I’m confused by this-just as things were maybe starting to cool down a bit are they trying to start a bank run again? “All deposits assumed by First–Citizens Bank & Trust Company will continue to be insured by the FDIC up to the insurance limit.” So in other words they just pulled protection for assets over $250K in SVB accounts, transferring them to a small bank with less than half of the deposits of SVB when the run started? Who’s at the steering wheel at the FDIC and are they not coordinating with the Treasury or Fed? Am I missing something or does this seem recklessly premature given the train wreck that is still in the process of being avoided? Are they confident First-Citizens can withstand 25% of deposits getting pulled in a few days because they’re flush with cash and short term treasuries?
“All transferred deposits will be separately insured from any accounts you may already have at First–Citizens Bank & Trust Company for at least six months after the failure of Silicon Valley Bank.” [1]
Sounds like maybe this isn’t an issue but unclear if that’s just an extra $250K insurance in the event you had an existing account there. Maybe unrelated to insurance they're fine because First Citizens bought from SVB at discount/current FMV so they can liquidate assets if needed to meet withdrawals without risk of loss.
> Are they confident First-Citizens can withstand 25% of deposits getting pulled in a few days because they’re flush with cash and short term treasuries?
I'd guess the tansferred assets are eligible for the new Bank Term Funding Program, so First-Citizens should be able to borrow cash to pay withdrawals in a way that SVB couldn't. I'd expect everyone involved to be aware of the danger of a bank run from this group of customers, and plan accordingly. Of course, expecting others to act sensibly is not always justified.
Eligible collateral under the Bank Term Funding program must be "direct obligations of, and obligations fully guaranteed as to principal and interest by, the United States", this covers assets such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities, but importantly doesn't cover any of SVB's $72bn loan book. (It does cover much of their $90bn of remaining securities that weren't transferred.)
First Citizens does however have existing assets that would count as eligible collateral.
Yeah, the big question is honestly if SVB would still be here if they had been able to borrow in this new way. On paper, the reason people panicked and did the run was because they felt their money was locked to the maturity date and that SVB would not be able to take out loans against their very real assets.
> All transferred deposits will be separately insured from any accounts you may already have at First–Citizens Bank & Trust Company for at least six months after the failure of Silicon Valley Bank.
That suggests that there is not going to be a reduction in coverage of FDIC insurance.
Separately the Federal Reserve’s lending facility makes it unlikely that the same sort of long-duration treasury notes will bring down a bank.
But yeah, it’s a good point that they did not explicitly spell out what sort of insurance is available for the transferred deposits.
Thanks! Still not clear to me if that extends beyond $250K or just not counting against an existing account held there, though. But as mentioned above they probably can just liquidate what they just bought if they need to meet large portion of deposits withdrawn. And the par value repo thing for stuff they already have makes sense would mitigate a run causing insolvency.
> Still not clear to me if that extends beyond $250K
It does not. The deposit insurance limit was $250k before the svb collapse, it was unlimited while the (government) fdic held your account, and now it has been transfered back to a private institution it is 250k again.
Only after bank failure can you truly determine what your FDIC insurance limit was. Per Yellen's own admission it is decided by several committees after the bank fails how to retroactively apply the variable insurance, depending on whether they deemed it "systematic." Of course if the depositors are mostly politically connected VCs or investments of politically connected VCs you probably have a better shot of being deemed systematically important.
Is it ironic though? The whole system is inverted in that way that citizens are second class, and failure is rewarded and the injured punished, aka fraud.
It’s a system that simply cannot go well for the majority of people even if the top continues their plunder and walks away with everyone else’s chips.
It’s not an ironic bug if the intentions of the features are nefarious.
> Is it ironic though? The whole system is inverted in that way that citizens are second class, and failure is rewarded and the injured punished, aka fraud.
Who exactly got rewarded here? Not the bank shareholders, not their management - only depositors got protected, aka the system actually worked for once.
> It’s a system that simply cannot go well for the majority of people even if the top continues their plunder and walks away with everyone else’s chips.
This simply did not happen here. It happens a lot. It didn't happen here.
the FDIC itself called this a "systemic risk exception", but SVB and Signature were not considered systemic before this, and thus had not behaved the same as the systemically important banks.
I am not sure we can say anything worked as intended.
The banks got to play and invest that money off those depositors. The investment was in government bonds. So essentially, the government got to use those depositors money, and then turned around and gave them back their money. Oh and it also inflated away the value of that money. If you think this is capitalism or the system working properly, you're deeply wrong. Finally, if this thing didn't blow up, those depositors would've seen none of the profits from lending to the government which is clearly a risky business.
This is the same old story, governments printing money. This time they held hostages as they were printing their money. Almost like Money heist. Funnily enough, the narrative is so strong they are somehow the heroes. Maybe because people can't understand that inflating money is stealing.
> The banks got to play and invest that money off those depositors.
And they got wiped out because they did it badly, while depositors kept their deposits. The system works.
> So essentially, the government got to use those depositors money, and then turned around and gave them back their money.
The government didn't give them back their money, the loss came from the DIF, which is a fund made of private contributions assessed to member banks. No government money was spent making depositors whole. I wouldn't care if it was personally, I think that's kind of the point of the government, but in this case that's simply not true.
> Finally, if this thing didn't blow up, those depositors would've seen none of the profits from lending to the government which is clearly a risky business.
Er, no, the bonds would have matured and they would have received face value plus interest. Lending to the US government is the least risky thing one can do, three-month treasury yields determine the 'risk-free' rate.
> This is the same old story, governments printing money.
The Fed actively manages the money supply. I'd look at where the demand for dollars is coming from to better understand the system and what's actually happening in the economy. These simplifications border on conspiracy.
They aren't though, that's the point of the deposit insurance. The government has a non-taxpayer funded bucket of money for exactly this purpose, and no money was created from thin air.
The government is a financial bully. It starts by printing money for itself, and using the value of the money in the present. Then it causes inflation which robs financial value out of everyone who lended to it. The actions of the Fed are extremely unpredictable.
If you're not a part of some inner clique you can't tell when will the Fed pivot. It took the Fed a goddamn one year too long to raise rates. Everyone who has no knowledge of the Fed actions beforehand is losing huge financial value. hundreds of billions of dollars rest on these decisions, and any common person who trades and does any financial decision in the wrong side of the Fed is being robbed of financial value by the Fed. Instead of playing capitalism we've been playing Simon says.
Yes in the same way the EPA is an 'environmental bully' - so actually no.
> It starts by printing money for itself, and using the value of the money in the present.
I'm really not sure what this means - I suspect you're conflating fiscal and monetary policy.
> Then it causes inflation which robs financial value out of everyone who lended to it.
Inflation has many causes, changes in supply aren't necessarily inflationary - what matters is what that new supply is used for and where demand is coming from. For instance there's a ton of demand for dollars from abroad. If new money is created and it goes into say dollarized nations then no, it doesn't. This is but one example. That's why supply increase isn't inflation - it's supply increase.
> The actions of the Fed are extremely unpredictable.
Actually they telegraph them far in advance.
> If you're not a part of some inner clique you can't tell when will the Fed pivot.
They will absolutely tell you in advance, like they told us they'd start tightening well in advance. That doesn't mean people won't try and front-run it.
> Instead of playing capitalism we've been playing Simon says.
I think the right way to think about this is a quote from the venerable Sir Desmond: "If you're incompetent you have to be honest, and if you're crooked you have to be clever".
Because First Citizens Bank acquired all of the deposits and loans but none of the securities, presumably the only way for the FDIC to complete the deal is to pay First Citizens Bank the difference in cash, which is roughly $63.5 billion (napkin maths: the $119B in deposits are assumed one-to-one, and $72B loans are acquired at $16.5B discount, resulting in a cash outlay of -$63.5B for the acquirer for a bundle of net assets worth -$47B on paper).
If depositors start withdrawing money from the new bank, they at least have access to this amount of extra liquidity from the acquisition.
The BTFP and other schemes from the Fed will provide any necessary liquidity to cover flight at par.
Remember that flight just means one bank is down and another is up at the Fed. All it needs is for the target bank(s), or the Fed to lend back and the circuit is closed.
Everybody wins - particularly the bank buying assets at a huge haircut.
> Are they confident First-Citizens can withstand 25% of deposits getting pulled in a few days because they’re flush with cash and short term treasuries?
Yes. The number gamed will likely be > 50% given the type of customers they are dealing with.
After the SVB thing, the fed set up a new facility "Bank Term Funding Program (BTFP)" which will provide liquidity to banks so they won't go the way of SVB.
The press release is somewhat difficult to parse, but it appears like First-Citizens Bank acquired:
Liabilities: $56bn (all of SVB's remaining deposits)
Assets: $56bn (SVB's illiquid loan book notionally worth $72bn at a $16.5bn discount)
(With a loss-share agreement depending on how the loan-book evolves over times.)
This implies that First-Citizens just acquired $56bn of flightly deposits with no additional liquid assets, and those depositors just lost their FDIC insurance for any amounts over $250k. If you're one of these depositors, why wouldn't you run to a big 4 bank?
You have that backwards (and it's a common mistake!). Loans issued by banks are assets; deposit accounts are liabilities. Although it seems counterintuitive, it makes sense if you think about it: loans are how banks (traditionally) make money, while deposits have to be surrendered by the bank on demand.
My understanding is that banks are required to have a certain level of liquid assets. For example, a safe liquid asset is gold. On the other hand, a cash deposit is not a safe asset because the entity that deposited the cash can easily remove it. Moreover, a loan will have collateral. Some collateral is much more liquid than other collateral. For example, if the collateral is gold, it is considered very differently than if the collateral is a building (which the bank provided the loan for) or stocks and bonds that the borrower can't trade for the duration of the loan.
What about US Treasury Bonds? Are those not safe? Yes, they are very safe, however, if they are low yield and the interest rates increase, they are not liquid so they at that point don't provide the requirement banks have for liquid assets.
Ah, I see. I misunderstood something I read earlier. Silicon Valley Bank had to sell Treasuries at a $1.8B loss which caused them to not meet capital ratio requirements. Their problem was a combination of their bond holdings decreasing in value and a bank run forcing them to sell the bonds at the discounted rate.
Sort-of, yes. But bank run makes it sound like something immoral or at least irrational. A bank that’s insolvent (has greater liabilities than assets) should expect and deserves a bank run.
The bad version of a bank run is when a bank is solvent but illiquid. It has a bunch of loans that are preforming and haven’t lost value due to interest rate changes, but there’s no easy way to sell them because they are just individual loan agreements between the bank and some borrowers.
But again, that’s not what happened here. The bank was in trouble because its assets were worth* less than it’s obligations.
Unless you're talking about melting gold, I can't see how gold is liquid. Bid/ask spreads are wide and it's hard to (literally) move a lot of it without both incurring costs and moving prices.
Gold is considered a Tier 1 safe investment under Basel III which banks can use to meet the capital ratio requirement. Under Basel III, physical gold is considered the same as cash. [0] Either solid or melted gold will work meeting the capital requirements.
I learned something new today! And I suppose that makes sense. Gold has been a medium of exchange for millennia, so the convertibility or not (in my discussion of liquidity) of gold to USD isn't as important as it might be for other commodities.
It's good to see that Basel III treats paper gold (gold futures or shares in gold-holding ETFs) as more risky than actual gold-in-hand.
Most people don't own commodities in physical form for long, usually they buy some stock or ETF which tracks the price of the commodity, typically the ETF or stock issuer carry the physical commodity, so each stock is backed by the physical commodity. This mostly circumvents the issues of moving a lot of it around and the liquidity issue, albeit you pay a management fee which is fractions of a percent typically. Doing it this way is probably cheaper than the alternative of buying and selling the commodities yourself depending on the quantities you're buying as the firm managing it benefits from economies of scale.
Banks are required to have a certain amount of collateral (cash) on hand, but SVB was one of the banks whose cash holding requirements were loosened in the 2018 rollback of some Dodd-Frank rules.
Still weird to me. Even with that reasoning, deposits can be lent out to make money. Loans might not be paid back. I would think a bank with $100 in deposits and $50 in loans is better off than a bank with the reverse.
It sounds like you might be inferring that $100 in deposits is both a) $100 owed to their banking customers and b) $100 in cash. It is only the former, though - the cash was lent out to make the loans or used to purchase income-producing assets. A bank with $100 in deposits and $50 in loans is insolvent - it owes $100 to its customers whenever they decide to withdraw it, but only has $50 of assets (loans) to back that. In the reverse, the bank only owes $50 to its customers, and meanwhile has $100 of assets - if the customers all wanted their money back, it could sell the loans, and as long as it got more than half of its nominal value they'd be able to repay everyone.
Your intuition is correct to some degree - if you imagine I go down to the bank and deposit $50 in cash, that deposit is both an asset and a liability to the bank (it expands both sides of the bank's balance sheet by $50). It's an asset in that the bank now owns $50 of paper notes, and it's a liability in that the bank now owes me $50.
The bank can then choose to loan out those paper notes to someone else, and therefore you're entirely correct that it can be lent out to make money, however the bank can't lend out the fact they now owe me $50 (that's just a liability to them).
1) Assets make the bank money (loans. interest collected), liabilities lose money (deposits. interest paid).
2) Deposits are loans the bank takes. (As in it has to pay interest to service the "debt".)
In your example a bank with $100 in deposits is paying interest on $100, but only receiving interest on $50. In the reverse it is receiving interest on $100, but only paying interest on $50. So the reverse is much more profitable for the bank.
Think about it like this: The bank can sell the loan to someone else because it produces positive cash flow, but the bank can't sell someone's deposit because if that person comes for their money, they expect the bank to pay them back.
It is backwards from the normal business model, but that's because a banks business is to make money lending instead of borrowing to make money.
When you give the bank a $50 deposit, they put it somewhere and importantly, mark $50 on a ledger for your account. The mark in that ledger is a liability for the bank, it is money they owe you.
Say they then use that $50 to buy office paper (it's a small bank).
They then owe you $50 and have several thousand pieces of blank paper.
The thing you are tripping on is that the deposit doesn't necessarily represent something the bank actually has.
But if you wanna discuss the convention, in your example the $100 in deposits might vanish overnight (as in fact did in the case of SIVB) whereas the $50 loans is a LOT less volatile.
They can. It won't matter to First-Citizens who will just backfill the deposits using Fed BTFP loans, or higher duration better matched deposits from elsewhere.
That book is worth $72bn on run off. $16.5bn pays an awful lot of interest.
> those depositors just lost their FDIC insurance for any amounts over $250k
Did people think that, just for them, a special institution disguised as as a defunct bankrupt bank, was never going to be "that one trick they dont want you to know about" and you would have infinity insurance for $0?
What do we expect small businesses to even do with their cash? It's conceivable that many of them have more than $250k for payroll at any given time.
Without a solution, we run a bank run risk _at all times_. This seems untenable. Perhaps we should raise the limit to quite a bit higher, and charge large account holders for that?
From the news I've been hearing recently, I think the idea is that you use a sweep account/purchase overnight bonds from the fed so that your deposits leave the bank every night and are put back the following day. So you're covered in case of a bank failure.
(Banks are already charged for the current insurance up to $250K)
Interesting. Is that a service banks offer? I suppose that it would mean that the bank truly could not lend against deposits that use this mechanism, so I wonder how much they would charge for this.
Yes banks offer this through a network with others banks,and they have reciprocity so if I puts $250k in another members bank they put $250k in my bank so the members banks don't really "lose" deposits. Net, the deposits can be used by the bank in the same way they usually are.
A sweep account is a very common business account and most banks offer this, if you don't pick it based on your balances they'll call you up and try and sell you this service. SVB strangely did not have this product for some reason.
> This implies that First-Citizens just acquired $56bn of flightly deposits with no additional liquid assets, and those depositors just lost their FDIC insurance for any amounts over $250k. If you're one of these depositors, why wouldn't you run to a big 4 bank?
Well, you never really had it (except for the last what, two business weeks) and you won't have it at a large bank either.
That's ok, you can probably insure in the private markets (I've never looked into it but you can insure literally anything else so) or you can adjust your treasury program.
And 20 billion loss out of 57 billion deposits is quite the haircut. Would have been a terrible precedent to set to allow a run and then stick the saps that were too slow with all the losses.
> 20 billion loss out of 57 billion deposits is quite the haircut
First-Citizens is buying $72bn assets for $56bn. They're leaving behind "$90 billion in securities and other assets...in the receivership for disposition by the FDIC." Nobody would have been haircut.
> press release says this is going to cost the FDIC ~20 billion. If they didn't shoulder that loss, who would have except for depositors?
I'm not familiar enough with FDIC jargon to know what this means. My guess is it's an accounting figure, incorporating the $16.5bn discount given to First-Citizens, not a cash outlay from the DIF, though the wording suggests the latter. (It may be a reference to the expected loss-sharing agreement outlay.)
Cost of funding overnight to maturity? 90bn for 5 years @ -3% carry, +/- defaults / refi on loan book? ~= 20bn?
Also total losses are FDIC + the already defauted on share capital + any bonds the bank had issued. The hole in the balance sheeet is a lot bigger than it first looked.
The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately $20 billion. The exact cost will be determined when the FDIC terminates the receivership.
I don't understand the math there. So they're selling 72 billion of assets for 55.5 billion + 500 million in stock, but out of 167 billion in assets they're only left with around 90 billion? What happened to the other 5 billion in assets?
And if they get 56 billion out of this deal that should leave 63 billion out of 119 billion in deposits to cover, so if the bailout ends up costing 20 billion that means they're only recovering 43 billion on the remaining 90 billion in assets? Is this some kind of worst case estimate?
I really wish they’d start reporting those things in independently verifiable forms to the maximum extent possible. Spreadsheets, Jupyter notebooks, etc.
All the information needed to derive the # as well as why its provisional and they can't provide a "Jupyter notebook, etc." right now is right there, in the article.
Are you talking about something two or three links deep branching out from the article? I don’t see any language even suggesting there’s such data to navigate to that’s specifically related to the article’s subject. There are three links in the article that seem to link to some procedural background stuff they thought offered good context to what was being discussed. What information specifically in the article did you feel satisfied the ability to derive on the spot?
Maybe a very basic question, but why does FDIC say it costs them 20B$ ? The assets are higher than deposits, can they not sell off all assets and cover the deposits?
I think it's more mark to market vs "par" value trickery.
SVB had plenty of assets at "par" value or held to maturity value.
But it was insolvent if you marked those to market.
So FDIC is letting First-Citizens buy the assets at closer to their true market value. 20% loss.
That's my understanding but it is kind of a distressing conclusion. SVB had no enterprise value, and the outcome we're getting is financially the same for FDIC as if they just firesold the assets and did a pure winddown?
> That's my understanding but it is kind of a distressing conclusion. SVB had no enterprise value, and the outcome we're getting is financially the same for FDIC as if they just firesold the assets and did a pure winddown?
Could you explain why that's a distressing conclusion?
Part of me wanted to believe that SVB's failure wouldn't lead to real financial losses for the FDIC. That there was a weird panic bank run, and then the steady hand of a regulator was needed, but there really were enough assets.
Not saying I studied the data and concluded that; it's just what I wanted to believe.
$20b loss to FDIC insurance fund feels high. It still meets the technical definition of "no losses borne by taxpayers" but it's a lot of money. I've gotta believe it's among the largest ever if not the largest ever losses borne by the FDIC for a single bank failure.
Distressing – some combination of having been in denial about just how screwed up SVB was financially, paired with concern for what this will mean if the dominos keep falling.
It is a weirdly high number. I can only assume it represents some sort of conservative "worst case" estimate, but so far I haven't seen any comprehensive breakdown.
And yes, if it does cost $20b, it will be the most expensive single bank failure (exceeding IndyMac).
Limits (possibly to include prohibitions) on using H2M accounting to back demand deposits would be a more targeted (and therefore appropriate) intervention.
The issue with a fire sale is that the seller doesn’t get the true market value. The market value is the value. Every time someone uses face amounts to claim asset value he or she is being entirely disingenuous.
If I have $100 in assets in 10yr zero coupon treasuries at par issued in a 0% interest rate environment, and funded with $100 of liabilities in the form of deposits paying 0%, and rates increase 1% and the rate I’m paying depositors increases to 0.1%. My bonds are now only worth $90, but I’m going to receive $100 at maturity, and so I’m really only out the the $1 on interest paid to depositors over 10 years, not the $10 mark to market loss. In this example I’d say your economic impairment is closer to $1 vs the $10 implied. judging at the asset side of the ledger in isolation doesn’t give you the whole picture.
You're forgetting that you are stuck in that position to maturity though.
So while you might not feel like you are not going to take a loss, you are also chained to a position that will not make money either.
While everyone else is out making 1%, you are stuck with 0%. If you could wave a wand and get out of your bond with no loss, you would pick up a 1% and hold that instead. It would almost certainly be better to just eat the loss, and re-invest that money into something else, and come out ahead after 10 years.
Dollars in, dollars out isn't the only factor here. Bonds give this illusion that loss isn't happening because you can wait to get your money back. But a little introspection reveals that the loss is actually just hidden in the waiting is a itself.
I’m not disagreeing with that - my point is that you’re assuming your liability/discount rate moves exactly in tandem with the move in your long dated asset. (In the example I gave above it only increases by 10%, if it moved 100% that you are absolutely impaired).
I'm not particularly literate in this, but I've understood a significant portion of the assets are very low yield government bonds.
No bank / institution today probalby wants older bonds that yield e.g. 1% if bonds issued today yield 3.5% and the Fed interest rate is 4.75-5.00%.
So there just may not be a market for them, unless you discount them enough to make the purchase price yield profit in the current inflation environment. At which point, you're selling 20B worth of bonds for e.g. 15B.
> No bank / institution today probalby wants older bonds that yield e.g. 1% if bonds issued today yield 3.5% and the Fed interest rate is 4.75-5.00%.
This is the whole 'mark to market' loss thing. If I have a treasury at 4% that I want to liquidate - but new ones are being issued at 5% - I can still do so instantly. I have to make up that 1% myself in cash, though. The 'loss' is the amount I have to come up with to make my treasury equivalent to a new one.
>No bank / institution today probalby wants older bonds that yield e.g. 1% if bonds issued today yield 3.5% and the Fed interest rate is 4.75-5.00%.
It is more complicated than that because the price of the bonds change to account for the market alternatives.
As an example, Would you rather buy a bond that returns $1005% for $100, or a greater number of bonds that return $1001% for $20 each?
Because the price of the low interest bond is discounted, the annual ROI is the same as the high interest bond. Additionally, if you hold to maturity, the ROI is better with lower interest (in this example)
Treasuries are the most liquid market in the world, they are basically used as currency at a certain level.
You can sell treasuries almost instantly for an instantly computed discount/premium...it's not like selling real estate, treasuries are nearly perfectly fungible
So it's not really a matter of demand for low yield treasuries...they've been instantly revalued every second since they were issued. All that matters is the duration remaining.
you as the seller don't get to "discount" treasuries, its auto-computed (why would it not be? your treasuries are not special, no one has any reason to buy yours over another with approximately the same duration)
its a currency market, liquid and fungible...there is no "enticement" of buyers
Yeah "discount" here means "sell less than par" not "choose to lower my price." I think we're all talking about the same thing from slightly different angles.
~$60 / person. You can be certain the banks will pass on the "special assessment" in a way that won't be regressive against the common person. Certain.
The point is that banks would incur costs from protecting themselves against a spate of runs on the banks and if it's true that banks pass on all their costs then those costs would be passed on to their customers.
Let's see if the Biden administration has the nerve to continue to claim that the bailout won't cost the taxpayer a cent, when the union of taxpayers and bank customers is 1.
It is an insurance fund; for every $100 in deposits, banks pay a few cents in insurance premiums.
notch898a is referring to how, when the full backstop of deposits regardless of size at SVB and Signature bank was announced, the government said that a) it wasn't a bailout because taxpayers wouldn't pay anything, and b) there would if necessary be a "special assessment" (i.e., mandatory additional premiums) from all banks. Our point is that a) is nonsensical given b), because of the total overlap between US taxpayers and US bank customers.
It’s intriguing that the buyer is a no name small time bank and not one of the big ones. You’d think the big guys would be falling over each other to claim SVB’s customer base
Matt Levine discussed this in one of his posts. During the financial crises the government asked JP Morgan to acquire a failed bank, which it did, and then the government fined JP Morgan for crimes committed by the failed bank it just acquired.
EDIT:
> Lessons from the financial crisis are still seared into management’s brain at JPMorgan. After the 2008 crisis, it got slapped with the label of a bailed-out bank profiting from taxpayers’ generosity, and it eventually paid billions of dollars of fines and legal expenses after buying Bear Stearns and Washington Mutual, including a then-record $13 billion penalty over mortgage lending. The irony was that it completed the takeovers partly at the request of the government, which had encouraged JPMorgan to acquire the stressed banks to prevent further instability in the financial system.
During the last banking crisis, JP Morgan, at the request of the Federal Reserve, bought up Bear Stearns and Washington Mutual. They later paid $19 billion in fines and settlements for prior activity.
Additionally, the FTC and CFPB are very much opposed to more bank mergers and acquisitions so any big players would likely face lawsuits blocking it.
The solution to avoid, or at least lessen the moral hazard that I've not seen mentioned in the press, is for accounts that are specifically for payroll to get special fidc protection. sure there's gonna be an accounting overhead to limit the amount of cheating going on, but at least the moral hazard, compared to infinity deposit insurance, is lessened.
We've had tools to solve this problem for a long time. My own bank offers me up to $2M in FDIC insurance through a network of banks. SVB depositors chose not to use these tools.
No, it is not possible for the FDIC to go bankrupt. The law that creates the FDIC specifies that it is backed by the "full faith and credit" of the United States. While no specific mechanisms are defined (since they've never been needed), it means the FDIC has infinite money as long as the United States exists and can print its own money.
Dumb answer: because SS and Medicare pay for "real" goods and services and have to interact with the main street economy, whereas FDIC acts in conjunction with the Federal Reserve, and the effects aren't seen by the public - the money isn't "spent" on something, it's just not _not_ there.
Also, the original statement is not quite correct - FDIC is funded by a special levy on all US banks, so while on principle it's backed by the "full faith and credit" of the US government, in actuality the money comes from the banking system itself.
Edit to add: from the article:
>The FDIC is funded by its member institutions through premiums and assessments paid on deposits. And, if ever needed, the FDIC can draw on a line of credit with the U.S. Treasury.
So, if you're a bank, you have to be a member of FDIC, or the banking regulators come and take your bank away. Being an FDIC member means you have to give them money, pretty much according to their whim (or they come and take your bank away). If that's ever not enough to fund a "not bailout", FDIC can get a loan from the Treasury, to be paid back from those premiums and levies on the banks over a period of time.
> Also, the original statement is not quite correct - FDIC is funded by a special levy on all US banks, so while on principle it's backed by the "full faith and credit" of the US government, in actuality the money comes from the banking system itself.
The banking system funds an insurance fund, but if that insurance fund is exhausted, the federal government is backstopping it.
My personal theory: if people even had the remotest inkling that the insurance would fail, then it is next to useless. The point of it is to prevent the majority of people from inciting a bank run since they know for sure that their money is safe. It's a bit of weird game theory.
There is no equivalent to a bank run risk on SS/Medicare so why put it in. Putting it in also means that these programs could cause massive inflation if the US Gov had to print money to finance them.
The FDIC is unlikely to fail. After all, as long as there is no major credit crunch (de-leveraging), money simply moves from one bank to another, and insurance premiums are collected regardless of where the money is located, money (and MTM short-falls) can be absorbed to big banks. Big banks, Fed and FDIC can work together to sort things out like this time.
Additionally, the dollar is merely a piece of paper, and the FDIC essentially guarantees pieces paper with $250,000 or whatever face value printed. There may be intricate mechanisms at play, such as the FDIC issuing bonds which the Federal Reserve subsequently purchases, or the Fed buying Treasury securities and providing the proceeds to the FDIC in the form of loans or capital injections. Or Fed directly offers credit line with failing banks. It is difficult to envision any issues the FDIC could encounter that could not be effectively addressed by the Federal Reserve essentially printing more money.
The value of US dollar is all about confidence, in the event of failing of FDIC, it is a testing moment of the confidence of USD. Although forced to print a lot more money could be bad for confidence, but not that catastrophic as FDIC failing.
After all, as long as there is no major credit crunch (de-leveraging), money simply moves from one bank to another, and insurance premiums are collected regardless of where the money is located, money (and MTM short-falls) can be absorbed to big banks.
The insurance premiums are collected and insured amounts. Uninsured amounts don’t pay premiums. That’s why this was a bailout and not an insurance payout.
> The assessment base has always been more than just insured deposits. From 1935 to 2010, a bank's assessment base was about equal to its total domestic deposits. As required by the Dodd- Frank Act, however, the FDIC amended its regulations effective April 2011 to define a bank's assessment base as its average consolidated total assets minus its average tangible equity. Therefore, a bank pays assessments on its total liabilities, not just insured deposits.
They can run out of funds but the taxpayer will bailout the FDIC. The FDIC has a pool of money that comes from fees they charge the banks. Currently I believe there is around 100 Billion left.
Last time in 2009, they took three years of advance premiums from its member institutions and operated the fund with a negative net balance. So it's unlikely that FDIC will go bankrupt.
FDIC holds $128 Billion that aims to protect ~$17 Trillion in depositor funds.
With a 0.75% coverage ratio I do worry what happens in the case of more bank failures. The only question is will the bag holders be the US taxpayer or all dollar holders globally via inflation?
The Fed is determined to fight inflation until their shareholders, the banks, are in trouble. Then we get to learn who the Fed really works for. Hint: not the people.
>With a 0.75% coverage ratio I do worry what happens in the case of more bank failures.
Hypotheticals like this are detached from reality.
Under what scenario would the entire depositor base try to withdraw all of their funds? What would be happening in the world for that to happen? People "lose faith" in banks? Okay, where are they now putting their money, under their mattress?
It wouldn’t need to be the entire depositor base. If only 2% of banks by deposits were to fail then FDIC would itself be bankrupt and require a bailout.
I disagree with your numbers. Based on current bank reserves, if ~20% of a banks deposits were to be withdrawn the bank would be insolvent. You don't need to withdraw 100% of deposits to have a run on the bank.
> The Fed is determined to fight inflation until their shareholders, the banks, are in trouble. Then we get to learn who the Fed really works for. Hint: not the people.
Then we move into the real world where reality exists: Fed officials double down on rate rise decision citing high inflation
The fed has a dual mandate: employment and control on inflation. They don’t care about banks. Powell explicitly said as much in the press conference after they announced another rate hike and no intention to reduce interest rates in reaction to the SVB implosion.
I agree that they have not lowered rates. However as the chart shows they did dramatically increase the Fed’s balance sheet in the past two weeks. They did this in order to facilitate loans to banks who have underwater assets on a mark to market basis.
It would be one thing if they were lending to banks based on the current market value of the assets, but instead they are letting the banks pretend the assets are worth what they would be if held to maturity. So both the Fed and the banks are playing pretend.
We can argue about whether or not this is inflationary. I suppose it would depend on what these funds are used for. It certainly isn’t as inflationary as if the Fed had simply given this money to consumers to spend.
However, I do think it is an error to ignore such a swift reversal of quantitative tightening over the past couple years.
Which was the second largest bank failure in US history. If we have 5 more of these in quick succession then it's pretty safe to say that an insurance agency isn't going to be able to save the economy. You're going to need an act of Congress and a massive bailout, and perhaps even that won't be enough.
I'm pretty sure they all had been just small banks. SVG was really big compared to almost every other bank who failed the last 20 years. As banks get bigger and bigger, like CS and UBS is just UBS now. People say the new UBS is now to big to bail for Switzerland and not to just big to fail anymore.
FDIC's reserves are less than 2% of insured deposits and far less than 1% of GDP. Perhaps the banking system is broken if 5x more spooked VCs pull their money out in similarly correlated banks means everything goes up in flames.
It seems Citizens banks made out with $20B of potential profit with very little downside. Hope I am wrong. Hope FDIC retained claims against SVB loan assets equal to what FDIC paid out to depositors that wanted to RUN (about $20B?)
Why you think Citizens made out with $20 billion in profit? And... why do you think a bank like Bank of America wouldn't have made a higher bid offer to make a measly $19 billion?
Not sure but things are moving fast and BAC may be kicking itself like other banks once they learned about the Citizens bank deal. I am guessing. My reasons for my thinking: It is reported that FDIC lost $20B in SVB bailout. SVB loan portfolio is healthy so this loss must be just payouts to depositors that wanted their money. Didnot see any reports that FDIC will get back those payouts from the loan portfolio (eventualy).
What is left of "this bank" if it is owned by another bank? My understanding is that the shareholders were wiped out and the senior management will be different.
I am not at SVB but was considering whether it might make sense to have a second account there, for FDIC-spreading purposes. I have the same knee-jerk reaction as many people, but on second thought I wonder if this is irrational.
Looking at this transaction, I don’t expect the SVB employees to keep their jobs with the exception of those who staff the branches. You’re already at a new bank.
> Do you hold deposits for others that they can withdraw at any moment?
Yes you do actually. There are many withdrawal events such as taxes, medical expenses, vehicle repair, and others that you need to provide liquidity for in short notice. If your funds are locked into treasuries or other assets that have a low current value relative to their final worth like SVB then you will have to sell them at a loss which might ruin you financially. Unfortunately there's no FDIC for individuals.
Yes there is, it is called "insurance" and is readily available from a variety of providers. It is meant precisely to turn unexpected high cost expenses into more predictable expenses over time.
"If your funds are locked into treasuries or other assets that have a low current value relative..."
That's why it's a good idea to pay attention to the term of the bond. You can buy short term treasury funds with yield to maturity of around 30 days. These aren't capable of having low current value compared to final worth. You can also save a little extra money and be capable of taking the risk of a longer term.
If you have more than $250k use a brokerage account, with linked checking account. And hold a simple laddered t-bill portfolio in the brokerage account, you get the $250k fdic insurance on the bank account portion, the sipc on the brokerage portion + excess of sipc insurance coverage (you have to research this, but should cover all but the biggest institutions) + asset segregation (you ostensibly own the bonds and they should not be co mingled).
I was* a Mercury customer for >1 year, and their product really is excellent. It behaves reliably, has good features. After SVB they enhanced their existing deposit insurance to spread your money across more bank accounts, giving you effectively $5MM of insured deposit coverage. Setup was a snap with them too.
Generally, if Stripe etc claimed the money was on the way, Mercury's app already saw the funds and made them available by the time I received the Stripe email. Underneath the hood its Evolve Bank and Trust (or at least my bank account was).. Mercury is merely the smart software layer on top of the actual bank account they open on your behalf behind the scenes.
* The only slight negative is that they did terminate my account last week - they immediately suspended all in/out transactions with no warning, and said they'd either wire or cut me a check to get my balance out in a few weeks. I think it's because I asked their support a question about bringing one of our other much larger businesses across and so asked some ACH related questions which probably spooked them due to lack of understanding.
I'd use them again quite happily in other businesses though.. just be mindful if they do shut you down you might find yourself unbanked for a period of time... and the wire to get your funds out if they suspend you requires manual approval by someone in Mercury Compliance. The account in question is a SaaS for Franchisor Operations and Franchise Compliance, so we're usually considered quite low risk.. I regret losing my Mercury account, as the alternative (RelayFi) is 'good' but not as good unfortunately.
This is one of the worst reviews I’ve read for mercury, despite your positive points. A bank that shuts you down for asking questions is not reliable to do large business with.
Betterment's Cash Reserve[1] might be of interest to you. It's a similar concept, where they spread your deposits among multiple program banks to give you a higher level of FDIC insurance.
A notable option might be one of the many Massachusetts banks affiliated with the DIF, that have unlimited deposit insurance beyond the $250k FDIC limit [1].
Curious to hear if anybody else has gone this route, and what your experience has been.
If your deposits are below the insurance limit, there's no need to deal with a too big to fail bank. Better to go somewhere where interest and service are available.
A problem is, that Small Enough To Fail banks may find it hard to offer competitive services, when they are competing on a slanting field against TBTF banks that don't have to pay the same for their safety nets.
"Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either 1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or 2) issuing a check to each depositor for the insured balance of their account at the failed bank."
Keep my money in an account, let me buy things with pieces of plastic, let me have pieces of paper when I want them, let me send it to other people when I want to and do none of that when I dont want it done.
If you want someone to be glad when you get home and listen to you complain about bill from accounts then get a dog.
If you want an actual startup-oriented bank that has their shit together (e.g. they employ sweep accounts and by default you have $5M of FDIC insurance), mercury.com has been excellent. Great tech, great UI/UX, great app, transfers are free (ach, check, domestic and intl wires), instant virtual cards, physical if you need it, finely-grained spending limits, etc. They're awesome.
“All transferred deposits will be separately insured from any accounts you may already have at First–Citizens Bank & Trust Company for at least six months after the failure of Silicon Valley Bank.” [1]
Sounds like maybe this isn’t an issue but unclear if that’s just an extra $250K insurance in the event you had an existing account there. Maybe unrelated to insurance they're fine because First Citizens bought from SVB at discount/current FMV so they can liquidate assets if needed to meet withdrawals without risk of loss.
[1] https://www.fdic.gov/resources/resolutions/bank-failures/fai...