Some insight into what is going on vis-a-vis banking oversight. Banking supervision has been throttled back again with the idea that banks, left to their own devices, will manage their own risks appropriately. [timestamped to segment]
I already pay a monthly fee for my account lolWhy would banks take any deposits then though?
EDIT: I guess everyone would have to pay a monthly fee to the bank for their accounts.
If that’s the case that’s fine but then the solution is to fully guarantee deposits AND charge the necessary fees to fund that guarantee.
We know that, at a certain point, letting a company fail is worse right now. But the truth is that it almost certainly better in the long run. We are in this situation today exactly because we bailed them out in 2008. There is no reason not to gamble big if you can't lose big. Since we have an entire half of our political system that is opposed to regulating the problem, we will just keep having this happen over and over if we keep shielding them from the consequences.
I think you're underestimating how much salaries, real estate, equipment, hardware, and compliance cost. Banks flat out wouldn't exist today if they only relied on their own money. Or the monthly fees would be so high that you'd shove a shit ton of already disadvantaged people out the door. Thats a big enough issue with banking as it is.Hot take: banks shouldn't be able to touch deposits. All moneymaking endeavors should be done with their own money, and any interest earned on that money. Investments in the bank should be done contractually with the understanding that the investment cannot be withdrawn until the contract expires, at which point each goes their separate ways, or a new contract is negotiated. Yeah, banks won't make as much money. I don't care.
How do you resolve the situation then? Because at present, if enough people decide to pull their money out because they've lost trust in their institution, the entire banking industry seemingly collapses overnight. That doesn't sound sustainable.I think you're underestimating how much salaries, real estate, equipment, hardware, and compliance cost. Banks flat out wouldn't exist today if they only relied on their own money. Or the monthly fees would be so high that you'd shove a shit ton of already disadvantaged people out the door. Thats a big enough issue with banking as it is.
Seems like a recipe for moral hazard to me. If banks know they can make huge, irresponsible bets with depositors' money and get paid if they win and be bailed out if they lose then there's little incentive to be responsible.I'm not sure it is. The Fed already has means its shown are capable to resolve situations like these although I do think the removal of their 13(3) powers is a general risk that could bite us in the ass at some point. And, realistically, the banks aren't just going to see a higher fee and say "Oh dang - less profits for us I guess." They'll trim staff\services\add fees\reduce rewards\etc. Granted there is a cost of most regulations so the consideration is where to drawn the line of overall benefit. Pure speculation on my part but I suspect the the public would pay more overall if that were the case via fees\opportunity cost\convenience\etc than occasional influxes of money to the system because they are protecting deposits all the time not just when needed. I also suspect that offering guarantees high enough to cover medium sized companies would require going into the multimillions of dollars of guarantees. While most businesses by number of entities are small businesses with less than 20 people their total capitalization is roughly equal to medium sized business which have 1500-2000 employees. A 1500 person company could easily have over $10M going through a bank every month just for payroll alone. Covering just that would require a 40x increase in FDIC limits. I'm kinda throwing darts with figures but even cutting it in half is a pretty drastic increase. It's probably enough to distort financial markets in all kinds of not fun and unexpected ways. Covering deposits above the existing guarantee once every 15 years or so doesn't seem that bad in comparison - at least in my mind.
We can't move to just having big banks cover big deposits as that will just encourage consolidation. Technically solvable via anti-trust laws but that hasn't really been a thing for far too long. I see that as even less likely to change unfortunately.
How do you resolve the situation then? Because at present, if enough people decide to pull their money out because they've lost trust in their institution, the entire banking industry seemingly collapses overnight. That doesn't sound sustainable.
And if banks cannot survive without essentially relying on govt assistance when any perturbance is created, the business model needs to change. Dramatically, if necessary.Seems like a recipe for moral hazard to me. If banks know they can make huge, irresponsible bets with depositors' money and get paid if they win and be bailed out if they lose then there's little incentive to be responsible.
Also, if the federal government is now insuring all deposits in banks do we even need banks for depository services? Could just make that into contracts for service/transaction facilitation, etc. It's all just numbers on a spreadsheet now anyway so it's not like 95% of people need a vault or anything.
Oh trust me, I know. It's far different when the experiment is mostly opt-in (stock market) vs required (banking) though.The economy has always been a giant experiment in trust/fear.
They lost big though. Bank is gone and stock is worthless. Who didn't lose were the depositors not the owners.We know that, at a certain point, letting a company fail is worse right now. But the truth is that it almost certainly better in the long run. We are in this situation today exactly because we bailed them out in 2008. There is no reason not to gamble big if you can't lose big. Since we have an entire half of our political system that is opposed to regulating the problem, we will just keep having this happen over and over if we keep shielding them from the consequences.
How do you resolve the situation then? Because at present, if enough people decide to pull their money out because they've lost trust in their institution, the entire banking industry seemingly collapses overnight. That doesn't sound sustainable.
Seems like a recipe for moral hazard to me. If banks know they can make huge, irresponsible bets with depositors' money and get paid if they win and be bailed out if they lose then there's little incentive to be responsible.
Also, if the federal government is now insuring all deposits in banks do we even need banks for depository services? Could just make that into contracts for service/transaction facilitation, etc. It's all just numbers on a spreadsheet now anyway so it's not like 95% of people need a vault or anything.
The federal government will not bail out the “investors and owners” of Silicon Valley Bank, Treasury Secretary Janet Yellen said
If the risk is so low that would mean the cost to insure it is low. Right?There have been 373 bank failures in the US since 2009. How many times has the banking industry suffered significant turmoil because of those failures? Once? And during a time that is already strained for various reasons including the Fed trying to slow the economy enough they're likely willing to cause a mild recession in order to tame inflation.
Given the above mentioned bank failures over the previous 14 years in 372 times out of 373 times we haven't haven't backstopped bank deposits like this. And SVB investors are still holding the short end of the stick. Those are some pretty long odds if your plan depends on a bailout if you screw up. I'd also point out their 'bet' was stashing too much money in ultra safe US Treasuries and were 24 hours away from a non-government based solution. If everything else was the same but we were a few years back before social media was causing bank runs they would have been fine. I do think we'll see some adjustments because of social media - maybe in the form of tighter daily transfer limits. I doubt we'll see that at the regulatory level though
@Exterous wasn't referring to the failure of SVB, which is more or less a nothingburger in the grand scheme depending on what industry you're in. He's referring to all the mid-sized firms that banked with SVB, and how "contagion" would have spread if essentially their money was stuck for weeks. As one example, I believe Roku had $500M under deposit at SVB (if I remember correctly). Roku is a moderately successful firm (albeit never solidly profitable), and it wouldn't take a genius to see they'd probably go under if they didn't have access to their funds.We know that, at a certain point, letting a company fail is worse right now. But the truth is that it almost certainly better in the long run. We are in this situation today exactly because we bailed them out in 2008. There is no reason not to gamble big if you can't lose big. Since we have an entire half of our political system that is opposed to regulating the problem, we will just keep having this happen over and over if we keep shielding them from the consequences.
Here are the FDIC assessment calculators if you'd like to find outIf the risk is so low that would mean the cost to insure it is low. Right?
Help me out. What does the calculator say for unlimited insurance?Here are the FDIC assessment calculators if you'd like to find out
Why are we talking unlimited insurance? First that isn't a realistic thing that would happen - the government would run out of money at some point. Second SVB wasn't insured\backstopped by the government for 'unlimited' amounts of money. They were backstopped for whatever the gap between assets and deposits is. At present that is up to $25 billion with the exact amount depending on how withdrawals compare to asset values in the near future. Would they have gone higher? Almost certainly. Where is the line? You'd have to ask Powell and YellenHelp me out. What does the calculator say for unlimited insurance?
So what line are you drawing as a backstop and why should we believe it, considering the previous line was not honored?Why are we talking unlimited insurance? First that isn't a realistic thing that would happen - the government would run out of money at some point. Second SVB wasn't insured\backstopped by the government for 'unlimited' amounts of money. They were backstopped for whatever the gap between assets and deposits is. At present that is up to $25 billion with the exact amount depending on how withdrawals compare to asset values in the near future. Would they have gone higher? Almost certainly. Where is the line? You'd have to ask Powell and Yellen
This is a terrible idea for exactly the reasons we're seeing with SVB right now. It gives high value depositors too much power to collapse a bank through a staged run because they could so without fear of loss.Bingo
We need to realize it should all be insured on the deposit side. But charge for it.
Why would I draw the line? That is a terrible idea. I'm going to go out on a limb and say the Feds and Treasury have a much better education and certainly privileged insight none of us have to be able to set the line.So what line are you drawing as a backstop and why should we believe it, considering the previous line was not honored?
My position is simple. If you’re going to guarantee all deposits then charge depositors the cost of that.Why would I draw the line? That is a terrible idea. I'm going to go out on a limb and say the Feds and Treasury have a much better education and certainly privileged insight none of us have to be able to set the line.
Help me understand your ire\stance\etc on this a bit because to recap:
-SVB investors and owners are completely wiped out by this. The value of their ownership and SVB holdings is exactly $0 combined
-Over the past 14 years 0.2% of failed banks banks have been backstopped like this. That seems very unlikely to cause a moral hazard. It also means that 99.8% of the time the system worked without any extra effort required. That seems like a pretty good success rate (not that I'm against some tweaks like looking a lot more closely at HTM vs AFS. I'd also agree that size of impact for the 0.2% matters but this has been pretty mild even as 'bad' bank failures go)
-Companies who held their $ at SVB won't be harmed or struggle to make payroll. Payrolls were processed within 3-4 days of expectations
-The cost of the backstop is - at present- capped at $25Bn. It is unclear to me where that money is coming from at the moment but even if we assume taxpayers for some context - in 2020 the Feds were buying ~$100bn in mortgage bonds per month.
-Becker scheduled a stock sale on Jan 26th for Feb 27th per 10b51 rules.
The last option makes the most sense - but maybe because it also irkes me. I suspect that there was enough knowledge to know something bad was happening. But he has also been regularly selling stock for many years so the sale is in line with that for better or worse (Willing to wait for the SEC investigation into that though). Fortunately the rules have increased from 30 day to 90 day waiting period and actually took effect last month. 90 days seems a lot more reasonable than 30 days
Yeah, but slight correction. FDIC insurance is per account category, not overall account. You can have a cd, savings, money market deposit and checking all with 250K in them each and be insured for each one.You can have accounts at different banks though, right?
In the interests of pursuing the important questions posed here:I got a call today from Etrade, where I have a brokerage account. I also have a savings account there which has a 3.50% annual return at the moment. When I went to cash in August or so, I moved cash from the brokerage account to the savings account, what they call their Premium Savings account. Now, my financial consultant there at the time told me it was insured to 500k. I wanted to make sure, I found some conflicting info, but was assured it was 500k. I know this is possible for joint accounts, but I don't have that.
I can at any time transfer money from the Premium Savings Account to my brokerage account and invest in whatever, stocks, ETFs, etc. If I go to cash, I can immediately transfer that to the savings account and start earning interest (which is paid monthly).
Anyway, today I am called by someone else who tells me they are now my financial advisor at Etrade, I ask what happened to my old one and was told he's no longer with the firm. Seems they closed their S.F. office and she's in Seattle.
I ask about the 500k insurance and she tells me that because Etrade and Morgan Stanley (Etrade's owner) are separate entities they are able to insure my savings to 500k. Well, that's nice. What's even nicer is she told me I can open a 2nd Premium Savings Account at Etrade and get an additional 500k insurance, i.e. on that on top of the insurance on my other savings account. I ask if I can open additional savings accounts, she didn't know, puts me on hold, comes back and tells me there's no limit! Wow! Well, I have to wonder, that does sound too good to be true.