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Comment by tedivm | Hacker News Reader

They're also taking action to prevent this kind of thing from happening again-

> The Fed facility will offer loans of up to one year to banks, saving associations, credit unions and other institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasurys, agency debt and mortgage-backed securities.

> “This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The Federal Reserve is prepared to address any liquidity pressures that may arise.”

https://www.cnbc.com/2023/03/12/regulators-unveil-plan-to-st...

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Moral hazard once again. At least previously there was a 5% haircut, now apparently nothing. And the loan is against the par value, not market value.

If 2008 did not do it, 2023 has institutionalized moral hazard in the financial system. Never, fear the Fed is here! We will absorb all!

What kind of moral hazard? Let’s be specific about who did something wrong. Do you think that businesses should worry about whether their bank has hedged enough against rising interest rates? Or maybe they should subscribe to news alerts telling them sooner when to get out?

The shareholders getting wiped out and bank management replaced seems like pretty strong incentive for the bank itself not to screw up.

Absolutely, businesses should worry about bank failures taking down their uninsured assets. If a business's assets are not insured, they should not expect to be made whole by an insurance policy in case of tail risk failures.

Fine, but let's talk about the other side of the equation: who should pay to make the depositors whole? Did the depositors do everything in their power to insure against their risk? Is there something in place already to help depositors get some of their money back immediately, and likely more as legal proceedings complete?

It's certainly not clear to me why the depositors, as crappy a deal as they got, should be bailed out by unaffected banks that are financially healthy or, as is the case no matter what, the rest of the citizenry should pay.

The short-term case for other banks bailing out depositors is that any systemic risk affects all banks and the rest of the citizenry, albeit indirectly.

But I think it's probably economically sound in the long-term as well. That is, asking every depositor with $250K+ to assess the financial health of each bank they use and maybe buy insurance is collectively more expensive than just having the FDIC implicitly insure all deposits.

That's different than asking if it's "fair". But I would wager it's probably more efficient.

Insurance always has a cap in the payout at some dollar amount, usually directly related to the amount one is willing to pay for the insurance. It's usually up to the insured to balance those two factors to get adequate, but not excessive, insurance for the risks they are exposed to.

Most of the arguments I've seen are effectively arguing that 250K is too low an amount. While that may be true, that was the well-established 'rule of the game'. The FDIC limit was no doubt chosen, as most insured amounts are, to cover the majority of damaged parties, for an acceptable cost.

This isn't grandma or Joe/Jane Public losing their life savings; the FDIC insurance easily covers the vast majority of individuals depositing cash. These are businesses that have, or should have, the financial wherewithal and resources to mitigate their risk beyond the FDIC baseline.

I think it is also necessary to consider that many of the regional banks have more diverse clients - individuals, small business and some mid/larger business dealings.

Perhaps I'm wrong but I suspect a much higher share of deposits are under $250K than the 3% at SVIB. The larger deposits are likely from companies doing a much better job of spreading counterparty risk around, ie traditionally managed companies.

The way insurance works is that you pay a premium so you don’t need to worry about a risk, whether or not disaster happens to you personally. The timing is a bit irregular, but morally it seems similar?

If paying for deposit insurance were available for large accounts, I expect many businesses would choose it. Might as well make it the default?

I think that's dubious. If management can make off with enough money prior to being wiped out, and it won't be clawed back, then there's still potentially a moral hazard at hand. So what if we lose the bank! We'll make off with millions anyhow, by investing other people's money imprudently.

Okay, but how does punishing the depositors for management mistakes fix that? It definitely increases the damage, though.

The shareholders lose it all if the bank goes bankrupt. They should have incentive enough to watch over management. If they don’t notice, how does it help for depositors to have their money at risk too?

Absolutely a business should be worried. I'll give two examples, one old one recent.

As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.

More recently, I was president of an HOA. Over a span of 5 years we built up a reserve account to just over $1M for a planned capital improvement. Every 250K we opened a new bank account. Had there been a delay in starting the project we would have opened a 5th.

So yeah, the Treasuer and staff of all of these companies should be taken to the woodshed and most likely fired for incompetency.

> As a college student I worked as an office temp at the hq of an midsized areospace company. They had a Treasurer, Asst Treasurer and clerk. Part of my job every morning was to get the short term deposit rates from a list of banks whom they did business with. They then would place their excess cash with a number of those banks.

Wouldn't it have been more useful if that job simply didn't have to exist, and they could just deal with one bank, and then that extra capital could have gone to something more useful?

Change the game so the risk is being managed in a way that doesn't require every single company to wastefully play financial hopscotch so they can instead focus on doing what they do best.

Do you think that was a good use of your time? Maybe it would be better if depositors didn’t have to worry about such things. What would be lost if all that busywork just went away?

Free markets

Did you explicitly open the new account at a new bank? Because if you just opened a new bank account at the same bank you don't actually get any extra protection.

So if i understand this correctly you can get a 0% interest loan as a bank if you need liquidity? I wish I could put my assets up for a 0% loan…

Not only that but they’ll loan you more than the security is worth!

This is dog shit because banks can now buy bonds at market value and use them for collateral at par value. Brilliant idea really.

Not 0%

The new facility isn't at 0% but it values securities at par value (some of which are valued by the market at 60 cents on the dollar)

Yet signature bank was shut overnight?

Not sure a new $25 billion facility matters when outflows can hit that much in a couple of hours.

Doesnt this just push the can down the road? Interest rates will likely be higher not lower in 1 year so their bond portfolio will be even more underwater.

No, so long as the average maturity is not too long.

The long-term bonds would have paid back enough money for SVB to pay back every depositor if there had not been a run that forced them to pay them all back at the same time. Knowing that everyone can get 12 months of runway will do much to allay fears and so reduce risk of further runs.

Weren't these 10-year bonds and negative-convexity MBS? 12 months doesn't improve the position at all, but maybe you can keep applying for these loans in which case it's just another QE.

What interest rate does that assume for depositors? Sure, the face value of the bonds in 2032 dollars might have been enough to pay back the 2022 obligations to their depositors, but banks are routinely offering 2-4% interest in high interest savings accounts now. So either depositors will leave for better options, or SVB would have had to offer competitive rates (digging the insolvency hole deeper).

Big banks are still offering sub-1% rates:

https://www.usbank.com/bank-accounts/savings-accounts/elite-...

Compare that to a money market fund from a stock broker at 4.5%:

https://www.schwab.com/money-market-funds

The question is, how quickly do simple folks figure out they're being slowly bled, and start moving their cash to some place where it's appreciated?

So bailouts again....

A larger bailout

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