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> nor the moral hazard created by the bailout There was no moral hazard created because bank shareholder equity got zeroed out. Bank management and shareholde

> nor the moral hazard created by the bailout There was no moral hazard created because bank shareholder equity got zeroed out. Bank management and shareholders were not protected against the 'find out' phase.

cwilkes 4y ago
The moral hazard is that there isn’t a a limit to the $250k FDIC insurance so people that put money into the bank don’t have to care what the bank does. So there’s no incentive to work with a bank that took the time and money to pass a stress test — in fact the one that didn’t bother to do any testing can give better terms as they aren’t spending money to be safe.
- arcticbull 4y ago
  I don't think it should ever be the depositors responsibility to figure out whether a bank is properly managing their risk backing your deposits. That's both intentionally meant to be opaque to depositors - you get dollars in an account, not share in an MMF for instance - and also, it is incredibly difficult for even professionals to evaluate. This is the responsibility of regulators plain and simple. And I'd argue by the FDIC taking this risk on now, moral hazard is still not a factor.
  - tripletao 4y ago
    I'd tend to agree that expecting depositors to police their banks is bad policy. It would be better to make that policy change explicitly though, by insuring all deposits, rather than by slouching into it with ad hoc rescues like here. I agree there's no moral hazard as to the SVB shareholders, since they got zeroed. There is a moral hazard as to the shareholders of other banks, who will benefit from the new lending program in proportion to the amount of bad interest rate risk they took.
    - 8ytecoder 4y ago
      That’s the point IMHO. We want depositors to keep money in the banking system. The inverse of it where depositors don’t trust the system would result in even more bank runs. However well run a bank is, there’ll always be a certain amount of assets in long term that lose value in the short term. We’ll be seeing perpetual bank runs and a new shadow banking system will emerge if this continues unchecked.
  - phoehne 4y ago
    It is and it isn't the depositor's responsibility. It's totally expected for a large company to take a long, hard look at their bank. When I was an undergrad in Econ and in Accounting, the issue of insured account limits was literally in the text books. In the accounting/finance/economics area it's already well understood that a CFO (or their office) is responsible for vetting the bank. Moreover, it's the CFO's job to make sure the bank has adequate controls because (unlike consumers) commercial deposits are not indemnified when fraud occurs. If a company's payroll is stolen through fraud, for example, it's likely not recoverable. (Unless the bank failed to follow their procedures or the procedures set forth by the depositor, and you may still sit in court for years.) If your personal Visa debit card gets compromised, you aren't liable for the fraudulent purchases and the processor eats the cost. The health of the bank is less opaque to mid to large businesses, which have access to tools like Lexis/Nexis, Bloombergs, detailed ratings, and let's not forget personal networks. Most large companies also have to run big choices, like what banks to use, by their boards. . Pending litigation . Counter party risks (e.g. do they have exposure to a problem bank) . Financial statements (usually the first stop and contains a lot of information) . Credit Default Swap rates (what does it cost to insure the debt issued by the bank) . What rules does the bank operate under (domestic, foreign, state, federal, etc.) . General reputation in the industry (e.g. go to $CS to launder your cocaine money) That being said, it's probably beyond a small business to really evaluate their bank risk. And while 250k may have been adequate for the 2010's, it may no longer be sufficient to cover many small businesses (and by small I mean the back office is a handful of people). Should it be 500k? 1 million? I don't know. What I suspect is that making it unlimited, it means that a bank that's hemorrhaging depositors could offer unsustainably higher rates. Less risk-sensitive CFOs might decide that parking 10 million in reserves might be a good deal since it's as safe as an officially insured deposit. It's much more liquid than holding a 90-day CD or 3 month T-bill to maturity. Suddenly, the bank is flush with deposits, but is still going under. This would be kind of like the 1980's S&L crisis. That's why I'm all for raising the cap, but with clear limits and adjustments to the fees charged to member banks for insurance. If we need to expand the FDIC insurance fund by 3x to raise the cap, that's fine. But raising the cap, for an extended period, without adjusting the rules or the price for the insurance could lead to unintended consequences. Should a VC funded company of 10 people do what GM does when evaluating a supplier or customer? Probably not. What about when it gets to 100 people? At that point I would expect there to be a competent CFO. What about the VC? (I'm just going to ignore all the tweets from the All-In community that showed a profound lack of understanding of banking, confusing a modern bank Gringot's.) Should the VC, as part of their advisory role, maybe recommend a good part time CFO or cash manager? Did regulators screw up SVB? Possibly, there were a lot of issues found when they transitioned to a new regulatory team year or two ago (or so I read). But regulators are not bank managers. And if a bank can show their risk controls are adequate, and those risk controls are being followed, it does not mean they're making good investments. (It's arguable that both lack of controls and following controls were an issue for SVB - as far as I've read).
  - tveita 4y ago
    They're opaque to anyone with less than $250k in the bank, which is almost everyone. If you are large enough player to be visible in the "systemic risks" picture you should be helping to stabilize the system, not just throwing your weight around like a drunk elephant to see where money falls out.
- chimeracoder 4y ago
  > So there’s no incentive to work with a bank that took the time and money to pass a stress test This assumes that there future uninsured deposits are guaranteed (they may be, yes, but this is a bet, not a certainty). Regardless, you're making the case that consumer choice is not sufficient pressure to enforce safety measures. Which is correct, but we already knew that! That's the purpose of regulations. Expecting industries to self-regulate in response to market forces is a losing battle.
- bagacrap 4y ago
  What's an individual supposed to do, pay for an audit of a bank's balance sheet? The bank had poor risk management, regulators were asleep at the wheel, depositors are blameless. Although I will say that a startup with millions in the bank should probably have a CFO.
  - watwut 4y ago
    You can insure larger deposits. It costs a bit more and that is about it.
  - kasey_junk 4y ago
    Large deposit holders audit bank balance sheets as a matter of course. It’s a standard risk management function for corporate treasuries. That it’s apparently news to a bunch of cash heavy depositors at SVB is one of the more revealing parts of the crisis to me.
  - phoehne 4y ago
    If you bank with publicly traded banks, they publish their financial statements and those statements are audited. They are freely available for you to read and contain a lot of good information. You could watch, for example, SVBs interest expense grow unsustainably, quarter after quarter. That's what the shorts picked up on and why some investors built up a short position on SVB. That being said, two people running an Etsy store won't do that. Nor should they have to. Maybe the insurance should be bumped up, but for either a very limited time, until you write new, official rules. And yes, the CFO should do an appropriate level of due diligence for a large business with lots of money. It makes you wonder what some of the CFOs did all day.
- dilyevsky 4y ago
  Right lets all just play silly accounting games breaking up your 100M into 400 individual bank accounts instead of doing something productive and just raising fdic limit to something sensible for a small-medium business
  - phoehne 4y ago
    That's why managing those insured deposits is automated.
  - HWR_14 4y ago
    You mean spread you 100MM into 400 individual banks so we have diversification when a single bad bank CEO decides to take stupid high-risk positions?
  - bagavi 4y ago
    You have to play silly games and try to fix the system simultaneously. You always keep your foot on the brakes in case someone is drunk driving on the road. At the same time, you'll try to fix those issues via legislation (DUI) and technology
xboxnolifes 4y ago
People keep saying this, but I don't understand why they don't see the issue. Yes, shareholders got zeroed out of their SVB shares. But since there was no risk to playing with depositors money besides losing the business, which can fail in any number of other ways as well, there is no deterrent to taking on the large risk. The optimal strategy to beat the competition is to edge toward more risk. And since you can get an edge by playing more risky, other banks will have to do as well to compete. A traditional business, when edging toward risk, fails when they cannot get their customers to buy from them. Banks fails when they can't get their customer's money back to them. That's the big issue with the risk dynamic.
- taeric 4y ago
  This is probably less true than you think. If SVB's assets had been anything other than treasuries, I would agree. But liquidating their assets would almost certainly move all of those to a willing buyer. It is everything else that is problematic and likely nobody wants to buy.
- yibg 4y ago
  What was stopping this behaving before or if there was no depositor guarantee? Either way there was no downsides to them.
doktorhladnjak 4y ago
There is absolutely moral hazard for depositors. If uninsured SVB depositors had gotten something like 90¢ on the dollar for deposits, every company with uninsured deposits would start thinking about how reliable their bank might be. More due diligence would happen. Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larger.
- Turskarama 4y ago
  It shouldn't be up to depositors to do "due diligence" on their bank, making sure they're compliant is exactly the kind of thing government is _for_. Imagine if you had to do several hours of research on every single thing you purchased and investment you made, you'd never have time for anything else and there's still a chance you miss something. Compare that to experts doing it and spending a lot more time on it, then slapping anyone who is not up to standard. It's a way more efficient system.
  - kshacker 4y ago
    If you see a bank offering 4.75 percent on a certificate vs another offering 2.75, which one would you choose? If you always choose the highest, should you not have a stake if the bank was found to take a lot of risk to offer this higher rate?
  - bagavi 4y ago
    Break up your deposit into 250k$ accounts, each insured by FDIC. Let software handle the logistics of payments via multiple bank accounts. Asking depositors to do the due deligence is a strawman.
    - norgie 4y ago
      > Asking depositors to do the due deligence is a strawman. Except that there are many commenters in this exact thread making that argument. As for splitting up your deposit into $250k chunks, I agree, companies should do this as much as possible. But it would be hard for some companies. An extreme case is Circle, who says they had $3.3 billion in SVB. To get all of this covered, would require 13,200 different banks. It looks like there are only 4,236 FDIC-insured banks in the US. Add in another 4,853 NCUA-insured credit unions, and we're still left with $873 million uninsured, despite using nearly 10,000 accounts.

cwilkes 4y ago

The moral hazard is that there isn’t a a limit to the $250k FDIC insurance so people that put money into the bank don’t have to care what the bank does. So there’s no incentive to work with a bank that took the time and money to pass a stress test — in fact the one that didn’t bother to do any testing can give better terms as they aren’t spending money to be safe.

arcticbull 4y ago
I don't think it should ever be the depositors responsibility to figure out whether a bank is properly managing their risk backing your deposits. That's both intentionally meant to be opaque to depositors - you get dollars in an account, not share in an MMF for instance - and also, it is incredibly difficult for even professionals to evaluate. This is the responsibility of regulators plain and simple. And I'd argue by the FDIC taking this risk on now, moral hazard is still not a factor.
- tripletao 4y ago
  I'd tend to agree that expecting depositors to police their banks is bad policy. It would be better to make that policy change explicitly though, by insuring all deposits, rather than by slouching into it with ad hoc rescues like here. I agree there's no moral hazard as to the SVB shareholders, since they got zeroed. There is a moral hazard as to the shareholders of other banks, who will benefit from the new lending program in proportion to the amount of bad interest rate risk they took.
  - 8ytecoder 4y ago
    That’s the point IMHO. We want depositors to keep money in the banking system. The inverse of it where depositors don’t trust the system would result in even more bank runs. However well run a bank is, there’ll always be a certain amount of assets in long term that lose value in the short term. We’ll be seeing perpetual bank runs and a new shadow banking system will emerge if this continues unchecked.
- phoehne 4y ago
  It is and it isn't the depositor's responsibility. It's totally expected for a large company to take a long, hard look at their bank. When I was an undergrad in Econ and in Accounting, the issue of insured account limits was literally in the text books. In the accounting/finance/economics area it's already well understood that a CFO (or their office) is responsible for vetting the bank. Moreover, it's the CFO's job to make sure the bank has adequate controls because (unlike consumers) commercial deposits are not indemnified when fraud occurs. If a company's payroll is stolen through fraud, for example, it's likely not recoverable. (Unless the bank failed to follow their procedures or the procedures set forth by the depositor, and you may still sit in court for years.) If your personal Visa debit card gets compromised, you aren't liable for the fraudulent purchases and the processor eats the cost. The health of the bank is less opaque to mid to large businesses, which have access to tools like Lexis/Nexis, Bloombergs, detailed ratings, and let's not forget personal networks. Most large companies also have to run big choices, like what banks to use, by their boards. . Pending litigation . Counter party risks (e.g. do they have exposure to a problem bank) . Financial statements (usually the first stop and contains a lot of information) . Credit Default Swap rates (what does it cost to insure the debt issued by the bank) . What rules does the bank operate under (domestic, foreign, state, federal, etc.) . General reputation in the industry (e.g. go to $CS to launder your cocaine money) That being said, it's probably beyond a small business to really evaluate their bank risk. And while 250k may have been adequate for the 2010's, it may no longer be sufficient to cover many small businesses (and by small I mean the back office is a handful of people). Should it be 500k? 1 million? I don't know. What I suspect is that making it unlimited, it means that a bank that's hemorrhaging depositors could offer unsustainably higher rates. Less risk-sensitive CFOs might decide that parking 10 million in reserves might be a good deal since it's as safe as an officially insured deposit. It's much more liquid than holding a 90-day CD or 3 month T-bill to maturity. Suddenly, the bank is flush with deposits, but is still going under. This would be kind of like the 1980's S&L crisis. That's why I'm all for raising the cap, but with clear limits and adjustments to the fees charged to member banks for insurance. If we need to expand the FDIC insurance fund by 3x to raise the cap, that's fine. But raising the cap, for an extended period, without adjusting the rules or the price for the insurance could lead to unintended consequences. Should a VC funded company of 10 people do what GM does when evaluating a supplier or customer? Probably not. What about when it gets to 100 people? At that point I would expect there to be a competent CFO. What about the VC? (I'm just going to ignore all the tweets from the All-In community that showed a profound lack of understanding of banking, confusing a modern bank Gringot's.) Should the VC, as part of their advisory role, maybe recommend a good part time CFO or cash manager? Did regulators screw up SVB? Possibly, there were a lot of issues found when they transitioned to a new regulatory team year or two ago (or so I read). But regulators are not bank managers. And if a bank can show their risk controls are adequate, and those risk controls are being followed, it does not mean they're making good investments. (It's arguable that both lack of controls and following controls were an issue for SVB - as far as I've read).
- tveita 4y ago
  They're opaque to anyone with less than $250k in the bank, which is almost everyone. If you are large enough player to be visible in the "systemic risks" picture you should be helping to stabilize the system, not just throwing your weight around like a drunk elephant to see where money falls out.
chimeracoder 4y ago
> So there’s no incentive to work with a bank that took the time and money to pass a stress test This assumes that there future uninsured deposits are guaranteed (they may be, yes, but this is a bet, not a certainty). Regardless, you're making the case that consumer choice is not sufficient pressure to enforce safety measures. Which is correct, but we already knew that! That's the purpose of regulations. Expecting industries to self-regulate in response to market forces is a losing battle.
bagacrap 4y ago
What's an individual supposed to do, pay for an audit of a bank's balance sheet? The bank had poor risk management, regulators were asleep at the wheel, depositors are blameless. Although I will say that a startup with millions in the bank should probably have a CFO.
- watwut 4y ago
  You can insure larger deposits. It costs a bit more and that is about it.
- kasey_junk 4y ago
  Large deposit holders audit bank balance sheets as a matter of course. It’s a standard risk management function for corporate treasuries. That it’s apparently news to a bunch of cash heavy depositors at SVB is one of the more revealing parts of the crisis to me.
- phoehne 4y ago
  If you bank with publicly traded banks, they publish their financial statements and those statements are audited. They are freely available for you to read and contain a lot of good information. You could watch, for example, SVBs interest expense grow unsustainably, quarter after quarter. That's what the shorts picked up on and why some investors built up a short position on SVB. That being said, two people running an Etsy store won't do that. Nor should they have to. Maybe the insurance should be bumped up, but for either a very limited time, until you write new, official rules. And yes, the CFO should do an appropriate level of due diligence for a large business with lots of money. It makes you wonder what some of the CFOs did all day.
dilyevsky 4y ago
Right lets all just play silly accounting games breaking up your 100M into 400 individual bank accounts instead of doing something productive and just raising fdic limit to something sensible for a small-medium business
- phoehne 4y ago
  That's why managing those insured deposits is automated.
- HWR_14 4y ago
  You mean spread you 100MM into 400 individual banks so we have diversification when a single bad bank CEO decides to take stupid high-risk positions?
- bagavi 4y ago
  You have to play silly games and try to fix the system simultaneously. You always keep your foot on the brakes in case someone is drunk driving on the road. At the same time, you'll try to fix those issues via legislation (DUI) and technology

xboxnolifes 4y ago

People keep saying this, but I don't understand why they don't see the issue. Yes, shareholders got zeroed out of their SVB shares. But since there was no risk to playing with depositors money besides losing the business, which can fail in any number of other ways as well, there is no deterrent to taking on the large risk. The optimal strategy to beat the competition is to edge toward more risk. And since you can get an edge by playing more risky, other banks will have to do as well to compete. A traditional business, when edging toward risk, fails when they cannot get their customers to buy from them. Banks fails when they can't get their customer's money back to them. That's the big issue with the risk dynamic.

taeric 4y ago
This is probably less true than you think. If SVB's assets had been anything other than treasuries, I would agree. But liquidating their assets would almost certainly move all of those to a willing buyer. It is everything else that is problematic and likely nobody wants to buy.
yibg 4y ago
What was stopping this behaving before or if there was no depositor guarantee? Either way there was no downsides to them.

doktorhladnjak 4y ago

There is absolutely moral hazard for depositors. If uninsured SVB depositors had gotten something like 90¢ on the dollar for deposits, every company with uninsured deposits would start thinking about how reliable their bank might be. More due diligence would happen. Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larger.

Turskarama 4y ago
It shouldn't be up to depositors to do "due diligence" on their bank, making sure they're compliant is exactly the kind of thing government is _for_. Imagine if you had to do several hours of research on every single thing you purchased and investment you made, you'd never have time for anything else and there's still a chance you miss something. Compare that to experts doing it and spending a lot more time on it, then slapping anyone who is not up to standard. It's a way more efficient system.
- kshacker 4y ago
  If you see a bank offering 4.75 percent on a certificate vs another offering 2.75, which one would you choose? If you always choose the highest, should you not have a stake if the bank was found to take a lot of risk to offer this higher rate?
- bagavi 4y ago
  Break up your deposit into 250k$ accounts, each insured by FDIC. Let software handle the logistics of payments via multiple bank accounts. Asking depositors to do the due deligence is a strawman.
  - norgie 4y ago
    > Asking depositors to do the due deligence is a strawman. Except that there are many commenters in this exact thread making that argument. As for splitting up your deposit into $250k chunks, I agree, companies should do this as much as possible. But it would be hard for some companies. An extreme case is Circle, who says they had $3.3 billion in SVB. To get all of this covered, would require 13,200 different banks. It looks like there are only 4,236 FDIC-insured banks in the US. Add in another 4,853 NCUA-insured credit unions, and we're still left with $873 million uninsured, despite using nearly 10,000 accounts.