4 ms·

>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

by 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.
  - pearjuice 4y ago
    As I said, the scenario outlined is hyperbole... Practically, they won't actually bet on red but use all kinds of financial instruments to achieve the largest amount of yield possible with the depositors capital at their disposal. I'm aware the bank is wiped out and the deposits are no longer managed by SVB. None of this refutes the point that until the bank goes bust, the bank will try to maximize yield and shareholder returns with the cost being their own capital. The depositors capital, is an extra with no cost. As far as I am aware, shareholder profits won't get clawed back. Now that the $250K FDIC barrier has been lifted, the moral hazard is that the bank (not SVB which no longer exists, but any other bank) is no longer responsible for whatever happens with the capital of their customers - even if they would go completely bust; the FDIC will fix it.
ericpauley 4y ago
Levine considered this yesterday as well. If you model bank shares as calls on underlying assets it clearly favors risktaking: https://www.bloomberg.com/opinion/articles/2023-03-14/svb-took-the-wrong-risks https://www.bloomberg.com/opinion/articles/2023-03-14/svb-to...

by skwirl 4y ago

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.
- pearjuice 4y ago
  As I said, the scenario outlined is hyperbole... Practically, they won't actually bet on red but use all kinds of financial instruments to achieve the largest amount of yield possible with the depositors capital at their disposal. I'm aware the bank is wiped out and the deposits are no longer managed by SVB. None of this refutes the point that until the bank goes bust, the bank will try to maximize yield and shareholder returns with the cost being their own capital. The depositors capital, is an extra with no cost. As far as I am aware, shareholder profits won't get clawed back. Now that the $250K FDIC barrier has been lifted, the moral hazard is that the bank (not SVB which no longer exists, but any other bank) is no longer responsible for whatever happens with the capital of their customers - even if they would go completely bust; the FDIC will fix it.

ericpauley 4y ago

Levine considered this yesterday as well. If you model bank shares as calls on underlying assets it clearly favors risktaking: https://www.bloomberg.com/opinion/articles/2023-03-14/svb-took-the-wrong-risks https://www.bloomberg.com/opinion/articles/2023-03-14/svb-to...