The FDIC will provide unlimited deposit insurance for Silicon Valley Bank and Signature Bank and the Fed will accept depreciated securities at par value from banks seeking emergency funding.
TRW - Given the FRC downgrade, I'm curious what you think about the following. I understand that certain (think most?) credit agreements require the borrower to hold cash at an investment grade bank.
With FRC now rated junk, FRC's institutional depositors who have loan agreements in place may be required to move their cash to an IG bank. This could further pressure FRC deposits despite the government coverage backstop.
In other words, if this pressure from the depositor's loan agreements materializes, the government's coverage program could be useless in preventing further withdrawals since this is contractually required rather than psychologically driven. Very interested in your thoughts.
I am not an American so this does not concern me directly, yet I very much sympathize with your outrage.
I think getting angry at bailouts is a necessary first step, but won't fix the problem. It's a systemic problem: the law treats deposits as risk-bearing loans, yet the public mostly believes deposits ought to be risk-free. Politicians, therefore, will always cave to pressure to bail out depositors. Also, bailouts are an "easy fix" for the systemic crisis risk (with very bad long-term incentive implications).
Professor John Cochrane has long ago outlined a systemic solution, and we should be shouting that this is what we want so that people stop accepting bailouts as a necessary evil.
Here's my inaccurate summary:
1. banks would be financed strictly by equity, would shoulder no bank-run risk.
2. bank deposits would be replaced with money market funds, that would be instantly convertible to cash.
3. if banks absolutely need to be credit-financed (equity is too expensive), let them get it through the intermediation of bank holding companies, which would issue equity and debt and buy bank equity.
implications:
- the banks themselves would never have to face a run. No need for a labyrinth of risk regulation. The bank's risk-taking can be regulated by its shareholders because the public is not on the hook.
- no more moral hazard, bail-outs are not necessary
- savers bear some risk of bank failure (more than now because there are no more bailouts), but now the risk is gradually and explicitly reflected in the price fluctuations of the money-market funds in their accounts.
Hoping that depositors would be competent bank risk analysts might not be a good plan. It does not seem to work politically, because the public rejects this assignment of responsibility and keeps giving depositors a free pass.
Cochrane's motivation, by the way, is preventing GFC-style systemic crisis. Avoiding both the pressure for bailouts and the heavy regulatory investment-risk-police are (very nice) side-benefits.
The artificial cap on insuring $250k deposit is vague and stupid.
Most people don’t chose banks after looking at financial statements of such banks, even sophisticated business people. It’s hard for even sophisticated investor’s to understand banks.
If people believe safety is garunteed by big banks, they will move money to big banks further eroding regional and small banks. These mega banks will pay less for deposits, effectively charging deposit insurance for large sums. So the spread between deposits at small bank and large banks is effectively your insurance rate. Just use that as a basis for large sum depositors insurace for say above $2 MM. what’s the point of $250k limit when some one with $2mm will open 8 accounts that are insured anyway. Depositors will be happy to pay some insurance to chose the bank they want to bank with based on factors they understand.
“ A similar critique could be applied to the behavior of some subset of VCs on Twitter over the weekend, which at times seemed directed towards sparking bank runs in other regional banks, with the goal of forcing the FDIC to step in and make depositors whole, whether or not their funds were insured or not. It was pretty ugly to observe, but ultimately, it was successful: the FDIC, Treasury Department, and Federal Reserve stepped in.”
Do you think this dynamic of unrealized losses within the securities portfolio will spill into other industries like insurance? Understand the liability side is different and carriers wouldn't be forced to sell / realize these losses like SVB had to. But, looking at Prudential, for example, they have $31.7bn of unrealized losses in their AFS portfolio. that's against $17.2bn of book equity. *As of recent 10-K
TRW, would you mind sharing insights regarding this defacto "term lending facility"? Isn't this, ultimately, a form of QE? If so, this action is more fuel for the inflationary fires, right?
What is absolutely despicable is manner in which many of the prominent venture capitalists (who are ostensibly libertarians) clamoured for the Government’s + FEDs intervention. As Buffet once said “Only when the tide goes out you discover who’s been swimming naked”.
With the contagion spreading to some brokerage firms now, is it still safe to let brokerages hold your stock certificates in “street name”? Was it ever safe?
I find the “no taxpayer funds” statement infuriating. Maybe there is some technical difference but when a governmental entity is demanding money from a business, calling it a special assessment rather than a tax is disingenuous.
Maybe this whole stupid episode will make these regional banks being once again subject to the same stress tests that the larger banks must go through. Since they are obviously “too big to fail”.
The irony here is that the Fed is bailing out some of the VCs who prompted the run on the bank.
Ultimately, over the next 10 years, the loss to the taxpayers will be minimal, as most of the assets will recover in price. Still the message is basically that losses are socialized....
Interesting take. Thanks for sharing! How would you approach the situation differently from what Fed did?
TRW - Given the FRC downgrade, I'm curious what you think about the following. I understand that certain (think most?) credit agreements require the borrower to hold cash at an investment grade bank.
With FRC now rated junk, FRC's institutional depositors who have loan agreements in place may be required to move their cash to an IG bank. This could further pressure FRC deposits despite the government coverage backstop.
In other words, if this pressure from the depositor's loan agreements materializes, the government's coverage program could be useless in preventing further withdrawals since this is contractually required rather than psychologically driven. Very interested in your thoughts.
I am not an American so this does not concern me directly, yet I very much sympathize with your outrage.
I think getting angry at bailouts is a necessary first step, but won't fix the problem. It's a systemic problem: the law treats deposits as risk-bearing loans, yet the public mostly believes deposits ought to be risk-free. Politicians, therefore, will always cave to pressure to bail out depositors. Also, bailouts are an "easy fix" for the systemic crisis risk (with very bad long-term incentive implications).
Professor John Cochrane has long ago outlined a systemic solution, and we should be shouting that this is what we want so that people stop accepting bailouts as a necessary evil.
Here's my inaccurate summary:
1. banks would be financed strictly by equity, would shoulder no bank-run risk.
2. bank deposits would be replaced with money market funds, that would be instantly convertible to cash.
3. if banks absolutely need to be credit-financed (equity is too expensive), let them get it through the intermediation of bank holding companies, which would issue equity and debt and buy bank equity.
implications:
- the banks themselves would never have to face a run. No need for a labyrinth of risk regulation. The bank's risk-taking can be regulated by its shareholders because the public is not on the hook.
- no more moral hazard, bail-outs are not necessary
- savers bear some risk of bank failure (more than now because there are no more bailouts), but now the risk is gradually and explicitly reflected in the price fluctuations of the money-market funds in their accounts.
Hoping that depositors would be competent bank risk analysts might not be a good plan. It does not seem to work politically, because the public rejects this assignment of responsibility and keeps giving depositors a free pass.
Cochrane's motivation, by the way, is preventing GFC-style systemic crisis. Avoiding both the pressure for bailouts and the heavy regulatory investment-risk-police are (very nice) side-benefits.
https://johnhcochrane.blogspot.com/2016/05/equity-financed-banking.html
The artificial cap on insuring $250k deposit is vague and stupid.
Most people don’t chose banks after looking at financial statements of such banks, even sophisticated business people. It’s hard for even sophisticated investor’s to understand banks.
If people believe safety is garunteed by big banks, they will move money to big banks further eroding regional and small banks. These mega banks will pay less for deposits, effectively charging deposit insurance for large sums. So the spread between deposits at small bank and large banks is effectively your insurance rate. Just use that as a basis for large sum depositors insurace for say above $2 MM. what’s the point of $250k limit when some one with $2mm will open 8 accounts that are insured anyway. Depositors will be happy to pay some insurance to chose the bank they want to bank with based on factors they understand.
Insightful comment from Ben Thompson today.
“ A similar critique could be applied to the behavior of some subset of VCs on Twitter over the weekend, which at times seemed directed towards sparking bank runs in other regional banks, with the goal of forcing the FDIC to step in and make depositors whole, whether or not their funds were insured or not. It was pretty ugly to observe, but ultimately, it was successful: the FDIC, Treasury Department, and Federal Reserve stepped in.”
https://stratechery.com/2023/the-death-of-silicon-valley-bank/
The antics of the VC set , with an assist from Ackman this weekend, makes more sense with this end result in mind. Mission accomplished.
(Not endorsing all of that link, just that one comment on possible motives.)
Do you think this dynamic of unrealized losses within the securities portfolio will spill into other industries like insurance? Understand the liability side is different and carriers wouldn't be forced to sell / realize these losses like SVB had to. But, looking at Prudential, for example, they have $31.7bn of unrealized losses in their AFS portfolio. that's against $17.2bn of book equity. *As of recent 10-K
Curious to hear your thoughts - thanks!
TRW, would you mind sharing insights regarding this defacto "term lending facility"? Isn't this, ultimately, a form of QE? If so, this action is more fuel for the inflationary fires, right?
What is absolutely despicable is manner in which many of the prominent venture capitalists (who are ostensibly libertarians) clamoured for the Government’s + FEDs intervention. As Buffet once said “Only when the tide goes out you discover who’s been swimming naked”.
With the contagion spreading to some brokerage firms now, is it still safe to let brokerages hold your stock certificates in “street name”? Was it ever safe?
I find the “no taxpayer funds” statement infuriating. Maybe there is some technical difference but when a governmental entity is demanding money from a business, calling it a special assessment rather than a tax is disingenuous.
Equity holders and unsecured debt holders are wiped out but I agree with your sentitment as moral hazard created / increased for depositors
Maybe this whole stupid episode will make these regional banks being once again subject to the same stress tests that the larger banks must go through. Since they are obviously “too big to fail”.
The irony here is that the Fed is bailing out some of the VCs who prompted the run on the bank.
Ultimately, over the next 10 years, the loss to the taxpayers will be minimal, as most of the assets will recover in price. Still the message is basically that losses are socialized....
Excellent and spot on.
Another helpful article. Thank you. Nice use of the word obviated! Cheers.