The discourse on this thread and Twitter is astoundingly inept. If the FDIC had permitted uninsured depositors to not be made whole, there would’ve been a systemic risk to American banking. Confidence in the banking system is critical to its well functioning. Quite literally banks are built by confidence that their depositors will get their money back. Discussing whether SVBs depositors should’ve taken a haircut misses the point entirely.
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> Confidence in the banking system is critical to its well functioning
Some might say that confidence created this situation in the first place.
Confidence fell in SVB specifically.
We did not see broad bank runs because confidence in the banking system did not fall. And now we can see why: because the FDIC backstopped depositors.
I don't get how your comment demonstrates that the rest of the conversation is inept. The whole conversation everywhere has been about this trade off.
People are arguing whether SVB depositors should’ve been permitted to take a haircut. This not a discussion. Had depositors lost a SINGLE penny, there would be a very widespread run on bank deposits as people try to get below the $250k figure. There was never a question that the Treasury was going to ensure that uninsured depositors were made whole. To argue about whether the depositors should’ve been made whole or not is tantamount to arguing whether we should willfully inflict a depression worse than 1929 on American citizens. It’s unconscionable and profoundly stupid.
I think this is that rare case where "begging the question" is actually apt! You are taking this as an inarguably factual premise:
> "Had depositors lost a SINGLE penny, there would be a very widespread run on bank deposits as people try to get below the $250k figure."
But whether a federal bailout was necessary to avoid that is exactly the question that people have been debating all weekend. It isn't an inarguably factual premise, it's the thing that is being discussed.
For my part, I think that if 1. A private purchaser had been found or 2. A bunch of jackasses with huge social platforms hadn't spent the weekend demanding they be bailed out, then your premise would have been false.
Both of those different outcomes was plausible on Friday. But in the universe that actually played out, I tend to agree that the bailout ended up being necessary.
But I still think it's bad that it was. And not just bad for everyone else, bad for us, here, many of whose livelihoods depend on the continued thriving of an industry that has sadly just demonstrated itself to be (to borrow a word) inept and unworthy of sympathy.
Precisely. This was not about SVB, or any morality tale on VC etc. Any other action would create systemic contagion that could spread far and wide.
> Any other action would create systemic contagion that could spread far and wide.
They could increase the FDIC coverage limit to a level that would avert a run, shoring up public confidence in other U.S. banks.
The BTFP if I'm reading this correctly values assets at par instead of face which is wild. It's not just providing liquidity to banks but rather giving them free money.
The Bank Term Fund Program (BTFP) allows banks to pledge their underwater MBS as collateral to borrow at par value from the Federal Reserve. This lending facility is a stop gap measure and still requires repayment from the banks if they utilize this facility, within a one year time. If the banks do not pay back the loans, then that means they have defaulted and will be seized by the FDIC or Federal Reserve. The Treasury department has promised to cover $25 bn in losses for this program to the Federal Reserve but it’s unlikely this fact will be used. This program is giving free money in the sense of providing below market cost of liquidity but, it is not even close to the Troubled Asset Relief Program in 2008 or Payroll Protection Program in 2020.
I see, thank you for clarifying.
It is not inept. People aren't however pointing out the actual switcheroo here: by the definitions everyone was using just 48 hours ago SVB was not systemically important nor did it post systemic risk. That designation was meant to be for financial institutions that were directly depended on by other financial institutions. Nobody is saying that's true here.
What Yellen has done now is redefine "bank that poses systemic risk" to mean "any bank at all", which in turn shows that the insurance limit was never real, and that in turn the winners of the system are those who don't believe in the rules, but rather those who gamble on duplicity and the socialist leanings of government employees. Those who tried to believe in the honesty of the system got burned, again, and those who bet on it being meaningless won, again. The long term consequences are fearful.
You're correct, in that it was not immediately clear whether SVB warranted the systemic risk declaration. However, it should appear clear that fear is very contagious and it has never been easier to move tens of billions of dollars of deposits with just a few button clicks. This poses a sincere risk to banks not already declared Systematically Important Banks (SIBS). The Treasury and Federal Reserve correctly intuit that it would cost far more to the real economy, and to tax payers to cover the cost of SIBs then it would be to signal that uninsured depositors will be made whole.
Your claim that "those who believed in the honesty of the system got burned again", is not entirely true. Equity and debt holders have been completely wiped out. Compared to the Trouble Asset Relief Program (TARP), in 2008, this barely constitutes a bailout. Furthermore, if the Frank-Dodd stress test requirements for banks with greater than $50 billion had not been relaxed in 2018 to $250 billion, then SVB and Signature bank would have been seized and sold off well before there was this bank run. It is clear that even smaller regional banks need to face the same rigorous stress tests that SIBs face.
it should appear clear that fear is very contagious
This can be true, and the Fed's move can be the right one, and it can still be case that the system has been dishonestly socialized by the back door and that this will have terrible long term consequences. It can also be that the Fed's fears were overblown and that in fact letting SVB and a few other similar banks fail would not wreck the entire system.
Equity and debt holders have been completely wiped out.
Only those who were bag holding at the moment of collapse. There will have been plenty of equity and debt holders who profited from SVB's risk-taking behavior and got out in time to realize that profit. The lesson bank equity holders will learn here is not that banks need to be more careful. It's that you can set up a bank, drive custom and profit with hyper-risky tactics, and as long as you sell your stake before the fraud collapses you'll not only get away scott free but nobody will even care because the large numbers of angry people who might organize politically to get justice will all be bought off by taxes on everyone else.
Shouldn't the goal be to create a bank ecosystem that is more robust? So that the failure of one does not lead to a domino reaction of failures?
> Shouldn't the goal be to create a bank ecosystem that is more robust?
You are seeing the robustness in the actions taken by the FDIC right now. Not all failure modes can be prevented ahead of time. There is no failure-proof banking system structure.
> So that the failure of one does not lead to a domino reaction of failures?
The "domino effect" in the context of bank runs is a result of human psychology, specifically herd panic behavior - not something that can be changed by the financial system. At best it can be tempered.
Maybe people should have the option to save their money in a bank that doesn't loan out their savings at all? Does such a thing exist? I would be willing to pay a flat monthly fee to keep my money in a bank and use their services in lieu of receiving their paltry interest on my savings account, in exchange for the knowledge that they actually have my money. I know this system of massive loan-to-deposit ratios is conducive to economic growth, nevertheless I get the impression we're all being scammed on a fundamental level by the banking system at large- and any suggestion of meaningful change is always dismissed as if this house of cards is just the way things have to be, and always has been
According to some comments here, such a narrow bank was proposed, but was denied license by the Fed, which apparently even fought in court to uphold the denial.
Exactly. The VCs were right, this saved a lot of regional banks and may just stave off a major recession
Is a recession this year still not considered likely, even before this SVB meltdown?
The labor market numbers have been strong despite rising interest rates and inflation has been falling (albeit still somewhat high). The signs seem to indicate a soft landing is possible.
However: widespread bank failures and panics can change the situation in an instant. If belief in the banking system evaporates, its not just a recession but likely a total meltdown that we’re looking at.
When the future cannot be predicted accurately, it may be wiser to prioritize making prudent decisions that benefit everyone, rather than seeking retribution against wrongdoers. It's important to consider that both bank shareholders and senior management could face significant losses and lose their positions.
No, they don’t know about the risks and they’re shouldn’t be any to the depositors. Banks are highly regulated institutions and the creation of the FDIC was intended to prevent a systemic bank run, with people shoving cash into their mattress. This is precisely what would’ve happened had SVBs depositors taken any form of haircut.
Why? It's completely unnecessary that bank deposits should face this much risk.
To play devil's advocate:
Toilet paper consumers should know the risk of not having 30 rolls of toilet paper stashed at all times and should face the consequences for that risk.
That’s pretty extreme. There’s plenty of blame for SVB, but the depositors? That’s victim blaming.