I'd also add that covering uninsured depositors isn't new behavior for FDIC, at least as I understand it. The mechanics of how it was done here are different than in previous instances.
And if we are going to expect them to be guaranteed in the future insurance rates must go up, not just to cover more things but to cover the riskier behavior it creates.
If we aren’t going to cover them 100% in the future then apparently it’s true that there are not just different classes of banker but different classes of depositors.
What's the difference between the FDIC insuring all deposits at US banks directly and US banks doing it themselves by forming a complete graph? (Other than there being a clear upper limit in the latter case, which is currently greater than $1b per account.)
But financially I think it's the same. If 400 customers each use 1 bank each, then a single bank failure means the FDIC needs to make whole one customer.
But if every customer put 1/400th of their wealth into each of the 400 banks, then FDIC has to cover all customers for 1/400th each.
The cost to us as depositors/taxpayers is equal.
If customers are only utilizing a single bank, and the FDIC will insure all deposits regardless of amount, they would need 400 times as much than would be necessary if the balances were swept.
> Insurance only pays out . . . if a bank fails
That's a good point. So one difference is that while the money is equally insured in both cases, the payout dynamics would change. Very roughly, the amount of a payout might be expected to go down in the cross-bank case (smaller account values, but then also more accounts per bank, so it isn't quite so simple), and the likelihood of a payout might be expected to go up (higher chance of failure with more and smaller banks). But this all depends on how interlocked the banks become; in the extreme they could end up functionally a single bank.
The first thing that came to mind for me is somewhat related: Spreading deposits across banks is relatively better for small banks and worse for big ones, since the small banks gain deposits and the big banks lose them. So you can definitely argue there's some advantage to keeping a lower insurance limit, although it gets murkier when we bring behavioral considerations and "too big to fail" into the picture.
This is new with SVB. I get the whole "250K minimum" argumemt, but this is the first where we are seeing major 10M++ depositors getting 100% guarantees.
I don't see issue with spreading money across smaller banks - other than perhaps they may not be able to assess risk as well as larger banks. But again, SVB.
I think one thing to keep in mind is that most bank depositors hold far, far less than the 250K guaranteed by FDIC. By a large margin. Id be surprised if the average was above 10K. There are $17T in deposits across the country [1]. The FDIC at the beginning of the year had $128B in balance as insurance to depositors [2].
[1] https://fred.stlouisfed.org/series/DPSACBW027SBOG
[2] https://www.fdic.gov/analysis/quarterly-banking-profile/inde...
The question is in what way(s) does it matter whether deposits are insured without limit in a single account, which is new, or with limits when spread across an arbitrary number of accounts, which isn't? If one costs 1x, why should the other cost > 1x?
It's a serious question. FDIC assessment rates aren't as simple as tax brackets and for example it's possible that the act of spreading deposits across more accounts in more banks would increase the fees paid into the existing system anyway.
It matters because only 1 (SVB) bank failed. If those depositors had their money swept across multiple banks this point would be moot.
Edit: If deposits are spread about multiple banks, the FDIC does not need to carry as large of a balance to cover the loses of any single bank, which results in less indirect fees to depositors of different banks.
If the deposit is 250k across 100 banks, and only 1 bank fails, FDIC is only on the hook for at most the 250k.
Now multiply that by number of depositors. It's RAID for banks. You're gaining fault tolerance by decreasing the impact of any particular failure.
Just wanted to say this is such a great analogy. Thanks.
Seems like having everyone use at least 400 different banks achieves one of the core goals of the FDIC guarantee - making small/midsize banks viable and preventing everyone from piling into the big four megabanks.
The regulatory regime is one that makes depositors whole when doing otherwise seems likely to cause a major crisis in the banking system. Which we've had for a long time. It merely seems inconsistent because evidence of "likely to cause a major crisis" differs by current possible crisis.
As https://www.bitsaboutmoney.com/archive/banking-in-very-uncer... explains in painful detail, the reasons why they likely concluded that there is systemic risk. But long story short, rising interest rates caused the banking sector to have $620 billion in unrealized losses. Unsurprising since the interest rate rise was *INTENDED* to make people lose money, making money more valuable relative to goods and services, which reduces inflations.
But $620 billion is substantially more than the $130 billion in the FDIC insurance fund. It is substantially less than the $2 trillion in equity in the banking sector, but both losses and equity are unevenly spread. Therefore there are banks under water, and others that are fine. But nobody is sure which are which. And given cash outflows from worried people, we were about to find out the hard way. And once there is a bank panic, even fine banks become not fine.
Like Wile E. Coyote, running off this cliff works fine until you look down. But we've looked down. And now the whole sector needs saving. Thus these actions.
They will go back to normal behavior once the crisis is over.
About 50 cents on the dollar.
The typical depositor in post-2008 bank failures (all tiny, until SVB and Signature) got about 75 cents on the dollar.
As far as I know, regulatory requirements require/encourage holding good bonds but if the FDIC is going to start treating gov/muni bonds of any maturity length as good as cash, then there's less reason to hedge against interest rate risk.
1. which seemed pretty likely, I know people who over the weekend were planning to pull all of their money out of a regional bank and put it in one of the 4 super banks Monday morning)
Agency MBS average trading volume is $250B to $300B a day, it could absorb SVBs entire bond portfolio without breaking a sweat in a single day.
Of course the banks are only happy to have ANY justification to complain and not raise saving rates, and blame the Federal Government.
But there have been no indication yet that the FDIC will be drawing on the insurance fund to cover the depositors.
It's hypothetical. The FDIC is likely to recover a vast majority of the uninsured deposits through asset sales, people just want to be outraged.
At smaller banks, 60-75% of uninsured deposits are usually recovered by FDIC and those banks went out of business for bad balance sheets, not bank runs due to duration mismatch.
We've gotten so used to assuming every statement is spin on 'you're getting screwed' that people assume it's always the case.
(Note that I’m not trying to suggest that you were not harmed, I just want to make sure that I understand the source of the harm.)
1) Is this outcome better than (expected) panic on the banks and bank runs? There still seem to be runs going on e.g. First Republic. Are the markets “calm” now?
2) Because insurance fund is not designed for the task it is currently experiencing, how the gap will be plugged?
3) Could this cause depositors move money from smaller banks to larger ones, and then larger banks just lend this money back to small banks w/some nice profit?
The assumption that an operating company should understand fixed income pricing dynamics, have a POV on future FED interest rate moves, and dive into each potential banking partners' asset duration is an interesting one, especially when most of SVB's deposits were made during a period of perpetually falling interest rates, where duration mismatch helped banks.
Relying on customers to check their bank, besides being fairly impractical for all but the largest and most sophisticated customers, is just going to trigger bank runs as soon as customers get any whiff of a problem.
I don't see the problem with unlimited FDIC provided the regulations are congruent with that. If you want to go the private route for better interest rates and take on the regulatory burden yourself, you can always go with an uninsured bank. If you just want a simple place to stash a few hundred million, why make you jump through hoops?
What I don't understand is why start-ups were apparently keeping millions of dollars of capital in a bank account rather than government bonds or other instruments, given that the FDIC limit was well known.
No sensical person is concerned with the interest rate on savings, it is nearly zero and effectively negative.
I dont believe anyone should have a single account with 100 million dollars nor should banks allow that, but they do. Perhaps part of the problem is that the $250k coverage is a value that should adjust annually and coverage should be relative to each account as opposed to each account holder
This might have been true for the past ten years or more, it's not true now. You can easily find savings accounts now which offer over 3%, and it's going up as the fed continues to raise rates.
This still might not be the best investment when you consider the high inflation, but it's great for emergency fund type accounts that need low risk, high liquidity.
I cant believe this got downvotes...
But isn't it likely to cause more bank runs if depositors lost money? So in a real sense, many other banks were saved from going under, by assuring depositors that their money is safe, whichever bank they're at.
My understanding is that other banks have massive unrealized losses as well, due to the steep interest rate increases. So they're all kind of vulnerable.
How were you harmed specifically?
> you will not see the interest rate on savings accounts go up as much as it might have otherwise.
Bullshit. Interest rates for savings accounts are and have been an absolute joke. Are they going to become a more hilarious joke? Probably but seriously, who cares?
> I'm not saying this outcome is terrible, perhaps it was the best solution for the system as a whole.
Yes, it is the best solution, otherwise you'd have written a completely different statement if the bank run went viral and you would have been really harmed.
That's like asking how you were specifically harmed as a result of there being one more CO2-spewing pickup truck in the world. Bad things amortized over millions of people are still bad, even if the harm to any individual is too small to verbalize.
> "Insured cash sweep is a safe and convenient service that provides FDIC insurance on large balances while giving you access to your money, as well as the ability to earn interest. Choose between demand accounts, which offer unlimited withdrawals, and money market accounts that permit up to six withdrawals per month."
I've heard some claims that SVB was offering incentives to depositors who kept their funds in one lump account, is this true and if so what's the benefit to SVB from doing that?
What’s unforgivable is why these large depositors that didn’t tend this cash for short term operational needs didn’t have the funds in govt securities in an insured brokerage account at a trust company…
Where many venture backed companies got hung up though is that the terms of venture debt provided by SVB required the borrowers to keep use SVB as their bank…
Do you have some reliable source about it?
(NOT a "look at it logically" or "here's how my health insurance works, why would the FDIC be different", or "do your own research" or anything else that's some random internet comment - I'm looking for real meat about this claim).
Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
In other words, if the FDIC's current funds can't cover the bill, an extra fee will be levied on banks to make up for it.
The problem, as it were, isn't some lurking or hidden loss, it's arguably that these answers aren't currently available and we don't have the slightest idea in the public what will happen if profits result from the bailout venture. This shouldn't be a "heads-I-win-tails-you-lose" redux.
The only thing we can be certain of is shareholders are wiped out and general creditors will take a significant haircut.
I guess the FED could have bullied some banks into buying the securities at a higher rate, but the books themselves are transparent.
1. Illiquidity. For example, there might be few people anywhere in the world with the expertise to accurately value some weird loan to a startup. If those prospective buyers are busy or undercapitalized, then the market may become inefficient, with best bids well below FMV. If we wait for those expert buyers to research the startup's credit risk, to raise more money themselves, etc., then the bids will eventually come back up to FMV. This is the classic "It's a Wonderful Life" style bank run, and was an important dynamic in 2008.
2. Time value of money. Assuming positive interest rates, a dollar later is worth less than a dollar now. When interest rates increase, the NPV of a future cash flow decreases, so the FMV of the corresponding asset decreases. This isn't a market inefficiency; if you assume that money is lent at interest and no riskless arbitrage opportunities exist, then it's just how money works.
The SVB's problem was #2. There's a liquid and orderly market for their assets, trading at prices close to those predicted by a simple NPV calculation; that price is just lower than the SVB wished. Hold-to-maturity accounting allowed them to ignore that, but that didn't change the economic reality.
The FDIC's current funds were $128.2 billion on December 31 2022
SVD had ~$200 billion of deposits December 31 2022 - but obviously had significant withdrawals prior to being taken over. Likely < 100 billion remained.
Beyond the special assessment, they almost certainly need to raise a new assessment to cover $250k+ deposits. Full insurance can't be on a discretionary basis.
For the Treasuries, this is known but not public. For the MBS, a theoretical value is known but not public. (The federal government has to sell these securities. It doesn't make sense to announce the holdings so they can be front run.)
They state clear as day that they had 91 billion of securities, currently worth 76 billion in their hold to maturity portfolio.
In their avalable for sale (AFS) portfolio, they had 28 billion, currently worth 26.
They break it all down by asset type, MBS, treasuries, foreign debt, ect. They break it down by the duration, eg <1yr, 5-10, 10+ yrs
There is no mystery. I dont know why people keep saying this.
Check out page 124 onward if you are curious: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d...
Yes, categorically. No, not specifically. 5 and 10 years produce different answers, particularly with current convexity. (It is fine if you're trying to get broad-grained answers.)
Potential buyers over the weekend got a list of CUSIPs. The public does not get that until ex post facto.
We still have a very good understanding of the "delta" and the magnitude of the loss, if not with crystal clarity.
Nearly all of the unrealized loss was in securities more than >10 years. They had 15.1 billion in unrealized HTM losses. 14.7 billion of this had a maturity >30
9 billion is agency MBS
2 billion in agency collateralized mortgage obligations
2.3 billion in commercial mortgage backed securities, and
1.2 in municipal bonds and notes.
They actually have relatively few treasuries, and none in their HTM portfolio. Unrealized losses on treasuries are ~1 billion, And mostly treasuries from treasuries less than 12 months ( contrary to what most people report).
I really recommend actually looking at their filing. It is extremely detailed.
https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d...
That doesn’t matter, because they’re federally backed. But it’s a crucial difference to appreciate less than one week after a run.
I'm not willing to do it to win a hn debate, but there's enough public information to estimate the size of their hole within a billion or two.
Claims that they were evasive or hiding things in their financial reportings are off base. Claims that it would be impossible to get an idea of their Financial losses are also off base.
Nobody (in this thread) claimed this? And I disagree with the “within a billion or two,” though do think within a few tens of billions is accurate. The problem isn’t the specificity of the filing per se but the delay; that isn’t the balance sheet anymore.
It is clear from the statement that we are almost entirely talking about 30 year MBS purchased in 2021.
3% 30yr MBS were about $105 throughout 2021. These were about $89.2 at the end of 2022 (10-k filing), and about $89.4 today.
You might say, "but they may have put it 30yr MBS!". The thing is, you can validate this by the ammount they lost from 2021 to 2022. It also doesnt make much of a difference if they bought slightly different rate MBS at 2.5% or 3.5%, as they track pretty closely. Lastly, MBS value havent changed much since the time of the 10-k filing.
To get "a few tens of billions" difference, they would have had to tripple their losses on MBS in a time when MBS value has been stable.
As long as the rates on the bond are > than the rates SVB is paying its depositors it will be fine.
Buy Banana futures while it's still cheap.
Since 1933.
It always has been.
How much extra are they taking from your bank to cover the delta between what the FDIC will recover and what they have to pay out?
I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect this means that you will not see the interest rate on savings accounts go up as much as it might have otherwise.
I'm not saying this outcome is terrible, perhaps it was the best solution for the system as a whole. But using an insurance fund to cover a kind of loss, the insurance was not sized to address is not a choice that has no impact.
If I were in charge of everything (perish the thought!) I would probably have insisted that the uninsured portion of the deposits take some haircut. If depositors had gotten back 90% or 98% of their deposits instead of 100%, it might have increased the chance in the future that institutions with 100 million+ bank accounts would pay more attention to the risk profile of the banks they choose to invest with. Banks are rewarded mostly in proportion to the risks that they take; having a force other than government regulation that pushes in the opposite direction can be very useful.