On the other hand, 80 years is a long time. Maybe Hollywood needs to do a remake. With Marvel characters.
Clearly no bank supports withdrawing it in cash, fine. But the transfer should just be a decrement of a number in the first bank and an increment of it in the account on the second bank.
What other effects do I need to think about? (Serious question)
If you’re converting currencies there are also FX mechanics where the bank will quote your transfer on the FX market and try to make a buck here and there before releasing your transfer which can add delays.
What happened here is that the VCs generated a run such that SVB had to liquidate a lot of assets. Moreover, these assets were long term investments. Meaning unlike your sudden and immediate demand for the money, they had to sell those assets on the open market. Unfortunately, since interest rates had gone up the loans the bank had given out were not as valuable on the market and the bank had to take a loss. For example, it had given out a million dollar loan at 3% over 30 years but now it was selling it at 750k on the open market because no one is buying 3% interest rate loans because currently the rate is ~5% (they couldn’t wait the remainder of the loan duration). That created a huge hole in their balance books. They tried to shore it up with a loan which would have plugged the hole but that fell through for some reason I forget (not sure why they announced they were looking for a loan before they had closed it).
So in practice you don’t have to think about anything. Moving $2 million is nothing. It’s when you move $2 million and convince 1000 other people to move it all at the same time that you can make the bank feel some pain (I don’t have a sense on the amount of money moved that cause a problem - all numbers here made up).
What I don’t understand is that a simple change to the regulation would close the ability of random people to create bank runs. If you want to transfer > X million ahead of time, you must give an N day notice. Additionally, the bank can choose to deny it if it’s coming from a regular (ie not money market) account (chequing / savings). You have a special carve out for regular periodic payments and you’re done. It’s kind of ridiculous that you can give a loan to someone and then arbitrarily ask for the entirety of the money immediately without warning.
We have those kind of fixed-term and notice accounts, but many businesses and consumers prefer to use more flexible demand-deposit accounts. You could theoretically regulate demand-deposit accounts out of existence and say everyone now has to use fixed-term and notice accounts, but that might have significant implications on the level of deposits that people choose to hold with banks (as opposed to just handling the cash themselves, where they have no such notice requirements), and this will have significant knock-on impacts to the availability of credit.
> Additionally, the bank can choose to deny it if it’s coming from a regular (ie not money market) account (chequing / savings).
Under what circumstances could they choose to deny it? For how long can they choose to deny it? I wouldn't personally be too fond of lending my own hard earned money to an entity that can arbitrarily choose not to give it back for an indefinite period of time in a way that gives me no legal recourse... Again such a regulatory change could have significant knock-on implications to the quantity of deposits and the availability of credit.
The tricky things with bank runs are there aren't any easy solutions - the best one we've come up with so far is deposit insurance, although this has it's limits (both metaphorically and literally).
The transfer actually decrements two numbers at the first bank and increments two numbers at the second bank, and typically also mutates two further numbers at another institution, as so:
If you transfer your deposit from a bank, then that bank needs to decrement it's liability to you. If it's decrementing it's liabilities, it also needs to decrement it's assets by an equal amount (otherwise it'd be making a profit with this transaction, which it's clearly not).
We therefore know from this that the first bank needs to transfer an asset of some kind from itself to the second bank.
The second bank then needs to increment their liabilities to record the fact they now owe you money, and they need to increment their assets to record the fact that they now own this new asset they've just received.
The asset that changes hands is typically Central Bank reserves, which is essentially money that is held in an account with the Federal Reserve. In order for the money to change hands, the Federal Reserve has to decrement the amount of reserves that are owned by/sit in the account of the first bank, and increment the amount of reservers that are owned by the second bank.
The other effect you need to think about is what happens if the first bank doesn't have a sufficiency of reserves to settle for this transaction? In this case, the sending bank would need to sell some of it's other assets so that it receives reserves from other institutions, before sending those reserves to the second bank, or alternatively it can go to the Federal Reserve and ask the Fed to create new reserves and lend those reserves to the bank, securing the loan against eligible collateral (such as US treasuries, as in the new Bank Term Funding Program), which it agrees to repay later (either with reserves that it receives in the future from other inbound transfers, or by ultimately selling the assets).
If it was I could manufacture money out of thin air just by never decrementing my ledger.
What actually happens is that banks have accounts at other banks. If you transfer say $230 from your account at SVB to PG&E at First Signature then what really happens is SVB decrements 1k from you and increments 1k to themselves and tells First Signature to decrement 1k from SVB's account and increment 1k to PG&E's account. (Take a look at #4 on how a wire transfer works [1]).
So when you want to transfer large sums it causes a bit issue as SVB might not have an account that size at the given bank. So they'll need forewarning so they can do a bunch of other transfers so that they do.
There's a practically issue with SVB having accounts at literally every other bank so if SVB and First Signature have an account at a common bank that works as well with just an extra step of transfers.
https://www.bitsaboutmoney.com/archive/bank-transfers-as-a-p...
Banks are not piggy banks. They don’t just pile the deposits into a vault. They estimate how much money is likely going to be whitdrawn in a certain period and invest the rest. That means that the bank might not be able to pay out all the money they owe if a large percentage of the depositors all at once request their deposits returned.
It isn’t that large a percentage of deposits - less than 20% for most banks by my estimate. Notably in 2020 the Federal Reserve reduced the required reserve ratio for banks to zero, though they do have other requirements such as a minimum equity ratio and such.
The reality is that fractional reserve banks have a massive failure mode if even a modest percent of demand accounts were to withdraw in a short period.
My sincere hope is that these recent developments raise awareness for how fragile the current system is and there is enough public outcry to effect meaningful change.
As it stands a checking or savings account at an FDIC insured bank is an unsecured loan to a leveraged counterparty that uses your funds for speculation, backed by an insurance program with $142 billion protecting $17 Trillion in deposits. (0.7% coverage)
If the FDIC fund is insufficient in a crisis either the US Taxpayer or all dollar holders will be left holding the bag.
Now that the medium of exchange and store of value is fiat currency that is digitally printed or burned by the Fed, it's the opposite. Most transactions happen with nothing physical changing hands. The marginal cost of a bank to take on more deposits is nothing. It's no longer natural for banks to be paid by depositors directly as custodians, which is why they have to make money elsewhere; as you said, leveraged (but regulated) speculation. We've decided that this is overall a good thing for society.
> backed by an insurance program with $142 billion protecting $17 Trillion in deposits
This part's kind of misleading, since it's not like all $17 trillion (or even some significant part of it) will leave the US banking system entirely. Almost all of it just goes from one bank to another. When too much leaves one particular bank at once, you get a bank run. But the system as a whole remains balanced, and there's no conceivable scenario where enough people will take money out of the banking system for it all to crumble. Where would the money go, under people's mattresses or other currencies?
I do find this confusing in a way - need to think about it some more.
Isn’t this only for smaller banks? if I recall correctly something like banks with a market cap over $500B have to maintain a proper reserve ratio.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
In other words, you can practically bring down any deposit-taking bank by starting a large-enough bank run. (Except maybe if the central-bank intervenes.)
Could just package it as Priority Withdraw Guarantee and charge it as an add-on and part of the guarantee is that your cash will be kept in a reserve independent of investment activities.
Standing on some sort of "customers shouldn't participate in bank runs" principle is a great way to end up in some sort of trouble or other.
It also isn't exactly clear to me how to stand "customers shouldn't participate in bank runs" on any sort of firm ethical basis that both stands up to theoretical scrutiny and also is an ethic that can be practically lived by. You put money in a bank. The bank counters with a promise that you can withdraw it whenever you like. Is it really somehow immoral for you to take it up on that promise when you become concerned they can't hold it up? Having already put your money in the bank, is it now somehow also your responsibility for them to be able to live up to their promise, let alone their promises to other people? Am I morally obligated to see that my bank has a reasonable chance to not fulfill their promise, but just live life as if it's not?
You might be able to work this into an ethic, but I would submit that at the very least it's going to be a long journey, not something that can be simply asserted as an unexamined premise. Taking a consequentialist point of view is superficially appealing, but it is unclear to me that across any time span other than a hyper-short one that a full accounting of the situation leads to an obligation to depositors to ignore threats to their deposit. You can easily simply end up destroying the bank system as a whole as you require people to incur risks they're not willing to incur in order to do some banking and other such things, so they choose not to bank at all. "You need to leave your money in even when it's at immediate risk and also you're not allowed to consider second and higher order consequences because that's immoral too and also you're not allowed to ask the banks to consider them either" gets to be rather untenable on a number of levels; even if you want to propose such an ethic theoretically it clearly fails the living-by-it-practically test.
But, again, I'm not saying you couldn't possibly work this into a coherent ethic, I'm just saying, it's pretty challenging. It's hard to avoid that you basically end up writing in that you should allow people to basically lie to your face about the promises they made to you and you're morally obligated to live by those lies.
Knowing that only $250k of those funds were FDIC insured, would you have left your funds in the bank and hoped for the best?
If you answered Yes, how would you explain your decision to your investors or employees?
There is zero benefit for them to take the risk of leaving their funds with the bank and considerable downside.
there is no modern western bank that is capitalized 100% - if everyone goes to every single bank and withdraws their money, the entire western economy collapses.
it's up to the depositors (the customers) to know that if they withdraw 100% of their cash, the entire system collapses.
as a human living in the current era, you either buy into this, or you go and live in a compound with gold bricks and weapons stashed in the basement, or you become a cryptobro, or you become like Russia and start wars to gather resources and land.