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It can be both true that there should be consequences for mismanagement of banks, and that SVB deposits should be guaranteed. The answer is better banking regul

It can be both true that there should be consequences for mismanagement of banks, and that SVB deposits should be guaranteed. The answer is better banking regulation, but that's forward-looking so something has to be done about companies making payroll now. Letting a thousand other businesses fail because bankers mismanaged their funds isn't a useful set of consequences for ensuring this doesn't happen again.

amanaplanacanal 4y ago
Wouldn’t that incentivize businesses doing a better job choosing their banking partners?
- DougN7 4y ago
  Probably not. Business owners are running a business, not doing deep research on their bank (one of the larger ones!), their electric company, the water and sewage company, the landlord, printer supplies company, caterer, ISP, all cloud providers, lawyers, accountants, etc, etc, etc. A small amount of due diligence sure, but not the amount and then constant monitoring of all of those to have known this was coming.
  - diceduckmonk 4y ago
    > owners are running a business, not doing deep research on their bank People buy index funds so that they don’t need to do deep research on individual companies.
    - thfuran 4y ago
      Typically without even researching whether whoever is managing the fund is actually allocating to follow the index.
- akvadrako 4y ago
  Or paying for private insurance in case their bank collapses.
mc32 4y ago
As a layman, I thought stress tests were done on some regularity and were supposed to pick up weaknesses like the ones experienced by SVB. Is little more than a figleaf that only exposes egregious malfeasance? And, how can not having a CRO not be a critical issue for a bank? I understand another officer in the UK was taking on those duties but apparently they were busy with other roles and didn't give the CRO role the importance it deserved.
- alephnerd 4y ago
  SVB was exempt from a lot of the post-2008 stress tests because they were not a National Bank (aka they got their license/charter and everything from CA's Banking Regulators). It's an open secret that state banking regulators are much more lax than Federal Regulators (eg. Basel III exemption). This is a big reason why almost all the post-GFC bank collapses are all State Chartered Banks.
  - mc32 4y ago
    Huh! That is quite interesting, thanks! I wonder if the Feds will now take a deeper interest in more direct oversight of these banks given the seriousness of the issues that were allowed occur under this climate.
    - alephnerd 4y ago
      Federal Regulators wanted to push greater oversight into State Charters during the GFC as well, but due to Federalism they couldn't push it as much. That was a big reason why they pushed regional banks to be acquired by National Charter banks during that fiasco. Because of the limits of American Federalism, it's easier to use M&A driven consolidation to make the banking industry more robust in the US than by dealing with 55 different legislatures (50 states and the 5 territories). If you want to have a rough feel of dealing with local charters I'd recommend seeing the whole Mesa Verde storyline in Better Call Saul - (spoilers) the whole reason Kim Wexler was hired to work with them was because that local NM bank wanted to expand into other states and as such needed to get a charter in other adjacent states like TX, AZ, UT, CO, etc.
rayiner 4y ago
If it’s true that all deposits should be guaranteed, why doesn’t the FDIC make that the policy instead of $250,000?
- roflyear 4y ago
  That requires congress
  - ericmay 4y ago
    Sure but then if the limit is $250,000 and it requires an act of Congress to raise it how is the FDIC guaranteeing more than that? I know the answer is that they are leveraging a fee across firms, but then it looks like practically the backstop is unlimited while the on paper there is a limit. Overall just not great there.
    - roflyear 4y ago
      The effective limit is infinite apparently, but since that can change at the whims of the government (rather than being a requirement) people are looking to increase the limit.
    - credit_guy 4y ago
      It looks to me the Fed identified and used some corner case in the law (feel free to substitute loophole for corner case if you wish). During the early weeks of Covid, I was amazed how quickly the Fed created new tools to address the financial crisis that was unfolding [1]. Although I interacted with Fed regulators, I was not close enough to ask them if they pulled all-nighters. It would not surprise me if they did. In fact, that was the only plausible explanation I could find, either that, or some of them are 10x guys. President Biden just gave an address [2] saying that the Fed will work with the Congress to make sure the situation will not repeat. So, yes, you are right, increasing the limit will require an act of Congress, and this will come, but it will take some time. Until then, the new "infinite limit" will be de facto, but not de jure. [1] https://www.americanactionforum.org/insight/timeline-the-federal-reserve-responds-to-the-threat-of-coronavirus/ https://www.americanactionforum.org/insight/timeline-the-fed... [2] https://www.youtube.com/watch?v=dLVbVqqsXF8 https://www.youtube.com/watch?v=dLVbVqqsXF8

amanaplanacanal 4y ago

Wouldn’t that incentivize businesses doing a better job choosing their banking partners?

DougN7 4y ago
Probably not. Business owners are running a business, not doing deep research on their bank (one of the larger ones!), their electric company, the water and sewage company, the landlord, printer supplies company, caterer, ISP, all cloud providers, lawyers, accountants, etc, etc, etc. A small amount of due diligence sure, but not the amount and then constant monitoring of all of those to have known this was coming.
- diceduckmonk 4y ago
  > owners are running a business, not doing deep research on their bank People buy index funds so that they don’t need to do deep research on individual companies.
  - thfuran 4y ago
    Typically without even researching whether whoever is managing the fund is actually allocating to follow the index.
akvadrako 4y ago
Or paying for private insurance in case their bank collapses.

mc32 4y ago

As a layman, I thought stress tests were done on some regularity and were supposed to pick up weaknesses like the ones experienced by SVB. Is little more than a figleaf that only exposes egregious malfeasance? And, how can not having a CRO not be a critical issue for a bank? I understand another officer in the UK was taking on those duties but apparently they were busy with other roles and didn't give the CRO role the importance it deserved.

alephnerd 4y ago
SVB was exempt from a lot of the post-2008 stress tests because they were not a National Bank (aka they got their license/charter and everything from CA's Banking Regulators). It's an open secret that state banking regulators are much more lax than Federal Regulators (eg. Basel III exemption). This is a big reason why almost all the post-GFC bank collapses are all State Chartered Banks.
- mc32 4y ago
  Huh! That is quite interesting, thanks! I wonder if the Feds will now take a deeper interest in more direct oversight of these banks given the seriousness of the issues that were allowed occur under this climate.
  - alephnerd 4y ago
    Federal Regulators wanted to push greater oversight into State Charters during the GFC as well, but due to Federalism they couldn't push it as much. That was a big reason why they pushed regional banks to be acquired by National Charter banks during that fiasco. Because of the limits of American Federalism, it's easier to use M&A driven consolidation to make the banking industry more robust in the US than by dealing with 55 different legislatures (50 states and the 5 territories). If you want to have a rough feel of dealing with local charters I'd recommend seeing the whole Mesa Verde storyline in Better Call Saul - (spoilers) the whole reason Kim Wexler was hired to work with them was because that local NM bank wanted to expand into other states and as such needed to get a charter in other adjacent states like TX, AZ, UT, CO, etc.

rayiner 4y ago

If it’s true that all deposits should be guaranteed, why doesn’t the FDIC make that the policy instead of $250,000?

roflyear 4y ago
That requires congress
- ericmay 4y ago
  Sure but then if the limit is $250,000 and it requires an act of Congress to raise it how is the FDIC guaranteeing more than that? I know the answer is that they are leveraging a fee across firms, but then it looks like practically the backstop is unlimited while the on paper there is a limit. Overall just not great there.
  - roflyear 4y ago
    The effective limit is infinite apparently, but since that can change at the whims of the government (rather than being a requirement) people are looking to increase the limit.
  - credit_guy 4y ago
    It looks to me the Fed identified and used some corner case in the law (feel free to substitute loophole for corner case if you wish). During the early weeks of Covid, I was amazed how quickly the Fed created new tools to address the financial crisis that was unfolding [1]. Although I interacted with Fed regulators, I was not close enough to ask them if they pulled all-nighters. It would not surprise me if they did. In fact, that was the only plausible explanation I could find, either that, or some of them are 10x guys. President Biden just gave an address [2] saying that the Fed will work with the Congress to make sure the situation will not repeat. So, yes, you are right, increasing the limit will require an act of Congress, and this will come, but it will take some time. Until then, the new "infinite limit" will be de facto, but not de jure. [1] https://www.americanactionforum.org/insight/timeline-the-federal-reserve-responds-to-the-threat-of-coronavirus/ https://www.americanactionforum.org/insight/timeline-the-fed... [2] https://www.youtube.com/watch?v=dLVbVqqsXF8 https://www.youtube.com/watch?v=dLVbVqqsXF8