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If a “healthy” bank had a run, would it still survive? In other words, are any banks solvent if a run happens to them? If not, then at what point are banks co

by nico 4y ago

If a “healthy” bank had a run, would it still survive? In other words, are any banks solvent if a run happens to them? If not, then at what point are banks considered solvent. Also, if no bank can survive a bank run, would the CEO be at fault here for kind of inciting one (by essentially saying in the call “we’ll be alright, as long as you guys don’t run”)?

timy2shoes 4y ago
Even a healthy bank had a run they would not survive, because fundamentally banks borrow short (deposits) to lend long (loans, bonds, etc). The old Bagehot quote comes to mind: "Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone..." Anything that would cause depositors to worry and demand their money back quicker than the banks' investments mature would run into this problem.
ncallaway 4y ago
> are any banks solvent if a run happens You're asking more about liquidity, than solvency. All banks in the US that are following regulations should be solvent. But, most banks in the US would not be liquid enough to survive a run. > If not, then at what point are banks considered solvent. Solvency is basically: "does the long-term value of your assets exceed your liabilities". Liquidity is: "can you sell assets right now to meet your outgoing liabilities right now". The problem for banks is, in almost all cases some loans will have longer-term time-frames, while almost all depositors can theoretically ask for their money back at any given time. So, for almost any bank a strong enough run will cause them to fail a liquidity test (even if they are solvent).
- verteu 4y ago
  Genuine question: If a bank invests all customer deposits in 10y treasury bonds, and then interest rates rise, is it solvent? It seems this is essentially what made SVB insolvent.
  - loopdoend 4y ago
    They are solvent unless they have to suddenly sell the bonds, in which case they are worth less now than at maturity.
lend000 4y ago
At least in the modern economy, people aren't running to withdraw cash. They just transfer it to another bank. So the strongest major banks are probably impervious to runs, because if there is a general panic (rather than a panic at a specific bank), it will result in a dilution of funds between a number of major banks, rather than a net exodus of funds from the banking system.
- twblalock 4y ago
  From the point of view of an individual bank it doesn't matter if the money stays "in the system." The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes. For any large bank, there is an amount of withdrawals that can take it out. And that amount is nowhere near 100% of deposits.
  - lend000 4y ago
    > The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes. As I specified in my original comment, a systemic panic, rather than a specific panic at a single bank would result in mass withdrawals, but a roughly equal number of deposits (from panic withdrawals from other banks), because we live in a largely cashless society. That is the point. The system isn't crashing down. A niche bank like SVB was always more liable to have a run and should have been better capitalized than a normal bank. This is because probably close to 100% of their clients had other primary bank accounts that they could instantly transfer funds to, whereas an exodus from something like Wells Fargo would require tons of people to set up a new bank account.
hristov 4y ago
Silicon Valley bank was a healthy bank so you have your answer there. It is well known that no bank can survive a run on it, even if it is healthy. That is why the FDIC was started. Regarding the CEO, one has to keep in mind that the CEO is responsible for being honest towards the shareholders as well as for keeping his bank solvent. He also has to disclose any material risk to the shareholders in a timely manner. Well it is easy to see this was a material risk. It is difficult to say what the CEO could have done better. If he said the bank is absolutely fine and it was impossible for it to fail to pay depositors, and the bank still failed, then the shareholders would have sued him. I think he got in trouble when he tried to call on the community spirit of silicon valley. When he said that his customers should support the bank as the bank has supported them. He should have known that kind of call for community spirit and non-contractually obligated decency would ring alarm bells in the minds of a bunch of silicon valley CEOs. And Peter Thiel. I think the lesson to learn here is that perhaps the FDIC insurance limits should go up. The FDIC has done a great job in ensuring ordinary people that their bank accounts are safe, as ordinary people usually keep less than 250K in their accounts. But, businesses tend to keep much more. And some venture funded tech businesses tend to keep even more. And silicon valley bank was unique in that most of its deposits were from venture funded tech businesses. So while the FDIC insurance does generally prevent runs on banks by ordinary people, it does nothing for businesses. As far as a business with 20 million in the bank was concerned, most of their money is at risk and the situation is not that different as it would have been 100 years ago in the 1920s. And thus, the very painful process of a bank panic happened to silicon valley bank just like it used to happen to old US banks back in the 20s and 30s, before FDR created the FDIC. So I think the government should seriously consider expanding the FDIC insurance to higher levels, perhaps in exchange for additional fees.
- dehrmann 4y ago
  > I think the lesson to learn here is that perhaps the FDIC insurance limits should go up. 100% this. $250k is reasonable enough for most individuals, but it's far too low for businesses. You don't want people worrying about if their paycheck will clear and companies going under because a traditional bank failed.
  - 4y ago

by nico 4y ago

timy2shoes 4y ago

Even a healthy bank had a run they would not survive, because fundamentally banks borrow short (deposits) to lend long (loans, bonds, etc). The old Bagehot quote comes to mind: "Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone..." Anything that would cause depositors to worry and demand their money back quicker than the banks' investments mature would run into this problem.

ncallaway 4y ago

> are any banks solvent if a run happens You're asking more about liquidity, than solvency. All banks in the US that are following regulations should be solvent. But, most banks in the US would not be liquid enough to survive a run. > If not, then at what point are banks considered solvent. Solvency is basically: "does the long-term value of your assets exceed your liabilities". Liquidity is: "can you sell assets right now to meet your outgoing liabilities right now". The problem for banks is, in almost all cases some loans will have longer-term time-frames, while almost all depositors can theoretically ask for their money back at any given time. So, for almost any bank a strong enough run will cause them to fail a liquidity test (even if they are solvent).

verteu 4y ago
Genuine question: If a bank invests all customer deposits in 10y treasury bonds, and then interest rates rise, is it solvent? It seems this is essentially what made SVB insolvent.
- loopdoend 4y ago
  They are solvent unless they have to suddenly sell the bonds, in which case they are worth less now than at maturity.

lend000 4y ago

At least in the modern economy, people aren't running to withdraw cash. They just transfer it to another bank. So the strongest major banks are probably impervious to runs, because if there is a general panic (rather than a panic at a specific bank), it will result in a dilution of funds between a number of major banks, rather than a net exodus of funds from the banking system.

twblalock 4y ago
From the point of view of an individual bank it doesn't matter if the money stays "in the system." The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes. For any large bank, there is an amount of withdrawals that can take it out. And that amount is nowhere near 100% of deposits.
- lend000 4y ago
  > The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes. As I specified in my original comment, a systemic panic, rather than a specific panic at a single bank would result in mass withdrawals, but a roughly equal number of deposits (from panic withdrawals from other banks), because we live in a largely cashless society. That is the point. The system isn't crashing down. A niche bank like SVB was always more liable to have a run and should have been better capitalized than a normal bank. This is because probably close to 100% of their clients had other primary bank accounts that they could instantly transfer funds to, whereas an exodus from something like Wells Fargo would require tons of people to set up a new bank account.

hristov 4y ago

Silicon Valley bank was a healthy bank so you have your answer there. It is well known that no bank can survive a run on it, even if it is healthy. That is why the FDIC was started. Regarding the CEO, one has to keep in mind that the CEO is responsible for being honest towards the shareholders as well as for keeping his bank solvent. He also has to disclose any material risk to the shareholders in a timely manner. Well it is easy to see this was a material risk. It is difficult to say what the CEO could have done better. If he said the bank is absolutely fine and it was impossible for it to fail to pay depositors, and the bank still failed, then the shareholders would have sued him. I think he got in trouble when he tried to call on the community spirit of silicon valley. When he said that his customers should support the bank as the bank has supported them. He should have known that kind of call for community spirit and non-contractually obligated decency would ring alarm bells in the minds of a bunch of silicon valley CEOs. And Peter Thiel. I think the lesson to learn here is that perhaps the FDIC insurance limits should go up. The FDIC has done a great job in ensuring ordinary people that their bank accounts are safe, as ordinary people usually keep less than 250K in their accounts. But, businesses tend to keep much more. And some venture funded tech businesses tend to keep even more. And silicon valley bank was unique in that most of its deposits were from venture funded tech businesses. So while the FDIC insurance does generally prevent runs on banks by ordinary people, it does nothing for businesses. As far as a business with 20 million in the bank was concerned, most of their money is at risk and the situation is not that different as it would have been 100 years ago in the 1920s. And thus, the very painful process of a bank panic happened to silicon valley bank just like it used to happen to old US banks back in the 20s and 30s, before FDR created the FDIC. So I think the government should seriously consider expanding the FDIC insurance to higher levels, perhaps in exchange for additional fees.

dehrmann 4y ago
> I think the lesson to learn here is that perhaps the FDIC insurance limits should go up. 100% this. $250k is reasonable enough for most individuals, but it's far too low for businesses. You don't want people worrying about if their paycheck will clear and companies going under because a traditional bank failed.
- 4y ago