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I agree, and I see three fallouts from this event: - Yellen folded fast, so the market will test her again (moral hazard) - Powell will hesitate to raise rate

I agree, and I see three fallouts from this event: - Yellen folded fast, so the market will test her again (moral hazard) - Powell will hesitate to raise rates further, concerned about hidden stresses building up in the system. This was basic duration risk, and the fact that they missed it entirely will raise the worry of what else they are missing. - FDIC will probably have to be reformed. You cannot guarantee everything, all the time. Maybe an opt in system where large depositors can buy individual coverage.

qwytw 4y ago
> FDIC will probably have to be reformed Why? Isn't the guaranteed deposits above 250k mainly 'insured' through Fed offering unlimited loans back by the nominal price of bonds owned by affected banks?
- BlandDuck 4y ago
  I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount. This doesn't work. The only way to draw a new line in the sand is some sort of reform. The key issue is that the new line has to be "subgame perfect", meaning it has to be credible that if a bank steps over the new line, it will not simply be bailed out again.
  - unityByFreedom 4y ago
    Yes, now I wonder if anyone is allowed to fail. David Sacks complained that if the regionals aren't protected, then everyone will only bank with the big four. Yet if everyone is protected even when the bank makes poor decisions, that's a run on the FDIC itself. So as you say, where is this new line, and who can be trusted to allow those who cross it to fail?
    - A4ET8a8uTh0 4y ago
      << Yes, now I wonder if anyone is allowed to fail. That was one of the questions on the call/presentation I was recently on and no one has a clear answer at the moment ( I suppose it is not a surprise since we can't take Yellen at her word ). Some clarity will be needed and sooner rather than later if stated policy and rules are to be believed to be real policy and rules. FWIW, odds are, just about every bank by now has either reviewed or scrambling to review their exposure. I do not envy the weight of Yellen's decisions, because from where I sit it is still hard to tell if it was a 'less bad choice' available.
      - unityByFreedom 4y ago
        > odds are, just about every bank by now has either reviewed or scrambling to review their exposure The lesson they learned is to shout global emergency when your regional bank can't meet withdrawals due to poorly managed finances. Banks will not be more prudent, in the long run. They've just been taught that the government will protect depositors beyond federally insured limits. So now they can make riskier bets.
    - zaroth 4y ago
      Keep in mind that SVB equity was totally wiped out. Everyone most certainly was not protected. The people who make the poor decisions absolutely took a hit. The Board and management of the bank all took a hit and lost their jobs. I don’t see a big problem with depositors being made whole. The bonds that backed their deposits are fully intact.
      - UncleEntity 4y ago
        > The Board and management of the bank all took a hit and lost their jobs. Right after they cashed out significant amounts of SVB stocks.
        webmaven 4y ago
        Don't be too surprised if the FDIC (or perhaps the SEC, since we're talking about equity) forces clawbacks of those payouts, not to mention salary and bonuses in general after December 2021.
  - phh 4y ago
    > I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount. If rich people think that, I think they deserve to be taxed at more than 80%, because that's stupid. FDIC move was perfectly rational and cost-optimized. Had they not done that, there would have been more bank runs, and they would have to actually pay out 250k/account on many more accounts than just SVB's, while ""saving"" SVB cost almost nothing.
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    - dbfx 4y ago
      You yourself just explained the reasoning as to why they would think that and seem to agree as well, not sure why you'd call it stupid.
  - rexreed 4y ago
    The simplest answer is "excess deposits insurance". Banks (or third-party insurers) could charge a monthly insurance fee for balances over $250k that provides insurance over the FDIC $250k cap. This allows everyone else under the $250k cap to bank without paying fees (the bank already paying insurance on those as per FDIC), and provides greater coverage to those above the cap. Think of it like an Umbrella Insurance policy. Some banks might provide the insurance for their most favored clients if they so choose, or embed the insurance inside other services.
    - pjc50 4y ago
      > Banks charge a monthly insurance fee for balances over $250k that provides FDIC insurance over the $250k cap The thing is .. the FDIC is already funded by banks. https://www.fdic.gov/about/what-we-do/index.html https://www.fdic.gov/about/what-we-do/index.html "The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage. The FDIC insures trillions of dollars of deposits in U.S. banks and thrifts - deposits in virtually every bank and savings association in the country." How the banks choose to pass that cost on to customers/shareholders is up to them. It's instructive to read https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022dec/qbp.pdf https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/... for the last available quarter; the insurance fund is on page 24. I can quote you two numbers and you can decide whether they are big or small: there is $128 billion in the fund, and this covers 1.27% of total US banking deposits.
      - rexreed 4y ago
        Yes that's correct. I'm suggesting an additional fee that is paid by the account holder who holds excess funds above the amounts that are already covered by the bank in their fees for FDIC insurance coverage. I'm aware of the existing bank-paid insurance that covers the mandatory $250k FDIC coverage up to the cap. The difference that I am suggesting is that the umbrella insurance is paid by the account holder to the bank for excess insurance coverage. This allows insurance coverage for account holders over $250k, of which there is no insurance coverage, optional or of any kind, available today.
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TheAlchemist 4y ago
Agree with 1 and 3. Not with 2 though. The BTFP (not to be confused with BTFD :) ) program is removing completely the duration risk (for a year). This lets the FED raise the rates as high as they want without putting banks balance sheets at risk (barred some other unforeseen consequences).
apercu 4y ago
If we have to buy insurance to insure our money, the financial sector will just game that, too, and make even riskier bets. That we (taxpayers) end up paying for.
- Eddy_Viscosity2 4y ago
  This is the gaming of the system that is resulting in the government FULLY covering the bets of the rich. They could have bought insurance, but running a bank is cheaper.
- gwd 4y ago
  Not necessarily. If insurance companies were allowed to set prices based on the bank you're deposited with, then what's currently a political process could become a market-based process. Have assets that are exposed to interest rate hikes? Higher insurance rates. Have assets that hedge against changes in the interest rate? Lower deposit insurance rates. Won't let us see your asset mix? Assume the worst case scenario. So in this universe, when you go to get insurance at SVB, you see that it costs you 1% per year, which seems high to you. You go to the insurance company's website, and see that insurance for Chase is only 0.5%, so you switch to them instead. SVB is pressured to change to a less risky strategy by the market, not b the government. (NB I'm not a libertarian, nor am I recommending this approach; I'm just saying that in theory such a system could work.) EDIT: Upon reflection, this might just punt the issue down the road: Suppose SVDI (Silicon Valley Deposit Insurance) gives you a rate of 0.1% per year at SVB. Everything is fine until SVB fails, and then it turns out SVDI didn't have enough capital to back their insurance, and you lose anyway. Maybe there are ways you could fix this, but my preliminary conclusion would be that you need some kind of regulation somewhere.
  - nradov 4y ago
    You can sort of fix this in a free market system through reinsurance which spreads the risk out across multiple counterparties with deep capital reserves. But ultimately the only way to eliminate the risk is through insurance by a sovereign with the ability to levy taxes and print fiat currency.
  - 4y ago
logifail 4y ago
> where large depositors can buy individual coverage Q: Aren't large depositors already free to buy individual coverage from whomever offers it?
- UncleEntity 4y ago
  FDIC basically forces all depositors to have insurance in a generalistic hand-wavy way. Seems we also need to force others to have insurance because they can’t be bothered and will just get bailed out — next time probably with taxpayer dollars.
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tomp 4y ago
Well then there’s 4: The regulators failed massively, allowing banks to mask their duration losses. Obviously this needs to change, but they probably need to fix the other banks first (that are still hiding their losses).
- adolph 4y ago
  Did SVB do anything irregularly? How would the pre-2018 regulations have changed anything?
  - tomp 4y ago
    From what I’ve read, they would have to mark the portfolio to market (i.e. report its value in terms of current market prices), not say “we intend to hold this to maturity” and account it at face value. Like, the latter actually makes more sense to me, but only if you actually don’t need to sell which might be true for a university endowment (all assets, no liabilities or at least very predictable liabilities) not for a hedging institution.
    - zeroonetwothree 4y ago
      Wouldn’t it have just made them insolvent earlier then? How does it actually prevent the problem?
      - matt_morgan 4y ago
        Requiring that they provide more information earlier encourages them to behave more safely (by exposing them to scrutiny backed by sound evidence). And if they still go down, at least it happened sooner and there are fewer depositors to be harmed.
      - chowchowchow 4y ago
        Not necessarily, since the gap in finances accumulated over time. They would have had to acknowledge asset price drops on their balance sheet much sooner. Basically they were allowed to build up a bigger integration risk with their accounting if they ever did have to sell due to not having to MTM in the mean time.
pclmulqdq 4y ago
Yellen has always been too quick to fold, and we saw that in her time as fed chair. Wall Street and silicon Valley insiders know this, which might be why they immedieately tried to put their PR campaign's focus on her (rather than Jerome Powell, who is a little bit steadier at the poker table).
- alecco 4y ago
  Yellen was the 11th President of the SF Fed [1] and the current president is her protégé [2]. Greg Becker (SVB CEO & president) was in SF Fed board of directors until Friday [2]. He successfully lobbied for less regulations for his bank. The SF Fed looked the other way. [1] https://en.wikipedia.org/wiki/Janet_Yellen https://en.wikipedia.org/wiki/Janet_Yellen [2] https://en.wikipedia.org/wiki/Mary_C._Daly https://en.wikipedia.org/wiki/Mary_C._Daly [3] https://www.reuters.com/markets/us/ceo-failed-silicon-valley-bank-no-longer-director-sf-fed-2023-03-10/ https://www.reuters.com/markets/us/ceo-failed-silicon-valley...
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- RayVR 4y ago
  Are you a trader? I traded global rates markets from 2012-2020 and yellen was probably the best central bank head I saw. She was the most stable and consistent. I would argue she was the least beholden to market pressure out of any bank head, except perhaps Draghi, who just did not care much the last couple years. She was also the least likely to react to congress or press questions and cause unnecessary market volatility.
  - AdamN 4y ago
    Yeah this previous comment is probably just good ol' fashioned misogyny. There's no consensus that Yellen is quick to fold from the previous crisis - these people also have real responsibilities so it's not necessarily 'folding' anyway to respond to stakeholders.
kingkawn 4y ago
Yellen “folded” bc risking the broader financial system in order to give it hard to a bunch of tech bros is itself a hazard of moralizing.
mihaaly 4y ago
Changing the rules during the game (full deposit insurance, one off advantageous loans to troubled banks) also erodes the moral by standing firmly behind reckless and risky (risky for the masses not self!) behaviour and entities, unlike the rest! For the rest the ordinary rules apply. Rules don't metter from now on or what?!
- AdamN 4y ago
  They didn't change any rules - they just followed the processes they already had - which was to declare the bank systemically important.
  - mihaaly 4y ago
    Tell it to other cases where deposits are lost above the insurance limit, tell them please to their face that the rules are the same and not changed ad-hoc.
    - travisjungroth 4y ago
      I would, but I’ve been looking for a case where were over the limit deposits were lost and can’t find one. Also, if it’s before 2008, the laws were significantly changed and the rules wouldn’t be the same but not ad hoc either.
      - mihaaly 4y ago
        Except that there were no blanket federal guarantee in previous failures BEFORE some private institution acquired the remians of the failed bank and just then they CHOSE standing for full the deposit if they thought so (most of the cases). Not always, not for everyone. Private cas to case agreement not new central rule! The rule was only up to the limits of insurance and so The Enloe State Bank, Covenant Bank, NOVA Bank, Jasper Banking Company, Eastern Shore, Home Savings of America, and several more (all after 2008) where clients did not have the balance above the insurance limit. Do you have some incentive here attempting to mislead?
- 4y ago
User23 4y ago
> You cannot guarantee everything, all the time. Why not? What’s keeping the Fed from working with Treasury and the FDIC to provide unlimited liquidity as needed for deposits? No doubt there will be higher order consequences, but I don’t know of any operational reason why it isn’t possible so long as the current monetary regime exists at all.
gizmo 4y ago
Powell and Yellen put a system in place over the weekend where all banks can borrow against their bonds at par, thereby preventing any other bank runs. The duration problem is that banks have bonds/CDOs on their books marked-to-maturity, but when faced with outflows banks are forced to sell them at market prices (much lower because interest rates went up). This turns an illiquidity problem into an insolvency problem if a bank bought too many low interest long duration bonds. Last week, when a bank had balance sheet consisting of bonds with a market price of $75 but valued at $100 marked-to-maturity they would get into trouble when faced with too many withdrawals. Today, they can borrow $100 from the Fed at a modest interest rate with the bond worth $75 as collateral. This fixes the bank run problem, because the bank can go to the fed to get the money they need to cover any outflows. This deal only covers quality bonds and only those bought before last week. This fix is not an invitation to start lending recklessly, it's just a stopgap measure to allow banks to lose money slowly on the bad debt they already have. This all means Powell can continue to raise interest rates without having to worry too much about bank failures.
- bcrl 4y ago
  So, the solution to bad assets is more debt? How are the banks going to cover that debt when their customers are fleeing and interest rates are rising? I fear this is only kicking the can down the road by a few months (or years) before even worse fallout occurs when the failed banks have to make substantially larger interest payments. Edit: a better term might be Zombie Banks.
  - mnky9800n 4y ago
    Welcome to Japan circa 1990s which is now why Japan has the economy it does today.
  - gizmo 4y ago
    The idea is that when customers know a bank has effectively an unlimited line of credit to pay for outflows that there is no reason to panic. Conceptually, the credit line works perfectly even if it's never used. I agree it's not a solution, but it's smart and effective stopgap measure.
Ntrails 4y ago
> - FDIC will probably have to be reformed. You cannot guarantee everything, all the time You absolutely can (should is the question)? The second question is whether you want depositors to care about the financial health of their banks or not. I'm on the no side of that conversation. So you let regulation take care of the capital requirements and so on whilst allowing people to feel safe with deposits.
- MrMan 4y ago
  its impossible to guarantee all deposits
  - pandemicsoul 4y ago
    Not for the United States government, the issuer of fiat currency. They can guarantee all deposits. Money is a concept.
bryanlarsen 4y ago
> You cannot guarantee everything, all the time. But it's not everything, not even close. It's only the amounts deposited in the standard class of bank accounts. Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents. It's certainly feasible and possible to have the "risk" part of the bottom of the risk-reward curve to be at the same level as the viability of the federal government. The risk isn't quite 0, but if the federal government collapses you have bigger problems anyways. Especially in a high interest rate environment. Bank accounts essentially have a 0% nominal rate, which in a high interest rate environment is a very negative real rate so there is lots of margin for implicit or explicit insurance.
- pjc50 4y ago
  > Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents. https://www.nytimes.com/2023/03/13/business/svb-collapse-companies.html https://www.nytimes.com/2023/03/13/business/svb-collapse-com... "Roku, the maker of the streaming media player, said in a U.S. Securities and Exchange Commission filing on Friday that roughly $487 million, or 26 percent, of its $1.9 billion in cash was tied up with Silicon Valley Bank" (this was not very clever of them! But it seems to have been encouraged among the SV community?)
- JumpinJack_Cash 4y ago
  > > Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents. Companies above a certain treshold (and all citizens for that matter) should be able to bank with the Fed, and have peace of mind that the money they deposit there is not being put to work in any way, shape or form. What developed over the last week is a victory for those who long for CBDCs .
  - isignal 4y ago
    Companies can already buy recurring 3 month treasuries to hold their cash.
  - 4y ago
scotty79 4y ago
> FDIC will probably have to be reformed. You cannot guarantee everything, all the time. Why can't you when you can literally print money? Just banks will have to be forced to pick up the tab for that, by limiting their money printing ability so that in case of emergency it can be safely printed. Dollar deposits in a bank should be 100% safe operation regardless of the amount. And investors can burn. Every investor is reaponsible for their own risk.
hef19898 4y ago
Ever since the initial Covid shock wore off, this whole thing just feels like 2008 in slow motion.
- lamontcg 4y ago
  2008 started back in 2006 and wasn't done until 2009
PaulDavisThe1st 4y ago
> FDIC will probably have to be reformed. You cannot guarantee everything, all the time. FDIC does not guarantee everything all the time, that's the whole reason for what happened at these banks being controversial.
RayVR 4y ago
Yellen folded? What does this really mean? The “market” will test her how? The market is only interested in pnl. Insolvent banks are a great place to make a trade. Hardline central bank policy (Japan) would be a place to make a trade. Treasury secretary and deposit insurance? I don’t know what you see there.

qwytw 4y ago

> FDIC will probably have to be reformed Why? Isn't the guaranteed deposits above 250k mainly 'insured' through Fed offering unlimited loans back by the nominal price of bonds owned by affected banks?

BlandDuck 4y ago
I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount. This doesn't work. The only way to draw a new line in the sand is some sort of reform. The key issue is that the new line has to be "subgame perfect", meaning it has to be credible that if a bank steps over the new line, it will not simply be bailed out again.
- unityByFreedom 4y ago
  Yes, now I wonder if anyone is allowed to fail. David Sacks complained that if the regionals aren't protected, then everyone will only bank with the big four. Yet if everyone is protected even when the bank makes poor decisions, that's a run on the FDIC itself. So as you say, where is this new line, and who can be trusted to allow those who cross it to fail?
  - A4ET8a8uTh0 4y ago
    << Yes, now I wonder if anyone is allowed to fail. That was one of the questions on the call/presentation I was recently on and no one has a clear answer at the moment ( I suppose it is not a surprise since we can't take Yellen at her word ). Some clarity will be needed and sooner rather than later if stated policy and rules are to be believed to be real policy and rules. FWIW, odds are, just about every bank by now has either reviewed or scrambling to review their exposure. I do not envy the weight of Yellen's decisions, because from where I sit it is still hard to tell if it was a 'less bad choice' available.
    - unityByFreedom 4y ago
      > odds are, just about every bank by now has either reviewed or scrambling to review their exposure The lesson they learned is to shout global emergency when your regional bank can't meet withdrawals due to poorly managed finances. Banks will not be more prudent, in the long run. They've just been taught that the government will protect depositors beyond federally insured limits. So now they can make riskier bets.
  - zaroth 4y ago
    Keep in mind that SVB equity was totally wiped out. Everyone most certainly was not protected. The people who make the poor decisions absolutely took a hit. The Board and management of the bank all took a hit and lost their jobs. I don’t see a big problem with depositors being made whole. The bonds that backed their deposits are fully intact.
    - UncleEntity 4y ago
      > The Board and management of the bank all took a hit and lost their jobs. Right after they cashed out significant amounts of SVB stocks.
      - webmaven 4y ago
        Don't be too surprised if the FDIC (or perhaps the SEC, since we're talking about equity) forces clawbacks of those payouts, not to mention salary and bonuses in general after December 2021.
- phh 4y ago
  > I should have explained better. My sense is that right now there is an implicit expectation in the market that the 250k threshold is no longer relevant, and that the FDIC is implicitly insuring everything that looks remotely like a deposit, regardless of the amount. If rich people think that, I think they deserve to be taxed at more than 80%, because that's stupid. FDIC move was perfectly rational and cost-optimized. Had they not done that, there would have been more bank runs, and they would have to actually pay out 250k/account on many more accounts than just SVB's, while ""saving"" SVB cost almost nothing.
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  - dbfx 4y ago
    You yourself just explained the reasoning as to why they would think that and seem to agree as well, not sure why you'd call it stupid.
- rexreed 4y ago
  The simplest answer is "excess deposits insurance". Banks (or third-party insurers) could charge a monthly insurance fee for balances over $250k that provides insurance over the FDIC $250k cap. This allows everyone else under the $250k cap to bank without paying fees (the bank already paying insurance on those as per FDIC), and provides greater coverage to those above the cap. Think of it like an Umbrella Insurance policy. Some banks might provide the insurance for their most favored clients if they so choose, or embed the insurance inside other services.
  - pjc50 4y ago
    > Banks charge a monthly insurance fee for balances over $250k that provides FDIC insurance over the $250k cap The thing is .. the FDIC is already funded by banks. https://www.fdic.gov/about/what-we-do/index.html https://www.fdic.gov/about/what-we-do/index.html "The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage. The FDIC insures trillions of dollars of deposits in U.S. banks and thrifts - deposits in virtually every bank and savings association in the country." How the banks choose to pass that cost on to customers/shareholders is up to them. It's instructive to read https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022dec/qbp.pdf https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/... for the last available quarter; the insurance fund is on page 24. I can quote you two numbers and you can decide whether they are big or small: there is $128 billion in the fund, and this covers 1.27% of total US banking deposits.
    - rexreed 4y ago
      Yes that's correct. I'm suggesting an additional fee that is paid by the account holder who holds excess funds above the amounts that are already covered by the bank in their fees for FDIC insurance coverage. I'm aware of the existing bank-paid insurance that covers the mandatory $250k FDIC coverage up to the cap. The difference that I am suggesting is that the umbrella insurance is paid by the account holder to the bank for excess insurance coverage. This allows insurance coverage for account holders over $250k, of which there is no insurance coverage, optional or of any kind, available today.
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TheAlchemist 4y ago

Agree with 1 and 3. Not with 2 though. The BTFP (not to be confused with BTFD :) ) program is removing completely the duration risk (for a year). This lets the FED raise the rates as high as they want without putting banks balance sheets at risk (barred some other unforeseen consequences).

apercu 4y ago

If we have to buy insurance to insure our money, the financial sector will just game that, too, and make even riskier bets. That we (taxpayers) end up paying for.

Eddy_Viscosity2 4y ago
This is the gaming of the system that is resulting in the government FULLY covering the bets of the rich. They could have bought insurance, but running a bank is cheaper.
gwd 4y ago
Not necessarily. If insurance companies were allowed to set prices based on the bank you're deposited with, then what's currently a political process could become a market-based process. Have assets that are exposed to interest rate hikes? Higher insurance rates. Have assets that hedge against changes in the interest rate? Lower deposit insurance rates. Won't let us see your asset mix? Assume the worst case scenario. So in this universe, when you go to get insurance at SVB, you see that it costs you 1% per year, which seems high to you. You go to the insurance company's website, and see that insurance for Chase is only 0.5%, so you switch to them instead. SVB is pressured to change to a less risky strategy by the market, not b the government. (NB I'm not a libertarian, nor am I recommending this approach; I'm just saying that in theory such a system could work.) EDIT: Upon reflection, this might just punt the issue down the road: Suppose SVDI (Silicon Valley Deposit Insurance) gives you a rate of 0.1% per year at SVB. Everything is fine until SVB fails, and then it turns out SVDI didn't have enough capital to back their insurance, and you lose anyway. Maybe there are ways you could fix this, but my preliminary conclusion would be that you need some kind of regulation somewhere.
- nradov 4y ago
  You can sort of fix this in a free market system through reinsurance which spreads the risk out across multiple counterparties with deep capital reserves. But ultimately the only way to eliminate the risk is through insurance by a sovereign with the ability to levy taxes and print fiat currency.
- 4y ago

logifail 4y ago

> where large depositors can buy individual coverage Q: Aren't large depositors already free to buy individual coverage from whomever offers it?

UncleEntity 4y ago
FDIC basically forces all depositors to have insurance in a generalistic hand-wavy way. Seems we also need to force others to have insurance because they can’t be bothered and will just get bailed out — next time probably with taxpayer dollars.
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tomp 4y ago

Well then there’s 4: The regulators failed massively, allowing banks to mask their duration losses. Obviously this needs to change, but they probably need to fix the other banks first (that are still hiding their losses).

adolph 4y ago
Did SVB do anything irregularly? How would the pre-2018 regulations have changed anything?
- tomp 4y ago
  From what I’ve read, they would have to mark the portfolio to market (i.e. report its value in terms of current market prices), not say “we intend to hold this to maturity” and account it at face value. Like, the latter actually makes more sense to me, but only if you actually don’t need to sell which might be true for a university endowment (all assets, no liabilities or at least very predictable liabilities) not for a hedging institution.
  - zeroonetwothree 4y ago
    Wouldn’t it have just made them insolvent earlier then? How does it actually prevent the problem?
    - matt_morgan 4y ago
      Requiring that they provide more information earlier encourages them to behave more safely (by exposing them to scrutiny backed by sound evidence). And if they still go down, at least it happened sooner and there are fewer depositors to be harmed.
    - chowchowchow 4y ago
      Not necessarily, since the gap in finances accumulated over time. They would have had to acknowledge asset price drops on their balance sheet much sooner. Basically they were allowed to build up a bigger integration risk with their accounting if they ever did have to sell due to not having to MTM in the mean time.

pclmulqdq 4y ago

Yellen has always been too quick to fold, and we saw that in her time as fed chair. Wall Street and silicon Valley insiders know this, which might be why they immedieately tried to put their PR campaign's focus on her (rather than Jerome Powell, who is a little bit steadier at the poker table).

alecco 4y ago
Yellen was the 11th President of the SF Fed [1] and the current president is her protégé [2]. Greg Becker (SVB CEO & president) was in SF Fed board of directors until Friday [2]. He successfully lobbied for less regulations for his bank. The SF Fed looked the other way. [1] https://en.wikipedia.org/wiki/Janet_Yellen https://en.wikipedia.org/wiki/Janet_Yellen [2] https://en.wikipedia.org/wiki/Mary_C._Daly https://en.wikipedia.org/wiki/Mary_C._Daly [3] https://www.reuters.com/markets/us/ceo-failed-silicon-valley-bank-no-longer-director-sf-fed-2023-03-10/ https://www.reuters.com/markets/us/ceo-failed-silicon-valley...
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RayVR 4y ago
Are you a trader? I traded global rates markets from 2012-2020 and yellen was probably the best central bank head I saw. She was the most stable and consistent. I would argue she was the least beholden to market pressure out of any bank head, except perhaps Draghi, who just did not care much the last couple years. She was also the least likely to react to congress or press questions and cause unnecessary market volatility.
- AdamN 4y ago
  Yeah this previous comment is probably just good ol' fashioned misogyny. There's no consensus that Yellen is quick to fold from the previous crisis - these people also have real responsibilities so it's not necessarily 'folding' anyway to respond to stakeholders.

kingkawn 4y ago

Yellen “folded” bc risking the broader financial system in order to give it hard to a bunch of tech bros is itself a hazard of moralizing.

mihaaly 4y ago

Changing the rules during the game (full deposit insurance, one off advantageous loans to troubled banks) also erodes the moral by standing firmly behind reckless and risky (risky for the masses not self!) behaviour and entities, unlike the rest! For the rest the ordinary rules apply. Rules don't metter from now on or what?!

AdamN 4y ago
They didn't change any rules - they just followed the processes they already had - which was to declare the bank systemically important.
- mihaaly 4y ago
  Tell it to other cases where deposits are lost above the insurance limit, tell them please to their face that the rules are the same and not changed ad-hoc.
  - travisjungroth 4y ago
    I would, but I’ve been looking for a case where were over the limit deposits were lost and can’t find one. Also, if it’s before 2008, the laws were significantly changed and the rules wouldn’t be the same but not ad hoc either.
    - mihaaly 4y ago
      Except that there were no blanket federal guarantee in previous failures BEFORE some private institution acquired the remians of the failed bank and just then they CHOSE standing for full the deposit if they thought so (most of the cases). Not always, not for everyone. Private cas to case agreement not new central rule! The rule was only up to the limits of insurance and so The Enloe State Bank, Covenant Bank, NOVA Bank, Jasper Banking Company, Eastern Shore, Home Savings of America, and several more (all after 2008) where clients did not have the balance above the insurance limit. Do you have some incentive here attempting to mislead?
4y ago

User23 4y ago

> You cannot guarantee everything, all the time. Why not? What’s keeping the Fed from working with Treasury and the FDIC to provide unlimited liquidity as needed for deposits? No doubt there will be higher order consequences, but I don’t know of any operational reason why it isn’t possible so long as the current monetary regime exists at all.

gizmo 4y ago

Powell and Yellen put a system in place over the weekend where all banks can borrow against their bonds at par, thereby preventing any other bank runs. The duration problem is that banks have bonds/CDOs on their books marked-to-maturity, but when faced with outflows banks are forced to sell them at market prices (much lower because interest rates went up). This turns an illiquidity problem into an insolvency problem if a bank bought too many low interest long duration bonds. Last week, when a bank had balance sheet consisting of bonds with a market price of $75 but valued at $100 marked-to-maturity they would get into trouble when faced with too many withdrawals. Today, they can borrow $100 from the Fed at a modest interest rate with the bond worth $75 as collateral. This fixes the bank run problem, because the bank can go to the fed to get the money they need to cover any outflows. This deal only covers quality bonds and only those bought before last week. This fix is not an invitation to start lending recklessly, it's just a stopgap measure to allow banks to lose money slowly on the bad debt they already have. This all means Powell can continue to raise interest rates without having to worry too much about bank failures.

bcrl 4y ago
So, the solution to bad assets is more debt? How are the banks going to cover that debt when their customers are fleeing and interest rates are rising? I fear this is only kicking the can down the road by a few months (or years) before even worse fallout occurs when the failed banks have to make substantially larger interest payments. Edit: a better term might be Zombie Banks.
- mnky9800n 4y ago
  Welcome to Japan circa 1990s which is now why Japan has the economy it does today.
- gizmo 4y ago
  The idea is that when customers know a bank has effectively an unlimited line of credit to pay for outflows that there is no reason to panic. Conceptually, the credit line works perfectly even if it's never used. I agree it's not a solution, but it's smart and effective stopgap measure.

Ntrails 4y ago

> - FDIC will probably have to be reformed. You cannot guarantee everything, all the time You absolutely can (should is the question)? The second question is whether you want depositors to care about the financial health of their banks or not. I'm on the no side of that conversation. So you let regulation take care of the capital requirements and so on whilst allowing people to feel safe with deposits.

MrMan 4y ago
its impossible to guarantee all deposits
- pandemicsoul 4y ago
  Not for the United States government, the issuer of fiat currency. They can guarantee all deposits. Money is a concept.

bryanlarsen 4y ago

> You cannot guarantee everything, all the time. But it's not everything, not even close. It's only the amounts deposited in the standard class of bank accounts. Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents. It's certainly feasible and possible to have the "risk" part of the bottom of the risk-reward curve to be at the same level as the viability of the federal government. The risk isn't quite 0, but if the federal government collapses you have bigger problems anyways. Especially in a high interest rate environment. Bank accounts essentially have a 0% nominal rate, which in a high interest rate environment is a very negative real rate so there is lots of margin for implicit or explicit insurance.

pjc50 4y ago
> Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents. https://www.nytimes.com/2023/03/13/business/svb-collapse-companies.html https://www.nytimes.com/2023/03/13/business/svb-collapse-com... "Roku, the maker of the streaming media player, said in a U.S. Securities and Exchange Commission filing on Friday that roughly $487 million, or 26 percent, of its $1.9 billion in cash was tied up with Silicon Valley Bank" (this was not very clever of them! But it seems to have been encouraged among the SV community?)
JumpinJack_Cash 4y ago
> > Companies with large amounts of cash keep very little of that in bank accounts, it's in money market funds and other cash-equivalents. Companies above a certain treshold (and all citizens for that matter) should be able to bank with the Fed, and have peace of mind that the money they deposit there is not being put to work in any way, shape or form. What developed over the last week is a victory for those who long for CBDCs .
- isignal 4y ago
  Companies can already buy recurring 3 month treasuries to hold their cash.
- 4y ago

scotty79 4y ago

> FDIC will probably have to be reformed. You cannot guarantee everything, all the time. Why can't you when you can literally print money? Just banks will have to be forced to pick up the tab for that, by limiting their money printing ability so that in case of emergency it can be safely printed. Dollar deposits in a bank should be 100% safe operation regardless of the amount. And investors can burn. Every investor is reaponsible for their own risk.

hef19898 4y ago

Ever since the initial Covid shock wore off, this whole thing just feels like 2008 in slow motion.

lamontcg 4y ago
2008 started back in 2006 and wasn't done until 2009

PaulDavisThe1st 4y ago

> FDIC will probably have to be reformed. You cannot guarantee everything, all the time. FDIC does not guarantee everything all the time, that's the whole reason for what happened at these banks being controversial.

RayVR 4y ago

Yellen folded? What does this really mean? The “market” will test her how? The market is only interested in pnl. Insolvent banks are a great place to make a trade. Hardline central bank policy (Japan) would be a place to make a trade. Treasury secretary and deposit insurance? I don’t know what you see there.