Update from Silicon Valley Bridge Bank CEO
svb.com
svb.com
- FDIC guarantees that every deposit at these banks up to an unlimited amount will be paid out by the US government.
- Because of that guarantee, the bank run stops and people leave their money there (and in fact deposit more).
- Because of the influx of cash the bank solves its liquidity issues and the government doesn't actually have to spend a single penny.
In theory all of this works. But the next question is – how far will this go? Will FDIC do the same for every bank in the country? Can they all just start taking more and more risk? Do customers not need to care about how well their bank is run, because ultimately the US government is everyone's bank?
Did we just accidentally invent a fully socialized national banking system?
To avoid legal hot water, the FDIC may find themselves to equally protect every bank which might quickly turn out regrettable…
> Did we just accidentally invent a fully socialized national banking system?
According to Kevin O’Leary, YES. He also makes a point about how the management was "idiotic" because if they had just gone to JP Morgan, or Wells Fargo, or another big bank - and said, "hey, we got a short term cash problem with a lot of treasuries," they almost certainly could have come to a very low-interest loan arrangement that would have prevented this outcome.
I’ve read a similar sentiment elsewhere about their inability to raise the necessary amount without hitting full panic button.
Whether idiotic or not, the CEO sold before this. Maybe there’s a bigger play
Not if the profits still go private interests.
The standard way of doing big business in the USA for quite some time has been “socialize the costs, privatize the profits”. So on the face of it this doesn’t seem new.
(edit: I see the phrasing "fully protected by the FDIC" -- this might be the general idea that depositors won't lose anything, but not literally that FDIC is officially extending insurance, I think?)
Anyway, for the BTFP, I think it is generally available to all banks. Seems to allow borrowing against underwater assets at par value, at roughly 4.6% interest.
https://www.federalreserve.gov/newsevents/pressreleases/file...
While it came together over the weekend[1] there are some guardrails -- including that it only applies to collateral that was already owned at the time of announcement (so far...).
[1] based on zero evidence, I wouldn't be surprised if they have stuff like this war-gamed and sketched out in case
I had seen the first round of announcements around receivership certificates https://www.fdic.gov/news/press-releases/2023/pr23016.html
I'm not sure on the time of that but the Fed press release the evening of the same day has the exception and "all depositors will be made whole" phrasing:
https://www.federalreserve.gov/newsevents/pressreleases/mone...
On second thought - SVB is apparently the safest place on the planet to park enormous amounts of cash. Why would you not deposit everything here? The Government will just save you if SVB screws it up again... right? Absolutely zero risk in parking everything with SVB... what a great signal to be sending the public.
This is a naked attempt to pump the value of SVB assets, and seek a less-than-fire-sale to another institution.
If some bizarre scenario were to happen (a failure of two of the big four) which the FDIC couldn’t recover, in the words of Dwight Schrute, “you’ve all been dead for weeks”.
When was the last time any of this happened?
This lie keeps getting repeated, but while it usually manages to do that (by facilitating a buyout, often before or over a business day – sometimes longer in calendar time because of a weekend – when the bank is closed), it doesn’t always, even when it facilitates a buyout rather than being forced to create a takeover bank.
When it does takeover without facilitating a buyout, it never protects uninsured deposits without invoking the systemic risk exemption.
> Otherwise the banking system would collapse.
Well it does where the banking system would collapse, that’s literally the point of the systemic risk exception.
No, only the balances of SVB and Signature at the time of the failure of the former banks have that. There’s no prospective guarantee inheritable by an acquirer. (Admittedly, any bank that could reasonably bid for them, especially for SVB, would probably independently qualify for the systemic risk exception itself if it suddenly failed, but also any bank that could reasonably bid wouldn’t be in any near term risk of that, either.)
Like I said downstream - if my bank fails next year (or 10 years from now) and I do not get infinite deposit insurance - then where are we? Just the well connected get special treatment? Seems so...
In the exact same place we’ve been for the last 15 years (much longer, really, because the last crisis wasn’t the start of this, either), between the time the systemic risk exception was announced for three large banks, and all the bank failures in between where it was not invoked.
A place where the FDIC guarantees $250K per depositor per ownership category per bank but tries to facilitate takeovers that protect uninsured balances and where, with the Treasury and President, might protect something more, if the conditions for the systemic risk exception are determined to apply.
The systemic risk exception has existed since at least 1950, was invoked as far back as 1980, and was easier to invoke (the FDIC could do it on its own) prior to 1991. It was also less necessary prior to 1991, since the FDIC could facilitate a sale even when doing so was more expensive than a payout of only the insured accounts until the least cost rule was put into the law in 1991, and in fact, since the 1960s, the general policy was to, where possible, facilitate a buyout by another bank to protect all depositors even when the cost to the Deposit Insurance Fund was greater than a payout of insured balances.
The arguments about the use of full-protection via the systemic risk exception for SVB fundamentally changing things is just, completely, historically ignorant.
I am not putting words in your mouth - that is the logic the government is feeding everyone today.
It is also disingenuous to claim a techy bank that catered to the tech sector posed an imminent risk to the entire banking system, ie the systemic part of the SRE. A bunch of tech elites and big tech companies would have been burned - and some failover would have happened certainly, but this was not a system issue, it was bad choices made explicitly by banking executives at some specific banks.
It is also disingenuous to claim no tax payer money is involved when it is in fact tax payers that are providing all the guarantees here, bear future risks, and ultimately will pay for it with bank fees and more.
The entire thing is a political exercise. Don't look behind the curtain... because it might all topple over.
The whole FDIC system (with or without the systemic risk exception) is a system of bailouts of depositors paid for by assessments on banks (which, sure, are a kind of targeted tax, and thus constitute funding “by the taxpayers”.)
Other than the fact that your earlier points are indefensible, I’m not sure what the point of responding in thread with such a sudden radical shift of topic is, though.
> It is also disingenuous to claim a techy bank that catered to the tech sector posed an imminent risk to the entire banking system, ie the systemic part of the SRE.
I dunno, more than $100 billion in uninsured deposits, largely he operational accounts of a large number of businesses (not isolated to the tech sector, but mostly either geographically in the region of the bank or in the tech sector or both), which given the nature of the asset situation of the bank could be expected to either be resolved quickly at a very low percentage of face value or extremely slowly at a better percentage, would have massive knock-on effects on the businesses involved, there employees and investors, their creditor (ultimately, in large share, other banks), etc. Is it a different character of systemic risk, in some regards, than other previous invocations? Sure. But while there are clusters of similar case, systemic risks tend to be different from each other in details.
> A bunch of tech elites and big tech companies would have been burned - and some failover would have happened certainly, but this was not a system issue, it was bad choices made explicitly by banking executives at some specific banks.
The “systemic” in “systemic risk” refers to the scope and nature of the effects of the risk materializing, not the nature of the cause of the risk. The systemic risk exception is not about blame, its about the effects of inaction.
> It is also disingenuous to claim no tax payer money is involved when it is in fact tax payers that are providing all the guarantees here, bear future risks, and ultimately will pay for it with bank fees and more.
Maybe. Again, this is just a radical shift of topic.
> The entire thing is a political exercise.
Yes, acts of government are by definition political exercises. This is not, even slightly, in dispute. Are you just looking for random things unrelated to the earlier discussion to try to get into an argument about now?
In practice, we just saw that the US government will gladly retroactively change the rules to insure any amount of money. For all practical purposes, trillions of dollars in deposits became insured by US tax payers this week.
And that's on top of the totally-not-QE BTFP facility they conjured up. That is available to all insured banks who have any underwater asset that they wish to move to the Fed's balance sheet at par for a mere ~5% per year.
By the FDIC, not the tax payer.
The funds will be recovered from special bank assessments, which means you and I will pay to bail out SVB and Signature via increased bank fees and more over the next decade. Not to mention the FDIC is guaranteeing depositors will be made 100% whole, which means again, you and I are guaranteeing the deposits if this special bank assessment comes up short or falls through.
So no, taxpayer money is not directly used - that part is true. But it is patently false that taxpayers will not be paying to bail these banks out.
It's a giant political game being played... avoid the look of a recession no matter what. Don't even speak the dreaded "B" word...
This was a classic bank run. A combination of the concentration of depositors from a single industry, massive swings in the monetary flow of that industry, poor investment decision making, and having regulations loosened on it meant that SVB saw far too many short term depositors call for their money and had too much of that money tied up in long term investments.
The government has the liquidity and the reputation that is needed to prevent this from becoming a problem.
The cost that is being borne by the taxpayers is the cost of people depositing money in smaller industry focused banks, which have greater risk, and lower efficiency. If you really wanted to eliminate the cost, the solution would be to have everyone deposit their money in a handful of Too big to fail banks, which would almost certainly be cheaper and more efficient, but is also a bad economic system because of the political power those entities gain.
Like SVB?
The red carpet was rolled out to prevent anyone form being harmed by SVB... and zero lessons will be learned and we'll just do it all again, but with a different name this time.
Everything that happened meant SVB was supposed to fail and drag down all of it's high-flying customers with it. Yet... here we are, pretending this isn't a taxpayer guaranteed big bank bailout during a looming election cycle with record inflation we're also pretending isn't real.
Politics makes things... insane.
It’s the Silicon Valley BRIDGE Bank. The one that was created by the government after shareholders were wiped out and the execs were fired, and new management was appointed.
Of course, a lot of operations, data, tech will continue. How else would they ensure customers etc are provided access to their funds and are able to carry out their regular banking services.
How long will the FDIC make this unlimited protection available to SVB++? Is it just long enough to calm everyone down, and then in a few weeks/months release a very quite announcement that the guarantee is going back to the original $250k? If it is new gov't policy that all accounts every where are guaranteed for ever, then that's a huge banking shift that seems like something that would require a bit of congressional approval. But that's just me not knowing a damn thing about how the FDIC decisions like this are made
The fact that the FDIC website still says $250k cap is amazingly laughable. It's either unlimited for everyone every time, or it's $250k for everyone every time.
The reality is - it's infinite deposit insurance if you are well connected. Let that sink in folks.
If so, maybe it's time for a better banking plan than "all eggs in one basket"
The point is the rules where changed mid-game to protect a bunch of very well connected people that played extremely loose with the "rules" and will suffer zero consequences as a result - because my personal dollars are being used to protect them.
Regarding the $250k cap in general - in my opinion, it's far too low. It's lower than the average price of a house in a large amount of the country.
What does the price of a house have to do with the cash-on-hand bank accounts of the average citizen?
I mean, SVB (and every other bank except those three) wouldn’t exist today if people treated the three banks the government decided to invoke the systemic risk exception for [0] in the last financial crisis that way, so, I’m going to guess the market will also not treat SVB that way.
[0] Two of which didn’t end up needing the exception to actually be used because the mere announcement of the decision facilitated other resolutions.
I think the first step they have to do if there is any hope of a successful relaunch, is a full rebrand.
Why do regulators never split banks up? [0] For people who talk so much about managing risk. Reminiscent of GHW Bush's complaint about eating broccoli.
Also, talking about concern about job losses and wider economic impact, compare to in 2020/1 when Congress was fetishizing daily about stimulus packages to save the airline industry, yet long-distance coach companies Greyhound/Boltbus and Megabus were simply quietly allowed to cease business.
[0]: https://www.americanbanker.com/news/regulators-willing-to-br...
> 1/17/2023 The Office of the Comptroller of the Currency and other regulators would consider breaking up big banks that repeatedly fail to correct bad behavior, according to acting Comptroller Michael Hsu.
> Though financial regulators have long had the power to split up banks for incessant violations, Hsu's remarks at the Brookings Institution on Tuesday were the most explicit warning in recent memory of regulators' willingness to break apart large, chronically delinquent financial institutions.
Second: IIUC, any shortfall in making SVB depositors whole will come from a levy on the rest of the banking system (and maybe small (<$400m) clawbacks from execs' share sales). How much will that levy cost the rest of us? Can it be legally or politically challenged? Are any Congressmen challenging it? (Where are the libertarian Republicans on this?)
The only “moral hazard” being created here is encouraging people to deposit money in smaller banks.
If the govt hadn’t created the “moral hazard” then people and businesses would simply have chosen to do all their banking with the much safer big banks like Chase and Citibank.
The reality is that Americans don’t want all banking to be concentrated in the hands, but smaller banks are significantly more risky and inefficient. Depositing money in the smaller banks and not just the top handful is the “moral hazard” that has been created by government intervention.
Many times. The typical uninsured depositor in bank failures from 2008 to today got about 75 cents on the dollar.
Depositors in IndyMac in 2008 got 50 cents on the dollar.
Or everyone, nationwide, starts moving every penny they have into whichever bank, anywhere, offers the highest interest rates, without regard to how they accomplish that. Let's call it "risk intensification".
The rest have already been paying for this insurance all along. Wouldn't make sense to levy a fee on fire insurance policyholders when someone without fire insurance has their house burn down.
This guy really thinks people are THAT stupid?
* a complete outsider to SVB
* formerly with FDIC
* ran a consumer banking-tech startup until joining SVB
* ran Fannie Mae for six years after the 2008 financial crisis
* high-level experience at BofA and Deutsche Bank
He sounds like about as ideal a person to run the new SVB as imaginable.
[1] https://www.wsj.com/articles/barney-frank-pushed-to-ease-fin...