Granted if SVB had all these bonds that would pay out “guaranteed” that feels pretty strong
I am being glib, though I am very wary of the safety of things that aren’t just like… cash. “We haven’t had to take over a bank for 2 years!” Isn’t as much of a vote of confidence in a system as I’d like.
And, absence a run, they were somewhat safe. They effectively concentrated all of their risk in this category. And then got hit there
Just to be clear: the problem is that SVB didn't have enough loss absorbing equity. If they had more, they wouldn't be insolvent.
Suppose your assets are 50 dollar reserves and 50 dollar investments.
The liability side of your balance sheet is 20 dollars of equity and 80 dollars deposits. For a leverage ratio of 1:4.
If the investments drop 10 dollars in value (to 40 dollars), your leverage ratio goes to 1:8.
If the investments drop 20 dollars in value (to 30 dollars) your leverage ratio goes 1:infinity.
If your investments drop below 30 dollars (say to zero), you are insolvent.
Yes, reserves are a tool that banks can use. But that doesn't mean that legal minimum reserve requirements are a good idea.
The bank also had very few chocolate coins (probably none), but that doesn't mean requiring them to hold more of those in their vault would have improved matters.
The problem is that the bank is insolvent; not so much that the bank is out of liquidity.
If they were solvent, someone would lend them the liquidity they need.
Like eg a money market fund that sticks to short term government debt. Or a 'narrow' bank.
That sounds like a Ponzi scheme. Wiki:
>A Ponzi scheme (/ˈpɒnzi/, Italian: [ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
They had assets on their balance sheet that lost in value. They lost enough value to wipe out all the equity, and become insolvent.
Very similar to how your brokerage account can go to zero, if you trade on margin.
The brokerage liquidating your account is pretty similar to the FDIC taking over SVB.
(Yes, in a technical sense SVB went to infinite leverage for a brief moment. Just your brokerage account can go to zero if the market moves faster than your broker pre-emptively liquidates your stuff.)
What you want to keep banks afloat are capital buffers, not reserves.
Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules.
As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)