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Comment by ahepp | Hacker News Reader

My understanding is it's not yet known whether a special assessment will need to be levied. The FDIC is making all deposits available before they find out, and if it turns out they cannot sell SVB assets to cover deposits, they will levy a special assessment to make up the difference.

Certainly open to being corrected if that's wrong. But as far as I know it's a bit premature to talk about this being a "tax on depositors at other banks". It seems like these actions ensuring stability in the banking system may be beneficial to everyone.

If it turned out that all SVB assets were worthless and a HUGE special assessment would need to be levied to cover deposits, I would agree that this could be a moral hazard. But right now I think it just looks like prudent management.

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You're absolutely right. It's entirely possible for SVB to sell their assets and cover the entirety of the deposits above FDIC limits.

Get real. The issue has never been that SVB's assets were completely worthless, it's that they're not going to cover all of the deposits over the FDIC limits. Ten year bonds were a bad idea and nobody wants them given the current interest rate trajectory. If SVB's assets could've been sold for their full cost they would've been. An assessment will happen, it's just a question of how large it will be.

It's possible the bank is only a "little bit" insolvent. Is it not possible that the difference can be made up by wiping out shareholders and giving unsecured bondholders a haircut?

Per Robert Armstrong of FT: https://www.ft.com/content/9ee5edda-a038-4992-863f-242bd69c8...

https://archive.is/OQdR7/43e461dad99a58217efdfde3878ee6b56cc...

It looks as though SVB may be "only $5 billion" short on its uninsured deposits, with $22 billion in other creditors

> Is it not possible that the difference can be made up by wiping out shareholders

In the US it's illegal to do anything that would be "bad" for shareholders. It's quite literally the law that CEOs must return a profit for shareholders (or attempt to). The FDIC however has no such requirements, so while the bank itself can't wipe out shareholders, the FDIC can do it without care.

Publicly traded companies will ALWAYS put shareholders above anyone else. It's the primary reason I'm very much against banks being publicly held. Just as I feel it's immoral for healthcare both insurance, pharma, and hospitals to be publicly traded entities.

> SVB's assets could've been sold for their full cost they would've been

Why? No one thinks the FDIC is gonna close their bank until the FDIC padlocks your front door with you inside. This literally surprised almost everyone.

If this is so prudent, how come nobody was suggesting it before it happened?

I agree though that it sounds like a reasonable solution, at least superficially.

Wiping out the shareholders at least is something I agree with. They need to eat risk.

I also think that deposits have carved out a space of its own in the mind of the public. You can't think of it as a risk investment like any other debt because people just don't treat it that way, they think of it as a safe place to store their money for convenient access for things like payroll. If you haircut them, everyone will have to re-evaluate where to keep their deposits and chaos ensues.

The big question then is how this levy on the rest of the banking system will work. That may turn out to be a clever solution or a carpet to brush future problems under. We'll see when there's more details.

But the question still remains, why didn't someone think of this earlier?

> If this is so prudent, how come nobody was suggesting it before it happened?

I guess this is kind of facile, but isn't it because the bank wasn't insolvent yet?

Interestingly, it sounds like systemically important banks may be required to do "resolution planning" for insolvency. If I'm understanding correctly, that sounds similar to what you're talking about.

SVB seems to have successfully lobbied for raising some of the thresholds for increased oversight from $50bn to $250bn. I don't know the specifics of exactly what was involved at this threshold, but it does seem clear that was a mistake.

Your last paragraph is dead on. Here is analysis from a blog run by Financial Times ("FTAlphaVille"): https://www.ft.com/content/c95e7708-b903-405d-a017-963844eb3...

Scroll down to screenshot of tiny text to find the "one trick" to explain it all. SVB poorly managed their balance sheet and had weak regulations for which they lobbied (oh, the lulz). Nothing more. FDIC wind-down or maybe sale. Plus, tighten up that rule. End of story. Maybe a few billion of special assessment (_in total_) on all other banks -- this is how deposit insurance works _in one form or another_ in all advanced economies.

Why is this darn story getting so much attention? Dunno. Slow news cycle?

EDIT: balance -> balance sheet

I haven't read the Alphaville coverage yet, but I thought their front page feature was pretty informative coverage: https://www.ft.com/content/b556badb-8e98-42fa-b88e-6e7e0ca75...

I'll read Alphaville next

> If this is so prudent, how come nobody was suggesting it before it happened?

Because if you tell someone "hey, we're gonna wipe your shit out" they're going to try to rescue as much money as they can.

> The big question then is how this levy on the rest of the banking system will work.

https://www.fdic.gov/news/financial-institution-letters/2009... Here's how it worked in 2009.

> why didn't someone think of this earlier

Like in 2009, the last time they did it?

> everyone will have to re-evaluate where to keep their deposits and chaos ensues.

That chaos is normal functioning of the market.

Nobody has a right to safe placement of large sums of capital.

It is not the government's job to protect your market winni g from the market moving against you.

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