> If banks need to take losses, so be it.
Then the government is bailing out with FDIC, plus the economy explodes.
It's not as sexy as it sounds.
Then the government is bailing out with FDIC, plus the economy explodes.
It's not as sexy as it sounds.
FDIC is backstopped by the Fed and participant banks. There is no hard limit anywhere. Make depositors whole, good luck to everyone else. If you’re exceeding FDIC insurance limits as a depositor, you should fix that, today. If you have exposure to at risk asset classes, you’re already exposed, you’re just waiting for prices to catch up to reality.
how do you fix it?
If you're a larger business (>$5M cash equivalents on hand), treasury management in government money market funds instead of a demand deposit account. All roads lead to mostly US treasuries here.
[1] https://www.fdic.gov/resources/deposit-insurance/brochures/i...
[2] https://www.fidelity.com/why-fidelity/safeguarding-your-acco...
(previous comment on the topic during SVB failure: https://news.ycombinator.com/item?id=35171289)
If your risk model is the US government allowing FDIC to fail, we're well outside of reasonable discourse. Your currency would be food, fuel, and firearms.
When the problem is too many loans 'how do you still let people get loans' is not the right question to be asking.
Reserve rates have been 0% since 2020. All Deposit taking institutions with a loan department have carte blanche to print money. The model you're operating under doesn't actually map to how things are now.
TL; DR What we did in March 2023.
First Republic, SVB, Signature—our nation’s second, third and fourth largest bank failures in its history [1]. (WaMu.) Resolved so smoothly we don’t even talk about it less than a year later.
[1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
Except now with the banks understanding that FDIC will make depositors whole, above and beyond the $250K limits.
The only thing this does is increase banks comfort with risk.
The stockholders care more about the stockholders than they do about the depositors. This is also true for most of the managers, maybe all of them.
Weren't those banks just sold without the government stepping in?
They were put into receivership under the FDIC before being sold in a structured process [1]. In any other country, and at any time prior to ~2012 in our nation’s history, March 2023 would have been a financial crisis.
[1] https://www.fdic.gov/news/press-releases/2023/pr23019.html
At least then it's bailing about depositors.
So bail out the customers / depositors and wipe out the equity investors? That's what they did with SVB...
FDIC limits government losses to USD 250k per account or something like that, right? I think it is still preferable to outright bailing out the entire bank. This is what we should have done with Silicon Valley Bank.
SVB deposits were businesses.
You're ensuring every regional bank collapses and all businesses bank with Chase if you let SVB fail and don't bail out the depositors.
Maybe that's what you want.
It's not what the government wanted.
So they bailed out SVB.
SVB didn't even take undue risk. They merely bought long-term bonds which lost book value due to rate hikes. What crushed them was high-profile people with insider knowledge of their bond holdings spooking the market.
Hindsight is 20/20, but what SVB was doing wasn't irresponsible with the knowledge they had at the time. I don't think any expected rates to climb as fast as they did. They were 80% unlucky.
Not hedging in ANY way against interest rates going up was explicitly undue risk. EVERY bet must be hedged. SVB said "well surely the government will never raise rates, so we can lock in money for 10 years to gain a small amount of extra profit", ignoring that their depositors were all highly aligned and literally friends that would act in concert.
You don't have every dollar you own locked up in a 7 year CD right? Because you're smart enough to know liquidity has non-trivial value! SVB purposefully ignored that in search of a slightly higher profit. It was trivially stupid.
>but what SVB was doing wasn't irresponsible with the knowledge they had at the time. If you're a bank, and you think you've found a magic money glitch that requires no hedging, you are wrong. They weren't doing arbitrage, they were gambling.
The point I was trying to make was that unfortunately the businesses were also taking too much risk if they were storing all their money in a single bank. Just as an individual I am spread across multiple banks as a means of derisking myself and ensuring that I'm fully protected by FDIC in the event a bank does something this epically stupid.