Is Silicon Valley Bank systemically essential? No. Is it systemically important? Yes, in that a failure of the U.S. government to act as a lender of last resort is likely to cause other banks to...
But I have a naive question. Why are these startups keeping millions in their bank accounts to begin with? Is there some reason they are not keeping all that spare cash in T-bills or something?
Surely all those SV geniuses can figure out how to do that and still have cash available as needed.
Brad, you make an excellent case for your long term solution of deposit insurance for all deposits, and, probably, liquidity requirements for all banks(I haven’t thought this through completely), and a penalty for depositors, who withdraw in the moment ( they were playing under the current short term rules of a maximum of $250,000 of insurance). Would it not also be equitable for the shareholders of the bank to also absorb any net, long-term loss of whatever final arrangement is worked out rather than shifting that whole loss to the taxpayers as a whole?
There is of course the risk of contagion here but one would hope proper messaging by the feds and the banks could mitigate . Svb was such an outlier and the interaction with the vc firm which told them to move their deposits is the proximate cause -- they yelled fire in the theater. It is amusing to see the politics here -- Brad of the left arguing in the end to bail out the rich (who pay lower taxes than most Americans) for shocking incompetence. Brad of the left squawking about this risk but as far as I can tell less interested in fed action to fight some also less than clear inflation expectations by hitting the job prospects of the lower classes who have faced years of subpar wage growth.
I think there should be buyer for SVB, from among the bigger, well-capitalized banks. They have a very attractive customer list, and the buyer bank could hire a bunch of SVB's tech-knowledgeable relationship officers. (Leave their not so good risk managers behind!)
The "Lehman moment" could have been avoided in 2008. The NY Fed did Not want to let them fail, to 'teach the boys a lesson.' They had a buyer lined up - Barclays. But the UK regulators would not let them do the deal - feeling, quite wrongly, that the risk to Barclays was greater than the systemic risk of letting Lehman fail.
You correctly point out that both insured and uninsured deposits should've been guaranteed from the get-go -- to whack chaos monkeys! Now we have set up a precedent. There will be an outcry if this isn't followed for another troubled bank. But then, haven't we let in through the back door an essential spirit of the Glass-Steagall Act to protect consumers/depositors? Looks like we've tried/experimented some things since the Act was repealed. After a couple of crises, we're re-learning the hard way something that a prior generation, who had also learnt the hard way, had bequeathed to us in the form of the Act. I hope this is not the way we learn in geopolitical affairs. Wait: given the "varying opinions" on Ukraine these days, we seem to be trying that, too.
I understand and agree with you overall view of how banks should be treated, but moves like this infuriate people and make it politically difficult to impossible to bail out the banks. Greed like this points out the rot in a system that sure seems to cater to even mild discomfort of the wealthy while at the same time heavily penalizing average people for missing bureaucratic deadlines.
Yes: shareholders are zeroed out. Bonds issued by SVB now trading at 31%
Peter Thiel and his buddy Elon Muck need to be strung up. Together.
All very informative, Brad. Thank you.
But I have a naive question. Why are these startups keeping millions in their bank accounts to begin with? Is there some reason they are not keeping all that spare cash in T-bills or something?
Surely all those SV geniuses can figure out how to do that and still have cash available as needed.
Brad, you make an excellent case for your long term solution of deposit insurance for all deposits, and, probably, liquidity requirements for all banks(I haven’t thought this through completely), and a penalty for depositors, who withdraw in the moment ( they were playing under the current short term rules of a maximum of $250,000 of insurance). Would it not also be equitable for the shareholders of the bank to also absorb any net, long-term loss of whatever final arrangement is worked out rather than shifting that whole loss to the taxpayers as a whole?
Good insights on the liquidity ratio requirement, and who it applies to. So what should we have learned?
Deposit insurance on all deposit amounts
Liquidity ratio requirement for all banks (?)
The Fed should remember their other mandate - banking stability, and not over steer the economy.
We should listen to Brainard.
Anything else?
There is of course the risk of contagion here but one would hope proper messaging by the feds and the banks could mitigate . Svb was such an outlier and the interaction with the vc firm which told them to move their deposits is the proximate cause -- they yelled fire in the theater. It is amusing to see the politics here -- Brad of the left arguing in the end to bail out the rich (who pay lower taxes than most Americans) for shocking incompetence. Brad of the left squawking about this risk but as far as I can tell less interested in fed action to fight some also less than clear inflation expectations by hitting the job prospects of the lower classes who have faced years of subpar wage growth.
I think there should be buyer for SVB, from among the bigger, well-capitalized banks. They have a very attractive customer list, and the buyer bank could hire a bunch of SVB's tech-knowledgeable relationship officers. (Leave their not so good risk managers behind!)
The "Lehman moment" could have been avoided in 2008. The NY Fed did Not want to let them fail, to 'teach the boys a lesson.' They had a buyer lined up - Barclays. But the UK regulators would not let them do the deal - feeling, quite wrongly, that the risk to Barclays was greater than the systemic risk of letting Lehman fail.
You correctly point out that both insured and uninsured deposits should've been guaranteed from the get-go -- to whack chaos monkeys! Now we have set up a precedent. There will be an outcry if this isn't followed for another troubled bank. But then, haven't we let in through the back door an essential spirit of the Glass-Steagall Act to protect consumers/depositors? Looks like we've tried/experimented some things since the Act was repealed. After a couple of crises, we're re-learning the hard way something that a prior generation, who had also learnt the hard way, had bequeathed to us in the form of the Act. I hope this is not the way we learn in geopolitical affairs. Wait: given the "varying opinions" on Ukraine these days, we seem to be trying that, too.
Brad, are you aware of this - https://www.axios.com/2023/03/11/silicon-valley-bank-paid-bonuses-fdic
I understand and agree with you overall view of how banks should be treated, but moves like this infuriate people and make it politically difficult to impossible to bail out the banks. Greed like this points out the rot in a system that sure seems to cater to even mild discomfort of the wealthy while at the same time heavily penalizing average people for missing bureaucratic deadlines.