Let's look at who is culpable in the downfall of SVB. It's easy to identify the first group of people, the management and board of directors who should have recognized that interest rates were not going to stay at zero and the purchase of any long term bonds without hedging was not a strategy for survival. The second group are the large depositors who started the bank run when they just could have sat tight. I do not pretend to know other than looking for yield why all of the sudden funds were pulled out of the bank. Did a group get together to conspire against the management (part of me thinks yes on this point).

Who is not getting 'bailed out'? Management, stockholders and likely bond holders as well. I hope the group that is unwinding the bank go after management for stock sales and bonuses when they knew the bank was on the ropes. Greed should always be punished, though often enough it isn't.

Depositors such as Roku and Etsy to cite two that I am aware of were victims here and the 'bailout' solves their problem of not losing cash reserves needed for payroll, investments, etc. This is as it should be. There should be NO expectation that depositors need to be cognizant of capital requirements, stress testing, SEC filings and financial statements as part of working with a bank. I post the 99% of all Americans' eyes would glaze over if you made this a common requirement of banking. This is the job of the regulators and Congress needs to insure that all banks regardless of size are under an appropriate regulatory regime.

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There is another way to look at this. I have seen objections to the claim that the bailout "won't cost the taxpayer a penny" that run "yes, but all bank depositors will have to pay for this in the long run in the form of higher insurance premiums". That strikes me as right from a positive perspective ... and also from a normative one? If bank depositors shouldn't pay for deposit insurance, then who should?

Stepping back for perspective, in order to operate as an ongoing concern, it is necessary as a matter of arithmetic for a bank to earn more on its assets than it pays for its liabilities. According to orthodox financial theory, the only way to do this is to take more risk on the assets than is being sold in the liabilities. In principle, any bank must be subject to failure if its depositors withdraw their deposits in a coordinated way. The only way a bank has of controlling this risk is to break the possibility of coordination by diversification. This requires not only a large number of depositors but a large variation in their type. This runs counter to the specialization that, as you point out, makes mid-size regional banks viable.

I would like to know which end of this Baker is willing to sign on for. Would he prefer America to be banked by a small number of large national banks that charge a small deposit insurance fee? That is perfectly viable. Or would he prefer a larger number of more specialized but more vulnerable banks? That is also viable - with the support of more expensive insurance. But you can't have the benefits of both and the costs of neither.

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A couple of points re the illusion this a cost free

1) as someone who actually had the job of pricing deposits for a large bank yes you do look at fdic insurance -- it is a real cost after all . But the caveat is of course you also have to be competitive in the market

2) I do believe but I am digging in my memory that fdic insurance costs are tax deductable.. this is a straight forward burden sharing with non bank taxpayers who make up the difference in addition to any reduction in profitability from point 1

The depositors got something they did not deserve for a non zero cost -- though the number is tbd based on the asset sales and how fdic is split between taxpayers depositors (though rates ) and bank (through impact on earnings) .

The larger issues for me are three fold:

1) svb was not a normal bank but a non diversified creature of Silicon Valley . The withdrawals were not random events but coordinated via vc emails yet there is no accountability

2) i also worked in the cash management function for a large bank and one would normally not see large deposit balances in deposit accounts -- was this some weird anomaly with balances not swept into secure things like t bills?

3) we will have to see the full impacts on the banking system. This is not 2008 when the needs were clear. Have we changed the rules of the game where deposit insurance limits really don't exist anymore ? With what impacts? Will runs become the norm since there are no consequences for depositors?

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The interesting question to me is: what happens to the repo market if any corporate account can make a safe deposit without having to handle collateral? I guess we'll find out.

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If depositors are safe (full insurance), there is never a need for a run. That is Brad's point, and also a major part of the government's point in what they have chosen to do for SBV depositors

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Thanks it's clear that it eliminates bank runs but without other regulatory changes increases chance of bank failures and their costs since there is one less check on bank lending behavior. It assumes either shareholders or regulators double down on oversight in some way . After the savings and loan crisis (I am old enough to have been involved in the issue), one thought for example was to change bank capital structure to include a tier of short term debt so that the market would frequently have to "vote" on bank viability . Another option is to increase bank capital and or tighten loan standards and oversight in general . My point overall is you have a system of risk management with costs --nothing is free and you have to look at the whole picture

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Yes, there should be a price to pay. And it needs to be assessed at the proper point in the financial process.

My view is that point is not 'on the depositors.' Because if it is, then I need to bank with the biggest, most diversified bank I can find.

Costs are already assessed on the failed bank's shareholders (typically get zero) and bondholders (often get zero or a small % recovery).

I think we do want there to be smaller, specialized banks. These banks can better understand the risks of their loan customers' businesses. And SVB was apparently good at that - though in recent years terrible on the risk management side for their own portfolio assets.

I think we want community banks, which know their local customers and know who is a good loan risk and who is not. They will loan to small businesses that a giant bank will sneer at, because the giant bank can't know all of its customers as well as that. My brother-in-law is on the board of a very small community bank in Midwestern farm country. They know all of their loan customers very well, and can and do carry a very small loan loss reserve.

I don't want too much consolidation in the banking industry. Among other things, giant banks have very loud political voices in the regulatory process, an obvious and large negative externality.

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And then - I just discovered that the small community bank I was referencing has just been bought up by a slightly larger community bank. So the bank goes from a one branch small-town bank to an eight-town mini-region bank. Consolidation - it's everywhere.

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The annoying thing is that the rules have been changed at least since 2008, though probably earlier. Depositors over the nominal insured limit of only one bank during that crash were denied complete coverage, but that was a Black owned bank so an exception was made. Maybe we need to mark the rules to practice and start thinking through the ramifications.

As a capitalist, I used to think of the banking system as an element of private enterprise, but these days it is more of a utility or natural monopoly. After each collapse, smaller banks are merged into larger banks and those larger banks have been regulated more tightly. If this continues, we will have one big bank by 2100. Given this would be the endpoint of a long trend towards consolidation, perhaps we should embrace it and just have the Federal Reserve operate as a bank with retail operations.

That would leave plenty of room for venture capital and the private sector while better isolating the economy from its vicissitudes. It makes more sense than restoring Glass-Steagall which served well in a very different era.

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I could see the Fed operating the entire payment system. The argument is serious. But what would be on the asset side of the balance sheet? If it stuck to govvies, the cost of credit would go up, since it wouldn't be funded by cheap bank deposits. If it extended credit to real people and businesses, the political pressure to lend to the, uh, right people would be enormous.

This is kind of what Morgan Ricks wants to do, although IIRC he would subcontract the credit allocation out to bank-like firms funded by discount window loans. This would reduce the political economy risk. By enough?

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How true. The potential for political mischief is impressive.

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I think it would be useful to step back a bit and look at comparable financial institutions to see how this can be prevented and resolved in the future.

In most every state, there is what is called a "Guarantee Fund" which is designed to protect the insured of a bankrupt insurance company. All insurance carriers must pay into the "Guarantee Fund". As a consequence, all insurance companies want regulatory oversight so they will not be assessed for someone else's failure.

I think Biden is correct to use the FDIC and its assessment process, and hopefully, when every bank pays into the fund, every bank will favor regulatory oversight.

Keep the penalties at the bank level and watch banks begin to demand more oversight.

I would also be interested in how other countries resolve these issues for both the banking and insurance industries.

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Banks already have to pay into the FDIC premium pool, according to the FDIC website, about $8B a year. There's a complicated premium assessment system which is beyond me, but probably makes sense to someone better versed in finance. (What is a CAMELS composite anyway?) I have no idea of how or how often those assessments are adjusted, though the FDIC seems to have a variety of fudge factors they can apply. (fudge = camels?)

The FDIC has about $130B in assets, not all liquid, so it couldn't cover 100% of a total SVB collapse, but it is unlikely to have to go that far. SVB does have some assets, and, if those are preserved in working form by a merger, the FDIC might not need to draw down its reserves at all. It's not like an insurance company dealing with the smoking ruin of a house or hulk of an automobile after a crash where the asset is now charcoal or scrap metal.

Despite Keynes maxim, the FDIC seems to be based on the idea that the waters will be calm after the storm has passed. The FDIC's trick is being to keep the ship intact and afloat until the storm blows over. Sometimes it seems impossible, but here the FDIC seems to borrow from quantum physics. Something is impossible but necessary, so it happens anyway, like electrons tunneling through an impassable barrier.

I'm not in love with the assholes who run Silicon Valley as a clique-y boy-cult. It is hard not to compare the Sequoia website with the Heaven's Gate suicide website save for improved CSS. However, I am impressed with the FDIC, one of those low key bureaucracies that seems to work.

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The pool may be $88 billion, but that is not how much is collected each year. Moreover, the FDIC premiums are a function of regulatory oversight and the frequency of bank failures. You can increase coverage while lowering premiums if the banks are required to be better capitalized--so the shareholders take the hit first--and less leveraged, where the depositors take the hit. I would be in favor of competition among banks to guarantee deposits with more insurance available at different limits from the FDIC. If, as a company, you choose to bank with someone without adequate coverage, that's your tough luck.

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You may have misread. That was eight billion dollars a year, not eighty eight billion. The assets on hand were about one hundred and thirty billion, and I doubt that is completely liquid and available. It is the result of long term accumulation of annual income.

I like your idea of being able to insure more of an account by paying a higher premium or accepting lower interest rates. I doubt this would have any impact on smaller savers and businesses. My main worry is that it could be gamed by large, sophisticated players. I am sure that one could set up a financial product with an FDIC insured component designed to hedge, or rather appear to hedge, a risky high return component. We saw something like this before the 2008 crash.

When that risky component collapses, the FDIC will find itself "morally" on the hook, that is, since it appeared to someone not reading the fine print to offer insurance, it winds up under political pressure to actually do so. The FDIC plays close to home since many people have FDIC insured accounts, so it is surprisingly easy to extort.

P.S. Do you remember moral obligation bonds? I'm not sure how those were supposed to work, but I love the term.

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Yep! "Serves them right" is not the way to think here.

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By a quirk of my career I am very familiar with the history of small Midwest banks and their environment -- I am not sure if that is a problem to begin -- everybody knows each other and self polices and how many deposits would not be covered -- recall there are ways to expand your coverage through multiple accounts with permutations on titling . A simple low cap on bank size might help -- but again these banks seem fine as long as thru don't stray into crypto or some nutty thing. As an example I saw the nuttiness of the bakken shale oil stuff in western North Dakota .. the local banks didn't really bite on the craziness as far as I am concerned.

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As the saying goes, if you're explaining you're losing. There are all kinds of systemic reasons that some soft of managed soft landing is necessary for the current condition of secondary banks, but the fact remains that if the common man receives a benefit like increased Medicare coverage or tuition loan forgiveness it takes months to years of arguing, financial impact statements, warnings of runaway inflation, Supreme Court cases, etc. On the other hand, if something inconveniences wealthy VCs the government turns on a dime to cater to their wishes. It reinforces the belief that whether run by Republicans or Democrats, the government is dedicated to the proposition that no billionaire should ever face financial discomfort. And that plays right into Republican hands as it takes a major issue off the table.

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Perhaps the resentment is multiplied by uncertainty around the true policy. To go back to Measure for Measure, if no one believes the FDIC intends to "hang Barnardine", it becomes easy to be cynical.

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Personally, I'd hope the bigger money depositors got shaved several percent not made fully whole. In bankruptcy cases don't bond holders often get shaved?

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The important thing is that the shrehplfrrd are zeroed out

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