AFAIK FDIC’s only source for covering $250K insurance and other bailout is printing money, am I right?
@dmspilot @jesse I'm sorry but I'm going to have to disagree here. Also, my little infographic was not about SVB or Signature specifically, but meant to be silly in capturing different missteps banks can make. I know that credit is not what brought down SVB. @jesse - Since I began covering regional banks at a major hedge fund 6+ years ago, SIVB was always considered a bank with substantially more concentration risk. For a bank that's translated to generally "riskier". And if you prize stability that's not amazing. Now you're right, it wasn't seen as being a reckless bank by any means, just one with a niche (tech/healthcare) that was both its growth story and its serious potential exposure. This is risk that they acknowledged in their reports using language like "we're different from other banking companies and have unique risks". They did, definitely, pay above average interest compared to the major money center banks. And they did provide more flexible financing terms for clients that other companies did not offer. They were not popular with Silicon Valley and cold-blooded, calculated venture capitalists just because they were the neighborhood bank with a branch down the street and a friendly smile -- they offered products other banks wouldn't. Where they actually screwed the pooch HARD is in growing extraordinarily quickly and placing that money in securities that had substantial interest rate risk. Other banks, well run ones, manage duration tightly. These guys did not. They didn't get crushed by credit or by some hard to compute derivatives exposure -- they blew up because they failed to pay attention to their duration gap -- ignoring it to pick up extra points on yield. It's hard to forgive because there is nothing more fundamental to a banks risk management than interest rate risk. The CEO, CFO and head of risk should have had those DV01 numbers memorized on a daily basis. The fact that they ignored it until it ballooned up into a massive problem and only dealt with it in a panic is not indicative of a well-run, properly risk-managed bank. @dmspilot - Ha, of course regarding the fractional reserve. That is how our banking system works. I think you're right about the bank run and any bank, on paper, being susceptible to it (even Top Tier Bank pictured above). But I think that's ignoring the fact that SVB, Signature, etc had given people a substantial reason to fear for the bank's health thus precipitating a run. Their collapse didn't happen in a vacuum and it wasn't a spontaneous social media induced meltdown targeting an unwitting company. If anything it was Moody's giving them a call last week that lit the fuse. In SVB's case, yeah, when you suffer a massive markdown in your assets and give people reason to believe you might not be entirely solvent, then you're giving people a good reason to run it. The key is to not give people a really good reason to doubt your survival. If you do then yeah, all bets are off for good reason.
But you're talking about it like a hedge fund would, which is as an investor. Not a depositor. Your entire business was to analyze prospective investments. Roku's business model was not analyzing banks to deposit cash at. So I think the two things are rather different. No one is talking about bailing out investors in SIVB, as far as I know.
No, safe to say their equity holders are wiped out. The one good takeaway from today. Just sounds like exceptionally poor judgement, not criminal. At least to me... But I'm not an attorney
Roku has a CFO. An experienced, *very highly paid* CFO, I might add. And he also has a full team behind him to evaluate all types of financial risks like these. Separately, the unreasonably high concentration of VC firms at SVB were also beyond equipped to do that due diligence, especially since risk and reward on financial assets is their entire business model.
And Signature Bank, too. Is there an anti-Cramer ETF one could buy? https://twitter.com/KanekoaTheGreat/status/1635063605245931522
I would hope that the CFO of Roku and the other "Masters of the Universe" PE and VC principals who own large stakes in the majority of the companies who own the capital to whom the Fed just rode to the rescue know how to read a bank balance sheet and how to ask tough questions of management. They owe their share holders some due diligence too, which obviously wasn't done. Once again I ask, if the Fed is going to rescue guys like this, why is is they deserve a carried interest tax treatment?
I suppose it depends on what the punishment is and whether or not punishment is a viable deterrent. But I'm having difficulty coming up with meaningful examples where your claim would be true.
btw - FDIC isn't the only insurance banks can get to protect depositers. For example, some banks use Deposit Insurance Fund.
As I understand it, FDIC is insurance that banks pay into. I saw this morning that there will be a special assessment on the banks that pay into FDIC to cover accounts that had more than $250k in them for SVB and Signature (the bank in NY)
To be more specific. SVB had a cash flow problem, not a capital problem. And any bank that is a fractional reserve based, if there is a run on it would face the same issue. Going on memory, banks in the federal reserve system need between 8 and 10 % cash on hand or equivalent. In the week before SVB collapsed, they had roughly 25% withdrawal of assets, this is way above the amount of cash on hand. Tim
No, all banks which participate in the FDIC (which is pretty much all banks except credit unions who have their own solution) pay an annual fee based on deposits. Currently FDIC has 100B USD on hand to cover the gap between SVB/Signature banks deposits amounts and current assets. Tim
What will come to light in the post mortem is that SVB failed at basic blocking and tackling and the fuse for the run was lit a year or more ago with bank examiners captivated by the slow burn and mesmerized at the size of the explosion. We will also find there were a few smart cookies that saw it coming and took care of themselves
I'm frankly surprised that the FDIC hasn't been using it's lever of increasing the % of deposits banks must hold as a way to shrink the money supply in addition to what they're doing with the fed funds rate. It would both reduce lending and create more resiliancy in the banking system. Especially as the discussion looks like we will hit a harder landing, it's a really easy "knob" for the FDIC to turn to reduce the money supply and also make banks more solid (though it does reduce short term profit of banks).
Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category. https://www.fdic.gov/resources/deposit-insurance/faq/
First Republic trading halted after their stock price collapsed. The midsize/regional banks aren’t getting much relief out of this. Notably, FR focuses on businesses and HNWIs looking for alternative investments….another concentrated segment. Let’s see how the commercial real estate banks fare since they’ve had higher reserve requirements for a while now.
Also, HSBC to Buy Silicon Valley Bank’s U.K. Arm for £1 per WSJ. That’s a little over a dollar in today’s dollars.
Sending the U.S. and the world into a depression would be an example, IMO. Whether that's a realistic concern or not, I have no idea.
FDIC does not control the reserve capital requirements. That is set by the US treasury. In any case, SVB did not have a capital requirement failure. They had a cash flow issue (really the gap between purchased capital assets and maturity dates was a fundamental problem and was alluded too earlier in the thread). Tim
pretty ridiculous punishment that isn't targeted at those responsible. Kind of like burning your apartment down to punish your kid for scribbing on the wall.
I've heard response time has a strong, inverse correlation with your donation levels in the last election cycle
Haha and probably brought to you by the same people who created the Short Kathie Wood (ARKK Innovation) ETF! (ticker=SARK versus the real one is ARKK)
By the way, for those who are concerned about rewarding the un-deserving, I think I read somewhere that the banks' stock and bond holders are not being bailed out, just the depositors.
That is correct. Only the depositors are being bailed out; and only from the perspective that the FDIC is going beyond the insurance limit. Bank stock and bond holders might get something (not likely) if FDIC manages to sell all the assets and cover all depositor liabilities. The moral hazard a number of complained about with this bailout is a false equivalency to the 2008 bailout. In 2008 the majority of the stock/bond holders were made whole. The "promise" made was that going forward, the stock/bond holders would not be bailed out by the government again. Bank executives have a fiduciary responsibility to the stock and bond holders. They have zero fiduciary duty to the deposit holders (you can argue that there is a moral imperative). The stock and bond holders are effectively being wiped out. Tim
Thanks for the clarification Tim, I was too lazy to go look up and now remember that coming from the Fed, though I think the FDIC inspectors have some accountability to inspect for it (I happen to know one personally). Regardless of them not failing to meet the regulatory requirement, I'm arguing for the Fed to raise the requirement (gently) to take some air out of the system and improve the foundations of the banks, though their shareholders will hate it.
It’s not printing money, there is an insurance fund that all FDIC banks pay into, it has roughly 128 billion dollars in it to cover incidents like this. I think SVB just lost several billion which results to a few percent, so even if funds were lost it would be minimal to large tech companies. Access to funds was resumed, the bank didn’t plan for the withdraws, given banks can invest deposits in long term investments, profits are paid out to highly paid C level staff, investment banker bonuses and stock dividends, there isn’t too much extra cash laying around to cover mess ups since they already paid it out. That is wrong… Biden is on TV saying the taxpayer isn’t paying for this, what a lie, we do pay for it in our fees and now the fund is reduced to cover tech companies with billions in cash vs the retiree who might need it later on. The FDIC limits need to be adjusted, for businesses and for people. I just cannot imagine a retired person dealing with this nonsense. Businesses need protections to pay their bills and salaries. Government totally screwed this up and the investing of deposits is ridiculous, should be safe keeping. Establish products and funds with the higher rates that present risk, then depositors can make their own decision if they want to risk it. Money in a checking or savings account should be there for safekeeping end of story. If banks have less to pay their staff bonuses as a result, sounds reasonable… To the poster who said they were almost unemployed, calm down, nothing was announced and in previous times the government always bailed out the bad players to save the people. Bank deposits must be felt safe by the consumer, no way around that. Also, haven’t you ever had a relationship argument? You’re taught to calm down and not make rash decisions, your message made it seem like you already closed shop and cut your losses, not even allowing the weekend to pass. Given we know the government always bails out the banks, the companies did not make a poor decision using SVB. And you cannot expect companies to open up 1000 bank accounts to split 250k in each, not practical. FDIC needs to adapt a new plan.
"The FDIC limits need to be adjusted," why? What is stopping you or anyone else from using a bank that has additional insurance?
It seems to me that it's right and proper for the FDIC insurance premiums to be paid by the depositors whose funds are being protected by that insurance. Is that not what's happening?
Which, when you think about it is kind of funny to make it sound like "they're being dealt with" because the banks were no longer going to be banks. Those guys were going to be employed for 45 days at most anyways . Now, if Biden announced that every director in the bank was going to have to pony up the last 10 years of SBC and cash salary, then I'd say OK, we're getting somewhere.
