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Comment by idopmstuff | Hacker News Reader

Nailed it. If people get whatever short term vengeance they're looking for, the contagion will cause a whole lot of collateral damage to people who aren't in tech.

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If you're claiming that startups are so systemically important that they need special protection, then you are also saying that they are so systemically dangerous that they need much more aggressive regulation.

Is that really what you want?

That's a very odd way of stating "here's a sector that will be badly hurt if the contents of their checking accounts disappear with an unknown timeline and percentage recovered."

By that rubric, you could perfectly well claim that your accountant, laundromat, and lawn care companies are systematically important, because they'd fire their employees if their checking accounts disappeared.

Sure, so I'm saying those things are not systemically vital such that they should be exempt from the consequences of their market choices.

You're the one claiming there will be contagion here. I don't think that's the case. If a bunch of unprofitable companies with bad treasury management go under, I think the rest of the economy will be fine. Companies go out of business every day.

If you are claiming that tech is somehow special such that contagion will harm the wider economy, as was the case with mortgage-backed securities in 2008, then any taxpayer-funded bailout should be a one-time deal that goes along with enough regulation so that contagion is no longer a risk in the future.

> You're the one claiming there will be contagion here.

In the sense that I never said that, sure.

The only thing I claimed, even implicitly, is firing a bunch of people because their employer's cash disappeared would be bad.

No, you explicitly used the word contagion: "If people get whatever short term vengeance they're looking for, the contagion will cause a whole lot of collateral damage to people who aren't in tech."

That has a technical meaning in finance: https://en.wikipedia.org/wiki/Financial_contagion

idopmstuff != x0x0

https://news.ycombinator.com/item?id=35122581

I repeat: "In the sense that I never said that, sure."

My apologies; I did confuse the two.

In which case, since you're not claiming contagion risk, I return to my previous point that there is no reason for taxpayers to bail out rich people who took a gamble and lost.

The issue is whether checking accounts at chartered banks are “market choices” for which there should be “consequences.” The banking system is so regulated because when we lived in that world, it was a bad time, and collective action to make banks reliable was in everyone’s interest. If we are back to “stupid depositors deserve what they get” then what exactly is bank regulation for?

Bank regulation's job is not to create a magic world of unicorns and rainbows. It's to a) keep regular folks from losing their shirts due to the shenanigans of the rich, and b) to prevent systemic risk that could harm the wider economy.

Banks make money through risk. Sometimes those risks work out and people make money. Sometimes those risks don't work out and banks fail. This is capitalism 101, and to the extent banks are capitalist enterprises, there's no way around it. Government's job here is just to limit the damage.

If you want banks to be perfectly safe, then you are arguing for government-chartered, not-for-profit, non-capitalist banks. These are things that exist, but we don't have them here in the US. We could, if you really want people with millions in cash to have someplace perfectly safe to park their money, you can certainly argue for their creation.

If you're a small or medium sized business and you just saw SVB evaporate and depositors take a substantial haircut, why wouldn't you open up an account at JPM on Monday and never again bank at a regional bank of SVB's size?

SVB was undone by a bank run, not because they were doing anything particularly risky. Something like 1/4 or 1/3 of all their deposits tried to exit on Thursday - no bank can survive that given how fractional reserve banking works.

If you are a small business who has way more than $250k but only has time to manage one bank account and lack the need for more sophisticated treasury management, then yes, I would absolutely say you should put it in the least risky bank. Or you could take the wild step of not putting all your eggs in one basket.

The bank run was the proximate cause of the failure, but they also made some big bets and lost, making them vulnerable to the bank run in the first place.

Yes and now think about the implication of all the SMBs flowing their cash out of their regional banks all at once. And if you have anything more than a few employees, you definitely have an account over $250k because that's still an incredibly small business.

There's a serious risk of contagion here.

I understand you have a fear of contagion risk, but I don't see many signs of it. I think this mainly happened because SVB had a depositor base where a big chunk was tightly knit and prone to herd-like behavior. Most companies just aren't a) in the red, b) letting millions in cash sit around, and c) lacking in treasuring management capacity.

But if there are a ton of regional banks who took advantage of laxer regulation and had balance sheets in as poor a shape as SVB, then I am fine with some of them failing too. It won't be anywhere near the problem that 2008 or the S&L crisis was, and we'll end up with tighter regulation for those banks next time around.

You don’t see any risk of contagion? We have a fractional reserve banking system. If even a small percentage of depositors try to withdraw all at once, that can bring down any bank.

Right now, everyone in the country with uninsured accounts is being incentivized to pull those deposits and pull them fast. We don’t know how things will turn out, but there is obviously a major risk of contagion.

As with the other person, I understand that's a thing you're imagining. I'm just not seeing much evidence for it. It is a possibility? Sure. But not one I see as a major risk. And from what financial regulators are saying, I don't think they see it that way either.

You're not seeing it because banks are generally closed over the weekend. This is like sitting in the eye of the hurricane and saying that everything is fine because it's not windy yet.

For the third time, I understand people have this belief. But restating a belief without adding evidence doesn't convince me you're right. If anything, it's the opposite.

We could be in the eye of a hurricane. Or we could be in any of the non-hurricane locations on the planet. I think the latter is more likely.

Fyi: https://www.federalreserve.gov/newsevents/pressreleases/mone...

Seems like the verdict is in.

Now that we know a second bank is being taken over, yes, a verdict is in. But I think that says more about having a second failure than the situation we were discussing.

The end point of every business doing “treasury management” to keep all their accounts under 250k is that the FDIC ends up insuring all the money anyway. The only difference is lot more of it goes to fees for money managers and banks, and starting/running a business is a lot more complicated.

What’s the point? Either set a limit that can’t be skirted by maintaining multiple accounts or guarantee the same amount in a single account.

Is that what you think large businesses do for treasury management? Just keep opening bank accounts until they've got one with every bank in the US?

It’s one component of it, clearly. That’s pretty much what IntraFi does—while they don’t open an account with every bank, they have thousands of banks in their network and claim to be able to maintain FDIC insurance for up to 160 million.

If FDIC wants it to be possible to insure that much, they should cut out the middlemen and financial engineering requirements and just insure deposits of every business to that amount. If they don’t want to insure that much, then IntraFi and other similar services should be illegal.

Nope. The FDIC's main concern is with individual bank failure. If people spread their money out among many banks, then they have lowered both their risk and the FDIC's risk.

If you'd like to argue that the FDIC should go further so as not to subsidize people with shit-tons of cash, I'm certainly open to that. But the increased regulatory complexity might not be worth the total risk reduction, so I'd want to see some math. I suspect it's mainly a red herring, though, as I couldn't find any sign that Intrafi is a particularly large business.

> If FDIC wants it to be possible to insure that much

FDIC doesn’t want to insure that much against a single bank failure. Encouraging diversification of large balances helps the FDIC’s goals, since it reduces the impact of single bank failures and reduces the possibility of single failures turning into broader economic collapses without increasing the cost to the Treasury of a single bank failure, which is an efficient way of promoting the purpose for which the FDIC exists.

If the deposits are insured, a bank failure is far less likely in the first place.

It might be efficient for the FDIC to require complex and expensive financial engineering just to keep operating capital safe, but it's hostile to businesses, especially small ones, and is out of reach for many.

> It might be efficient for the FDIC to require complex and expensive financial engineering just to keep operating capital safe, but it’s hostile to businesses

The FDIC exists to protect against a general collapse of banking like the one that preceded the Great Depression, not as a generalized subsidy to business.

More moral hazard however: when you've got to use 10 banks to be covered by insurance you're not exactly going to do due diligence on them.

> If they don’t want to insure that much, then IntraFi and other similar services should be illegal.

Why though? The "$250k per bank" rule is clearly a feature of the system, not a bug. If the FDIC wanted to have the insurance limit be across all banks, that's how they would've structured the rule.

But they didn't, because their purpose wasn't to provide unlimited protections to corporations from bank failure, it was to limit the impact of any individual bank's failures and decrease the likelihood of bank runs.

The current rule does this effectively, and encourages larger businesses to diversify their assets while also providing significant downside protection to many individuals and small businesses.

The point is that these diversified funds are much less likely to need the FDIC to bail them out all at once.

I would argue that holding long duration treasuries in a rising rate environment and capitalizing before marking to market are two very risky ways to run a bank.

> I would argue that holding long duration treasuries in a rising rate environment and capitalizing before marking to market are two very risky ways to run a bank.

Not to mention doing so when you know that most of your customers' businesses are incredibly sensitive to interest rate hikes, in part because you have explicitly marketed to that market for years.

What contagion? How is this going to spread to the rest of the US that isn't actually dependent upon any of these startups or this bank? No other banks have yet popped up with similar risk exposure so its not a systemic issue like 15 years ago and startups are not that big a part of the US economy.

SVB was the sixteenth largest bank in the US. When businesses see that their money isn't safe in the sixteenth largest bank, they're going to cause bank runs on all the smaller banks as they attempt to move all of their money to the top three or four.

> No other banks have yet popped up with similar risk exposure so its not a systemic issue like 15 years ago and startups are not that big a part of the US economy.

That doesn't matter in the slightest. Companies don't do deep evaluations of the financial risks of their banks (as clearly evidenced by what's happening right now). They'll flee from what they perceive as unsafe into what they perceive as safe, regardless of balance sheet realities.

> they're going to cause bank runs on all the smaller banks as they attempt to move all of their money to the top three or four.

One of the primary issues being discussed is the insured limits at banks, and the uncertainty on whether depositors can be made "whole" (it's unclear whether people saying that mean 100% or something close to 100%, so I'm putting it in quotes, some people are being really loose with their terms in this thread). Why the fuck would people, given that context, ever move "all of their money" to only the biggest 3 or 4 institutions and increase their risk by consolidating in exactly the same way that caused the current problems? If anything this is a potential boon for the many smaller banks as they can gain additional depositors as people wise up to their risk exposure.

Because if there was a run on JP Morgan, the US government would absolutely "bail out" depositors.

Consolidating increases the risk of a bank run, decreases the risk to the individual depositor.

I can see the logic of that, "Let's act irrationally together and force the government to bail us out next time we make a run on our own bank." Or they can act rationally, distribute (manually or through existing methods) their cash across multiple banks so that their risk exposure is lower and they don't have to depend on the government maybe, possibly, bailing them out. You know, the thing they'd have done if they'd hired financial managers in the first place (which obviously they didn't, or they hired incompetent ones).

It's not irrational to act in your own interest. It's irrational to suppose that everyone should act in the majorities interest.

I'm not saying they should act in the majority's interest, I'm saying they should act in their own interest. Mitigate their risk by managing their capital properly instead of hoping ("Hope is a poor substitute for strategy") that things will work out. It's irrational to act in a way that, if a failure occurs, requires someone else to bail you out when they aren't legally or ethically required to bail you out. That's operating on hope, not strategy.

Putting all your capital in one too big to fail bank is the least costly option and the optimum strategy.

Until the US lets the largest bank fail this will continue to be the case.

The top four banks are too big to fail and WILL be rescued, as happened in 2008. Bank of America or Citi failing would be the end of America as we know it. That's why everyone will move to the bigger banks. Which is obviously not what we want. But it's what will happen if you leave depositers out to dry because it's a smaller bank.

I don't think that's likely. Most banks have about half of their deposits FDIC insured because their depositors have low balances. SVB only had 3%. Most banks are unlikely targets for a bank run as a result.

This is simply not true and very easy to verify via

https://banks.data.fdic.gov/bankfind-suite/bankfind

Most banks actually have most of their deposits NOT insured. Most banks are not bofa.

People saying that depositors need to be ratfucked reminds me of a guy writing about living through the great depression. First he knew about it was one morning when his dad showed his mom the paper with a headline about the stock market crashing. And saying 'good that'll teach those guys'. Six months later his dads tailor shop went under and his dad never had stable employment after that.

Perhaps we ought to stop paying off the hostage-takers and let things follow their natural course.

that's a lie. and if there is contagion it won't be stemmed by bailing you as a depositor out, we will need that money elsewhere to shore up the system. good luck to you

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