Federal Reserve, FDIC & U.S. Treasury announce plans to protect Silicon Valley Bank depositors
The joint effort in the creation of this backstop is to make depositors whole and is not a bailout for SVB or its shareholders.
The ongoing story regarding Silicon Valley Bank reaches a bright note today as the Federal Reserve, FDIC, and U.S. Treasury announce that they will protect depositors that banked with SVB. The Treasury is making $25 billion available, with depositors able to have full access to funds starting Monday.
As reported by CNBC on March 12, 2023, the Federal Reserve, FDIC & U.S. Treasury have come together to protect those depositors who had funds within Silicon Valley Bank and Signature Bank. There had been concerns regarding uninsured funds due to the $250,000 insured amount, but this backstop will “fully protect all depositors” according to the Treasury Department.
Source: FDIC
The Treasury Department will utilize $25 billion from its Exchange Stabilization Fund to aid with funding this protection. CNBC notes a senior Fed official said this fund may not be needed but will exist as a safeguard.
The Fed provided a statement regarding the backstop:
This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy. The Federal Reserve is prepared to address any liquidity pressures that may arise.
A joint statement was released by Fed Chair Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chair Martin Gruenberg:
Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.
It was on March 10 that SVB was closed by regulators with insured deposits to be protected by the FDIC. The concern was for those companies that had funds that exceeded this $250,000 limit and that had done nothing wrong. Today’s news ensures that those depositors are made whole.
In order to offer further guarantees, CNBC writes that the Fed facility is offering loans up to one year to banks and other credit agencies. Those that do utilize this will need to provide collateral.
For those companies that were concerned about their funds that fell outside of the $250,000 insured amount, this should be a bit of good news. Additionally, Treasury Secretary Janet Yellen said there would be no bailout for SVB. On top of this, Dow Jones futures are up over 200 points at the time of writing.
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replySam Chandler posted a new article, Federal Reserve, FDIC & U.S. Treasury announce plans to protect Silicon Valley Bank depositors
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It seems like a moral hazard for sure.
I haven't followed it too closely, but I wonder how the FDIC is going to do the insurance payout. If it involves the Fed printing more money, we could se another smack of inflation in a few months.-
The bank has enough assets on hand to cover depositors. The Fed is going to front the money for bonds that won't mature for another few years and sell them when they are due. No taxpayer money is being used for this.
The bank employees/shareholders/investors are all fucked, so I'm not really sure how this is a moral hazard?-
This is where I'm a bit confused. If those assets are worth what the FDIC is paying, shouldn't there be other buyers? Or is the issue that the process would be too slow and people would lose their jobs in the meantime?
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I believe it's the latter. Making people wait weeks or months to get their money back would be devastating.
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Its an issue of time and how reserve banking works. The fed increased interest rates so extreme that if you bought treasury bills say in 2020 you got maybe 1% interest.
Now you can get bills pushing 5% interest so those bonds you bought are now worth less today on the market because why buy 1% bond when you can get 5% bonds with the same amount of cash.
If you can hold the duration if the bond its not an issue you get your original capital back.
FDIC is just now going to hold those bonds.
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How is it a moral hazard? The people who fucked up all lost their jobs and investors/shareholders are fucked.
The people using the bank as a place to store money were not involved in any of the shenanigans that led to it to fail. Where's the moral hazard?-
The idea is that it signals to banks they don’t have to worry if they fuck up.
However this idea is bogus in my opinion, since a bank collapsing would still mean a loss of money for the bank. The coverage here is only for depositors not the people who fucked up (at least according to what was said in this case).-
How? Everyone at the bank lost their job, all the shareholders and investors are fucked. Do you honestly think any of the people who did this give a single solitary fuck about depositors?
The people responsible are being roundly punished for being stupid. The innocent bystanders (regular depositors) are being made whole by assets that were taken from the bank. I really don't see any moral hazard here.-
The moral hazard is in the "other" bankers that watch this and think they can take the same or higher risk without potentially affecting their depositors. The Fed will fix things so why not take a little extra risk, give a bit higher interest rate on deposits, if it works out, you are filthy rich, if not, well I'm sure it's profitable in the short term.
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lmao, none of the people managing these banks go to sleep at night worrying about their depositors. That's a completely absurd take.
Like, you really seriously think that they make business decisions based on anything other than increasing their own bottom line? We have thousands of pages of banking regulations for a reason, and it's not because bankers have historically made decisions with depositors best interest in mind.-
Ok.
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Iirc, due to the last crisis when bankers at bailed out banks got huge bonuses they implemented new rules. One thing was clawbacks on bonuses.
So if you are an executive at a big bank and it collapses not only do you lose millions in stock options but you could lose millions in clawbacks. Even the executives who left can lose out I believe.
I'm not 100% on this and clawbacks can be discretionary. But overall, its really bad for an executive to be at a failing bank. Who wants to hire the loser that crashed a bank when there are lots of options to hire people from successful banks? Personally,
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conceivably the moral hazard is in how it affects the depositors behaviour, which in turn affects banks behaviour.
ie. depositors are disincentivized from making runs on banks even when they're in sketchy situations, which in turn gives banks more leeway to get into those situations in the first place since they don't have to worry about runs as much.
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That seems like a stretch, people are herd animals and prone to irrational panic. Remember the great TP shortage of 2020? Despite the fact that literally everyone knew it was ridiculous, people lined up to buy as much TP as possible because everyone else was doing it.
That's something ingrained into human nature that ain't going to change any time soon.-
The smart people just bought bidets. I suppose that might eventually might not seem so smart if there's a serious local water shortage but at that point you got bigger problems like the fact that you can't flush anymore.
Not using toilet paper just makes more sense if you have a bidet and the local water supply is not an issue.-
Smart people bought TP from bulk suppliers because they had plenty to go around. Businesses, companies, schools, etc who sent everyone home wasn't buying in bulk and the bulk suppliers didn't really have a sales channel to individual buyers who normally bought 4-6 rolls of TP at a time not a pallet. My work had lots of huge boxes of TP as well and many employees tapped into it to take home since where I worked it was illegal to take our work home but I came up with a system of alternating people by splitting us up into two teams and working alternating weeks.
People also were now buying way more than they needed as well and there were stories of people trying to return TP when the 30 day return window approached. Especially the ones who tried to speculate.
It's kind of like how I managed to get disinfectant and N95/P100 masks and filters from industrial suppliers for 3-4 weeks after the Pandemic started since most no one knew of their existence unless you worked purchasing. But word of mouth eventually got out.
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Losing your job is an extremely minor punishment for this type of behavior. Not the kind that would ever dissuade an exec from doing it again given the money they made on the gambling that got them here.
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The investors are getting fucked. What’s up with y’all wanting regular bank customers to lose all their money?
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Why? The bank has the money on hand to pay people back, are you saying the government should just confiscate the money and not pay anyone back?
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Where should a company keep its cash? If a company has 10m in cash to ensure they can cover payroll should they be required to deposit it in 250k chunks in 40 different banks? Or they should risk all the employees not getting a paycheck?
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They could maybe choose a bank that doesn't heavily invest customer money and therefore would be more likely to have their money if they need it. lol.
In the end these are all business decisions that were made. It's kind of weird to me that we let businesses fail all the time, but when it's because of them putting their money in a bank somehow it's different.
But at the same time we also wouldn't want to regulate those banks! No sir.-
Or they could... get insurance. Because doing what they did was risky.
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And what if they get their assessment wrong? We want every company to try to have the expertise to audit a bunch of banks to figure out which one is safest?
250k is not a lot of cash for a business. I don’t get why people think it’s smart to just say “well of course all that money should be at risk of disappearing so your workers can’t get paid, that’s what you get for being a fat cat with a small business”.-
How difficult is it to ask the bank how much of their money is going to be invested and make a choice on whether the current level of risk is worth it? Shit ain't rocket science.
What if a company gets their assessment as to the value they bring to their market wrong? Or guesses wrong on raw materials or how much R&D costs? Well then their workers don't get paid.-
I actually remember going over this specific thing in my loathsome business school classes. It's not some unknown thing.
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How difficult is it to ask the bank how much of their money is going to be invested and make a choice on whether the current level of risk is worth it? Shit ain't rocket science.
I’m quite sure banks have the sophistication to make things look very safe when they are in fact not. Especially when every small business doesn’t have a bunch of deep finance experts on how banks work.
Why aren’t people mad that banks don’t insure higher amounts of deposits instead of thinking workers should be punished by bank and company execs mishandling bank interactions?-
Obviously the answer is banking regulation because otherwise banks are going to continue to be sketchy assholes however they can, as has been demonstrated time and again. It's just hard to swallow spending taxpayer money on bailing out this kind of thing when it doesn't come hand-in-hand with regulation to fix the problem.
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not really. the private market has already spoken. there's PRIVATE insurance options that cost money. no one uses them.
the taxpayer bailout amount should be sacred and not breached. these companies make SO MUCH MONEY they can afford to use the alternative insurance market in addition to the FDIC
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The framing of this for political gain is ongoing.
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As long as the money is coming from the bank's assets it's fine. I think folks are assuming that taxpayers are going to pay for it and that's what they don't like.
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depositors weren't really doing anything risky themselves, this was more an issue with how the bank stored its assets
the thing that also makes it a bit different afaict is that they do have the money, its just locked up in bonds they can't access right now
though i will certainly be first to say it's obvious we pull all the stops to find a solution when wealthy people have a problem, and continue to ignore the multitude of crises for the poor that surround us
that part is as american as apple pie. but i think it's possible for that to be true AND for it to be true that it's reasonable for us to help a bank honor its depositors. especially given the ramifications.
idealistically we'll see some change come out of this. cynically probably not much.-
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Given the relatively stable history of US banking, it hasn't historically been very risky.
The question is, should it be risky to put that much money in a bank? Does the FDIC really intend for companies to hold their funds in 50-100 different bank accounts to avoid losing it all? It seems like a complicated and silly thing to ask of depositors. -
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Right, but it's a risk you agree to when you set up the account or whatever. Traditionally it's been pretty low, but it's there and is pretty clear.
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"they would always play ball on loans that other folks didn't" what could go wrong? lol
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Did their loan portfolio have anything at all to do with them going bust?
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Not that I know of, just seems like another thing that sounds obviously risky, especially after 2008 etc.
AFAIK it was investing customer money heavily in bonds and getting screwed when the fed kept raising rates and then people freaked out.
Really need to bring back banking regulations of old.
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I don't think many stops had to pulled to find a solution here. There is a huge (and old) infrastructure in place to handle exactly this scenario, this is the remit of the FDIC, it's why they exist. They know what they are doing and have plenty of funds to handle it.
Letting SVB depositors lose their money would have affected a lot more non-wealthy people than wealthy people, IMO. Payroll for thousands of companies would disappear and tens of thousands of employees would be screwed.
Addressing the multitude of crises of the poor requires new work to get done by Congress, new infrastructure to be created. Our government is terrible at getting actual impactful work done, so on it goes, sadly. I also hope we see some change come out of this, but am pessimistic. -
Keeping more than the FDIC insured amount in an account is risky
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