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Comment by nsmog767 | Hacker News Reader

>The federal government’s action is, in my estimation, the right thing to do for this moment in time. There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything? Banks, meanwhile, are now motivated to pursue even riskier strategies, knowing that depositors will be safe.

I don't believe this is a binary issue, but a lot of the "pro-bailout" rhetoric is essentially "well of course we need to know we'll get our money back if we deposit it in a bank." This is clearly the best ideal. But that's not how it works! And FDIC limits were real but ignored in this case!

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Could get the best of both worlds with a small, but symbolic haircut. Like 95% back.

Now everyone knows that money in bank is not risk-free, and you limit any systemic fall out.

> This is clearly the best ideal. But that's not how it works!

The “systemic risk” exceptions that are in the legislation and announcements over the weekend mean this is exactly how it works.

My guess is that this will be continued - perhaps even publicly formalized - or small banks will cease to exist very quickly in favour of those that are too big to fail.

It's essential a thousand times over that money goes to banks instead of mattresses. Letting bank runs erase savings is a really terrible idea that would be a repeat of the 1920s era mistakes.

> This is clearly the best ideal. But that's not how it works! And FDIC limits were real but ignored in this case!

The FDIC limit is basically useless at this level. 250k for SVB given their clientele really seems futile.

So I'm not sure even discussing it would serve much value. What I fund more interesting was the UK branch of SVB was actually higher in assets than liabilities and was making profit. It's just so strange to me still how this seems to have happened so quickly and seemingly, made worse by some people just getting worried.

There is something called the risk-free rate. It used to be 0, but not any more.

Limits were not "ignored", the companies simply have no other choice. The problem is systematic and by design. A medium sized startup/business handling only 25 million would need to bank with 100 different banks, obviously that's inconceivable in practice.

And now look at some of the more prominent customers. Pinterest, Shopify, CrowdStrike Holdings, Beyond Meat, Andreessen Horowitz, Founder's Fund, Circle. The latter is of particular interest because they are confirmed to have had around 3.3 billion dollars with SVB (of the $40 billion they manage in total). So some quick math, they should have used 160000 different banks to be safe, no problem. Apart from the fact that there are less than 5000 FDIC insured banks in all of the US.

There is a straightforward hierarchy of cash management techniques that safely handles large sums of money. If Boglehead retirees can figure it out then why can't startups?

Deposit sweep cash management accounts offer FDIC sweeps up to ~3M (note that this is not just abusing some technicality, it reduces systemic risk by diversifying investments. The whole point of the FDIC is to prevent bank runs in the first place). Money markets provide short-term exposure to treasuries beyond that. In the 25M range, companies should absolutely be expected to manage purchases of treasuries. Again, if Bogleheads can figure it out for individual retirement savings then why can't businesses?

> If Boglehead retirees can figure it out then why can't startups?

Because every dollar spent on keeping your investors' dollar safe is a dollar not spent on moving fast and breaking things. /s

So isn’t this one of those cases where the market is supposed to respond?

If FDIC genuinely topped out at 250k, and there exist customers who have more than 250k they wish to deposit, the market should be able to respond by providing private insurance for cash balances over 250k.

Your premium would presumably depend on the balance and the risk profile of the institution where you’re keeping the balance. Insurance providers would want to audit institutions at which their customers are holding those balances to make sure they have a risk profile consummate with the insurance premiums they’re collecting.

You, know, like insurance companies do.

Should lead to private banking accreditations that have the same imprimatur value as ‘FDIC insured’, but privately funded, right?

Now people might say ‘too big to fail policies are why that kind of product doesn’t exist’; but it’s not like products like that were in widespread use before 2008… has the banking industry just always assumed that federal insurance is effectively unlimited?

The above explains how the system is flawed and the solution is not to throw public funds at banks to in a way reward risk taking. I don't generally support bailouts.

Again, the system is intentionally made this way. Insurance would not even be needed if safer banking models were approved, which they're not.

The article describes exactly what the safe choice is: short term treasuries. The option that SIVB ignored in order to yield chase.

Of course they have a choice: money market funds and T-Bills. If you're handling millions in cash, you're supposed to know about these.

Circle needs those dollars highly liquid because otherwise they'd run into issues with their own customers. Exchanges can't give the customers T-Bills when they trade for dollars.

Also startups do not get paid in Treasury Bills when they strike deals. Clearly this system is flawed and prone to bank runs, which happen again and again. Because business people especially are aware of how banking works, they know the bank doesn't actually have the money in full. When there are issues, it's a risk leaving your funds with the bank instead of pulling them out.

I don't know much about Circle and hold no resentment towards them, but this sounds very much like a "them" problem.

If you're operating a business that requires millions or billions of dollars sitting in a bank account, you can't plead ignorance around FDIC insurance and claim that you're just a small business trying to scrape by. Your business is open to a big risk, and there are well understood techniques for managing that risk. If you're a disruptive company who's trying to change the world and you don't fit into traditional finance, you find a creative way to deal with the risk. But if you _do nothing_ and keep all your money in a bank hoping they don't collapse, sorry, but that's accepting the risk.

I don't see this is a systemic failure. The system is set up to protect individuals and small businesses, with the expectation that larger companies can pay people to manage these risks. If Circle's CFO and finance team couldn't come up with a better solution than parking all their money at SVB, I'd argue it's a sign of Circle not being a viable business rather than a sign of some fundamental flaw with the banking system.

Banks will extend all the credit you need if you have billions of t-bills as collateral. No need to actually have millions (let alone billions) in actual deposits.

The answer seems pretty simple. Don't invest much more than you're ready to lose. I'm sure that even in the US there's a way for a business to open an arbitrarily large risk-free zero interest i.e. no investment bank account.

What do you mean "invest"? Most of this bank's customers are running a business and need a bank account, it's not an investment.

It’s quite simple, really. Startups should buy hundreds of millions in gold, then stash that under 160,000 different mattresses to diversify risk of a systemic bank collapse.

If Bogglehead retirees can figure that out, why not startups?

A poor straw man.

There are better monetary instruments (like short term Treasury Bonds) to keep money at scale. Most startups don't have a team (CFOs etc) but I am sure the larger ones don't keep cash like that.

There are many ways a business can practically manage cash to avoid bank risk.

This has been pointed out so in the past 48 hours that I am beginning to think people are just willfully ignoring it.

Companies could insure funds over the $250,000 limit

What would it take to formally increase this limit to USD 250 million for everyone?

Probably negative interest rates for customers

> depositors are a bank's creditors, who are compensated for lending money to the bank;

this is simply not true. if anything the bank charges me money to hold my funds.

You should currently be getting at least 3.3% APY from your savings account. If you're not, it would be in your financial interest to move it to an account (possibly even at the same bank) where you do.

>But that's not how it works!

I would imagine the people advocating for a 'bailout' (using the most generous possible definition here) want this to become how it works.

Like how in Germany the government guarantees every German bank balance.

I have enough problems, I don't want to have to worry that my bank balance will disappear unless I spread it around in order to abuse a technicality.

Spreading deposits around is not abusing a technicality. The limit incentivizes diversifying deposits because it reduces the risk of a single bank. Retail banks benefit immensely from the fact that much of their deposit base is smaller accounts that are less correlated. A bank handling only large deposits from a small number of highly correlated depositors is exactly what FDIC caps ought to prevent.

> Like how in Germany the government guarantees every German bank balance

… up to the amount of 100k per customer, so less than the FDIC guarantee.

There are additional, voluntary, insurances given by groups of banks. These are also limited and customers are not legally guaranteed a payout.

> Like how in Germany the government guarantees every German bank balance.

Up to 100.000€, they don't guarantee it without limit, and they don't guarantee it for anything that isn't insured.

Greensill's insolvency recently got lots of media attention since local governments deposited large sums and were not (fully) covered by the normal mechanisms that protect private and business customers.

Same 100k limit applies in Switzerland too

> Like how in Germany the government guarantees every German bank balance.

It does? I didn’t know about that, and looking it up brings me to 100k per person guaranteed. Do you have a source for unlimited?

I don't want to have to worry that my bank balance will disappear unless I spread it around

If you have enough money to worry about having to spread it around, you have enough money to buy additional insurance for it, and/or enough money to hire someone to take care of those things for you.

"Oh, no! I have $250,000 in savings and now I might have to open another bank account to hold even more money! Woe is me!"

Can you even hear yourself?

I can also pretty much guarantee that very few individuals with >$250K of savings are keeping it in a bank. It's in a brokerage account in some combination of bonds, money market, and equities.

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