SVC, Bank Contagion, and Government Action
The Biden administration had little choice but to act.
WaPo takes us inside “The 72-hour scramble to save the United States from a banking crisis.”
It seemed like a simple question: Did the treasury secretary have any concerns about the economic risks posed by Silicon Valley Bank?
It was Friday morning, and a wave of public panic had started to spread about one of the tech industry’s leading financial institutions. Seated for a roughly three-hour grilling on Capitol Hill, Janet L. Yellen replied with a calm nod and a glance at her notes: “There are recent developments that concern a few banks that I’m monitoring very carefully,” she said.
“When banks experience financial losses,” she added, “it is and should be a matter of concern.”
Yellen’s comments foreshadowed the start of a scramble behind the scenes at the White House. New fears began to surface about a potential run on Silicon Valley Bank, threatening widespread devastation not just for California, its companies and workers, but perhaps the U.S. economy writ large.
A frenetic, roughly 72-hour race soon unfolded in Washington to confront the threat of a full-blown financial meltdown. A bank was failing. Billions of dollars — in workers’ paychecks, and tech companies’ balance sheets — were about to be lost. And the government faced fears of an economy in free fall, rekindling nightmares of the Great Recession in 2008.
Ultimately, the Biden administration decided to complete a major intervention with extraordinary speed, acting to preserve deposits at Silicon Valley Bank while safeguarding the finances of other firms on the precipice of ruin. Their efforts showed the extent to which the president was willing to risk being accused of providing emergency help to bail out the financial sector — a charge the White House adamantly denies — in a bid to keep the system stable and stave off a worsening crisis.
The administration had until Asian markets opened on Sunday to ensure that SVB customers could withdraw funds and businesses could pay their workers — all without sparking similar runs on other U.S. banks. Top aides at banking regulators over the weekend spotted surges in requests for cash withdrawals at banks that didn’t appear to be connected to SVB, three of the sources said.
In the back of their minds, government officials recalled all too well the fallout from the 2008 financial crisis, and the immense political blowback that followed over the government’s use of taxpayer funds for what was widely seen as an unfair bailout. Over the weekend, they began to see banks outside of tech-heavy New York and California showing signs of volatility. Bank executives told federal officials that major customers had warned they would withdraw their money and move it to a Wall Street giant for safety first thing on Monday morning.
The Biden administration faced further pressure from Silicon Valley executives, including the co-founder of LinkedIn, as well as a wide array of influential California Democrats such as former House speaker Nancy Pelosi. They amplified the urgent need for action when many financial analysts outside Washington remained unaware of how bad things could get.
“We had to protect the depositors, we had to protect small businesses … [and] make sure this doesn’t become systemic,” said Pelosi, noting she had heard from another unnamed bank executive who said customers were withdrawing cash at higher rates. “We don’t want contagion.”
Instead, the administration managed to calm markets, after a day of turbulence that cut deeply into banks’ stocks Monday. And it prevented the sort of panic that might have resulted in countless Americans withdrawing money from their banks, which could have created damaging instability in the financial system.
That all seems rather straightforward and more or less matches what I had previously understood about the decision. Still, while I think the action was both necessary and proper, SVC is an unusual case. This much we also knew:
Silicon Valley Bank held an unusually high percentage of its assets in Treasury bonds. When the Federal Reserve raised interest rates, the value of existing bonds — a normally safe asset — went down. So the bank could not sell those bonds easily to make good on customers’ deposits as panic set in, and many flooded the bank seeking to withdraw their funds.
Many of the bank’s customers, meanwhile, were not the usual fare — they were investors, companies and other large institutions. It had more than $170 billion in deposits by the end of December, but 90 percent of them exceeded $250,000, the amount up to which the federal government insures in the event of a collapse.
But that also means this:
Compounding the deadline, the Biden administration faced calls for urgent action from some of the biggest names in Silicon Valley, who wanted to see all depositors — regardless of their size — made whole.
Sounding alarms were the likes of Reid Hoffman, the founder of LinkedIn and a partner at Greylock, a major venture capital firm. A prolific donor to Democrats, including Biden, he took his concerns to Democratic lawmakers and administration officials. Ron Conway — another of the area’s leading investors, with original stakes in Airbnb, Facebook and Google — worked withPelosi and Gov. Gavin Newsom to put pressure on the White House, Treasury Department and elected officials.
More than 600 tech executives, engineers and investors piled onto a hastily arranged, late Friday call with Rep. Ro Khanna (D), whose Bay-area district includes the headquarters for Silicon Valley Bank. Publicly, Khanna soon emerged as a forceful voice calling for the Biden administration to rescuethe bank’s depositors, warning about broader financial shocks to come.
The lobbying blitz reflected a broader sea change in the normally libertarian tech industry — one that typically tries to ward off federal intervention. Now, many of those same voices were calling on the Biden administration to act and protect an ecosystem in which they had a large stake.
California lawmakers, meanwhile, mounted their own pressure campaign in Zoom calls and other contacts with Biden administration officials. They immediately began to hear from voters, business owners and political donors, who feared the economic blow that the bank’s collapse could bring.
“When I went to do a little grocery shopping, I couldn’t help but notice a lot of people at the banks,” said Rep. Anna G. Eshoo, whose Golden State district includes a portion of the tech industry, recalling her concerns over the weekend.
Rep. Maxine Waters (Calif.), the top Democrat on the financial services committee, started raising the issue with the FDIC late Friday. Rep. Zoe Lofgren (D), who leads the California delegation, by Saturday evening organized the first of several meetings between a wider array of state lawmakers and federal banking regulators.
Initially, Democrats expressed their broad belief that the government, first and foremost, should try to secure the sale of Silicon Valley Bank. But as the potential dangers became more apparent of letting uninsured bank deposits evaporate, party lawmakers shifted toward trying to persuade the administration to take any action necessary to stave off crisis.
California members told administration officials stories of local businesses that stood to suffer in the event of a financial catastrophe, even beyond tech. In one example, they pointed to a payroll processor that parked its money at SVB and served nearly 1 million workers — people who could miss paychecks if large depositors weren’t rescued. Khanna, meanwhile, pointed to a local food bank that had relied on the now-failed firm.
While the decision to make depositors whole was almost certainly prudent public policy, the fact that so many of them are huge donors to the campaigns of decisionmakers certainly factored in. As did the fact that SVC is in California, which has the largest Congressional delegation.
But this all led to a balancing act:
The administration still faced obstacles to sweeping action. Biden had reservations about approving a plan that could be spun as a bailout for bank shareholders. Sen. Bernie Sanders (I-Vt.) was publicly warning against a bailout as well.
Although administration officials had largely decided by Saturday night that all depositors must be protected, they also worried about how to ward off the perception that they were acting primarily to bail out the rich and well connected who had been pressing for help. The plan does not protect the SVB’s shareholders or executives.
“There was a lot of concern about: What is the messaging here?” said one person, who spoke on the condition of anonymity to describe private deliberations. “Are we just saving these rich people, or are we doing something to save the economy? How do we present that, and what do we demand in terms of accountability to make clear this is not favorable treatment for a select few?”
Biden has emphasized that the plan is focused on protecting workers and small businesses.
I’m hardly an expert in the banking system but it seems to me that the plan hit the right wickets in that regard, protecting depositors while firing the management team and letting shareholders take their losses. It also took measures to stave off future runs.
The Fed is expected to continue raising interest rates this year in its campaign to thwart inflation, which could subject other banks to the same challenges.
“The weekend intervention dampened the immediate crisis,” said Bob Hockett, a Cornell University economist. “But continued rate hikes will simply bring more distress to industries — and thus to their banks — in the weeks and months to come.”
Rather clearly, regulations surrounding this need to be rethought.
Does the $250,000 FDIC limit make sense? If a simple payroll processing company needs to keep millions of dollars liquid, maybe not. But it would seem reasonable to ask those needing to do so pay extra for the ability to have huge deposits backstopped by Uncle Sam.
I gather from some commenters that SVC’s investment strategy was unusually risky. Most of the reporting I’ve seen focuses, as the above WaPo piece does, on the big bet on Treasury bonds, which doesn’t strike me as particularly reckless. But FDIC-insured banks shouldn’t be in such a precarious position that bailouts are necessary outside of general economic collapse.
Beyond that, I just don’t have the background on banking regulation to know what additional measures are appropriate. While “too big to fail” was the buzzphrase of the Great Recession, SVC wasn’t all that large by US banking standards. But, clearly, the possibility of contagion puts policymakers into a no-win situation in which they have little choice but to react. Which almost certainly means they need to take proactive measures to mitigate against being put into a crisis scenario.
James, not sure what you meant here, “If a simple payroll processing company needs to keep a million dollars liquid, maybe not.” but the quote above about the payroll company reference “1 million workers”. I’m prerry sure they were getting more than $1 per pay packet 😉
[Yep–I misread the line in the report. Fixed. -jhj]
Yep. And insurance exists for that. Makes me wonder why so many geniuses of investment and risk management got caught with their pants down. And Roku, WTF were you thinking, leaving massive amounts of money uninsured?
Prediction: Banking rules will be revised to reduce this risk a banking insolvency. And within five years, lobbyists will successfully work to have those rules repealed. Lather, rinse, repeat.
On the other hand, Monday regional bank stocks were crushed, those who purchased Monday’s falling stocks. woke on Wednesday with nice gains and the prospect of those bank shares continuing to return to the, last Friday value.
If risk is going to be removed from capitalism, then the rules need to be tightened.
If only we were as quick to preserve Democracy as we are the banks.
I have been traveling a lot this past month and been less attentive to the news than I usually am. Is the whole banking system collapsing still? Are we about to see the end of money due to woke Californians and return to a strict barter economy? Or are there some problems with a bank or two that are being worked out?
It took the current administration a whole weekend to figure out a working solution. Will this incompetence never end?
“Yep. And insurance exists for that. ”
What is that insurance called and where do you buy it? If you have anything much more than 20 workers in a small business you likely have over $250,000 sitting in your account at one time pretty often. Storing your money in lots of accounts is doable if you are talking about personal savings but for a business that would be chaotic. The money goes in and out quickly, to and from many places and hoping that everyone sends it the right place would be awful. I dont know anyone smaller business that has the kind of insurance you mention.
It’s no small thing that SVB had been operating without a senior risk compliance officer for most of 2022. Honestly, what a mess.
This is a perfect example of why regulations are necessary and in fact a GOOD THING.
They had no choice, it would not be practical to divide $1.9 billion into $250 K bits, and they did have only 26% of that ($487 M) at SVB.
The problem was that so many companies like Roku etc. were all using the same mid-sized bank. Which makes me wonder how readily available information on the type of liabilities a bank has is – Peter Thiel appears to have been aware.
This is pretty much the problem in a nutshell. Big companies with large payrolls probably shouldn’t be parking everything in a mid-sized bank. The fact that multiple big companies did this is…problematic.
Since only about 5% of Americans have $250k in liquid assets, and the 2% who have significantly more than $250k are perfectly capable of looking after their own money, this is exclusively an issue for corporate depositors. If the federal government response to the event was to say “a member bank made poor decisions, but the system has worked as intended and all of the individual investors are safe” then the only possible contagion would be among uninsured corporate depositors. Who, frankly, should be either buying insurance or getting their money out of Risks-R-Us and putting it into boring conservative banks. Or taking their lumps when their high-risk choices don’t pan out. Elsewise, government-subsidized moral hazard.
Shorter Dave: I’m willing to tolerate a lot more paternalism for individual humans than for businesses, and this system seems pretty well-balanced to me as-is. (Other than the idiocy of not having the reimbursement limit be inflation-indexed, that is…)
Is it a damnable rumor that Peter Theil got some internal SVB info and singlehandedly set off the bank run?
Some podcast in the background said that yesterday. I cataloged that as a too-convinient villain but never looked into it.
Except as of Friday there was a high risk of a bank run screwing up a lot of other banks. A bank run could hurt many more people then just the big depositors – payrolls, vendors, customers etc. of the big depositors, insured deposits waiting for their money, etc.
Not exactly insurance, but a inter-bank risk pooling approach. Most common scheme in US seems to be insured cash sweeps aka IntraFi Network Deposits.
Essentially the deposit is broken into multiple units and shared between banks that participate in the scheme, so each of the sub-accounts is within the FDIC insurance limit, but allows the user to access them more or less as a single account.
Can cover deposits of up to $150 million.
Comes at a cost, needless to say, but then insurance always does.
Query: how many businesses will now be less inclined to pay such costs?
@TJ: and as I understand it a lot of equivalent/members of that service basically just harvest 0.5%-1% of the rate they would usually offer as the “fee.”
Well, the result of the intervention is that the depositors are whole, the stockholders lost it all, the corporate executives lost their jobs, and the bondholders will get something. .
Honestly, to me that seems about right. Now, how did this happen? We don’t know. We’re guessing. We will likely learn more. Here’s a great rundown: https://ritholtz.com/2023/03/do-not-know-svb/ For instance:
So, yes, just a rumor at this point. We don’t know anything.
As I understand it, yes and no. He did advise companies he deals with to pull funds from SVB. Would there have been a run without that? Who knows. Others blame: Fed Chair Powell for raising rates, Biden for spending that forced Powell to raise rates (ignoring the tax cuts), SVB for putting all their eggs in the long term treasuries basket, for putting all their eggs in one industry, the clubby nature of said industry, the Trump administration repeal of portions of Dodd-Frank, not having a Risk Officer for a year (how the hell did regulators allow that?), crypto in the case of Silvergate Bank, Goldman Sachs gave them bad advice, and SVB being too woke and taking their eyes off the ball. Which caused it? IMHO they all did, except the last. It’s like flying accidents, usually there’s a chain of things that had to go wrong.
There’s going to be a big argument about whether the relaxation of Dodd-Frank caused it. Kevin Drum has already weighed in that it didn’t. Many will look at this and say regulation wouldn’t have mattered and fall back to the standard conservative position on all things that nothing can be done, that’s just the way things are. The proper take is that D-F was a good start. More needs to be done.
The real moral of this story is, IMHO, there’s no right answer to exactly how and how tightly to regulate banks. That being the case, the government should err on the side of caution. Way, way on the side of caution. After the Great Depression reforms, including Glass-Steagall, we went decades without a significant bank failure. However, bank lobbyists were constantly nibbling away at those regulations. They said they slowed the economy and used the evergreen claim they somehow hurt small business. Mostly they cut into the huge profits to be made in more care-free banking. Banks need to be tightly regulated.
@Jay L Gischer:
To me, that seems like the least the regulators could do. The very least. It won’t be enough to discourage other large depositors from blithely assuming they’ll be bailed out in future. The depositors should suffer some consequences. At the least they should not have immediate full access to their money. It’s unclear to me who is now managing SVB in receivership. Whoever it is should be supported by essentially all the current deposits, as of Friday close. For any large withdrawal they should have to show receipts it was for a necessary business purpose, not for deposit elsewhere and that they don’t have sufficient funds elsewhere. Apparently FDIC is going to cover this with increased fees, which spread over the whole system probably won’t amount to more than round off. The companies and CFOs who put the money in SVB should pay a concentrated share, maybe 1, 2 …5% of their deposits. We need disincentives to flow from this. I don’t care really how they do it, but the uninsured depositors should take some, albeit small, haircut.
Run by whom? Small depositors are protected — no need to run, easy message. Insured depositors are protected — no need to run, easy message. Where is the volume of at-risk cash that could cause a run? Is a significant fraction of all deposits in uninsured accounts with high-risk institutions? If so, sounds like that’s the problem… And I don’t see how a run from risky banks to sound banks would threaten the banking system — it’s not like the Rokus of the world would pull their cash and put it in a mattress…
Not being any sort of expert on finance, I have a question. Above there’s some struggling with whether large deposits can be insured and whether cash sweeps are practical and sufficient. Part of the fallout of 2008 was recognition that parties could write contact for anything. Can a company put all their cash, uninsured, in SVB or whoever and go to, say, Wells Fargo and take out a contract that WF will cover any losses in a bank failure? One assumes WF would prudently make sure they weren’t taking too many contracts for the same bank.
Off course one’s assumption of prudence might fail, in which case WF would demand a bailout.
Precisely. I have bank accounts that are indured for up to $1 million. I pay extra for that extra protection.
These massive companies did not think of that? I know of corporate accounts that offer insurance up to $100 million. Key is you have pay extra for the extra insurance. Were Roku et al being cheap? Lazy? Dumb? Risky?
They and similar sized companies should not be allowed to do this again. If can buy deposit insurance surely they can.
Which message I received over the weekend in an email from the small, regional Credit Union with which I do my banking. They cite the credit union equivalent of FDIC and note they have few or no deposits over the limit. I expect a lot of people got similar messages from their banks.
They had the choice to buy extra insurance, and could have thus done ~$100+ million dollar bits.
Regulators and regulations should require corporations to purchase enough deposit insurance to cover payroll (at least). Might not be a bad idea for the FDIC itself to start offering such a product.
But these rich people bailouts have to stop. It’s gross. Especially when we have to hear how struggling young people can’t get a measly $10,000 to $20,000 loan writeoff because it’s too costly and an issue of fairness. Give me a f****** break.
Theoretically, yes. But WF would have to register as an insurance company and play by all applicable rules.
I know this because a lobbyist group I did some freelancing for way back tried to do a thing where, if you were a paid member and used their “how to get out of a speeding ticket” book and lost your case, they’d pay the fine. The state of Wisconsin said “Okay. Then you’re an insurance company. Here are the rules you have to follow.”
They chose not to go through with the program.
My understanding is that this was, in part, an SVB requirement – companies that got VC and other loans from SVB needed to have a majority of their working money at that bank.
Sure, but which regulations and how are they enforced? I don’t think anyone is saying there shouldn’t be any banking regulations or that regulations are not necessary – it’s a question of the appropriateness and effectiveness of the regulation and its enforcement.
For example, lots of people talking about the 2018 legislation changes and stress tests – the irony is that the Fed-mandated stress tests did not include scenarios in which the Fed drastically increased interest rates. The government – and most everyone else – became so inured to super-low interest rates that considering problems of solvency due to rises in rates were not considered.
Not that I necessarily blame them, but I would expect they – above anyone else – would be most cognizant of the effects of the dials they control.
This is where the moral hazard comes in. The government, and this is just the latest example, will make depositors whole. The risk to large depositors is minimal because of this – they correctly conclude that if the bank they are using fails, that they will be made whole, or at least will be first in line to be made whole. That was and is the expectation and the FDIC limit is not a real limit anymore.
@Andy: Off the top of my head, the requirement that there actually be a risk compliance officer A) seems like a good idea; and B) probably should have been flagged here. I’m sure there are others.
Oh, I agree. There was no good option here. Let things rip and you risk a run on other mid-sized banks that would normally not have a problem. Make those who made the bad decision to hand a big account over to a bank that couldn’t really handle it comfortable with making that decision again is a really bad idea. The only thing we can hope is that the reputational risk of making stupid decisions like this will have some impact.
I worked at a mortgage banking company during the S&L crisis/circus in the late 80s. Regulations result when people at companies make boneheaded decisions. They don’t come out of thin air.
The Biden Adminstration has done an excellent job and deserves great credit for agility, pragmatism and speed of response. Without caveat.
If you read the Financial Times profiles I shared you should find a better understanding as the general reporters / general newspaper reporting on this subject is at best mediocre.
SVB (not SVC) issue was
(1) it received massive inflow of deposits (essentially as historically for them, VC tech company in the vast majority) in 2020-2021, over 100 billion expansion
(2) It was not in position to do what it had done historically, which is to lend such out, there was too much inflow – their lending book they maintained good quallity one notes, good lending discipline
(3) a bank has to do something with that money so they chose a strategy of placing the excess deposits into US federal paper
(4) at the time in the extreme low rate environment and chasing yield, they chose to place a large amount in long-dated US treasuries (as longer-dated = higher rate). This while a direct financial return sensible was extremely risky relative to the mismatch with sight-deposits callable at any time that it was an implicit one-way bet on interest rates – the same direction as their sector focus – that is both their lending portfolio AND their asset portfolio were highly aligned in value and sensitivity to any interest rate changes (which given near zero Covid environment no one in banking should have believed was going to go lower… so only Q of how long it stays low).
4.a: Short-dated security portfolio would have given less return but would have by being replenished/updated naturally on short maturities would have adjusted better to interest rate rise risk and also woul have been of a maturity profile better resembling the deposit maturity (callable).
4.b: this is important as these securities are backing callable rather than time deposits and if your depositing companies start needing unusual amounts of cash, you are going to need to sell these things – and possibly fast.
(5) they apparently at some point dropped their hedging on rates
(6) this asset portfolio was marked as Hold to Maturity – that is the bank was affirming they were not for trading – and they were not. And this was perfectly fine so long as they did not sell into a rising rate market (and this asset portfolio was not intended to be sold so long as the deposits did not start an outflow) – paper market value losses if you are holding to maturity are genuinely irrelevant to you, as if you do not sell you are going to get your coupon return and then the principal and what the secondary market said about resale value is completely irrelevant to the cash you pocket. This is not as some innumerate journo wrote today an accounting loophole, it a cash reality.
(7) as the Covid effect started to recede for the tech sector and excessive boom faded, particularly in 2022 – at the same time they lost their Chief Risk Officer – they began to experience a deposit outlow that accelerated.
(8) in rising rate environment which by early 2022 was an obvious forward development, they were doubley badly positioned
If one looks at FT’s Martin Wolf’s chart in https://www.ft.com/content/09bfbb8d-22f5-4c70-9d85-2df7ed5c516e you can see clearly how extremely unusual the SVB position was – nobody on a marked to market basis was as badly hit as them by a long country mile.
@gVOR08: this is not a discovery of 2008, but for precision a commercial bank like Wells Fargo is not going to write such a default contract for various technical reasons.
@Mu Yixiao: Wells Fargo would not need to be an insurer in such a sense for such purposes, one does default swap contracts outside of insurance, the Credit Default Swaps are an example. However a systematic sized commercial bank would not find such a thing interesting in the least. Another type of institution might, but given the margins in such a business I can not see any private entity finding this particularly interesting to do.
@Andy: Silicon Valley Bank extended certain kinds of non-collateralised and revenue participating financing that is not typical of ordinary commercial banks. These are relatively exotic. Deposit based security becomes an alternative to other forms of loan or financing line security / collateral which can be an interesting option for young asset-light companies whose borrowing profiles also are well out of the range which Founders would provide personal guaranties.
What SVB did was in short radically different than the kind of banks most everyone here is familiar with. As a venture bank that was highly specialised, their strength and weakness was extreme specialisation – which provided access to financing to a category of business that normally has trouble raising debt at tehir stage and profile.
@Andy: the FDIC limit has not been a real limit in times of crisis since the 1980s. Uninsured depositors were protected in the financial crisis, and they were protected in the S&L crisis after the failure of Continental Illinois in 1984.
The reality is that when a banking system is going down in a panic, the collateral damage from a system collapse makes the choices of lesser evils quite clear. The econometric data from countris that experience real financial sector (banking sector) collapse is stark – the theoretical economist risk on moral hazard is nothing compared to the real risk experienced on collapse
(but this does refute the Libertarian’s foolish idealised market vision and arguments against regulation)
@Sleeping Dog: as today’s return to panic shows, plenty of risk remains, if one tried short-term strategy one lost. Also hedges lost. And I can say those of us on other side of Atlantic had a most interesting day due to largely irrational panics even on European side
@Jen: This point is important, as it is in fact the one fact point to date that I have found quite shocking – and is the one that if one is a financial institutional professional one finds a red flag.
It’s all fun and games until someone loses an eye.
Illustratively of why theoretical moral hazard discussions the Swiss intervene to backstop despite European application of full kit Basel III – the reality is that deposit taking banks can not survive depositor panics, this has and always will be the case.
Sure, but this is self-reinforcing. And telling people that deposits over the FDIC limit aren’t insured when in practice they are creates certain behavioral incentives. It’s the same problem when many important people, including people in Congress like Barney Frank at the time, insisted that Fannie Mae and Freddie Mac would never get bailed out in a crisis, but of course, they were.
The problem I have is we pretend like we are not socializing costs when in fact we do so consistently. Having a policy and regulatory regime that is supposed to do one thing, yet in reality does something else is, at best, kind of dumb. If we’re going to have a policy where depositors will always be made whole, then make that the policy and implement the details to achieve that and quit pushing this fiction that depositors over the FDIC limit are at any real risk.
@Andy: Mate, that train left the station forty bloody years ago. 40 years ago.
You have spent (as has with less pretence, Europe) forty years on this pretence – the “fiction” is in effect an optionality for regulators. In other circumstances not covering the ostensibly uninsured could be an option.
I understand it’s been going on for 40+ years. It still ought to end or be rationalized into something coherent and less deceptive.
I guarantee that fear of a 5% loss would be enough to get people to move their money fast, which would create a panic at other banks deemed to be at risk.
That would not be good for the system as a whole, especially implemented as a sudden ad hoc policy decision.
It’s the ad hoc nature that is probably the biggest problem, as unknown and unexpected financial effects spook people.
I would honestly like to see a move to higher FDIC limits tied to tighter regulation (with multiple different levels of insurance and regulation), and letting depositors take a haircut above that limit.
It is in our interest for companies to store their payroll somewhere safer (assumption here that more regulation is safer, which is generally but not always true) to reduce the likelihood of pile on effects of bank failures.
Elizabeth Warren likes to say that “banking should be boring” — and I agree. We should be nudging big accounts to the most boring banks that take the fewest risks and/or nudging the banks to be more boring.
@Andy: The general public does not understand banking. Even educated people do not understand banking.
Any sufficiently sophisticated banking regulation will seem deceptive to you all – as it will be complex and not digestible (or it will be primitive, and inefficient and thus in the end harming to even the average joe).
@Gustopher: Madame Warren’s populist sloganeering is without doubt nice politics for her audience. It is however empty posturing and incoherent with the realities, inescapable mechanical realities of banking in taking savings that are accessible and converting them in long-term funding is inherently unstable. It is an act of self-deception to believe otherwise. But for better or worse it is apparently a necessary act of self-deception in general.
Simple pallative declaratoins “boring banks” “banks more boring” translate into amongst other things, (1) less funding to start-ups (SVB did this perfectly well, their loan book did not explode through several generations of crises), (2) more money moving to ironically less-regulated forms such as money market funds and like, which then actually make less money available to the real economy, the main-street economy, than banks, although often in their placement and structure, perfectly fine soures of liquidity to leverage for the High Net Worth – if you will people like me which you people love to hate.
In the end the backstopping for SVB and the Regional Banks as it is about liquidity-to-confidence criss and not inherent solvecy – unlike 2008 which was inherent solvency failure (or insolvecy rather) – is not likely to cost the average tax payer anything (unlike write offs of loans) and will have an upside in avoided financial crisis driven recession à la 2008 which took a decade globally to recover from.
The essence of reaction here is largely misplace class-driven moralising reaction. Companies at cash deposits at risk and you think “rich guys” rather than “the salaries of employees and payments to small business service providers, the cleaner vendors” – as you don’t understand that the HNW rich guys wealth assets are not kept in cash deposits in a commercial bank.
Aiming your ire at the Libertarians and the idiot Fox-MAGA fraction going on about woke in a stupid disgusting manner or hypocritically attacking Biden, this rather makes sense. The other prescriptions based on thin understanding you might well want to take a pause on.
For the record, that is not why I hate you.
@charon: The information as to the profile of SVB was and is quite available, even part of proxy fight in 2021 relative to a take over. It is not secret. What one concluded out of the subjective potential of a liquidity squeeze is another matter.
In the end, there is No Regulation In The World that makes a run on deposits with 30-40% withdrawals survivable by any bank anywhere. None, nada, zero.
The moment Thiel & Co made their call to withdraw funds (instead of partcipating with their fellow VCs in the then ongoing emergency backing discussions to back the bank and stabilise), SVB was toast. But it was Toast because of those messaging not because it was inherently toast.
@Gustopher: I am sure you have any number of tedious reasons to dislike me personally but the comment of course was not about any reason you have to dislike me the individual, but that your “solution” or Madame Warren’s solution would in fact in the final analysis hurt main street financing and benefit oligarchs. I can say this without doubt as I work in markets where such applies, and the Big Families benefit via shadow banking, inaccessible private pools, and the little guys have crimped access. And one goes round-and-round without admitting what the real issue – that the structure is not really benefitting the little guy, it in fact benefits the oligarchs (and me I suppose although I have no particular love for it and at least speak openly rather than in typical francophone maquillage dressing up oligarchic interest in grand philosophising slogans)
The Sloganeering is nice Populist posturing but is a bad ultimate solution.
It is further worth observing that the Market Discipline much touted in fact worked, once the sophisticated corporate actors sniffed out that the emergeant instability (which arose not from the lending but from the boring assets) they pulled their money out – however we see that laying aside simplistic Libertarian assertions about Market Discipline, it is not so simpleas that market discipline set off a contagion of panic that irrationally then is putting otherwise perfectly fine banks and business at risk.
The comments here are confused when they talk about the rich guys – the ones behind the actual bank money, the Equity in the bank (the shareholder-owners) are in fact wiped out. As are the Senior Debt holders. They are not bailed out.
However the simplism of Libertarians nattering on about market discipline is an error – pure market discipline unsupported by government regulation is fine in some areas but it is not workable in every application (another area would be health care where one should not be expecting patients to “market discipline” bad hospitals etc).
While Madame Warren’s prescriptions are simplistic populist wrong-headedness, the need for regulation and the refutation of the market purists is also clear
Given how often bankers and corporate finance departments have to be saved from their own banking screw-ups, bankers and financiers don’t understand banking.
@Lounsbury: “Even educated people do not understand banking.”
Only LOUNSBURY understands banking.
Can’t believe you made it through so many messages before reminding the world how much better you are than everyone else. “Look on my works, ye mighty, and despair!”
As best I can tell, nobody wants/wanted to save SVB. They earned their fail. The goal was simply to stop contagion. Since nobody else’s money was in danger due to SVB’s screwup, that ought to be a question of messaging, not of bailouts.
Detailed breakdown of SVB liabilities (i.e., deposits).
Yes, which is why depositors should not have to perform due diligence and constantly analyze a bank’s finances to determine if their money is safe.
Bank runs are driven by human psychology. This is why the current system is bad. We pretend that deposits over $250k are at risk when they aren’t, but in the back of people’s minds they think that maybe this time they won’t be made whole, and so when Thiel (or whoever) starts the ball rolling downhill, others scramble to get their money out and the bank run is on.
So the question is how to prevent or minimize bank runs and cut that psychological instinct off at the pass. And it seems to me the simplest answer is to guarantee all or almost all deposits as a matter of policy. We do that as a matter of practice but not as a matter of policy. That breeds uncertainty which is bad from a regulatory standpoint.
When depositors don’t think they might lose their money when a bank has problems, they are going to be less likely to try to pull their money out when things start looking bad and create a bank run. And I think the result would be fewer runs and if that had been in place, SVB would probably be fine.
Getting back to people who understanding banking, well that would be bankers. And they and their investors ought to be the ones who are both responsible and accountable for properly running the bank. So when a bank fails, the government ought to protect depositors, nationalize the bank, fire the bankers, and then hand off the assets and liabilities to other banks or a new bank. Or if it’s not that bad, the government can do what it did here, which is step in, fire management, and get the place on a sound footing.
To me most of economics is about psychology and therefore, incentives matter a great deal. Depositors need the incentives to not start or participate in bank runs. Bankers need incentives not to be stupid or risky. Right now, our regulatory policy doesn’t do either of these things, at least not as adequately or as well as it should.
The tedious is definitely part of it.
Good god, man, you do go on, and either never get to a point or just bury the point under so much florid fluoride and prosaic prose that you might as well be writing in Norwegian.
@DrDaveT: In fact there was an organised recapitalisation rescue effort and there is substantial interest among venture funds in this. Had not Peter Thiel and compatroits triggered the rout on Thursday, this might have been pulled off by Monday. The FT links I have given rather detail this. (I add Kevin Drum quite independently – sans financial nous – has done so as well).
There was no fundamental reason for SVB to fail than panic.
Lest it not be clear, I was largely saying this as excepting some very gross parameters, even for the relatively sophisticated this is not a reasonably easy task. Even for corporate finance directors at modest but sophisticated companies.
And the psychology aspect of banking – utterly and permanently inescable – is a risk factor one can not model for.
In the first I agree. In the 2nd I do not agree. I worked in central bank regulation, there are trade-offs. I think optionality for critical intervention is necessary. Backing 100% all the time is not needed – earlier failures over the past nine months passed unnoticed – being in marginal entities and not highly mediatised. General public did not notice. (people like me see it, but not you)
So 100% permanent guaranty is an added expense that is not needed in all cases. And if not blanket does present a bit of discipline to marginal actors. This is not to say the current US configuration is ideal or shouldn’t be modified (the insanely complex layering of your bank regulatory system which is much much more than just the two federal entities you all hear about all the time is deeply unwise and incentivizes gaming the system).
But full blanket is not a good choice and is an over-reaction to this situation IMO.
The subject is fiendishly complex – with trade-offs not evident – but in the end banking is inherently an unstable business of taking short savings and lending long, it is spinning plates on a set of poles in a windy piazza (or driving at night on icy pavement – the driver typically understands perfectly well how to drive, and even probably how to drive on ice, but one hits that unexpected icey patch and bang, one’s car is in someone’s living room…). There will be accidents.
Had SVB had about 48-72 more hours – had Mr Thiel & his colleagues not stabbed his VC colleagues in the back and not made the call to pull deposits – this would have been a page 3 kerfuffle of interest to people like me and never entering this blog at all.
@wr: Really, WR, do try to be somewhat less boring, the tedious uncreative resentmentful sniping is rather pathetic and predictable, even Dilbertesque. Try to show some panache in the future, some flair with an insult, I do appreciate entertainment and unlike you, not paper-thin skinned.