My understanding is it's not yet known whether a special assessment will need to be levied. The FDIC is making all deposits available before they find out, and if it turns out they cannot sell SVB assets to cover deposits, they will levy a special assessment to make up the difference.
Certainly open to being corrected if that's wrong. But as far as I know it's a bit premature to talk about this being a "tax on depositors at other banks". It seems like these actions ensuring stability in the banking system may be beneficial to everyone.
If it turned out that all SVB assets were worthless and a HUGE special assessment would need to be levied to cover deposits, I would agree that this could be a moral hazard. But right now I think it just looks like prudent management.
You're absolutely right. It's entirely possible for SVB to sell their assets and cover the entirety of the deposits above FDIC limits.
Get real. The issue has never been that SVB's assets were completely worthless, it's that they're not going to cover all of the deposits over the FDIC limits. Ten year bonds were a bad idea and nobody wants them given the current interest rate trajectory. If SVB's assets could've been sold for their full cost they would've been. An assessment will happen, it's just a question of how large it will be.
It's possible the bank is only a "little bit" insolvent. Is it not possible that the difference can be made up by wiping out shareholders and giving unsecured bondholders a haircut?
> Is it not possible that the difference can be made up by wiping out shareholders
In the US it's illegal to do anything that would be "bad" for shareholders. It's quite literally the law that CEOs must return a profit for shareholders (or attempt to). The FDIC however has no such requirements, so while the bank itself can't wipe out shareholders, the FDIC can do it without care.
Publicly traded companies will ALWAYS put shareholders above anyone else. It's the primary reason I'm very much against banks being publicly held. Just as I feel it's immoral for healthcare both insurance, pharma, and hospitals to be publicly traded entities.
> SVB's assets could've been sold for their full cost they would've been
Why? No one thinks the FDIC is gonna close their bank until the FDIC padlocks your front door with you inside. This literally surprised almost everyone.
If this is so prudent, how come nobody was suggesting it before it happened?
I agree though that it sounds like a reasonable solution, at least superficially.
Wiping out the shareholders at least is something I agree with. They need to eat risk.
I also think that deposits have carved out a space of its own in the mind of the public. You can't think of it as a risk investment like any other debt because people just don't treat it that way, they think of it as a safe place to store their money for convenient access for things like payroll. If you haircut them, everyone will have to re-evaluate where to keep their deposits and chaos ensues.
The big question then is how this levy on the rest of the banking system will work. That may turn out to be a clever solution or a carpet to brush future problems under. We'll see when there's more details.
But the question still remains, why didn't someone think of this earlier?
> If this is so prudent, how come nobody was suggesting it before it happened?
I guess this is kind of facile, but isn't it because the bank wasn't insolvent yet?
Interestingly, it sounds like systemically important banks may be required to do "resolution planning" for insolvency. If I'm understanding correctly, that sounds similar to what you're talking about.
SVB seems to have successfully lobbied for raising some of the thresholds for increased oversight from $50bn to $250bn. I don't know the specifics of exactly what was involved at this threshold, but it does seem clear that was a mistake.
Scroll down to screenshot of tiny text to find the "one trick" to explain it all. SVB poorly managed their balance sheet and had weak regulations for which they lobbied (oh, the lulz). Nothing more. FDIC wind-down or maybe sale. Plus, tighten up that rule. End of story. Maybe a few billion of special assessment (_in total_) on all other banks -- this is how deposit insurance works _in one form or another_ in all advanced economies.
Why is this darn story getting so much attention? Dunno. Slow news cycle?
> SVB deposits are being paid for with an assessment on FDIC members.
You're not being totally honest here. If there isn't enough capital to satisfy deposits, the FDIC facilitates an auction of assets owned by the bank. This occurred Sunday night. Not every asset owned by the bank is in the toilet, and ALL the value built up in any asset is given to depositors, not shareholders.
If there is a shortfall between the assets owned by the bank, yes, there may be a special assessment on FDIC members. Special assessments have happened before, and they'll happen again. In 2009 it was 5 basis points, or a whopping 0.05% of deposits after a huge, sprawling economic meltdown.
The stock isn’t being bailed out, but a certain class of society/account-holder is (again), which seems to be just as bad in terms of perpetuating the moral hazard.
What moral hazard being created though? Most SVB customers, unless they are finance experts, are not in any position to do due diligence on how their bank invests its loans and are pretty blameless in my opinion. They weren’t capturing any real risk premium by banking with this bank.
Especially considering the government disallows people that aren't "qualified investors" from investing in specific asset classes entirely because people that don't meet that threshold are just too stupid to participate.
But they were by, for smaller but over 250k depositors, not spreading their deposits between multiple banks. Which can be done manually or through a sweeping account very very easily. Or, for larger depositors, having other safety mechanisms in place. Really depositors over 250k do need to take some moral responsibility, even though I think it is better that they be made whole to stave off a 2008 style financial crisis.
So what is the risk premium they were collecting? The time savings of not managing multiple accounts? Is it really desirable for larger depositors to carry the inefficiency of spreading their deposits across multiple banks, if the net liabilities of the banks end up being the same?
Net doesn't matter to the individual firm. And who should carry it? Everyone else who had the gumption to spend, what, a few man hours, to guarantee that they won't end up not being g able to make pay roll?
No, VCs who literally demanded they put their money there did. Guess who cries the most about bail out - VCs. The same people who wanted regulations to ease up, the same people that actually indirectly profited from bank taking higher risk.
It is ridiculous that the supposedly smartest groups whose literally did this to themselves gets bailed out.
They don't need to do extra due diligence. Just buy insurance for the excess amount above the FDIC limit. After all, they do benefit from the upside like cheaper mortgages for execs.
One way this could create moral hazard is that large depositors are happy to lend to quite risky banks at high rates because they know they will be made whole in case of a bank failure. Btw., this could also make deposits less sticky as moving for opportunity has no downside in such a scenario.
> Most SVB customers, unless they are finance experts, are not in any position to do due diligence
Someone wants to have it both ways - they are sophisticated investors and entreneurs when it suits them. Leaders of our time, telling the rest of us how to live.
Other times, they can't be expected to have basic financial literacy or consult a financial adviusor accessible to a regullar joe
> SVB is a 40 year old bank that's been doing business in the valley since the VC era started.
So it’s a fairly new bank, by the standard or banks, and the point remains, why did they choose to risk keeping money in excess of the $250K insurance backstop in one bank with no real track record?
Until this event the whole idea of the FDIC insurance fund was to ensure that people (not corporations) with relatively small nest eggs wouldn’t lose the whole thing and therefore starve if their bank made bad bets… once your nest egg grew beyond the backstop it was your right (and privilege) to assume the risk of losing it, if you wanted to.
Now because VCs and CEOs were essentially asleep at the wheels of companies that, for the part that have gotten this absurdly quick action from the government, consider $250K to be a rounding error, the rules have changed. That’s the special class… the kind of people who somehow think 40 years is a substantial track record for a business that’s big enough to underpin an economy.
> Until this event the whole idea of the FDIC insurance fund was to ensure that people (not corporations) with relatively small nest eggs wouldn’t lose the whole thing and therefore starve if their bank made bad bets.
Nope.
"The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation's financial system."
You don't know that a "certain class of society/account-holder is" being bailed out. Maybe you think it's likely, but the only people who really know the deal is the FDIC, and they seem confident that everything will wrap up cleanly.
FDIC typically insures up to $250k. The government is now doing a one-off (well, two-off) to make ALL depositors whole.
"People with in excess of $250k cash" is most assuredly a "certain class of society". Or, maybe a few classes - rich individuals AND small companies. In either case, both groups should be better diversified OR have insurance against banking losses. The FDIC limit isn't unpublished - it's well known among people with even moderate amounts of cash.
The FDIC limit comes into play when there are no underlying assets to distribute to depositors. If the bank has no assets, it's likely all you'll see is $250k.
If there are assets, they can be disposed of, and the depositors with over $250k can receive dividends. The fact that the FDIC is confident that the deposits will be available says to me they were able to successfully sell enough assets to ensure liquidity for whoever took over the deposits.
This isn't a "government two-off to make ALL depositors whole". This is how these bank failures happen.
First, since we’re comparing numbers to each other, you should go back before Wednesday to get a real number for pre-run market cap, it’s about 2.5x that. Not that it really matters.
Second, just so we’re clear is your point that the holders of that $6B-$15B of useless paper won’t care because it’s less than $150B? At the end of the day, you don’t care what percent of the bag you’re holding, just that you’re holding it.
No, the point is that shareholders of the bank are investors in the bank, and investment comes with the risk of loss. Depositors in a bank are not investors in that bank.
> Depositors in a bank are not investors in that bank.
No, they’re not. But until just now depositors in any other bank assumed the risk for any deposit in excess of $250K… and if these depositors weren’t morally different than the depositors that would absolutely have lost their wealth in excess of $250K when their chosen bank did a stupid thing, then they’d have paid the piper just like you and I would have.
These special depositors are getting special treatment and aren’t suffering what countless non-special depositors have suffered… the rules are changing because of who took the risk, that’s the very definition of moral hazard at work.
Was it? I think I read somewhere that this bank had an unusually large share of depositors over the deposit insurance limit, or in other words a high share of uninsured deposits.
Yes but that doesn't mean they would lose everything over the insured limit. If I owe you 1M but only have 950k to give you that's a lot better than having only 100k, in which case you'd end up with 250k.
Ok, but assuming the numbers above are correct, 150B in uninsured deposits - 5B in market cap firesale = 145B that SVB apparently didn’t have the cash on hand to repay.
If every depositor walks in first thing Monday morning and withdraws their bad bet in their (apparently single) chosen bank’s management, the customers of all other banks are now on the hook for 145B… which ultimately means everyone on the planet can expect to pay more for their haircuts.
No, GP is just foolishly conflating liabilities and assets and bank deposits and enterprise value among other issues if you read this and their other comments.
tl;dr - GP doesn’t have a clue what they are saying.
With the number of ELI5 guides all over the internet on the SVB situation, this level of willful ignorance you displayed here is just sad. Seriously, stop talking out your arse and go educate yourself, even a little, first.
What is the shortfall once all the assets of the bank are sold though? It's not like anyone is putting $150B into this to make sure those deposits are made whole.
You can't say that right now, I'm not sure anyone can. The government is literally writing a blank check because they don't yet know how much it's going to cost to fix.
Everyone seems to be operating under the idea that while their liquidity came into question the underlying assets were and are strong-- if that were true they would have found a private sector solution early in the weekend. Waiting until 6pm on Sunday and a second regional bank collapsing to announce "oops, all bailouts!" seems like an open admission we're in the early stages of another banking crises.
> the underlying assets were and are strong-- if that were true they would have found a private sector solution early in the weekend
One does not follow the other. The triggering problem here were unmatched maturities of assets and liabilities, i.e. liquidity crunch. They have created that liquidity by selling some assets at a loss and tried to recoup that loss from investors.
But that was not the problem. The problem was now-imminent bank run, potentially requiring up to ${total-deposits } liquidity injections and unclear future then. Once VCs told their portfolio companies to pull out svb was effectively toast.
Bigger bank with more cash could have bought them, fixing liquidity issue. This didn't happen, suggesting that there's problems with bank's assets, not just liquidity.
Yes and no. There were 4 stages in this drama. 1. Build up where books became imbalanced 2. Imbalanced maturities draining liquidity 3. Liquidity issues being prominently voiced causing bank run 4. Aftermath.
Once the situation evolved from stage 2 to stage 3, the liquidity hole expanded from ${gap-in-maturities} to roughly ${total-deposits} and that is only to contain immediate issue, fixing books would have possibly required additional capital.
You are probably right, a bigger bank with liquidity could have saved SVB at stage 2. However, the situation evolved from stage 2 to stage 3 too quick for any meaningful deal to take place while still in stage 2.
As far as coverage has stated so far, the underlying assets ARE solid...
Problem is they're just not even a good investment compared to brand new fed bonds / bills of short / long (might have that backwards) due to the now MUCH HIGHER interest rates. They locked in at historically low rates, and had a bank run on their free reserves.
I'm sorry, I don't follow the logic here. Do you mind elaborating?
I see some correlation between SV remote working and COVID, but don't understand how mortgage backed securities play into this. Are you suggesting higher inflation on the way, lower property values, higher rates, and that it was intentional?
Nobody has to put in anything other than confidence. Given enough time the bank already has plenty of assets--the whole point of the feds saying "all deposits will be made whole" is to stop the panic withdrawals and thus obviate the need to sell those assets.
As I see it, market cap/valuation _should_ resemble the price you'd need to pay to buy a company, but it often is not. E.g. a company has marketcap of 10B, but has 30B in liquid cash on hand. It's clear it cannot be bought for 10B. Or the other way around, the company has 30B in liabilities -- the company should pay you 20B to be bought.
