I hope that a change like this would come with a requirement that all FDIC-insured banks become subject to the full set of capital and stress test requirements that the largest banks are subject to.
This would need care to avoid immediately killing some smaller banks.
All these people shocked by the risk inherent in their large deposits — it wouldn’t hurt for there to be somewhere you actually can rest cash securely, for a service fee. You could imagine a federal institution for this, or simply a regulatory program that required banks to offer such an account.
The only reason there’s risk on uninsured deposits is because banks are allowed to place their own bets with the money in exchange for holding it.
> it wouldn’t hurt for there to be somewhere you actually can rest cash securely, for a service fee.
This is called a Narrow Bank. [0] The Fed doesn't want it though, because such a bank would not participate in the money creation process, or help the Fed disseminate its monetary policy, which all banks implicitly do.
Alternatively...
> You could imagine a federal institution for this, or simply a regulatory program that required banks to offer such an account.
> it wouldn’t hurt for there to be somewhere you actually can rest cash securely, for a service fee.
If you're large enough to have your own bank - many car manufacturers are, IIRC also IKEA - and are in Europe, you can already do this and deposit money at the ECB. In fact, so many were interested in that service that it turned from the usual - banks get paid interest, but a low rate - to the negative as a consequence of all the QE money injected after 2008ff.
If you're not large enough, park your money into a time spread of government bonds - the US and Germany are among the safest harbors you can get. Spread your yearly cash burn over 5-10 different banks, buy 1 year bonds and roll them over with the rest.
> Spread your yearly cash burn over 5-10 different banks, buy 1 year bonds and roll them over with the rest.
That’s almost what SVB did, but they got hit by an “unexpected cash burn”. 1 year government bonds may be at low risk of default but there’s a high risk of interest rates and market conditions changing in that time. If you suddenly need the money in 6 months and interest rates have changed, you’ve lost money. You’d need to buy monthly bills to be truly safe and then have the cost of rolling them over every month. Ironically SVB offers a product that can help you do that:
>If you're large enough to have your own bank - many car manufacturers are, IIRC also IKEA - and are in Europe, you can already do this and deposit money at the ECB. In fact, so many were interested in that service that it turned from the usual - banks get paid interest, but a low rate - to the negative as a consequence of all the QE money injected after 2008ff.
Didn't ordinary banks offer negative interest rates too? Or was it just the ECB?
you can do this now with https://www.intrafi.com/ - they federate your money in $250k chunks to as many banks as it takes, but you still access it all through one main bank.
I understand it pays respectable interest rates too
The limit is $50M, which should be plenty for any org to meet short term obligations. The rest of your funds can then be in short dated treasuries, which are risk free.
Perhaps my information is inaccurate, that’s the number I was told by a colleague at a financial services firm that just launched their related HYSA sweep product a week ago. Perhaps the limit is defined by each provider?
> I hope that a change like this would come with a requirement that all FDIC-insured banks become subject to the full set of capital and stress test requirements that the largest banks are subject to.
Wait a minute. Why would more (large) banks fail? I am guessing small banks and companies fail periodically. By any measure, SVB seems to be a one-off, gigantic risk management blunder. Why would there be an expectation of more of this to come?
yes, and i wonder if they were preparing for the SVB thing in advance, too. The run that everyone is blaming happened in about 24 hr window and ended up in them taking over, is it even possible to prepare for a bank takeover in such a short time?
Institutions have long memories, especially government ones. I suspect there are a decent number of people who still work there and cut their teeth during the financial crisis.
It would also be mind blowing to me for someone whose job is to handle bank failures to not have a playbook for them. I know that FEMA has a truly impressive library of disaster playbooks in their analogous role.
There was an episode of "The G Word" on Netflix that followed a FDIC bank takeover game-day. They're always preparing for the worst and know when they're called, if they handle things smoothly, it protects the entire system.
I have huge respect for the FDIC. I feel they're the perfect example of a government agency that works.
There are other banks with similar long term treasury holding problems vs liabilities and assets on hand. Not the real big guys like Chase and co, but banks in size to SVB. First Republic and Signature Bank are going to be clenching their buttholes next week as they are set to experience a bit of a bankrun too.
Basically, look at the stock market, any bank that is now hit with a >50% decline in share price like those 2 named above is because people noticed the problem.
Wow. I did not realized that. What SVB did, basically having a gigantic unhedged position on the interest rate through mismatched duration, is just plain crazy. It should have never happened in any bank with the basic risk controls. Not a rocket science at all. But if there are more banks out there with such unhedged positions, this is scary. I am guessing this is what the "Moral Hazard" looks like, that people were talking about during 2007-2008 financial crisis. Everybody is expecting a bailout and people are incentivized to take crazy risks.
It’s a bit different from 2007-2008 because these assets that are causing problems are required by law to be held by these banks, in part from the regulations that came out of the previous crisis. Banks do have freedom with respect to duration but when small banks need funds for operations, are required to hold low yielding assets, and the short durations are at 0%, they really don’t have much of a choice.
Actually, most banks have mismatched duration. Accepting short term deposits in checking accounts and giving out longer term mortgage and business loans. SVB undertook a strategy that had a similar duration as issuing loans, and via a portfolio of govt treasuries - as safe and liquid as it gets (outside of interest risk).
The broader concern, with hindsight, is they had an extremely correlated/flighty deposit base compared to most banks, and that meant they should NOT have copied what other banks did. They needed to keep duration on the loan book much shorter and have much more liquidity/equity cushion.
Some of the other large regional banks also have a very large proportion of deposits above the FDIC insurance limits, and are also sitting on hold-to-maturity portfolios which can't be liquidated to satisfy a large deposit outflow without incurring losses which would wipe out the banks' equity.
Most banks are fine. They aren't gambling like SVB did. Ofc it's a VC bank gambling like a VC.
SVB had ~40b in short term liquid assets. They had ~100b HTM securities. 210b in total assets. Nearly half of their assets were in HTM securities. You aren't going to find many banks with half their assets in HTM securities even banks holding a lot of HTM securities.
SVB had 170b in deposits which is a short term liability.
So they only had 40b in short term assets to cover 170b in short term liabilities.
That's the problem. The problem isn't HTM securities. The problem is diversification.
My understanding is that rising interest rates means people and businesses are less likely to get loans and do additional business with the banks. Along with bad investments and holdings, if banks aren’t well diversified, and they’re taking too many risks, they can bleed money.
Based on past examples… bank runs can be kind of contagious. “What if my bank collapsed?” may be a fleeting thought, but it’s also pretty easy to withdraw some cash “just in case”… if the situation escalated and there’s any genuine fear, the example set by anyone not getting all their money out of a collapsing bank incentives anyone who succumbs to the fear of loss with respect to the idea their bank may too collapse, to go and try to withdraw most of their money… and it becomes a bit like a snowball down a hill as more people have trouble… The FDIC are nominally to protect against this but the statutory deposit protection limits aren’t worth as much as they used to be… thanks to inflation and changes in housing market values.
This is why I recommend to people to park your money with entities like NFCU, PenFed or NASA FCU if they are available to you (and at least one of those likely is for most Americans).
If things start to go south, government employees and the military are still going to get their money.
Government employees and the military are specifically the people who don't get paid in certain cases, for instance in a government shutdown. I don't think they are as protected a class as you think.
> Why would there be an expectation of more of this to come?
As a general approximation, all banks would fail if there were a run on them. It's merely a question of how much of a run would be needed. If the panic among VCs that led to the run on SVB were to continue in other parts of the financial system, other banks with shaky risk management could have similar challenges.
That being said, JP Morgan is not going to fail next week. Make no mistake that this was a massive risk management failure on the part of SVB. But large depositors of similar banks are panicking right now (just read HN this weekend), and it's up to banking regulators (FDIC, Federal Reserve, etc.) to calm their nerves by Monday morning.
National retail banks are not going to fail. This was a pretty unique circumstance: deposit base had tripled in 3 years, serious failure in risk management, most deposits from business customers well above the deposit insurance limits.
Right. My point in saying "all banks would fail if there were a run on them" is just that if for some reason, every depositor at JP Morgan were to decide to withdraw their deposits on Monday in favor of some other bank, JP Morgan would fail.
There are so so many reasons that won't happen, but the statement is true and is useful to keep in mind when thinking about banks and the banking system.
In this case SVB bought long duration bonds, and they lost value because of higher interest rates. So this caused their books to become unbalanced. Other banks could have this problem.
What forced them to realize losses was high withdrawal rates because tech funding went down. But SVB would have been fine if they didn’t inadvertently trigger a mass panic bank run
SVB saw more than 25 percent of their deposits withdrawn. No bank could handle that. Ultimately the money has to go somewhere (it won’t fit under everyone’s mattress) so a big bank would be unlikely to fail.
Republicans get elected and rollback regulations. Democrats get elected and are forced to bailout the industry the Republicans deregulated. Rinse and repeat as a variation on Jude Wanniski's "Two Santas" tactical strategy.
Sounds like this could help with preventing potential panics at other banks but seems like this would do nothing for uninsured deposits at SVB, correct?
All banks are going to see large depositors pull funds, to diversify risks. They will have incoming deposit activity too, but the weaker ones may have a cash crunch that causes a widespread run, as dominos begin to fall.
Hopefully govt takes quick actions like this one, to minimize effect - but we are definitely getting more pain before relief :(
Please stop using the word "bailout" to describe what the FDIC does, it isn't even close. Shareholders are wiped out in a FDIC takeover event, and if needs to be additional money to make depositors whole, it comes from a fund paid for by taxes on banks. No money comes from taxpayers, and the "bad people" (bank management and shareholders) are punished just like you want.
Theres a petition being pushed by Garry asking for people to sign that calls for the government to save SVB. I agree with you that FDIC is only insurance but the ask is to be saved by the taxpayers.
Thinking that the proposal making the rounds that in the future all deposits be fully insured is not so crazy. Paid for by the banks (and subsequent fees) of course.
After this, cash sweeps will become VERY popular, making full insurance essentially the case anyway.
Eh, I have no idea why I should be forced to subsidize the banking practices of billion dollar corporations with fees on my money. At some point you have enough wealth you are responsible for managing it well.
I understand the social benefits of making sure ordinary people using banks ordinarily are safe. But Roku can afford to manage its own risk.
The term meaning varies by brokerage, but my implied meaning here is a service that distributes a large virtual account across a network of banks to keep the individual actual accounts below the insured limit. If this becomes the norm, even large accounts will become effectively insured.
They will pay a fee (or receive a lower return) for it for sure.
You could argue that this is a free market way to adjust from this event, but this was already available yet the failure still happened.
Making it explicit saves the system from future less savvy or inattentive depositors creating a mess again.
I don't see how this usage means that I will have to subsidize risks in the future. That usage implies the way to reduce exposure is literally for companies to spread their assets so any given bank run doesn't impact many of their assets. That is, they have to actually reduce their risk.
Based on the FDIC/Fed/Treasury actions this afternoon, they have effectively removed the $250K limit as a practical thing. If you have a deposit, you will be "bailed out", "backstopped", whatever. In their press release they said if they need extra funds to cover deposits, there will be a special assessment on all banks, passed on to you and me. So there you go.
Right now it's the billion dollar corporations that are subsidizing your FDIC insurance, since the assessment base for FDIC insurance is proportional to its total liabilities, not to the amount insured.
Why don't banks offer a "virtual bank account" which would be like a management layer on top of N actual bank accounts. This way, a depositor could deposit an arbitrary dollar amount (automatically divided among total/250k accounts) and still benefit from FDIC insurance and the ease of a single "virtual" account.
In Canada, we don't have to worry about bank runs. I feel calm about my own money, but am just a tiny bit worried that the unstable banks down south are going to train wreck the western economies again
> Just don't go protesting, I heard that's one way to lose access to your money in Canada.
You heard incorrectly. Don't accept anonymous international donations to participate in disruptive harassment so severe that it requires the federal government to invoke the emergencies act. It's a pretty damn easy bar to pass.
I think you mean just don’t give or receive donations in any amount to any cause that the Canadian government may retro-actively determine to be unacceptable or embarrassing, and your right to access your own money won’t be put at risk. (By a fellow Canadian with a different point of view.)
These are the parts that aren't a reasonable argument:
> your right to access your own money won’t be put at risk.
The bank accounts that were frozen were those "that funnel money to demonstrators"[1] - i.e, not their own money.
> any cause that the Canadian government may retro-actively determine to be unacceptable
This was after the invocation of the Emergencies Act, which made it clear that the actions were not permissible. And the use of the Emergencies Act was found to be justified.[2]
> A. A state party to the ICCPR can never derogate the right to life, freedom from torture, or freedom of thought for instance. And, importantly for our current circumstance, a state can’t make retroactive laws in an emergency either. That means anyone who donated to the convoy before the emergency order would not be subject to having their assets frozen.
Maybe a law on the corporate side would be good? Like you can’t have more than $50mm or 25% of cash (if greater than $10mm) in a single institution for more than a single quarter. (My numbers are not based on anything)
It could also prevent the largest banks from being the only safe place since you can’t park all your cash there.
Why do banks, whose fundamental job is to accept money and then return it to the customer on demand, struggle to meet the "giving the money back to you" obligation. Why isn't there be a bank that doesn't fuck around with my money, so I can always be guaranteed to be able to get it out whenever I want. I'd gladly pay $20/mo or so for such a service.
Another case of: "If you aren't paying for it, you are the product."
Earning US$500 taxable annual interest on an account with balances averaging US$100,000 isn't particularly valuable to me, especially if the edge cases are that the money I gave them might sometimes not be available to be returned to me when I need it.
87 comments
[ 4.6 ms ] story [ 183 ms ] threadThis would need care to avoid immediately killing some smaller banks.
The only reason there’s risk on uninsured deposits is because banks are allowed to place their own bets with the money in exchange for holding it.
This is called a Narrow Bank. [0] The Fed doesn't want it though, because such a bank would not participate in the money creation process, or help the Fed disseminate its monetary policy, which all banks implicitly do.
Alternatively...
> You could imagine a federal institution for this, or simply a regulatory program that required banks to offer such an account.
This is called a CBDC. [1] It may one day happen.
[0] https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
[1] https://www.federalreserve.gov/central-bank-digital-currency...
If you're large enough to have your own bank - many car manufacturers are, IIRC also IKEA - and are in Europe, you can already do this and deposit money at the ECB. In fact, so many were interested in that service that it turned from the usual - banks get paid interest, but a low rate - to the negative as a consequence of all the QE money injected after 2008ff.
If you're not large enough, park your money into a time spread of government bonds - the US and Germany are among the safest harbors you can get. Spread your yearly cash burn over 5-10 different banks, buy 1 year bonds and roll them over with the rest.
That’s almost what SVB did, but they got hit by an “unexpected cash burn”. 1 year government bonds may be at low risk of default but there’s a high risk of interest rates and market conditions changing in that time. If you suddenly need the money in 6 months and interest rates have changed, you’ve lost money. You’d need to buy monthly bills to be truly safe and then have the cost of rolling them over every month. Ironically SVB offers a product that can help you do that:
https://www.svb.com/liquidity-management/deposits-and-invest...
Didn't ordinary banks offer negative interest rates too? Or was it just the ECB?
I understand it pays respectable interest rates too
https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...
I think this is called a US government short-term bond, and they'll pay you.
Please don't think this is good or beneficial
It would also be mind blowing to me for someone whose job is to handle bank failures to not have a playbook for them. I know that FEMA has a truly impressive library of disaster playbooks in their analogous role.
I have huge respect for the FDIC. I feel they're the perfect example of a government agency that works.
Basically, look at the stock market, any bank that is now hit with a >50% decline in share price like those 2 named above is because people noticed the problem.
The broader concern, with hindsight, is they had an extremely correlated/flighty deposit base compared to most banks, and that meant they should NOT have copied what other banks did. They needed to keep duration on the loan book much shorter and have much more liquidity/equity cushion.
SVB had ~40b in short term liquid assets. They had ~100b HTM securities. 210b in total assets. Nearly half of their assets were in HTM securities. You aren't going to find many banks with half their assets in HTM securities even banks holding a lot of HTM securities.
SVB had 170b in deposits which is a short term liability.
So they only had 40b in short term assets to cover 170b in short term liabilities.
That's the problem. The problem isn't HTM securities. The problem is diversification.
If things start to go south, government employees and the military are still going to get their money.
The paychecks always come eventually...or else.
As a general approximation, all banks would fail if there were a run on them. It's merely a question of how much of a run would be needed. If the panic among VCs that led to the run on SVB were to continue in other parts of the financial system, other banks with shaky risk management could have similar challenges.
That being said, JP Morgan is not going to fail next week. Make no mistake that this was a massive risk management failure on the part of SVB. But large depositors of similar banks are panicking right now (just read HN this weekend), and it's up to banking regulators (FDIC, Federal Reserve, etc.) to calm their nerves by Monday morning.
There are so so many reasons that won't happen, but the statement is true and is useful to keep in mind when thinking about banks and the banking system.
All banks are going to see large depositors pull funds, to diversify risks. They will have incoming deposit activity too, but the weaker ones may have a cash crunch that causes a widespread run, as dominos begin to fall.
Hopefully govt takes quick actions like this one, to minimize effect - but we are definitely getting more pain before relief :(
I wouldn’t be surprised if all bank stocks are halted with the market open, to contain the contagion.
Wait, I mean 2020 and 2023.
I wanna my business to be too big to fail.
After this, cash sweeps will become VERY popular, making full insurance essentially the case anyway.
I understand the social benefits of making sure ordinary people using banks ordinarily are safe. But Roku can afford to manage its own risk.
They will pay a fee (or receive a lower return) for it for sure.
You could argue that this is a free market way to adjust from this event, but this was already available yet the failure still happened.
Making it explicit saves the system from future less savvy or inattentive depositors creating a mess again.
https://twitter.com/rywalker/status/1634614103586078721?s=46...
You heard incorrectly. Don't accept anonymous international donations to participate in disruptive harassment so severe that it requires the federal government to invoke the emergencies act. It's a pretty damn easy bar to pass.
> your right to access your own money won’t be put at risk.
The bank accounts that were frozen were those "that funnel money to demonstrators"[1] - i.e, not their own money.
> any cause that the Canadian government may retro-actively determine to be unacceptable
This was after the invocation of the Emergencies Act, which made it clear that the actions were not permissible. And the use of the Emergencies Act was found to be justified.[2]
[1] https://www.cbc.ca/news/politics/emergencies-act-banks-ottaw...
[2] https://www.cbc.ca/news/politics/poec-report-released-friday...
Nope:
> A. A state party to the ICCPR can never derogate the right to life, freedom from torture, or freedom of thought for instance. And, importantly for our current circumstance, a state can’t make retroactive laws in an emergency either. That means anyone who donated to the convoy before the emergency order would not be subject to having their assets frozen.
* https://macleans.ca/politics/ottawa/what-ottawa-can-do-now-u...
It could also prevent the largest banks from being the only safe place since you can’t park all your cash there.
Another case of: "If you aren't paying for it, you are the product."
Earning US$500 taxable annual interest on an account with balances averaging US$100,000 isn't particularly valuable to me, especially if the edge cases are that the money I gave them might sometimes not be available to be returned to me when I need it.