5 ms·

> Why not just hold them > If there is a run If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. T

> Why not just hold them > If there is a run If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.

eastbound 4y ago
Can’t they just not honor the run, so that they can honor it in the long term, rather than selling at a loss and not being able to honor 20% of them?
- salawat 4y ago
  No. That's theft. That's not how deposits work. You lend out on shorter terms than you figure your depositor will need and pray they don't need it back. If they all do though, you're screwed. It's statistical multiplexing as applied to piles of other people's money.
  - tome 4y ago
    Are there some legal terms preventing limiting withdrawls? If not it seems like there should be, exactly to cope with the risk of runs! [EDIT: corrected "limiting withdrawls" to "preventing limiting withdrawls"]
    - alistairSH 4y ago
      [simplified explanationfollows] No, the inverse. Banks are required to keep a % of deposits available in cash, another % in easily sellable assets, etc (lots of regulations here, esp post 2008 crisis, though the US exempted community banks from the new rules, which contributes to the current crisis) in order to reduce the risk that a bank run puts them out of business. But a big run can exceed those safeguards, as appears to be the case here. The bank can’t offload enough investments to meet withdrawal demands.
      - tome 4y ago
        Sorry, I meant is there a law preventing limiting withdrawls. If not, I don't see why banks don't just do that, when subject to a run, so I guess there must be. In other words, the government says that deposits must be always withdrawlable immediately on request, which seems like a surefire recipe for runs.
        akiselev 4y ago
        IANAL but my layman’s understanding is no, there is no law preventing them from halting withdrawals and a temporary suspension can on rare occasions stop a bank run. Problem is, clients can sue to get their withdrawals and the judge in charge of the case can force the business into involuntary bankruptcy proceedings (without the protection of voluntary bankruptcy) if they think the bank can’t meet the withdrawals in full, to get a valuation of its assets so that the plaintiffs can be made whole. This won’t happen over the weekend because courts aren’t in session but can happen on a week or two timescale, in which case the business is basically frozen for months while everyone fights over a half dead carcass. It’s a relatively catastrophic outcome for everyone involved.
        salawat 4y ago
        Normally contract law. You select an account offering with different procedures for liquidation. A demand deposit or checking accound has little or no notice. A money market may take a day or so for underlying assets to be exited. CoD's and such typically don't even have the option for withdrawal. You just have to wait for maturation. Point is, you know this when you open the account. They should take great pains to ensure you understand the instrument... And to manage things appropriately, which apparently, SVB did not.

eastbound 4y ago

Can’t they just not honor the run, so that they can honor it in the long term, rather than selling at a loss and not being able to honor 20% of them?

salawat 4y ago
No. That's theft. That's not how deposits work. You lend out on shorter terms than you figure your depositor will need and pray they don't need it back. If they all do though, you're screwed. It's statistical multiplexing as applied to piles of other people's money.
- tome 4y ago
  Are there some legal terms preventing limiting withdrawls? If not it seems like there should be, exactly to cope with the risk of runs! [EDIT: corrected "limiting withdrawls" to "preventing limiting withdrawls"]
  - alistairSH 4y ago
    [simplified explanationfollows] No, the inverse. Banks are required to keep a % of deposits available in cash, another % in easily sellable assets, etc (lots of regulations here, esp post 2008 crisis, though the US exempted community banks from the new rules, which contributes to the current crisis) in order to reduce the risk that a bank run puts them out of business. But a big run can exceed those safeguards, as appears to be the case here. The bank can’t offload enough investments to meet withdrawal demands.
    - tome 4y ago
      Sorry, I meant is there a law preventing limiting withdrawls. If not, I don't see why banks don't just do that, when subject to a run, so I guess there must be. In other words, the government says that deposits must be always withdrawlable immediately on request, which seems like a surefire recipe for runs.
      - akiselev 4y ago
        IANAL but my layman’s understanding is no, there is no law preventing them from halting withdrawals and a temporary suspension can on rare occasions stop a bank run. Problem is, clients can sue to get their withdrawals and the judge in charge of the case can force the business into involuntary bankruptcy proceedings (without the protection of voluntary bankruptcy) if they think the bank can’t meet the withdrawals in full, to get a valuation of its assets so that the plaintiffs can be made whole. This won’t happen over the weekend because courts aren’t in session but can happen on a week or two timescale, in which case the business is basically frozen for months while everyone fights over a half dead carcass. It’s a relatively catastrophic outcome for everyone involved.
      - salawat 4y ago
        Normally contract law. You select an account offering with different procedures for liquidation. A demand deposit or checking accound has little or no notice. A money market may take a day or so for underlying assets to be exited. CoD's and such typically don't even have the option for withdrawal. You just have to wait for maturation. Point is, you know this when you open the account. They should take great pains to ensure you understand the instrument... And to manage things appropriately, which apparently, SVB did not.