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What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 a

What I still do not understand is why the whole SVB episode isn't a bailout and didn't just introduce much more risk into the system. Yes, the stock went to 0 and investors did not get compensated (if they didn't already cash out when they saw it coming due to inside information) but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Saying that taxpayers won't pay for this is a joke too. The burden of filling the insurance gap won't come out of the pocket of other banks or their shareholders. Even though the FDIC receives no federal funding on paper, they seem to be fully invested in treasury securities and can borrow directly from the treasury, against rates not available to the common Joe. It's a perverse relation which the taxpayer contributes to.

duxup 4y ago
> Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Because they don’t want the stock to go to 0? I think most businesses and investors would not want that. We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.
- Gys 4y ago
  Then why is (was?) there a limit of 250k anyway?
  - duxup 4y ago
    Does it matter in regards to what I said?
  - skwirl 4y ago
    To prevent bank runs.
  - patio11 4y ago
    There has been, over the nearly century we’ve had the institution, many many waves of feelings regarding it. That said, three prominent ones: the amount one needs to reserve, and therefore the rates one needs to charge banks to build the reserve, are sensitive to what portion of the sector is actually insured. There exists a sense that rich, sophisticated people and entities can arrange for their own risk management at their own expense rather than a society-wide program with implicit government backstopping. Finally, there is frequently strong disinterest in either the reality or the appearance of public funds being used to backstop the banking industry. And so that is the reason for the limit. It gets bumped up every few years, partially due to inflation and partially due to the increasing wealth of the upper middle class and retirees, who the insurance fund is primarily aimed at motivating. It would not be effective in its aims if “local elites” at the typical community bank felt like they still shouldered run risk, and local elites in 2023 are substantially wealthier than they were in 1945.
  - marcosdumay 4y ago
    To guarantee the FDIC itself doesn't fail.
- pearjuice 4y ago
  They don't want the stock to go to 0, but they don't want to miss potential returns either. When the FDIC will cover all depositors, investors (from a purely capitalistic perspective) would demand to use as much of their capital as possible to maximize returns. As we've seen numerous times before in the past, a large quantity of investors is myopic and regulatory oversight often comes too late or after the fact.
- jjoonathan 4y ago
  Yes, banks as organizations still have the correct incentives. I'm not sure management does, but 1. it's the responsibility of owners to keep management under control and 2. if management doesn't care about investors surely they would care even less about depositors.
ascotan 4y ago
It's a bailout of the depositors not the bank.
wil421 4y ago
Wouldn’t the FDIC or whoever absorbs the treasury notes be able to get a majority of the money back? Less inflation, opportunity costs, and the like.
_heimdall 4y ago
It is a a bailout, this time a bailout of unsecured investors of the bank that were holding deposits at the bank rather than shareholders. And yes though the line is being drawn today with investors vs. depositors, depositors are actually a form of unsecured investor. As to why it doesn't introduce more risk, it very well could. So far they have either slowed down a train wreck or prevented one. Bank issues in the last week have seemed more tied to depositors getting spooked and withdrawing or transferring money, the real question is whether other banks are so full of unrealized losses that the shift from a market depositing $5T in newly printed money to an economy spending more than it earns will break the banks.
lukas099 4y ago
Matt Levine's Money Stuff talked about this yesterday. I'll post a couple of the relevant paragraphs. > The regulators’ response to SVB — guaranteeing all depositors, but also the Fed’s Bank Term Funding Program to finance other banks’ bond portfolios at par[7] — increases the value of other banks’ optionality, which encourages them to take more risk, because their deposits are safer. (I suppose this is the real moral hazard concern.) And so there should be more regulatory and supervisory changes to tamp down the other banks’ risks. > [...] > [T]he post-SVB actions have made bank deposits a lot safer, which is a nice windfall for the shareholders of every other regional bank that has a lot of losses on held-to-maturity securities. And so in exchange for that windfall the regulators should regulate those banks much more strictly, which will make them actually safer (and reduce the government’s exposure to their risks), but will also reduce their profitability.
- em500 4y ago
  Emeritus a University of Chicago finance professor John Cochrane has been screaming for years that the whole design of more and more regulations combined with all sorts of implicit ex-post creditor insurance is structurally unstable and all but guarantees bank runs and collapses every decade or so. That the only thing that can work is much higher capital (not reserve!) requirements, i.e., a lot higher shareholder equity vs debt on the balance sheet. He mentions that existing bank regulations already number hundreds of thousands of pages, yet the regulators apparently got blindsided by duration/convexity risk which is CFA / MBA finance textbook material. Just like generals, regulators are always fighting the previous crisis.
kasey_junk 4y ago
The bailout to the banks is two fold. First the direct bailout in form loan guarantees. The moral hazard on those are limited by the time limit on when the assets had to have been bought (in the past) and on how long they can be used (a year). The second is a third or fourth order bailout of banks. By moving the goal posts on depositors responsibilities to “none if you are a powerful lobby”, risky banks no longer have the second most important limit on their riskiness (depositors managing their own risk and due diligence). That leaves only the equity holders to do the diligence. I think the reason people aren’t calling it a bailout is that it puts all the pressure on equity. Which maybe what we as a society wants but it’s certainly a big change to the existing regime.
- skwirl 4y ago
  I don't think it's a big change. I think very few people are qualified to do due diligence on their banks. It's a bit like expecting people to inspect bridges before they drive over them. It's a piece of financial infrastructure that we expect to just work. It would be a big change to not have that expectation, and would likely result in the collapse of the regional banking system as people flock to the Big Four "systemically important banks" which have stricter regulatory requirements and the implicit backing of the federal government. We are seeing a lot of that flocking despite the actions of treasury on Sunday. Moody's gave SVB an A rating until they were already collapsing. The State of California said SVB was financially sound until March 8. And the problem is, even if it were possible to know the health of a bank as a depositor, a sound bank that people come to believe may be unsound collapses in a bank run the instant that the realization occurs, so you would lose your money anyway even though the bank was sound when you first deposited unless you got in early on the run.
  - kasey_junk 4y ago
    > I don’t think it’s a big change This is a big part of the problem in tech apparently. It _is_ a big change and in other industries it is very common for large cash holders to do normal due diligence on their banks and to have technology and procedures to mitigate the counterparty risk. The flocking concern was literally cited as one of the problems with “too big to fail” in 2008 and it happened! Lots of corporate & governmental treasurers took that as a clue to move to larger banks. Bank runs start because someone notices and publishes that a bank is insolvent, not the other way around. In this case it was because a bunch of supposedly sophisticated actors realized it too late.
eternalban 4y ago
> explicitly lifting the 250K FDIC limit. The desperation of that action speaks volumes about what they faced (and we don't know). Having no limits for FDIC will stem panic in the short term at the cost of (practically guaranteed) mid and long term hazard that this decision will directly engender.
ajross 4y ago
> but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. That's not the correct analysis. It was a liquidity crunch, not a "hole" in the sense of a debt. In some sense the bank always had the assets, just not in a form they could pay out as a withdrawal. So when everyone wanted out at once they ran out of cash and got seized by the FDIC. That's not to say there won't be any losses at all. There likely will as the successor bank liquifies holdings and makes whole the folks who want out. And yes: those losses are (as reported currently) not going to be borne by depositors at all. Currently the idea is that they'll be rolled into fees on other banks, which is part of the FDIC insurance regime. So we all collectively pay for it, just not via taxes per se.
skwirl 4y ago
>Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". This makes zero difference to the bank. The bank doesn't get saved by the FDIC limit, as you know. What happens after the bank fails - whether the depositors are made whole or not - is immaterial to the people who owned the bank, who now see their asset (the bank) worth $0. If you want to make a moral hazard argument with respect to the FDIC, you'd have to make it with respect to the actions of depositors. Also, WRT the $250k limit, that's the minimum they will guarantee. They have always tried, and in recent decades always succeeded, in making depositors whole one way or another, usually without spending much (if anything) from their insurance fund. The $250k is the worst case scenario.
- pearjuice 4y ago
  Given the bank's yield is some sort of formula with regards to how much and succesful they are in investing/loaning-out the capital of their depositors. Then how is it not a moral hazard, when the bank gets a signal that the FDIC will cover all this capital, regardless what the bank does with it? Even if the bank asset can go to 0, in the end the vehicle used to prop up this asset will come from the depositors. If I (depositor) give you (bank) 100$ and someone else (FDIC) tells you "do whatever you want with that money, if you lose it I'll give it back to the depositor" - you could basically go to the casino and put it all on red. Even if you would also lose your own 100$ in the process (you risked 200$), you would probably take on more risk simply because my capital isn't at risk but the returns will be yours. Hyperbole yes, but the moral hazard seems to be with the bank (and the investors therein), not the depositors or their actions. Or I misunderstood you.
  - skwirl 4y ago
    I think there's a real misunderstanding here with the distinction between banks, depositors, and what protections apply to each. The scenario (betting on red) is illegal, but assuming it was not, it doesn't matter to the bank whether or not its depositors have their deposits protected. I can kind of assume what your misunderstanding is, but it's not completely clear. I think you are assuming that if the deposits are protected, the bank gets to keep the deposits and continue running. This isn't how it works, though. As soon as the bank becomes insolvent (loses its bet on red), the bank is shut down and its shareholders are wiped out. The FDIC sets up a new, government run bank to hold and guarantee the deposits, and then tries to find another bank to sell the failed bank's deposits and loans. Right now there is no Silicon Valley Bank. If you had deposits there, they are now held by Silicon Valley Bridge Bank, N.A, which is a new bank operated by the FDIC.
gregw2 4y ago
The moral hazard risk you mention is real. But likewise no bank can rest easy for two reasons: 1) the lending programs setup to backstop banks (not depositors) in the current situation expire in a year. Not all the bank supports can be expected in perpetuity. Regulators buy themselves time to assess true risk of payroll services, Fintech FOB, and the like. 2) Per recent history the first (Bank) victim may get a pass but not the second victim. Bear Stearns was saved, Lehman wasn't. A complacent bank bets that the moral hazard criers won't have the upper hand at the particular+unknown timeframe their bank needs a handout.

duxup 4y ago

> Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". Because they don’t want the stock to go to 0? I think most businesses and investors would not want that. We’ve seen bank stocks drop, it is in those banks interest to show they’re not taking chances like SBV.

Gys 4y ago
Then why is (was?) there a limit of 250k anyway?
- duxup 4y ago
  Does it matter in regards to what I said?
- skwirl 4y ago
  To prevent bank runs.
- patio11 4y ago
  There has been, over the nearly century we’ve had the institution, many many waves of feelings regarding it. That said, three prominent ones: the amount one needs to reserve, and therefore the rates one needs to charge banks to build the reserve, are sensitive to what portion of the sector is actually insured. There exists a sense that rich, sophisticated people and entities can arrange for their own risk management at their own expense rather than a society-wide program with implicit government backstopping. Finally, there is frequently strong disinterest in either the reality or the appearance of public funds being used to backstop the banking industry. And so that is the reason for the limit. It gets bumped up every few years, partially due to inflation and partially due to the increasing wealth of the upper middle class and retirees, who the insurance fund is primarily aimed at motivating. It would not be effective in its aims if “local elites” at the typical community bank felt like they still shouldered run risk, and local elites in 2023 are substantially wealthier than they were in 1945.
- marcosdumay 4y ago
  To guarantee the FDIC itself doesn't fail.
pearjuice 4y ago
They don't want the stock to go to 0, but they don't want to miss potential returns either. When the FDIC will cover all depositors, investors (from a purely capitalistic perspective) would demand to use as much of their capital as possible to maximize returns. As we've seen numerous times before in the past, a large quantity of investors is myopic and regulatory oversight often comes too late or after the fact.
jjoonathan 4y ago
Yes, banks as organizations still have the correct incentives. I'm not sure management does, but 1. it's the responsibility of owners to keep management under control and 2. if management doesn't care about investors surely they would care even less about depositors.

ascotan 4y ago

It's a bailout of the depositors not the bank.

wil421 4y ago

Wouldn’t the FDIC or whoever absorbs the treasury notes be able to get a majority of the money back? Less inflation, opportunity costs, and the like.

_heimdall 4y ago

It is a a bailout, this time a bailout of unsecured investors of the bank that were holding deposits at the bank rather than shareholders. And yes though the line is being drawn today with investors vs. depositors, depositors are actually a form of unsecured investor. As to why it doesn't introduce more risk, it very well could. So far they have either slowed down a train wreck or prevented one. Bank issues in the last week have seemed more tied to depositors getting spooked and withdrawing or transferring money, the real question is whether other banks are so full of unrealized losses that the shift from a market depositing $5T in newly printed money to an economy spending more than it earns will break the banks.

lukas099 4y ago

Matt Levine's Money Stuff talked about this yesterday. I'll post a couple of the relevant paragraphs. > The regulators’ response to SVB — guaranteeing all depositors, but also the Fed’s Bank Term Funding Program to finance other banks’ bond portfolios at par[7] — increases the value of other banks’ optionality, which encourages them to take more risk, because their deposits are safer. (I suppose this is the real moral hazard concern.) And so there should be more regulatory and supervisory changes to tamp down the other banks’ risks. > [...] > [T]he post-SVB actions have made bank deposits a lot safer, which is a nice windfall for the shareholders of every other regional bank that has a lot of losses on held-to-maturity securities. And so in exchange for that windfall the regulators should regulate those banks much more strictly, which will make them actually safer (and reduce the government’s exposure to their risks), but will also reduce their profitability.

em500 4y ago
Emeritus a University of Chicago finance professor John Cochrane has been screaming for years that the whole design of more and more regulations combined with all sorts of implicit ex-post creditor insurance is structurally unstable and all but guarantees bank runs and collapses every decade or so. That the only thing that can work is much higher capital (not reserve!) requirements, i.e., a lot higher shareholder equity vs debt on the balance sheet. He mentions that existing bank regulations already number hundreds of thousands of pages, yet the regulators apparently got blindsided by duration/convexity risk which is CFA / MBA finance textbook material. Just like generals, regulators are always fighting the previous crisis.

kasey_junk 4y ago

The bailout to the banks is two fold. First the direct bailout in form loan guarantees. The moral hazard on those are limited by the time limit on when the assets had to have been bought (in the past) and on how long they can be used (a year). The second is a third or fourth order bailout of banks. By moving the goal posts on depositors responsibilities to “none if you are a powerful lobby”, risky banks no longer have the second most important limit on their riskiness (depositors managing their own risk and due diligence). That leaves only the equity holders to do the diligence. I think the reason people aren’t calling it a bailout is that it puts all the pressure on equity. Which maybe what we as a society wants but it’s certainly a big change to the existing regime.

skwirl 4y ago
I don't think it's a big change. I think very few people are qualified to do due diligence on their banks. It's a bit like expecting people to inspect bridges before they drive over them. It's a piece of financial infrastructure that we expect to just work. It would be a big change to not have that expectation, and would likely result in the collapse of the regional banking system as people flock to the Big Four "systemically important banks" which have stricter regulatory requirements and the implicit backing of the federal government. We are seeing a lot of that flocking despite the actions of treasury on Sunday. Moody's gave SVB an A rating until they were already collapsing. The State of California said SVB was financially sound until March 8. And the problem is, even if it were possible to know the health of a bank as a depositor, a sound bank that people come to believe may be unsound collapses in a bank run the instant that the realization occurs, so you would lose your money anyway even though the bank was sound when you first deposited unless you got in early on the run.
- kasey_junk 4y ago
  > I don’t think it’s a big change This is a big part of the problem in tech apparently. It _is_ a big change and in other industries it is very common for large cash holders to do normal due diligence on their banks and to have technology and procedures to mitigate the counterparty risk. The flocking concern was literally cited as one of the problems with “too big to fail” in 2008 and it happened! Lots of corporate & governmental treasurers took that as a clue to move to larger banks. Bank runs start because someone notices and publishes that a bank is insolvent, not the other way around. In this case it was because a bunch of supposedly sophisticated actors realized it too late.

eternalban 4y ago

> explicitly lifting the 250K FDIC limit. The desperation of that action speaks volumes about what they faced (and we don't know). Having no limits for FDIC will stem panic in the short term at the cost of (practically guaranteed) mid and long term hazard that this decision will directly engender.

ajross 4y ago

> but the gaping hole in the books was filled due to government intervention and explicitly lifting the 250K FDIC limit. That's not the correct analysis. It was a liquidity crunch, not a "hole" in the sense of a debt. In some sense the bank always had the assets, just not in a form they could pay out as a withdrawal. So when everyone wanted out at once they ran out of cash and got seized by the FDIC. That's not to say there won't be any losses at all. There likely will as the successor bank liquifies holdings and makes whole the folks who want out. And yes: those losses are (as reported currently) not going to be borne by depositors at all. Currently the idea is that they'll be rolled into fees on other banks, which is part of the FDIC insurance regime. So we all collectively pay for it, just not via taxes per se.

skwirl 4y ago

>Why would any bank look at SVB and NOT think "oh, time to take more risk for more profit; the government will prop up the FDIC limit if we fail anyway". This makes zero difference to the bank. The bank doesn't get saved by the FDIC limit, as you know. What happens after the bank fails - whether the depositors are made whole or not - is immaterial to the people who owned the bank, who now see their asset (the bank) worth $0. If you want to make a moral hazard argument with respect to the FDIC, you'd have to make it with respect to the actions of depositors. Also, WRT the $250k limit, that's the minimum they will guarantee. They have always tried, and in recent decades always succeeded, in making depositors whole one way or another, usually without spending much (if anything) from their insurance fund. The $250k is the worst case scenario.

pearjuice 4y ago
Given the bank's yield is some sort of formula with regards to how much and succesful they are in investing/loaning-out the capital of their depositors. Then how is it not a moral hazard, when the bank gets a signal that the FDIC will cover all this capital, regardless what the bank does with it? Even if the bank asset can go to 0, in the end the vehicle used to prop up this asset will come from the depositors. If I (depositor) give you (bank) 100$ and someone else (FDIC) tells you "do whatever you want with that money, if you lose it I'll give it back to the depositor" - you could basically go to the casino and put it all on red. Even if you would also lose your own 100$ in the process (you risked 200$), you would probably take on more risk simply because my capital isn't at risk but the returns will be yours. Hyperbole yes, but the moral hazard seems to be with the bank (and the investors therein), not the depositors or their actions. Or I misunderstood you.
- skwirl 4y ago
  I think there's a real misunderstanding here with the distinction between banks, depositors, and what protections apply to each. The scenario (betting on red) is illegal, but assuming it was not, it doesn't matter to the bank whether or not its depositors have their deposits protected. I can kind of assume what your misunderstanding is, but it's not completely clear. I think you are assuming that if the deposits are protected, the bank gets to keep the deposits and continue running. This isn't how it works, though. As soon as the bank becomes insolvent (loses its bet on red), the bank is shut down and its shareholders are wiped out. The FDIC sets up a new, government run bank to hold and guarantee the deposits, and then tries to find another bank to sell the failed bank's deposits and loans. Right now there is no Silicon Valley Bank. If you had deposits there, they are now held by Silicon Valley Bridge Bank, N.A, which is a new bank operated by the FDIC.

gregw2 4y ago

The moral hazard risk you mention is real. But likewise no bank can rest easy for two reasons: 1) the lending programs setup to backstop banks (not depositors) in the current situation expire in a year. Not all the bank supports can be expected in perpetuity. Regulators buy themselves time to assess true risk of payroll services, Fintech FOB, and the like. 2) Per recent history the first (Bank) victim may get a pass but not the second victim. Bear Stearns was saved, Lehman wasn't. A complacent bank bets that the moral hazard criers won't have the upper hand at the particular+unknown timeframe their bank needs a handout.