The failure of the Silicon Valley Bank – and subsequent other banks – garnered all of the headlines this week. Like many of you, I’m sure, my simple response was to double-check that none of our bank accounts had more than the FDIC $250K in them. I didn’t expect we had that much parked anywhere, but worth double-checking, I figured.
We were, as expected, good. As were all of the depositors of SVB, regardless of whether or not they had more than $250K in their accounts. The US Department of Treasury made all SVB depositors “whole”. I thought that was odd, and my friends and I all started grumbling about another unwarranted “government bailout”, although Secretary Yellen promised none of the funds used would “be borne by taxpayers.”
The next morning, I got an email from a company I’m “angel’ invested in that said they were “directly affected by the SVB crisis” themselves. Apparently, they used Silicon Valley Bank as their financial institution and were carrying more than the FDIC limit. The CEO said the Treasury action meant they were “fully protected” and would now shift their focus “toward diversifying our funds so that we do not find ourselves in this same situation again.”
I guess I should be happy when policy decisions that run counter to my own sense of fairness end up benefiting me. Still, I can’t feel good when two wrongs – one from the company and one from the government – cancel each other out. I can’t believe there aren’t negative costs being paid by someone in this situation and doubt that the government’s “protection” is sustainable over the long run should other banks fail.
We’re you at all impacted by the SVB or subsequent collapses?
Image: KTAR News
MrFireStation 
Dr. Art Laffer, one of President Reagan’s economic advisors and the person who the Laffer Curve was named after, made a recent appearance on One America News to discuss the SVB bailout. As a reminder, the Laffer Curve is a theory that government can optimize economic activity and as function of greater economic activity maximize its tax revenue by charging optimal tax rates that are not too high or too low. Dr. Laffer clearly isn’t a big government Marxist.
He suggested that FDIC and the US Government need to temporarily insure all bank deposits in order to stop bank runs. His concern is stopping the bank run mania, which is a lot of depositors seeing a bank run at another bank and deciding their money is not safe to keep in their bank, so they need to withdraw it to keep safely tucked away under their mattress. A good movie example was the bank run in “It’s a Wonderful Life”.
Making the SVB Depositors whole will actually save money, if it successfully stops bank runs from spreading.
Here is a personal anecdote about bank run mentality. My oldest son contacted me a couple days ago, because he was worried about bank runs and wanted to know what I was doing. Just that morning a financial ratings service that I subscribe to had run safety numbers on the majority of Major US and Regional Banks and sent me a spreadsheet. The spreadsheet considered three factors including Common Equity, Percentage of Uninsured Deposits, and Unrealized Losses.
My son uses JP Morgan Chase. I gave him JPM’s safety score, which was low risk. This is function of JPM’s status as a too big to fail bank, so the government actually requires it to maintain a larger Common Equity Percentage.
As a final comment, the SPIC insurance thresholds for Brokerage Accounts are $500,000 for the combination of securities and cash, and $250,000 for the cash alone. Staying under these thresholds would be quite challenging for many MrFireStation readers.
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One of the challenges seems to be that the Fed is treating deposits in big banks differently than little banks. Some uninsured accounts are bailed out, but others are given no such guarantee. Small, community banks are getting no guarantees, yet they are being forced to pay special assessments to bail out the bigger, failing banks.
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I read a similar article over the weekend. Not having community banks would make it harder for some specialized lending. I could only get construction financing to build my house in the late 80s, when I was only 29, from a small community bank. The big guys were not interested. Later in 1994, I needed to refinance my house in the middle of the Southern California housing debacle and personally reduced income that were caused by cutbacks in the defense industry. My credit union was the only institution willing to step up.
SVB strayed from sound underwriting when they bought long government bonds where the duration exceeded the duration of their deposits. This works great when interest rates are stable or going down and your deposit base is growing. When interest rates go up, the value of the bonds goes down, which wouldn’t be a problem if they could have held the bonds through maturity. A declining deposit base forced them to start selling the bonds at a lose.
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Additionally, SVB apparently had foreign/Chinese investors who are now being partly bailed out by the special assessment on the small community banks.
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This is frustrating for all of us believers in right and wrong. The aspect of controlling bank runs is interesting and perhaps justified.
Remember and correct me if I am wrong but SPIC is for cash at brokerages isn’t it? I thought that say if Merrill Lynch went BK then funds with them would be covered by SPIC to $500K but any securities held on your behalf would still be yours as they are still “your 500 shares of Apple or whatever security”
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Yes, that’s roughly right. It’s actually SIPC – Securities Investor Protection Corporation. It protects cash and “lost” securities in investment accounts up to $500K. If the shares of stock exist, they are not covered. Only if they are somehow lost.
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