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Let's preface this by stating that I'm looking at things from outside the US, but nonetheless mildly affected by SVB's collapse.

There is already talk about rules being changed so that in case of an implosion like SVB, the executives' bonuses could be clawed back over a span of several years. That would be a damn good start, because it would put the C-suite personally on the hook for setting up these cock-ups. It won't be enough.

I hope, and would expect, that FDIC fee structure will also change. The best way to incentivise banks to spread their exposure risks across industry sectors will likely be to charge aggressively progressive fees for increased sector risk. Spread your risk across multiple, mostly uncorrelated sectors? Pay reasonable fees. Concentrate on just one or two? Get charged through the nose, to the point of stunting your profit margins.

Sticks and carrots are not always enough. Sometimes you do need modded, lethal cattle prods.

We've effectively had 100% deposit insurance at the "too big to fail" banks since 2008 and the lending restrictions you are predicting have not happened.

The fundamental problem is that we had effective 100% insurance at the "too big to fail" banks but not at the others. People just didn't think about that until quite recently, and when they figured it out, they panicked and were going to move all their money into the too big to fail banks unless the government stepped in.

Why weren't the likes of JP Morgan competing with SVB for this business?

And notice that in 2018 SVB was explicitly relieved of the increased regulation accompanying the "systematically important" label.

> A regulator liable for ALL the deposits becomes responsible for ALL the assets. Regulators are generally conservative, and loans to new companies with strange ideas and no track record don't look so good to them. SVB's underwriting of startups depended on regulatory freedom to take risks not entirely understood by regulators, with corresponding risk that those loans might fail. Some career bureaucrat will not look kindly on a bunch of loans to the likes of nextbigthing.com.

SVB wasn't making those kinds of loans to startups and it wasn't risky loans that blew it up.

The problem is that its model of deposits was startups which would get backed by $5M-$50M all at once and then need to draw that down over time.

The problem comes when VC funding dries up completely and then there's no new deposits to replace everyone burning through their cash.

They did take mortgage debt back in mid-2021, but it was not particularly controversial mortgage debt -- however due to rate increases in mid-2022 it went underwater on a mark-to-market basis. This wouldn't have been a problem if they could hold to maturity, which is what they stated they intended to do (and which they probably did intend to do) but the drawdown in deposits forced them to sell some of these to raise cash and forced them to book those losses.

The weird risk here was really the way the deposits all dried up and the cashflow out of the bank became strongly negative due to economic conditions of the depositors. The whole business model of the bank had a baked-in bank run that would happen. That isn't really a normal kind of risk, though, and not something that is typically regulated or anticipated by anyone. The actions to close down the bank and take it over and insure the depositors seems fine to me.

The moral of the lesson seems to be that bigger banks need to have startup-oriented divisions that will accept this business and absorb those cash flows inside the scope of a much larger bank. You can't have one bank that takes all the deposits of something volatile like VC funded startups. I don't know how you regulate that though other than the Fed explaining to the major banks like JPM that this kind of thing can't happen again so they need to start serving VC companies.

Was SVB actually lending money to companies with no revenue? Isn't that where VCs should be?

I'm sure they weren't lending to zero revenue companies but there are lots of new small companies with some revenue and capital that need some momentary liquidity: credit lines, bridge loans to next equity funding, etc. And loans/services to people with stakes in such companies. Need a loan to fund exercise of options in a private company that's doing well? SVB might do something like that, Citibank not so much.

A knowledgeable bank can safely make such loans but no regulator will.

Financing startups is not the roll of banking. Banks are low margin and high volume.

I fail to understand why they don't pick a number like 90%. Enough to prevent financial ruin of depositors, but also set to encourage some measure of risk evaluation by depositors.

Should depositors really be responsible for risk evaluation?

How much do you know about the balance sheet of your bank? For any banks that are not publicly traded, shouldn't they be forced to then share their financials and transactions with depositors?

> Should depositors really be responsible for risk evaluation?

A nudge. So OK, call it 95% coverage. People putting money willy-nilly into shady "banks" is how we got here.

Why don't banks charge to hold your assets? They're liabilities. You should have to pay the bank interest if you expect to be made whole. Rhetorically speaking, where is the restitution money coming from?

If you're making money in interest, dividends, capital appreciation, market value, etc., that's because your capital is being employed. That's risky and the profit (or loss) should be a function of that risk.

Banking as a pure store of assets feels decoupled from that objective.

I do think SVB depositors being made whole was good, but a hypothetical widespread failure event across dozens of big banks would be catastrophic. There should be easy liquid stores of value that are essentially zero risk for this type of failure, even if you have to pay for them.

Banks use deposits to fund loans and profit by the difference in the rates paid by the loan and the depositor.

It's a pretty good business model with a stable deposit base, but SVB got a huge influx of deposits and mismanaged it.

> Banks use deposits to fund loans and profit by the difference

Yes, but but that's risk.

It feels like there should be a class of bank that doesn't get involved in additional risk at all, that makes all of their expenses and margin on management fees.

You'd experience inflation and the fee itself, but it'd be better than stuffing it under a mattress.

I imagine you'd want to have this as a diversification method as one vehicle in your total protfolio of investments and value stores.

I think you're describing money market funds, they take your cash and put it into very short-term commercial paper and t-bills. Google says they're managing something like $3 trillion these days. Places like Vanguard, Fidelity and Schwab offer them and you can write checks against them.

And many banks make lots of money on fees and various services. It's problematic because no one likes ATM fees and minimum balance fees, and the politicians get involved.

No, I think he means something like the Narrow Bank or Oeconomia Augustana by Dieter Suhr.

Oeconomia Augustana works like this. Your bank borrows money at the Feds funds rate and when you borrow, instead of paying the interest on the loan, the feds funds rate is deducted from your balance. When you transfer your balance, the new recipient has to pay the interest fees as he is benefitting from the fact that the Fed issues this safe liquid and universally accepted money and the bank can survive a bank run. The interesting aspect of this is that if you lend your money via certificate of deposit you don't have to pay the fee, so there is no risk of depositor funds for loans drying up as opposed to the Narrow Bank system where there is very little incentive for people to lend their money via certificate of deposits, which is why they suggest doing away with lending and betting everything on mutual investment banking.

Exactly what I was interested in, and the other benefits and properties of this setup are great.

I want to put some portion of my portfolio in something exactly like this. It would make sense to me if more companies and individuals held some portion of their net worth in these safe depository vehicles. This feels bullet proof.

Thank you!

People expect free government subsidized insurance on their bank accounts though. The fact that this means wealthy people receive a higher subsidy does not bother them.

In fact, they will rally against it, even though say a -5% on their demand deposits is most likely going to be an insignificant amount of money, and if they want to earn money they should have gotten certificates of deposits so the bank doesn't have to take on the duration risk.

There are already banks that provide products to sweep your large valued accounts into as many banks as necessary to keep your entire balance insured.

Insuring 100% balances is fine, it’s up to them to set premiums and banking policy directly.

As long as failing banks fail (stockholders wiped out, assets seized and sold to cover deposits first) there’s no problem with insuring deposits.

I do have a bit of a problem with how broadly bad mortgage backed securities are being bought by the fed to prevent losses from bad investments from failing more banks.

Housing prices are killing our society and there needs to be pressure against the enormous loans nearly every homeowner has.

Insuring 100% balances is fine, it’s up to them to set premiums and banking policy directly.

I disagree. Why should everybody suffer higher fees, higher loan interest rates, and lower savings interest rates so that a small number of rich people can be stupid with where they put their money? If your business puts its money in the hands of reckless yahoos and can't pay its salaries it should have to get a loan to do so until it can get its deposits back from the failed bank.

Every time we remove a piece of accountability we inject permanent stupidity into the system.

What the fdic just did was insure 100% at a "systematically important" bank while charging a special assessment to all the banks, even if the same designation and thus extended insurance did not apply to them. It's the worst of both worlds.

Insuring balances is not 100% fine. Spitting money across banks decorrelates the risks. And presumably whomever is picking the actual banks involved is choosing them with some care. So the FDIC is surely fine with people opening multiple accounts.

But insuring 100% of the balances at a single bank creates moral hazard. It gives executives a bigger incentive to gamble knowing that their losses will be covered. They'll be less sensitive to long-tail risk. Their customers will be less worried about bank failure, and so more likely to place their money with banks that are taking more risk.

The executives will have no choice but to take risks. Depositors, knowing their funds are covered no matter what, will chase banks with the highest yield. Eventually, the only way to compete higher is to take greater and greater risks. He who takes the most risks gets the biggest interest rate, he who does not loses his depositors to someone who does. In the end the conservative actors implode from losing their depositors and paying special assessments for 'insurance' risk of competitors, and aggressive actors pump up from those chasing high yields and then explode with their depositors getting bailed out.

Very well put.

It's questionable how much splitting money across banks decorrelates risk. SVB's mistake was buying slightly too many treasuries at slightly too long a duration. Pretty much every bank is in this same boat if interest rates continue going up.

All the banks own debt (treasuries, mortgages, bonds, etc) at pitifully low interest rates.

It's not all that questionable. How many banks have failed out of the total number of banks?

Suppose the FDIC decides they are keeping the 250k limit. The logical outcome is for companies to leverage fintech services that help spread corporate deposits among multiple banks.

The problem is now you have high correlation across that pool of banks. If depositors get scared and a bankrun occurs, they are now pulling money from the entire pool. The 2008 bank failures provided a small glimpse into that correlated risk.

How many banks today are capitalized sufficiently to handle a bankrun of the scale that occurred at SVB? SVB's balance sheet is not unique, all banks have significant unrealized losses due to bonds, mortgages, and any other kind of debt that they own. During the pandemic, the Fed reduced the reserve requirement to zero so banks need to keep 0% of customer money 'in the vault'.

That sounds like a very specific hypothetical future risk. That's a logical outcome in a vacuum, but companies have managed large cash and near-cash positions for a long time without services like you describe. I think your "slippery slope" argument is a fantasy.

But if it weren't, and if it were a problem for the FDIC, which I don't think is established, then the FDIC can just change the definition of what's covered a bit. It's not a hard fix for them to say that they won't cover more than $x per beneficiary total.

nah, they will get another SVB through lobbying, regulatory capture, and deregulation in time.