Because the taxpayers (and all users of USD) repeatedly bail them out. I could define anything as not being risky if I knew taxpayers would bail it out.
More importantly, if there is no risk, what purpose does a bank serve? They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. The government should be able to offer that service for free.
Bank shareholders or creditors are engaging in risky behavior and should face the full consequences of bank failures. No bailouts for them.
There wasn't any bailout at all. This entire thread is so confusing. But yes they got 2 days or something of deposit freeze IIRC.
SVB came out of this broke - as they should for such mismanagement - but the concern is that depositors were made whole beyond the amount usually insured by the FDIC.
But, at least in the US, regulators keep blocking the 1st step: narrow banking. Let banks offer savings accounts that just stick the money in the Fed, zero risk.
Can you provide some more information, because I'm not really seeing the value in being required to interact with more financial institutions in practice.
- on deposit at the Fed, in the account of a Fed member bank (which could be your bank, or a bank your bank has an account at)
- loaned out by your bank (or again, a bank your bank uses)
The Fed, so far, has refused to allow new member banks (eg that could deposit at the Fed) that don't intend to ever loan out deposits. They would take all customer deposits and stick them at the Fed. Many (most? the ones at the Fed anyway) think allowing this would siphon away money that would otherwise be used to make loans. They are, in effect, putting their finger on the scale to push you to allow your savings to be used as loans.
The rise of Private Credit, where wealthy individuals and institutions loan money to private firms for to fund loans is the new thing that could break this open. These arrangements are long term, the customer can't "call" the money back, they are committed, and (for the most part) their commitment matches the duration of the loans. So there can be no bank runs. And the people providing the money know what they are doing.
Levine is mostly arguing that with so much money in private credit, we could do without forcing small savers to fund loans.
I can see some upsides (in addition to matching bank creditor and debtor duration expectations), like the implication that it would be easier in some sense to safely manage large amounts of cash because said cash is invested in T-bills instead of who knows what, but there are some obvious downsides as well concerning risk management. To quote Levine directly here, "How will the NDFIs find an extra $100 of loans to make? One obvious possibility is by making much worse loans. Another is by making fake loans."
Banks provide security for deposits as well as liquidity (velocity of money), and slight inflationary pressure.
Wiping out depositors doesn't prevent much moral hazard since the depositors are unsophisticated, so they are unable to differentiate risk among banks.
This type of corruption is antithetical to a strict, rules based system, which is needed for trust in the financial system. Either give everyone the same protection explicitly, or follow the rules.
Also, the rules and lack of centralization might have made sense when cash was a thing, but in a society where electronic money is the primary mode of payment, I see no reason why a non government entity should be involved at all in the simple act of maintaining a record of how much money is an account and adding and subtracting to it.
The taxpayer didn't pay for those bailouts. They were funded by the DIF, which was replenished by premiums that banks pay.
> They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow.
Did you just look into what banks do at all before making this claim? If that were the case, companies like Apple, Bilt, and Robinhood wouldn't be relying on real banks and could easily start their own.
I feel like I must be misunderstanding something here because it sounds like you're saying depositing funds in a bank is considered risky behaviour?
89% of deposits at SVB were uninsured.
$250k is not much at all for a business
Individuals can do this too with investment brokers or wealth management providers.
Alternatively we could just made FDIC coverage unlimited, but then that creates poor risk taking incentives, which is the whole point of not setting the expectation of the a bailout by making exceptions.
of course it is, that's why the bank pays you interest on your deposit. They loan out what you deposit at a higher rate and collect the difference as profit. If that loan defaults then your money is gone because the bank was never able to collect it back. FDIC was invented to insure your deposit up to 250k so you're protected (up to 250k) in case that happens.
And banks do a lot more than what you described, which I have to assume you know already.
And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
https://americandeposits.com/insights/brief-history-us-bank-...
>In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure.
I do not have a comprehensive list of every time depositors have been bailed out, but I have read about it multiple times in my adult life of the last 25 years.
>And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
The federal government already controls all the banks. What could go wrong that they already do not have the power to make go wrong?
The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.
Also, I don't know what you have been reading, but a comprehensive list of times that depositors have been bailed out by taxpayers (or anyone else, as the FDIC is not bailing out anyone by definition) would be quite short.
Lastly, there is a huge distinction between regulating banks and directly controlling access to an individual's funds. If you really can't see any theoretical problems there, I suggest you work on your creativity.
You mean like FedNow[0], which many banks are eschewing in favor of services life Zelle[1]?
In particular the article incorrectly states that the bank was bailed out. It was not. The bank failed. Depositors who were running their non-profit in the Bay Area did not lost all their charitable contributions.
The bank failed because it had placed deposits into US Treasury bonds that were temporarily worth less for sale on the open market than they would be at maturity. When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement.
When the depositors were bailed out, taxpayers didn't lost anything, it was a wash. We could have paid at bond maturity or now, but it made little difference to us.
The bailout did not accelerate bond maturity. Those were picked up by other Banks when assets were sold off.
Last, who is the other banks that paid for the bailout, not taxpayers, at least not directly. If you call higher FDIC insurance rates for JPMorgan Chase a taxpayer cost, how does that logic scale to the rest of the economy?
I think he did more than that. He either has precognition Nostradamus would be proud of or he absolutely had insider information, and a good amount of it.
1. He knew that when the bank closure would be, because despite how the FDIC has very detailed and historically very successful efforts at keeping such plans highly confidential (for obvious reasons), like agents in hotels under fake names, etc., he told his investments on Wednesday night that "all funds must be out of SVB by COB Thursday". FDIC rolled into SVB 8am Friday morning.
2. He had also had instructed another of his companies to build a website and app that was able to handle applications for business bridge loans, and it "needed to be tested, and ready to go live, by noon on Friday".
Also, not for nothing, causing a bank run is a federal felony.