A very measured explanation without the rhetorical panic I'm seeing everywhere. Thank you for not pulling on heartstrings with evocations of the plight of low salaried workers not to blame for this mess. I am continuing to wonder about what audits were done and what they said.
On a purely vibes level, I wouldn't object to an outcome in which deposits are guaranteed but David Sacks and Jason Calacanis in particular get 100% wiped out
I agree -- a very measured and clear explanation. However, it leaves out one, very important item -- how did the regulators who were supposed to have been monitoring this bank miss the imbalance between their risk profile and their asset profile? SVB was a "state bank" chartered by California and, I believe, a member of the Federal Reserve System. Thus, California's Department of Financial Protection and Innovation (DFPI) and the Fed shared responsibility for overseeing the bank's risk management. News reports indicate that SVB's risk profile was unique in that it was exposed to billions of dollars of short term risk -- the payroll and other cash needs of tech start-ups -- but backed these risks largely with illiquid securities, mostly long term government and corporate bonds. It will be interesting going forward to learn how DFPI and the Fed failed to detect SVB's vulnerability and direct the bank to take timely corrective action. The interest rate inflation that ultimately undid SVB has began in 2021. Two years seems like enough time to have detected SVB's exposure and taken action.
An excellent read and have to say reassuring as well. Been hearing all sorts of horror stories since certainly gets u thinking....Also reminds us to check out any banks we sign on with, especially today with the higher savings and CD rates.
What is the best site to do a bank financial check up?
Mar 12, 2023·edited Mar 12, 2023Liked by Noah Smith
Wouldn't a vote by the fed saying that SVB's collapse represents a threat to the stability of the financial system kinda be in tension with any message saying this isn't a reason to worry about deposits at other banks?
"The second difference is that a deposit guarantee wouldn’t cost taxpayers any money. It would be paid for by a new deposit insurance fund that banks pay into. So regular folks won’t be on the hook for some Silicon Valley billionaire’s mistakes. Again, not a bailout."
This is not economically accurate; at least it requires some more support. The incidence of the cost to the deposit insurance fund, banks, and ultimately bank shareholders or customers is not necessarily zero. Unless you are now asserting that banks are in perfect competition and unable to pass on any cost increase like this to their customers.
Also let's be a little clearer, saying customers confuses the fact that we are talking about depositors/creditors getting a guarantee. You can be a bank's customer without being a depositor/creditor.
All SVB depositors going to be made while on Monday and all the smaller banks now have access to a funding window (with safe collateral taken at par) so essentially making all the deposits here sort of insured as Noah explains well. Fed announcement here. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
"The only worry regarding a deposit guarantee is that it would create moral hazard. Some people will fret that this sort of move would effectively make all uninsured bank deposits FDIC insured, which will encourage people to put their money in crappy banks in the future."
No. No. No. Vehemently disagree. You've totally missed the moral hazard - It's not the depositors that are a major worry, it is the moral hazard of the regional banks themselves. If all deposits are insured, banks, particularly the regionals, can happily pick up pennies and nickels in front of a steamroller, knowing full well that an incredibly poor bet that "interest rates are fixed" is somebody else's problem.
"The bank executive lobbying in this instance, is the same Greg Becker who “sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. The sale of 12,451 shares on Feb. 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on Jan. 26.”
The federal reserve is not federal, nor does it have reserves. The banks have been pulling this shit for hundreds of years. Fractional reserve banking...grab a f'ing clue.
“Unless our economic officials are extraordinarily stupid, I don’t see anyone’s deposits going up in smoke.” Translation, judging by the track record of oir economic officials - we’re screwed.
A very measured explanation without the rhetorical panic I'm seeing everywhere. Thank you for not pulling on heartstrings with evocations of the plight of low salaried workers not to blame for this mess. I am continuing to wonder about what audits were done and what they said.
On a purely vibes level, I wouldn't object to an outcome in which deposits are guaranteed but David Sacks and Jason Calacanis in particular get 100% wiped out
I agree -- a very measured and clear explanation. However, it leaves out one, very important item -- how did the regulators who were supposed to have been monitoring this bank miss the imbalance between their risk profile and their asset profile? SVB was a "state bank" chartered by California and, I believe, a member of the Federal Reserve System. Thus, California's Department of Financial Protection and Innovation (DFPI) and the Fed shared responsibility for overseeing the bank's risk management. News reports indicate that SVB's risk profile was unique in that it was exposed to billions of dollars of short term risk -- the payroll and other cash needs of tech start-ups -- but backed these risks largely with illiquid securities, mostly long term government and corporate bonds. It will be interesting going forward to learn how DFPI and the Fed failed to detect SVB's vulnerability and direct the bank to take timely corrective action. The interest rate inflation that ultimately undid SVB has began in 2021. Two years seems like enough time to have detected SVB's exposure and taken action.
A clear explanation of a complicated situation.
Thank you for a great article. One question: if there is very little downside for insuring all deposits, why do we hvae uninsured deposits at all?
An excellent read and have to say reassuring as well. Been hearing all sorts of horror stories since certainly gets u thinking....Also reminds us to check out any banks we sign on with, especially today with the higher savings and CD rates.
What is the best site to do a bank financial check up?
Well written!
Wouldn't a vote by the fed saying that SVB's collapse represents a threat to the stability of the financial system kinda be in tension with any message saying this isn't a reason to worry about deposits at other banks?
"The second difference is that a deposit guarantee wouldn’t cost taxpayers any money. It would be paid for by a new deposit insurance fund that banks pay into. So regular folks won’t be on the hook for some Silicon Valley billionaire’s mistakes. Again, not a bailout."
This is not economically accurate; at least it requires some more support. The incidence of the cost to the deposit insurance fund, banks, and ultimately bank shareholders or customers is not necessarily zero. Unless you are now asserting that banks are in perfect competition and unable to pass on any cost increase like this to their customers.
"Maybe that was a little negligent, but it wasn’t greedy — they didn’t get rich by having a checking account at a badly run bank."
Did they get rich? No, but they certaily got a lot of benefits that a boring diversified bank didn't offer. There are reasons so many start ups used SVB (https://twitter.com/jonwu_/status/1634250770555219970).
Also let's be a little clearer, saying customers confuses the fact that we are talking about depositors/creditors getting a guarantee. You can be a bank's customer without being a depositor/creditor.
All SVB depositors going to be made while on Monday and all the smaller banks now have access to a funding window (with safe collateral taken at par) so essentially making all the deposits here sort of insured as Noah explains well. Fed announcement here. https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm
"The only worry regarding a deposit guarantee is that it would create moral hazard. Some people will fret that this sort of move would effectively make all uninsured bank deposits FDIC insured, which will encourage people to put their money in crappy banks in the future."
No. No. No. Vehemently disagree. You've totally missed the moral hazard - It's not the depositors that are a major worry, it is the moral hazard of the regional banks themselves. If all deposits are insured, banks, particularly the regionals, can happily pick up pennies and nickels in front of a steamroller, knowing full well that an incredibly poor bet that "interest rates are fixed" is somebody else's problem.
Via Adam Tooze at Chartbook
"The bank executive lobbying in this instance, is the same Greg Becker who “sold $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses that led to its failure. The sale of 12,451 shares on Feb. 27 was the first time in more than a year that Becker had sold shares in parent company SVB Financial Group, according to regulatory filings. He filed the plan that allowed him to sell the shares on Jan. 26.”
As reported by Business Standard
https://www.business-standard.com/article/international/svb-chief-greg-becker-sold-3-6-mn-in-stock-days-before-bank-s-failure-123031100067_1.html?utm_source=substack&utm_medium=email
The federal reserve is not federal, nor does it have reserves. The banks have been pulling this shit for hundreds of years. Fractional reserve banking...grab a f'ing clue.
“Unless our economic officials are extraordinarily stupid, I don’t see anyone’s deposits going up in smoke.” Translation, judging by the track record of oir economic officials - we’re screwed.
Just once in my life I want to be „systemically important“.