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Comment by crazygringo | Hacker News Reader

> In theory, VC's, investors, and founders are considered to be "sophisticated" investors. However, they deposited a significant portion or all of their money...

Depositors are not investors. They don't have equity in the bank.

You're supposed to do your research on a business when you invest in it. You're not supposed to have to do research into a bank's financials when you're just using it as a bank. You're supposed to be able to trust government regulators.

It's the same way you're not supposed to have to research the construction of each bridge before you drive over it.

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Hedge fund manager here. Depositors and banks are counterparties, and every financial institution & fund I’ve ever encountered does significant and ongoing diligence on their multiple banking relationships.

It’s hard to imagine how irresponsible these VCs and startups were.

These 'startups' include small businesses like wineries and restaurants. They're not in finance and are not going to want to spend time becoming experts in banking due diligence.

If we insist that they take on their bank's solvency risk as depositors, the rational decision for most of them will simply to be move to a systemically important bank that the govt will likely never let fail (Citi, BofA..). There's no reason for them to keep their business at a small bank and take on risk they don't need to. Regional banks would then wither, and the banking industry would become even more concentrated with a few too-big-to-fail banks becoming even more powerful. It would be a bad outcome for everyone.

BTW, for anyone wondering which banks are considered to be 'systemically important', here's a convenient link to the list:

https://www.fsb.org/wp-content/uploads/P211122.pdf

And here's a link to the group that decided who goes on that list:

https://www.fsb.org/

Do SV restaurants have millions in cash? Cause up to 250k they were guaranteed.

Those people I know who run restaurants basically have zero cash at hand and are constantly repaying some debts.

These are more like “prime brokers” rather than “counterparties” in trade.

How often do you assume that your prime broker will go out of business before your hedge fund does? Unless you’re a big one (Citadel, Millenium), probably “never” (it’s the same with startup companies).

It's obviously different if you work in finance and you're dealing with hedge-fund-sized quantities of money. Making money off risk is your core competence.

For the vast, vast majority of startups that's not their business. Storing a few million dollars should not require expert due diligence into a bank's holdings when you're in a developed country, due diligence that these business owners don't even know how to do. It's not irresponsibility, it's focusing on the things a small business should focus on rather than distractions.

I don’t understand how VC funds can be in the billions and yet outsiders must assume they do not know anything about: 1. bank failures in the US in the last 100 years 2. deposits being on a bank’s balance sheet, hence the terms credit and debit cards 3. creditor subordination in event of default

Believing #3 especially makes no sense to me given the liquidity preference clauses I hear VCs have been writing into investment agreements with startups over the last few years.

These two realities, naive depositor and liquidity preferenced multi-billion dollar VCs, do not square up in my head.

FDIC protects naive depositors, not sophisticated financial professionals entrusted with billions of dollars of investment funds.

> I don’t understand how VC funds can be in the billions and yet outsiders must assume they do not know anything about: 1. bank failures in the US in the last 100 years 2. deposits being on a bank’s balance sheet, hence the terms credit and debit cards 3. creditor subordination in event of default

Without offering judgment: VCs are concerned with many things that can kill the companies in their portfolio across multiple different verticals. I would assume a big part of how this happened is that of all the things that could kill their returns, banks were low enough on the list that they weren't regularly thinking about it.

IMO there's a legitimate question about whether we believe it's good for one of the things VCs have to consider is bank failure risk as it will necessarily take attention away from other concerns more related to business and innovation.

What do you mean you're supposed to trust government regulators though? Regulators don't prevent bank failures. What account holders can (more or less) trust is the deposit insurance scheme to insure them for a well-known amount.

If somebody deposits significantly more than FDIC in a bank account, would you advise them to research the bank's financials or not?

If you are setting that as the bar for depositor competency, congratulations, you've just guaranteed that every single business and HNW individual will only bank with a too-big-to-fail bank.

Access to some basic understanding of financials and risk is not out of reach of many businesses and "NHW individuals" that would be inclined to deposit that much. Your assertion is false.

You would do well to be quite certain of what you're talking before you try being snarky.

And I am not setting any bar. That is the bar which has been set by the reality of things as they are. Don't complain to me if you don't like it.

Depends if it’s a bail-in or a bankruptcy and depositors don’t get to pick which one is applied to their bank.

Depositors are investors, they're just not equity investors.

No they're not, that's not how the word is defined.

You deposit money into a checking account, you don't invest money in a checking account.

The same as when you deposit a retainer with a law firm you're not an investor in the firm. Or if you have a security deposit with your apartment's management company you're not an investor in that company.

Words have definitions.

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