Everybody in charge lived through 2008. Now we all get a live fire test of the question: did anybody learn anything useful from that crisis.
One of the lessons learned from 2008, especially after the collapse of Lehman, is that acting too late or sending mixed messages can make the problem worse.
The SVB run started on a Thursday, and the government announced a plan to stabilize the banking system the next Sunday before the markets were about to open. It was a pretty fast reaction all things considered.
What we didn't learn well enough from 2008 was the extent to which small bank failures can create systemic risk for the entire system. It's not like SVB was the only bank with long-term investments that lost market value after rates rose. When people realized that, they freaked out.
The other thing people realized too late was that we have had a two-layer system of deposit insurance since 2008: the too-big-to-fail banks effectively have infinite insurance (because they can't fail) and smaller banks didn't. That creates an incentive for depositors to run on the small banks and move all their money to the ones that cannot fail. It seems like nobody understood that until a few weeks ago, including the regulators.
Another problem, which is older than 2008 but needs to be fixed, is that our current system of deposit insurance doesn't make sense for the way businesses use banks. If it did, we wouldn't be in a situation where only 60% of deposits are insured nationwide. That blunts the effectiveness of deposit insurance for preventing bank runs. The solution may not be more insurance, but perhaps caps on account balances or limits to the percent of uninsured deposits at a given bank.
Now with that knowledge there is little incentive for banks to play it safe and a bailout every couple of years is to the benefit of everyone except the taxpayer and a few unlucky scapegoats.
Of course this is not sustainable either and maybe this time or next time what we learned 2008 will prove untrue...
By which you mean the shareholders and lenders. Out of all possible evils, this is probably the best.
Some did, most didn’t. That was the gripe. That’s why we’re doing it differently this time.
Something I did not realize until recently, which I think is very important here, is that the FDIC is not funded by taxpayers. It is funded by fees levied against the banks themselves.
https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corp...
Its the same failure mode regardless if played via everyone paying taxes or everyone paying FDIC, privatize the gains and socialize the losses until collapse.
But if everyone is paying FDIC via fees levied against private banks, then the POTUS and Yellen and everyone else can release a statement saying "no taxpayer funds will be used to bail out SVB". That way everyone can breathe an ironic sigh of relief: "Oh good, I was worried I was going to have to foot the tax bill for that. It's bad enough I have to pay all these greedy capitalists at my local bank a new fee every other week, at least the government is looking out for the little guy!"
I'm sure that's not passed onto the customers at all.
Except SVB and signature shareholders lost all their money and most of the employees will be fired...
Imagine that the Fed guarantee for SVB had been put forward two weeks before it was. Would SVB shareholders and managers had received the same level of consequences? Any consequences at all? I am not sure of how big the difference would have been, but I would be surprised if it wasn't significant.
The fed guarantee is only for banks that are solvent. Banks that are insolvent have been put in receivership. In fact, the fed didn't guarantee SVB anything, they guaranteed that deposits at National Bank of Santa Clara, the successor to SVB, are safe.
On the other hand effective control of the media (including the web) is much tighter now compared to the late 2000s - early 2010s, I personally cannot see a Occupy Wall Street-like movement happening again in the States.
Selling begets fear which begets selling, which can also make it harder for poorly capitalized banks to raise money via equity/bonds. Self fulfilling in a way. Moving quickly can short-circuit this cycle.
Unfortunately the ability to predict this situation was lacking. Apparently the Fed was monitoring SIVB for a year before this happened, but why they didn't force asset sales or equity issuance is beyond me. The fact that the bank stress test only looked at credit quality issues and not duration risk was surprising to me. These issues would have been quite obvious months ago if the HTM system that allowed pegging asset values at par instead of market values didn't exist.
I think it's conceivable that things stabilize beyond this week. Lots of scary headlines, but the fundamentals of the economy are still strong... for now.