> Then what do we do with the billions in remaining assets? Appropriate them, and leave small and mid businesses hanged to dry?
Easy, pay out $250K per account, then distribute the rest pro rata based upon closing balance from when the fed's took over. If they have to wait because assets need to be liquidated then sucks to be them. I'm sure they can get their money faster if they agree to a haircut.
> “This is a bailout”. It would be if shareholders were to get their money back, which doesn’t seem likely. The government will use the bank assets to make customers, not owners, whole.
Money to depositors for amounts greater than $250K is a bail out. They have no right to that money from the Feds.
> Generic screeching against the tech world. I get the schaudenfreude, but this will not hurt big tech and VCs as much as tens of thousands of small businesses, and the people employed at them. Some billionaires will be upset at some relatively insignificant losses, while hundreds of thousands may lose their jobs.
On the flip side, there's nothing special about many of the customers being small businesses, or startups, or big businesses, or really anything else. There's established rules for FDIC insurance and that's what we should be following.
It is completely insane to allow innocent depositors to lose their money especially when the government clearly would have no problem coming up with the funds to backstop depositors since this is an isolated incident. This bank being located in a tech hotspot is incidental and I am sure some non-techies are swept up in this as well. Imagine a 70 year old woman who just lost her husband and sold her house to downsize to an apartment. She has $1 million in her SVB account and plans to live off the interest in her retirement. Should this 70 year old widow take a $750k haircut because she hasn’t spent the last few years brushing up on SVB 10-k filings and calling up SVB’s board of directors to ask them how they plan to manage interest rate risk?
FDIC limit should be way higher anyway (when was the last time it was raised?) but if we allow depositors to lose money it will quickly cause a stampede to the handful of huge banks and drive smaller regional banks out of business. That’s why other bank stocks are also plummeting right now. Is that what you want?
If an enormous earthquake strikes one region causing billions of dollars of damage but you live on the other side of the country do you complain about the federal government spending your tax dollars to help those people rebuild?
For the record I believe SVB shareholders and debt holders will get wiped out, as they should.
> Imagine a 70 year old woman who just lost her husband and sold her house to downsize to an apartment. She has $1 million in her SVB account and plans to live off the interest in her retirement. Should this 70 year old widow take a $750k haircut because she hasn’t spent the last few years brushing up on SBV 10-k filings and calling up SBV’s board of directors to ask them how they plan to manage interest rate risk?
Making a sob story about a 70 year old granny doesn’t change the facts.
And she wouldn’t take a $750K haircut. She’d get $250K guaranteed and her share of the remainder which is not going to be zero. Probably much closer to 80+% of the balance above $250K.
> If an enormous earthquake strikes one region causing billions of dollars of damage but you live on the other side of the country do you complain about the federal government spending your tax dollars to help those people rebuild?
If it’s going to be done with funds not allocated or aligned with FEMA then damn straight I’ll complain. Society does not have infinite money. If they want to increase funding for something then we have a process for that.
So you’re saying the government (taxpayer) will get back 80%+ of the funds it uses to backstop depositors. Isn’t that a small price to pay to avoid a total collapse of the local and regional banking system?
Did these banks all make the same stupid decision as SVB? Unlikely but maybe. More likely though is the risk that people get spooked over SVB customers losing their deposits (even just 20%) and decide to move their money away from smaller banks like SVB to huge banks like Citi, Wells Fargo, etc. Personally if there were a chance I'd lose just 10% of my balance I'd make the switch, it's the only rational thing to do if other depositors are taking a haircut elsewhere. It's not going to collapse the entire banking system, just the local/regional one, which you see is already starting to happen.
I fail to see how burning most of grandma's life savings (and other innocent people who probably never experienced a bank run before) and allowing the collapse of regional banks is somehow better than backstopping depositors now and making much tighter banking regulation for smaller banks going forward to prevent this from happening again. Do we want the nation's banking infrastructure to consist only of 3 or 4 enormous banks or do we want the options that a lot of smaller local banks who are able to cater to the specific needs of their communities provides?
I don't think that's how the FDIC insurance works. I was under the impression that the 250k is after liquidation, the last resort. Anyway, SVB was really leveraged so I'm not sure how much of their asset book value is recoverable.
> FDIC limit should be way higher anyway (when was the last time it was raised?)
In 2008 it was raised from $100K to $250K. The increase in the FDIC limit has actually outpaced inflation since its establishment in 1934, when it was $2500, which is $56K inflation-adjusted today.
>the government clearly would have no problem coming up with the funds to backstop depositors since this is an isolated incident.
If you start bailing out banks which take risks, then the incidents become less isolated
Once you're handling millions of dollars you absolutely should be looking into counterparty risk when you deposit funds. Baffling that people are arguing business owners should do no due diligence on a bank or take no insurance.
NO! Checking and savings accounts are NOT separately insured! The FDIC is $250k per bank, per depositor and per ownership category. Ownership category = single account / joint account / trust account / mortgage escrow account/ (10 more obscure categories).
As a regular person, you get $250k for your checking and savings together, and your spouse gets $250k for theirs, and then you get another $250k for jointly owned accounts.
> Imagine a 70 year old woman who just lost her husband and sold her house to downsize to an apartment. She has $1 million in her SVB account and plans to live off the interest in her retirement. Should this 70 year old widow take a $750k haircut because she hasn’t spent the last few years brushing up on SVB 10-k filings and calling up SVB’s board of directors to ask them how they plan to manage interest rate risk?
That is simply awful financial management. You can be extremely unlucky and have it happen the day you get your deposit, but that seems like an annoying edge case which is unlikely to happen in the real world.
In my jurisdiction across the pond, investment funds are the easiest method to manage the account insurance risk. They need to be legally and economically separated from the broker you are managing them through, so if whoever you are brokering with goes bankrupt, you still own them. You can access them with a new broker after a bit of hassle.
If you want low-risk, pick funds investing in government-backed bonds. High-risk choose stock market-based index funds.
Now the only thing counting towards the $250K limit is whatever you have in the brokerage account between transfers. Easy peasy, your risk of a bank collapse is zero and you have the money available within a couple of bank days notice.
I think the idea is that millionaire grannies should be advised to split their cash across four accounts, or buy bonds, or some other sensible thing, rather than just keeping bank deposits.
Have we yet deviated from FDIC rules? I don’t think so, even with what Yellen says. My limited understanding of the situation is that the assets to cover everything is there, they’re just tied up in long-term treasuries.
From the FDIC’s site:
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
For simplicities sake, let’s just assume 100% of the assets are actually there, but it’ll just take varying years for everything to mature. So, what’s next? FDIC finds a buyer for the assets, perhaps a private bank or a a pseudo-government body who has the ability to wait till maturity, and in the meantime, everyone gets all their deposits. That’s not a “bailout”, and is following the rules.
Magically using billions of federal money to hold assets to maturity is a bailout. If hypothetical JPMorgan is willing to pay for the (ie) bonds $20B, but they "support" $25B of deposits... that $5B is a bailout. Even if in 10 years those bonds would be worth $25B.
> So, what’s next? FDIC finds a buyer for the assets, perhaps a private bank or a a pseudo-government body who has the ability to wait till maturity, and in the meantime, everyone gets all their deposits.
Yes, that's happens in the ideal case. However, due to the rise in interest rates, the market value of SVB's assets is likely lower than $175B at the moment; so it might prove challenging for FDIC to find a buyer for these assets at the required price to give everyone their deposits back. Even well-capitalized entities that have the capital to refund depositors now and the ability to wait till maturity will not pay the face value for these bonds, as they can get a better return by investing that money somewhere else (such as treasuries).
That's true, I should've said that the market value of SVB's assets is likely lower than their deposits at the moment. Of course we don't know for sure, but if the market value of assets exceeded deposits, they wouldn't have had to close down.
This is short sighted. If the government doesn’t make depositors whole then people and companies all over the world lose trust in US banks and eventually US dollars. This is a federal problem.
It makes sense to make depositors whole, they’re innocent here. It doesn’t make sense to make SVB whole for managing their risk poorly.
It does not make sense to let bank shareholders profit from having an implicit guarantee of federal taxpayer funded bailouts.
The bank’s owners have to pay $x for buying FDIC insurance of up to $250k per account per person. If it actually costs $y > $x to insure for more than $250k, then that is quite a windfall for the bank owners at the expense of federal taxpayers.
There's no moral hazard if we pay out depositors and let the bank fail. The big "problem" in 2008 was that the bailed out banks were made whole with equity injections and then continued to grow. (Although the government did quite well on those investments).
SVB is dead. Shareholders are getting zero. The losses are not being socialized. But because we don't want a bank run on every regional bank, let's make depositors whole.
Why even bother with the fiction and payroll of the FDIC and a $250k limit and FDIC insurance premiums if there is always an implicit taxpayer bailout?
Obviously that insurance costs something, and the moral hazard is that both bank owners and depositors of banks with lax standards get to financially benefit from lower costs due to all federal taxpayers subsidizing their risk.
Anytime taxpayers give money, they are tilting the incentives such that the risk of the loss being bailed out is now going to be underpriced, because it will be assumed a bailout is coming.
If the goal is to have no depositor in the US ever lose any money, then the government should just give everyone an account they can transfer money into and out of. It will earn no interest, and no bank owners will profit from the taxpayers’ subsidy.
The moral hazard is that if depositors know they'll always be made whole then they'll keep their deposits in riskier institutions and therefore executives who are taking on undue risk will win at the expense of the insurance provider. (I think this is probably what lotsofpulp was saying in a different way.)
The general public doesnt care about the shareholders. For the public, a bailout is a bailout. By lending money to that bank, depositors took a risk and participated in the bank's business. It was NOT a state bank. It did not pay any taxes, fees, or anything else to the public's treasury more than the $250k per account insurance. If it did, you would be right - everything could have been rescued to the order of that insurance. But there is no such insurance over $250k.
> make depositors whole
It seems that the big money people affected by this chose this nonsensical, archaic term to use in place of 'bailout' so that people wont react. It really doesnt work and it looks way, way nonsensical.
I’m with you that we shouldn’t make a habit of spending taxpayer dollars to make depositors whole. We should have better regulation so this couldn’t have happened in the first place. Banks should be required to manage their risk better.
But in this particular instance taxpayers should want to invest in trust in US banks and dollars until regulation is corrected.
> We should have better regulation so this couldn’t have happened in the first place
We do. SVB lobbied successfully to exempt itself from the Fed’s stress tests and Basel III, both of which test assets for interest rate risk and would have caught this problem.
And if it does. And sets new standards it leads to massive moral hazard and potential of even bigger and even worse failures in future. Why not run a ponzi scheme as bank if in the end tax payers or fed ends up making everyone whole. After you have spend years making money from fraud. With your depositors happily participating in as they have zero risk.
Yes, surely using the government to let private businesses run roughshod on the uninvolved public will prove that we are sufficiently exploitative to guarantee your money’s safety.
Don’t worry world, when push comes to shove, those who had nothing to do with it will bear the responsibility!
> If the government doesn’t make depositors whole then people and companies all over the world lose trust in US banks and eventually US dollars. This is a federal problem.
I fail to see how the government doing exactly what the law says and what they've always said they will do makes people lose trust in the US.
Why would doing the exact same thing as many, many previous times - here's a list https://www.fdic.gov/resources/resolutions/bank-failures/fai... - suddenly make people and companies all over the world lose trust in US banks and eventually US dollar, if that didn't happen in all the many previous times when depositors weren't made whole (beyond the limits insured by FDIC) after a bank failed?
> If the government doesn’t make depositors whole then people and companies all over the world lose trust in US banks and eventually US dollars.
Good. That's exactly what should happen. It should happen every single time, repeatedly. People should have to learn the hard way that banks and the government cannot be trusted.
These are the consequences of their irresponsibility. They should not get to avoid those consequences just because "banks and USD are important" or whatever excuse they come up with. If the US really is all about the free market as it claims, it should allow these banks to fail and everyone who trusted those banks to lose. Customers lent their monet to this bank and they lost. Allow them to face the consequences of their actions.
no. absolutely not. these are smart greedy people playing the game for their own benefit. they knew the rules. if they lose they eat the losses just like anyone else.
it is all the bailouts and insider dealing that kill confidence in the dollar and the banking system. enforcing the rules increases confidence.
> Money to depositors for amounts greater than $250K is a bail out. They have no right to that money from the Feds.
No. The feds aren't giving anyone fed money, they're selling SVB's assets and giving the people they owe their own money back. There isn't enough money to give everyone 100% back, so they won't be getting 100% back. There's no extra government money making anyone "whole". They're just winding down the assets so they don't all get stolen like FTX.
Extra money is precisely what Yellen is proposing. The government will backstop the depositors to prevent a run on every other non-SIFI. This is the right move.
I don't get this comment at all. The post you're replying to literally says the bank has more assets than 250k per client. I read somewhere the insured amount is around $8B whereas the bank's assets are at least 20x that. Where should that money go if every client gets capped at 250k?
They have more than $250K per client but not the full value.
Each account should be allocated MIN(balance, 250K). Then the remaining should be allocated pro rata. So if one is still owed $1000 (ie the balance was $251K before the collapse), then that account’s share of the remainder is: $1000 / (sum of all remaining balances owed)
The haircut per account is only on amounts beyond $250K.
I think the depositors should get a bit of a haircut if selling the assets don’t cover all deposits. For example, 5%. If it’s more than 5%, then the government steps in and pay for the rest.
5% seems like the right balance between the two extremes.
Companies and people should pay a small penalty.
At the same time, we shouldn’t rock the financial system further. We need to have confidence in the system.
After this, the government should make new regulations to prevent this scenario from happening again.
For those wishing to just follow existing rules exactly as is, bear in mind that a contagion will likely reach your personal finances.
Government steps in and pays the rest? No, change the laws if this is the case. Why special treatment to help out but in any other scenario where tragic financial mishaps of regular folks you are given a pat on the shoulder and “good luck”. Pretty sure they have a write off tax wise for any additional loses.
5% is still going to cause bank runs elsewhere. No one is going to stay at any bank where they might take a 5% hit.
Make the depositors whole and let things calm down. Then, at leisure, on a case by case basis, claw back a few percent to cover the moral hazard of people getting better loan terms or whatever.
> 5% seems like the right balance between the two extremes.
No it's not. If they get a single cent above the bank's remaining assets (after administrative costs of the FDIC action), I don't think I will be the only one losing any remaining trust in the system.
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
Yes, issue for the depositors is how long it might take. Digging through the closed banks history at the FDIC is fascinating - https://closedbanks.fdic.gov/dividends/
Sometimes up to ~75% of the funds is paid out within weeks of collapse, but for some banks it’s only 10 or so percent. Most of the time it seems to end up with over 90% being paid out (sometimes it’s 100%), but the payments can come over ten or more years!
Often seems to be one within weeks, one in the next month or two, and then the payments seem to start coming every three or so years.
Well, if depositors can wait 10 years, they will absolutely get 100% back. The assets are worth more than the deposits right now if they aren’t sold in a fire sale.
The problem now is that startups need the money quicker than 10 years. But to sell everything now means a giant haircut.
The $250K is the FDIC covered limit. Amounts greater than that are not insured by the Feds. If the bank fails, the Feds ensure that depositors get at least $250K per account.
If SVB is insolvent than customer deposits are not worth their full value. The phrase “making all depositors whole” would be the Feds covering the difference. Anything beyond the $250K per account would be money that they are not entitled to per US banking regulation.
> If it were the latter then bailouts happen all the time without bank failures or FDIC takeovers (all transfer > 250k).
This has nothing to with bank transfers. It’s about deposit insurance.
> Anything beyond the $250K per account would be money that they are not entitled to per US banking regulation.
This isn’t correct. SVB has assets which are still worth something, even if they are less than their total liabilities. Unsecured depositors are first in line for that money, and the $250k fdic insurance limit has nothing to do with it.
As others have pointed out, those assets are not liquid. And selling many of them on short notice, will cause all other kinds of problems. Takes time and you wont get the money equal to their current valuation.
> Anything beyond the $250K per account would be money that they are not entitled to per US banking regulation.
It's my understanding that FDIC considers $250k the minimum they'll cover and they can (and have) cover(ed) higher through raised premiums to other banks.
This situation isn't a handful of big individuals losing some of their money and the majority being insured under FDIC, the bank's customers is mostly small and medium businesses which have lost all of their money.
I hate bailouts and think we should allow more failure but it would be a horrendously bad idea to let a bunch of businesses fail under no fault of their own.
They'd likely be looking at multiple tens of thousands of unemployed individuals near instantaneously along with accelerated layoffs at unaffected businesses as clients disappear overnight / businesses get spooked.
Easy, pay out $250K per account, then distribute the rest pro rata based upon closing balance from when the fed's took over. If they have to wait because assets need to be liquidated then sucks to be them. I'm sure they can get their money faster if they agree to a haircut.
> “This is a bailout”. It would be if shareholders were to get their money back, which doesn’t seem likely. The government will use the bank assets to make customers, not owners, whole.
Money to depositors for amounts greater than $250K is a bail out. They have no right to that money from the Feds.
> Generic screeching against the tech world. I get the schaudenfreude, but this will not hurt big tech and VCs as much as tens of thousands of small businesses, and the people employed at them. Some billionaires will be upset at some relatively insignificant losses, while hundreds of thousands may lose their jobs.
On the flip side, there's nothing special about many of the customers being small businesses, or startups, or big businesses, or really anything else. There's established rules for FDIC insurance and that's what we should be following.