US Says All SVB Deposits Safe, Creates New Backstop for Banks
bloomberg.com
bloomberg.com
The Federal Reserve has created a new program that provides a backstop to banks based on the par value of their assets, rather than the market value. This is huge because the issue here is that the assets on a bank’s books are baskets of loans (typically mortgages or loans to the US government) that are very safe but have lost market value because interest rates have risen. However, at par (what they'll pay over their lifetimes), they cover all the bank’s deposits.
Mechanically, the way this would work would be that if a bunch of depositors all withdraw at once, rather than the bank having to sell that basket of loans at a big loss, they’ll borrow from the Federal Reserve instead. That way, they won’t take a loss and won’t end up insolvent. Depositors get their money and everyone would be happy. Since everyone now knows this is possible, in all likelihood this won’t actually get used that much because it’s safe to leave your money in the bank.
[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...
One of the big "lessons" of the 2008 financial crisis was the need to mark assets to market value, because otherwise, the banks were reticent to admit that their worthless assets were, in fact, worthless. So I find a certain amount of amusement in the government saying 15 years later in effect that mark-to-market is a bad idea and needs to be avoided to prevent financial problems.
This is not about 'worthless' assets. This is about, say, 10 year US treasury bonds, the safest investments in the world, losing current market value because of interest rates raised by the Federal Reserve.
The intent is two fold, not only saving banks, but also making sure that long term bond's interest rates don't go higher because of lack of demand. That will have repercussions like municipal bonds not getting buyers except maybe at high rates, etc.
>So I find a certain amount of amusement in the government saying 15 years later in effect that mark-to-market is a bad idea and needs to be avoided to prevent financial problems
They didn't say that, they're creating a narrow exception in their books. Mark-to-market will continue to be used everywhere else.
Am I good to ignore the $250K FDIC limit forever because this will happen next time too?
Will unlimited FDIC backing apply to money in brokerage sweep accounts?
Can I park money in a money market fund instead of a bank account now and enjoy higher yields? Because even though it's not technically insured the government will save the day?
Are all banks equal now in safety, so I can just pick the highest CD rate regardless of whether it seems sketchy? How about muni bonds?
No longer can we just read the sign that's literally posted at these banks "insured to at least $250K" and the disclaimers about lack of insurance on other products and know what anything means.
(And, cynically and perhaps irrationally, while I'm glad the startup world is not imploding, I can't help but think of the parties, events, and other goodies that SVB treated VCs and founders to instead keeping more liquid assets on hand...)
The moral hazard in this case is that depositors will feel safer putting all their deposits into a single high-risk bank where they can earn higher interest on deposits, since the implicit insurance is effectively much higher than $250k per individual or company. I think the sensible to solution to this, in the modern age of banking, is for the Federal Reserve to not allow concentrated, high risk banks to exist in the first place. In the same way that the government doesn't allow carnival operators to reduce safety standards in order to make roller coaster rides cheaper or unreasonably fast.
It’s amazing the mental and bureaucratic gymnastics needed to avoid admitting that fractional reserve is an inherently unstable system.
1. Existing assets are more than current deposits, but liquidity is low
2. Shareholders, bondholders, etc.. are going to get zero
3. The Fed will provide immediate liquidity
4. Assets will be sold to repay the liquidity provided by the Fed
Especially when their "opinion" directly contradicts the stated facts of the situation. The feds are not going to bail out the bank—Yellin specifically said, "We're not doing that again." But they are giving the depositors, meaning people and companies, their money. That is huge. That, far as I am aware, will prevent this situation from becoming a deadly falling-domino game.
The FDIC guarantees $250k which is covered by fees paid by the banks. Above and beyond that they will pay out depositors first by selling the bank’s assets, which they took over on Friday.
In this case, FDIC is saying they will make depositors whole. They’ll do so by covering it with FDIC funds which they’ll recoup by selling assets and charging other banks if there’s a shortfall.
FDIC et al. just fast-forwarded to the end, although notably I don't see a discussion of where any potential profits will go.....
Banks do not have a reputation of absorbing costs.
I think we can agree that destroying depositor money is going too far. That being said, we still have a long way to go, inflation is still 6%+, so more rate increases are needed... which will only cause further monetary destruction and other issues similar to SVB.
Still it makes me wonder if the transmission mechanism for interest rate hikes will work, since the politically connected are where most of the money is already.
Even if its coming from other banks, it means they have to increase fees somewhere.
This is a key question, and the reason traditional banking and investment banking should not be allowed in one company.
"In a separate announcement, the Fed late Sunday announced an expansive emergency lending program that's intended to prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole."
"The Treasury has set aside $25 billion to offset any losses incurred under the Fed’s emergency lending facility."
If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
Tell me you didn't read the article without telling me you didn't read the article.
Maybe so. But I think we should be honest about what this is: a bailout of the banking industry.
"In a separate announcement, the Fed late Sunday announced an expansive emergency lending program that's intended to prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole."
"The Treasury has set aside $25 billion to offset any losses incurred under the Fed’s emergency lending facility."
If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
Once again, politicians serving their masters.
Pop quiz: who is Kevin McCarthy?