC-backed fintech start-up SALT, “SVB was the default bank for any international start-up expanding operations to the US. It was a stable bank and most VCs recommended it, so the impact of SVB failure is expected to be even larger than just Indian SaaS companies and YC-backed start-ups.”

From https://www.thehindubusinessline.com/companies/indian-saas-a...

Even still, YC doesn’t give any recommendations on bank account that I’ve seen. For ourselves, we had to do some corporate clean up before YC and while they connected us to the right lawyers and provided basic review, it was really just between us and our lawyers. For wiring the money, they just ask you where to send it.

SVB is no doubt popular, but YC makes no recommendations on any banks whatsoever in my experience

But is that a good thing for society? Adding a rent-seeking middleman that doesn't actually contribute anything except a technical workaround for an issue that can be solved directly by the governemnt?

It's called risk management, it costs money and it's something anyone running a business should be familiar with. Don't run your company like a multimillion dollar lemonade stand.

From an insurance perspective, why is it ok to guarantee payment to 20 x $250k but not $5mm? From a payout perspective the amount is the same, is it just the single point of failure risk?

That's the idea. One bad management decision doesn't take down all the capital.

But in terms of socializing the risk it works out the same. There is no difference between paying a company back $5mm or 20 companies 250k each.

Do you think most entities socialize the cost of their finances by just dividing up millons to billions between infinite banks and customers of this bank are the only ones not doing this? This seems unlikely. What you are proposing would obviously cost more money in practice else it would make no sense for you to propose it.

Lets take it another way. Why not limit FDIC insurance such that its harder to stack them and derive more benefit?

Sure, if we change the limit of FDIC so it's harder to stack that would make sense. e.g. coverage is per entity not per account.

But that's not what people here are suggesting. People are suggesting to divide the funds so that it's all covered. That it was irresponsible of companies NOT to do that and hence they deserve not to get the full deposit amount back.

EDIT: yes it'll cost more money to split today. But it's a waste. The extra cost doesn't go to the FDIC or tax payers, it just goes to a middleman. So then why not just raise the FDIC limit? (or change the rules so you can't split it)

You are oversimplifying their argument. People are suggesting that people use more than one bank or make a service that involves using more than one bank not necessarily infinite banks. It isn't necessary to choose between zero risk and existential risk. You can with only modest effort achieve moderate risk.

the math is still the same though, just different degrees. If we (as tax payers) are ok with insuring 3 accounts (as an example) x 250k each, why are we not ok with insuring 1 account for 750k?

Because you're spreading the risk of bank failure across many banks, which honestly is probably good for everyone....

Someone with 3 250k accounts is liable to need a bailout on 1 of 3 costing less money.

Yes but now you have 3 times as many accounts that need to be bailed out.

Instead of 3 people holding 1 account each at 1 bank with 750k, now I have 3 people holding 250k at 3 banks. Per bank it’s still 750k.

Are you really suggesting they open up 20 different bank accounts? And not only pay the monthly account fees but also pay a bookkeeper to upload statements for all 20 banks into the accounting system? And have appropriate controls on all money movements? And float money between the accounts each time payroll or some large expense is run? And follow the financial results of all of those banks in order to find signs of weakness?

Id rather be in a world where businesses don’t have to spend so much time playing games with their bank accounts and just trust that their money is safe, which is why the fdic needs to guarantee the deposits.

That sounds like just another cost of doing business.

Companies RAID-stripe the data on their hard drives, they can pay somebody to spread the risk in their finances.

(At a certain scale this eventually becomes inevitable. Google actually has a huge real estate and finances arm precisely because they have the kind of money pool that is impacted by things like nation-state failure and changes to the tax code in 50 states).

Just search for insured cash sweep accounts

There are many many banks that offer this . It doesn't even have to be a TBTF Bank

Infact, SVB itself offered and those funds are protected

https://pilot.com/blog/svb-faq

What about my cash sweep account? So, here’s the good thing about the cash sweep account: the assets held in the cash sweep account aren’t bank deposits or on SVB’s balance sheet—they’re held by a third-party custodian. So our understanding is you should be able to recover 100% of the funds there, regardless of what happens to the uninsured deposits at SVB.

> Are you really suggesting they open up 20 different bank accounts?

No. I said that putting all the money in one bank account is not extremely prudent, which seems obvious given the circumstances.

I'm pretty sure that there are individuals paying attention to this, so I don't think it's too weird to ask businesses to do so as well.

Services like this exist: https://www.investopedia.com/terms/c/certificate-of-deposit-...

> And follow the financial results of all of those banks in order to find signs of weakness?

Well no, if all your deposits are below the 250k fully insured limit, then you don't have to worry about the banks collapsing.

Apparently they did that on purpose to be better able get a view on the activity of the money they poured in. Someone on a different thread is pointing to the levers VCs had in SVB for this exact purpose.

Exactly. If you’re forced to use SVB because of your founders, you don’t have a recourse on the bank.

But there is also a risk question that companies are responsible for that I see is glossed over. No, you shouldn’t have to spread your business accounts to limit them to 250k. But you must know it’s not insured above this, just like a money market account is not a guaranteed rate of return or even guaranteed against capital loss.

I’m just spitballing, but for example what was the rate on a “money market” checking at SVB versus other larger national banks? If it was much higher, it immediately indicates higher risk in a business checking account at SVB to get those rates. You can see this way back with the old junk bond / Lincoln Savings fiasco of the 1980s, or with 2008 MBS, or CD accounts in early 2000s.

> forced to use SVB because of your founder

Investor not founder.

Would you suggest that every small business in the US with working capital over the FDIC limits do something like this? It would be a massive waste of resources. FDIC insurance exists to stabilize this part of the financial system.

There is a risk question that companies are responsible for that I see is glossed over. No, you shouldn’t have to spread your business accounts to limit them to 250k. But you must know it’s not insured above this, just like a money market account is not a guaranteed rate of return or even guaranteed against capital loss. Have lines of credit with alternate banks, or insurance on that additional money.

Or, just like when the market tanks, you suck it up and get back 80% of your capital on deposit because you couldn’t foresee a money market checking account could lose capital even though it’s spelled out on EVERY SINGLE statement and offering letter from the bank.

Yes, I would definitely suggest and recommend for businesses to not have a single point of failure for something as important as their working capital.

> FDIC insurance exists to stabilize this part of the financial system.

Up to $250k per account holder per bank.

Yes, that is the letter of the law. The intent, given that the FDIC emerged from the Great Depression, is to prevent bank runs.

Most banks with a large retail deposit base are immune from bank runs. SVB is unique in that it didn’t have a large retail deposit base yet also had a bimodal customer distribution (financially sophisticated VCs and later-stage startups/enterprises and early stage startups which have the financial sophistication of your local auto mechanic).

No acquiring bank will want to touch SVB because of its lack of retail deposits - the risk of account holders fleeing at the earliest opportunity is very high. That forecloses one of the FDIC’s main tools for resolving a bank collapse - especially one of this magnitude.

So we have a very unique situation here: a large mostly commercial bank that, unlike most large commercial banks, has a bunch of mom-and-pop level customers.

I don’t know what the solution is, but hopefully it will go in the direction of minimizing impact on these small businesses.

should have put it into gold right?

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