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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)
by 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 agoAs 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.