The problem with all these banks disappearing is that there are continuously fewer and fewer choices left. Eventually there will be a handful of megabanks and nothing else. I guess this is happening in every industry these days.
Start-ups who raise a Series A aren't looking to earn 1% on it - it seems silly that they can't really do anything with it that doesn't take on risk, and that FDIC insurance for just storing cash only goes up to a low amount.
Sure, in the old days when money was physical and there were costs involved in storing it and transporting it that makes sense. But these days, I feel like I'd like to just be able to have an account straight at the Federal Reserve or something, which doesn't earn any interest, but lets me keep my cash sitting there without any risk of a run or anything like that.
But generally, I don't think I really need a bank. I want somewhere to temporarily store any amount of cash (Federal Reserve), and somewhere else that I can invest what I want, if I'm looking for a return, with some risk, on my money. Neither of those are really roles of a bank, right?
There are Massachusetts banks insured by the DIF (the inspiration for the FDIC) that has insurance for deposits over 250k, but at that point you're kind of putting more faith in the state of Massachusetts than the U.S. government.
> Start-ups who raise a Series A aren't looking to earn 1% on it - it seems silly that they can't really do anything with it that doesn't take on risk, and that FDIC insurance for just storing cash only goes up to a low amount.
If this is what they're looking for, they should probably just be banking with a SIB [1]. Wells Fargo and Bank of America might pay laughably low interest rates on their accounts, and deposits might technically only be insured up to 250k, but the U.S. government cannot and will not let these banks fail under any circumstances because they would drag the entire U.S. economy down with them.
[1] https://en.wikipedia.org/wiki/List_of_systemically_important...
It will make you angry.
Then, according to the CEO of the bank, the Fed leaked to the press.
It seems like most normal people operate as though money... is money. What should change in the way most normal people do what they do with... whatever it's called now?
Tada! You have replicated narrow bank functionality. None of us have enough pull to change Fed fractional reserve and banking regulatory policy unfortunately. If you can't change the wind, adjust your sails.
If you don't mind your deposits being exposed to fractional reserve lending and FDIC insurance, CDARS: https://www.intrafinetworkdeposits.com/ To my knowledge, it can provide at least $50M in FDIC coverage with sweeps under the hood, although someone on HN mentioned the other day the limit might be more. Ask your financial services institution what their limit is.
(not investing advice, educational purposes only)
Brokerages will issue checks and debit cards now?
https://www.tdameritrade.com/investment-products/cash-soluti...
https://www.fidelity.com/cash-management/atm-debit-card
Even vanguard can do it, but they don't LIKE to: https://investor.vanguard.com/investor-resources-education/f...
https://www.fidelity.com/mutual-funds/fidelity-funds/money-m...
(This mirrors some of the primary strategies used by money market funds, but a startup is in a better position because they can probably accurately forecast their cash needs a week or a month out.)
Small startups and business can easily end up with cash in the multi-millions. We are talking about companies with a handful of employees, too small to warrant a full time financial focused position. As the OP mentioned, there is zero reasons we can't have a zero risk depositor account. And I think most folks would be happy to pay a small fee for the service, but fees should not be necessary as the provider can still get overnight rates. But the only reason we don't have one right now is because the government doesn't want to interfere with the banks ability to make money off of our deposits.
EDIT: For some extra context, I know someone that had a swap account at SVB. In theory they were protected, but they still lost access to their funds for multiple days, which can be very problematic for a business. And on top of that it wasn't (and still isn't) clear how one would recover swap accounts, so they spent the weekend reaching out to lawyers. At this point they have probably spent a week of time sorting this mess out. They are a small biotech focused on finding cures for diseases and have zero interest/resources for financial engineering. And for companies that typically only have 1-2 years of runway, loosing a week of productivity is a huge distraction.
It is economics 101. Even a regular citizen doing a once-in-a-decade housing deal has to be wary of it.
Please explain to me what happens to a sweep account when the primary bank fails. Asking for a friend, who quite literally tried to get an answer to this over the weekend. Also, I asked this question in the Mercury thread where the founders were responding to questions and got no answer.
And apologies, but I added an edit before I saw your comment. But in that edit, I explain how the sweep account was of little comfort during this SVB debacle. If they had needed to make payroll on Friday, they would have missed it. And while the FDIC has restored access to 100% of funds thanks to the intervention, it is still unclear how and when they would have gotten access to the sweep accounts in the case of no intervention.
I worked for many years at a bank that did just that. We happened to be able to offer significantly lower deposit rates than our competition, because we had very low exposure to the kind of banking that risks government takeover due to surprising repricing events.
Wealthy customers too lazy or otherwise unable to spread deposits around to stay below the deposit guarantees chose us to an overwhelming degree, in spite of competition that offered better rates.
Granted, it's in Europe. Don't know if there's stuff in the US environment that makes this harder.
Side note: what HOA needs more than $250K in reserves? I'm all for a rainy day fund but I'd be asking for a reduction in dues...
Leftover from suing the builder for improper waterproofing. We're spending that. Turns out retrofitting waterproofing costs a lot of money!
If you tens of millions in cash, that money shoupd be managed proffeshionally. And anyway, why should preserving that money be anyone's problem other than the owner's?
There is no such thing as 'sace money' in the world. It just doesn't exist.
We as a society spend more effort making sure money is safe than we do making sure children are safe/not hungry.
A person walking outside cant be safe from getting hit by a car, a child cant be safe from getting an ilness, plant machinery cant be safe from breakdown, a city can't be safe from being hit by an earthquake.
There is no person or asset that is safe.
why should money be safe?
Exactly. Many HOAs are now required to get periodic reserve studies that calculate predicted maintenance costs going out sometimes 30 years. Association Reserves did our study (<300 homes) and calculated we needed $1.4M to be 100% funded. Our HOA policies require only 60%, which we think reduces the risk of special assessments to a very low level, but that's still a lot of money. Association Reserves believes that property values in HOAs with high percentage reserves can be 5-10% higher than low percentage (<40%) reserves.
If you have an account with noname for $3,000k and noname has 12 accounts with localcorp1-localcorp12 each of $250k -- and noname goes poof, what happens?
I think, according to the preSVB rules, you get $250k from FDIC and then get a very strong claim to $2,750k from the rest of noname's assets (if no BigBank steps in to buy the part of noname you're connected to).
https://www.fdic.gov/consumers/banking/facts/priority.html
You'll (probably) get your money back, but after how much time?
Also, per FDIC rules, the 250k is per party attached to the account, so at least for a married couple it seems to be $500k per account.
But hey, I'm sure it'll all be fine and we won't need to worry about the fine print.
Its per owner per account class, but what constitutes an owner varies by account class, and, IIRC, many class by definition have a single owner.
But, yeah, you can double your coverage in simple directly-owned accounts as a married couple by splitting funds between maxed out single accounts ($250K) for each party and a maxed out joint account ($500K) for a total of $1M in coverage, because single and joint accounts are separate categories.
When I was last tangentially involved in such projects it was quite unclear how they thought this would interact with monetary policy. Narrow banks could easily be created today without any new IT systems, but generally, governments are unwilling to do what it takes to enable them for political and financial reasons. At some level it's another obfuscated way of raising revenue without explicitly raising taxes: they force people to deposit money in banks, force banks to lend those deposits to "low risk" counterparties like themselves giving them more money to spend on vote-winning policies, then if the banks go under they either print the money to bail them out (taxation via inflation), or force banks to charge the depositors (taxation with the banks as collectors), thus hiding the true nature of what's happening.
To get banks with zero risk deposits is therefore not really an infrastructure problem - banks could easily just park cash with the CB and then charge fees for administration of things like the websites, the branches and so on. The problem is to convince governments to reduce their spending levels to the point where they can eliminate the rules forcing banks to loan them money, which in turn would allow narrow banks/accounts to appear, and that in turn would allow them to start removing the guarantee on deposits. In such a system people who wanted ROI would have to explicitly move some deposits into funds that expose the liquidity risks and requirements, and which can be left to collapse without a bailout if they make big losses.
Unfortunately governments are currently stuck in a local minima. Although everyone can see that bank runs are bad, and that they're also easy to eliminate, doing so would require people to believe that the government will not bail out depositors at a fractional reserve bank if there's a run. For as long as people suspect the government's commitment to the policy is weak, the winning move is to keep banking with a fractional reserve bank and pocket the zero-risk interest yields. The suckers who put their money in a safer place will end up poorer than those who put their money into a bank that later collapses.
They're smaller organizations with far less overhead and no stupid fees for every little thing.
Perfect for just storing money if that's all you need.
The fundamental lie here is allowing banks to tell you you have “cash” deposited and “available” with them. If the online app showed the truth - how your $10k you deposited turned into some shares in mortgage backed securities or whatnot, the alternative “just pay to park some cash” might be able to survive.
I have the same pet peeve about Amazon being able to tell you that you “buy” a Kindle book instead of buying a revocable license to read it temporarily.
It’s all false advertising really and it’s eroding competition and consumer trust.
Certainly for up to $250,000 deposited at an FDIC insured institution, it is absolutely true that you can assume that you have cash deposited and available. If at any time the bank gets itself into a position where they can’t make good on that, FDIC will fix it so you still have your cash.
That is precisely the mechanism that the federal Government makes available that gives you a place to park your cash.
Because when SVB closed on Friday and reopened on Monday, you could have still used a paper check during that time and it would be honored; but online access may have been shut off.
IANAL and it’s quite unclear to me.
There is this saying that if you are not paying for it you are the product. Curious that people only apply it for search and email services.
That's basically what bond mutual funds are (including money market mutual funds, which closely simulate savings accounts via $1 share price), and they seem to have a market.
Like, the problem is that the mental model of this money is wrong: there needs to be a place where a company that intends to take a bunch of money in and then spend it over the course of a few years can do that without it causing everyone a bunch of issues as those deposits were supposedly backing loans to still other people (such as that story with the hashicorp people that was posted here yesterday with the Chase bank branch that failed to understand that a startup's goal is to lose money, not invest it).
Banks offer a deposit product that lets you do useful things like ‘get your salary paid directly into your account from your employer’s account’, and ‘use a debit card to authorize transferring a couple of bucks to Starbucks’s account’.
I mean they're trying to work with it: https://www.federalreserve.gov/paymentsystems/fednow_about.h...
???
This never stopped being the case.
Banks receive deposits and make loans. They are core pieces of modern banking. They play a role in increasing the monetary supply through debt servicing.
Even if you only do business within the US, exchange risk is baked into your supply chain and inflation.
If market value is 10% less than face value for these securities on average, then the Fed would have unrealized losses of about $700 billion. But the Fed doesn't have the same insolvency or liquidity risks that ordinary commercial banks do.
The US dollar would go down in value if there were more dollar sellers than buyers. That would happen if those with dollars had something else to buy. The Us dollar index is up a bit today, so far. I'd imagine at the moment that a run on the dollar would be unlikely. But there could be some combination of circumstances . . .
We're going to need a bigger mattress...
I think this is a natural consequence of letting the biggest companies control the politicians that set the rules.
(What you say is true for pure free markets, but the banking industry is incredibly regulated, and the government routinely picks winners and losers in it.)
I don't see why they are special and the trends are clear, despite the claim. If govt regulation results in a few winners who have played by the rules and are seen as more reliable or it's free market monopolists (or duo, etc), the result is the same.
Are you claiming that economies of scale don’t exist, or that they are trivial to the composition of markets?
I don't really know what happened in East Palestine, but I haven't found anyone saying it was because of deregulation
Are you arguing that, if markets are left alone, economies of scale are more or less irrelevant, and we wouldn’t see consolidation in banking?
Seems like a dubious claim to me. More driven by ideology rather than evidence.
Banking is already one of the most regulated industries, regulation takes out smaller companies and leaves out only the ones that are big enough.
It seems to me way more dubious to claim that more regulations would solve this problem in an already incredibly regulated industry
Bank failures were incredibly common in 19th and early 20th century America. Today they are next to non existent.
Again, take a step back from the ideology and look at the evidence. The count of bank failures before 1930s era regulations vs post speaks to the effectiveness of government intervention.
A fairer comparison perhaps would be to see how many dollars of deposits (in some adjusted manner, like per capita, percentage of GDP, or percentage of circulating money) were imperiled as a result of bank failures back then versus now? A hundred banks failing in the 19th century each serving a few thousand customers each would be a much smaller impact than, for example, the hypothetical failure of Bank of America.
Conversely, more regulations mean more monopolies due to larger first-mover advantages, and the only viable route is to build until you get bought by a parent company who can sort out the admin.
Constant government intervention isn't what makes competition. It being worth it to start and build a company without, in the slim chance you make it, being a verbal and financial punching bag for future politicians, is.
At least banking has credit unions everywhere, although the ones around me in Canada are also consolidating rapidly.
Or E[vil]-corp for short.
Edit: I realised a missed opportunity for a Mr. Robot reference.
What is described here is some variant of state capitalism or state monopoly capitalism, which is an extremely controversial form in socialist circles: https://en.wikipedia.org/wiki/State_capitalism
Is it that less competition allows for companies like Wells Fargo to take advantage of their customers on a large scale? Is it that regional ones can provide fewer fees?
Particularly business loans.
For example, say I buy a home for $400k and gut renovate it for $200k. Let's say that the specific renovations are going to improve the value of the home, but it's hard to know by how much. If I go to Chase, they will gladly lend me 80% of the $400k ($320k). But Then I need an $80k down payment + $200k for renovations, or $280k cash on hand to make this work.
If I go to a smaller bank that doesn't do things as algorithmically and knows the local market, they might say "hey, we're gonna give you the $320k down payment and then we think that in that area of Boston and based on what you are doing, the house is going to be worth $150k more when you finish renovations, so we're gonna finance 80% of that $150k as well ($120k). You are still going to need to prove that you have your $80k down payment + $30k (20% of $150k) + $50k (the difference between what renovations cost and what they will add to value of home), or $160k total. So in this example, I need to have $160k in the bank if I want to make this whole transaction work with Regional Bank X, whereas with Chase, I need $280k.
Your anecdote presumes that the small bank is right and the big bank is wrong. I'm not so sure.
Also, whay does 'right' even mean in this case? They lost the customer. Unless customer default on the loan, they won't be 'right'
This isn't how banks work. They put in place rules that they consistently adhere to when they decide if they're going to give out a loan to someone or not. The real answer is that if consistently allowing that type of loan would make them more money than it would cost, then they won't be right.
If Computer Says No, nothing is happening. But Computer lacks any sense of context or local variation. By definition decisions are based on national stats which average a lot of behaviour.
Smaller banks have people - who are probably experts - making contextual loan decisions. Someone's good character and work ethic - or lack of - is going to influence the decision.
This doesn't make decisions infallible, but it's the difference between small-focus rigid decision making, and broad-focus community-dependent decision making.
It's also why so many people are caught in the rental trap. Many of them are perfectly able to afford a mortgage, but they don't match the bureaucratic criteria on some relatively minor point, and so Computer Says No.
It's also why credit scoring is so slanted. I have a perfect payment record, but no loan history because it's more than six years since I paid off all my debts. If I apply for a credit card I'll be marked down because I don't have a large existing credit limit.
This is deliberate policy, because lenders don't want people like me who will pay off the balance in full every month. They want borrowers who won't. This prioritises immediate profitability - until the loan book blows up with a wave of defaults during a recession, because these borrowers are inherently riskier.
- Amortizing real estate costs into the future to get to a stable cash flow.
- Rainy day funds
(The last one is a risk to the lender, but can be low risk and profitable on average for the lender, as that part of SVB was.)
This is a general economic principle. To put it into an HN context, this is why Google, Amazon, Facebook, Microsoft, and such aren't the only tech companies. When they sit down to spend a dollar, they do an analysis and put it into the place that will make $1.60 (tech companies still have absurd return ratios compared to the rest of the world even after the last year). It doesn't make any sense for them to put it where they will make $1.30. It doesn't matter how big they get or how much money they have, that analysis always holds true.
This is why Google shuts down so many things. Even being profitable isn't enough for them, it has to be wildly profitable and at scale to compete with "making ads better". It is also why it is perfectly rational to be distrustful of anything Google puts out and fear it being shut down. It is not a transient corporate culture thing, it is a systemic issue with where their profit comes from. And yet it is rational for them to float out various things as probes to see if there's some huge profit for them to tap into, even as total long shots.
Meanwhile, other smaller companies can happily survive and thrive on that $1 -> $1.30 return, and then themselves be too big to worry about a $1->$1.13 that a startup may thrive on.
There are some other reasons why One Big Company isn't actually a practical outcome, but this is one of them, and the one relevant to this discussion. It applies to tech companies. It applies to the retail industry; this is why Wal-Mart and the fancy boutique downtown import shop can still coexist, even today. It applies to the auto industry, which is why your local auto dealer may service a local business' 10-car fleet but there will be another company servicing huge fleets. And it applies to banks.
This does not mean a large bank is obligated to be negligent of you, it just mean that there's a pretty strong pressure that is hard for them to resist. Strong internal leadership may push the consumer branch to be friendly as a sort of advertising mechanism for the rest of their bank, because you never know what individual will be in charge of directing a large corporate account in the future. But they'll be vulnerable to the next MBA to come along and cut that cost and boost short term profits, and who will have moved up before the long term costs come in.
Also, not all banks offer all products. Many of the big megabanks product portfolios are missing fairly common financial instruments
Credit unions are superior and their disparate ownership structure is a key reason why.
https://www.cato.org/regulation/fall-2019/myth-capitalism
I’ll posit that this am academic flight of fancy or distinction without a material difference. The fact is there’s no meaningful competition in the American economy, whether it’s called capitalism or socialism for the rich and debt peonage for the rest.
Cause and effect may be the reverse.
Capitalism simplifies and commodifies, to extract more of the surplus.
Consolidation is often rationalized with the goal to "reduce redundancies" (and passing the "savings" onto consumers, naturally).
End game is the Fed tracking everything you do financially via their digital currency, this is almost classic Hegelian dialectic where you now have a manufactured crisis to get people begging for CBDC
You are correct and I agree with your assessment for what it's worth. Dozens of banks collapsing has two outcomes. Centralization into TBTF banks or a fed bank. Given the desire to manipulate currency further with CBDC I would suspect the modern money "theorists" in congress are salivating.
(1) ensuring only $250k should ensure capital is spread
(2) the above hasn’t been happening, so people are moving to big banks because the government bails them out
(3) regulations are such that smaller banks have to go through an insane amount of work to get to a “big bank”. Basically the big players have a moat. They’ll get bigger because they control / design regulation. It helps consolidation. Smaller banks can’t enter
(4) it doesn’t help some (maybe all) of these big banks are also board members of the fed. For instance Jamie Dimon of JP Morgan [1] where they funnel support to their corporations
(5) to fix, there’s a lot of options. (a) Simple one is to limit the amount of assets a bank can hold. They currently only do that for the smaller banks (not the big ones) (b) audit the fed directed by congress (there’s a lot of inner dealing there) (c) create a graduated tax based on asset (as it increases systemic risk) (d) good old fashion anti-trust breakups
[1] https://www.newyorkfed.org/newsevents/news/aboutthefed/2010/...
1. Large organisations become unwieldy - computers help track and tame that complexity.
2. Geographically distributed organisations have trouble communicating and can be outcompeted in a region by a company focussing on that region. The internet helps reduce the friction in communication.
Once both of these started getting adopted in the 90s and 00s, big companies became more competitive relative to smaller ones.
The East India Company was pretty big and operated globally. And they didn't even have electricity. Ditto the Catholic Church.
In the US the variety of consumer banks seems very healthy. Granted I understand there are different types and things are different elsewhere.
Have a line of credit with a big bank that I don’t really use, but means there’s a bank everywhere I can walk into if I needed a large amount of cash or a bank draft, and I pay it off the same day.
There are also new banks popping up here and there that grow very rapidly due to a more software/tech focus.
And there are smaller more specialized banks that have been doing well (in Switzerland). There is at least one very recognizable co-op bank here and another one with a focus on sustainability.
It's relatively well known in fact [0]. Once you realize that was the intention to begin with the structure of modern banking starts to make a lot of sense.
[0] https://www.federalreservehistory.org/essays/jekyll-island-c...
capitalism works when there is competition, otherwise it's just an oligarchy with ever-worsening terms and conditions.