The important role of banks in our economy is lending, funded by deposits. Few businesses can survive, let alone get started, without access to credit.
If the banking system collapses most businesses will fail.
If the banking system collapses most businesses will fail.
They mean the risky, overleveraged and marginally valuable businesses fail, and the conservative, careful, and valuable businesses survive and buy up their assets.
It's precisely the interference with this process that's exacerbating economic booms and busts in the first place.
Let those who played it safe now have their reward, and those who played it risky have their comeuppance - not the other way around.
Equity holders of three banks just lost all of it - that is exactly what you're asking for.
In fact nobody recommends holding one bank account, under any circumstances. Banks can and do freeze accounts for any reason. You always have some backups standing by.
You also don't keep all your assets that way. Businesses can hold reserves in stocks or bonds or gold or cash in a safe just like everyone else.
The VCs didn’t concentrate their money like this for no reason. They got some benefit out of it, surely (easier access to loans for their portfolio companies, I suspect). And VCs are, or should be, sophisticated enough to be accountable for concentrating their capital without purchasing insurance.
There’s no clear way for VCs to pay the price they should pay without some startups being collateral damage. I think that’s the crux of the disagreement about what should have been done.
Founders used SVB because of hearing things like how regular banks, if they see you have a failed startup in your history, might not give you a home loan. (And because it was trendy.)
So much of this is built on trust, it’s literally the government’s job to step in and fix this before this explodes. Luckily, it sounds like SVB has the assets to cover the losses but not liquid so it will take time. Also, nobody is getting a bail out. SVB is dead, period. Depositors money belongs to them and they should be made whole. This could have been so much worse.
Almost like some scam? Why should banks have such priviledge? Who gave them that?
Liquid deposits at low interest rates are useful. Home loans are useful. And banks can bridge the two successfully almost all the time. And even when banks can't, the biggest problem is probably panic.
In many countries, the solution has been to transfer the tail risk from bank depositors (not owners) to the state. The state then reduces this risk by regulating banks heavily, and by requiring them to pay into an insurance fund.
I am not a libertarian. I support the idea of government as a regulator and an insurer of last resort. I am 100% aware that banks can only exist because the government holds the tail risk.
I think that wiping out SVB's shareholders and unsecured creditors was the right move. If we can claw back some executive bonuses or recent insider stock sales, all the better. However, I also think that making depositors whole is the right move in this case, because lots of banks own long term T bills and mortgages locked in at low rates, making them vulnerable to bank runs. Our best chance of fixing the situation is to prevent short-term contagion and then to change the regulations on banks to eliminate this risk in the future.
But yeah, I think banks are a useful fiction created by state regulation and state-mandated insurance. If we no longer want to provide that particular economic fiction, then I would prefer voters to elect people who figure out an orderly plan to wind down banks, rather than just letting the system implode.
(Full disclosure: Neither me nor my employer has money in SVB. But my paycheck is handled by Rippling, which passed funds through SVB in the process. Had my paycheck been paid last Friday, it would have been held to at least Monday.)
I keep some of my money at the bank because I have to and because my employer is paying my salary through a bank account. The most of it is at some safer place.