FDIC accidentally reveals details about Silicon Valley Bank’s biggest customers | Hacker News Reader

FDIC accidentally reveals details about Silicon Valley Bank’s biggest customers

cnn.com

33 pointsLinuxBender25 comments

Discussed previously:

https://news.ycombinator.com/item?id=36445278

(124 points | 1 day ago | 93 comments)

> “The American people are going to pay the $16 billion bill to prevent the collapse of Silicon Valley Bank,” Kelleher, the Better Markets CEO, said. “Those banks are not going to cut their executives’ bonuses…They are going to recover those costs in higher fees and rates for everyday banking services and products for Main Street Americans.”

And once again, average Americans are going to foot the bill for all of this.

> And once again, average Americans are going to foot the bill for all of this.

If anyone is subject to increased fees for the benefit of de facto federal deposit insurance it will be the beneficiaries, mostly businesses that need sizable sums of money on deposit to operate. At most banks depositors are already paid next to nothing in interest anyway in exchange for the security and convenience that banks are supposed to provide. Large depositors are already paying for that security, they just aren't receiving it or at least are not guaranteed to receive it, which is a major problem, and one that is relatively easy to fix.

The solution to having large deposits at banks is not to have the FDIC charge everyone larger amounts to insure it, but for the banks to charge large depositors larger amounts to buy third-party insurance. Maybe that will incentivize large depositors to not keep quite so much at any given bank.

That would discourage a customer from keeping more funds at a bank. As a bank, that would be counter productive to the purpose of having more deposits, right?

If someone is putting more than $250k in your bank you would presumably be offering them various value-added investment products to keep them depositing more.

Why buy insurance when you can just flex your political muscles and get others do provide it for free? Some may even say it's the best way of maximizing return to your shareholders.

AIG taught us that private insurance is not any more insulated from financial disaster than the government-backed insurance systems anyway. They’re so deeply connected that catastrophic events deeply impact both.

I don't understand the perspective of "large depositors should just smurf their deposits across 1000x FDIC banks." If they do that, the FDIC is still on the hook for the aggregate large deposits, so why not cut out the smurfing middleman and just insure large deposits directly?

Because this is what prevents contagion from spreading across the banking system.

If you hold 1M in 4 different banks, you’re in way better shape if one bank fails than if you put it all in one place (plus you’re still fully insured if you deposit evenly).

Odds are that not all 4 banks are collapsing due to their stupidity (as SVB did).

The FDIC insuring all deposits is also very effective at preventing contagion.

Except that it encourages banks like SVB to specialize instead of distributing depositor risk. I can imaging a scenario where specialized bank failure can lead to contagion where it wouldn't if all banks distributed risk.

E.g. The companies keep their payroll funds in Industry Payroll Bank (IPB). IPB fails the same way SVB did, and suddenly everyone working for the industry companies are short for a week on their pay. A bunch of these people bank with Local Bank and Credit Unions (LBCUs). Instead of getting expected deposits suddenly many of their depositors are borrowing from their lines of credit.

Now probably, given the short-term nature of the contagion, the LBCUs can survive this by temporarily borrowing capital. And at the very least, if they did fail, it would probably be due to liquidity instead of being underwater, so shouldn't hit the depositor's insurance funds much, if at all. But maybe there's a scenario I can't think of in which something like this could be bad.

> Except that it encourages banks like SVB to specialize instead of distributing depositor risk.

Which is why the FDIC only insures up to $250k per account. The SVB situation was bad enough that the FDIC opted to make creditors whole, but they don’t always do this.

Part of this is depositor laziness. Businesses figured out really quick during the savings and loan crisis in the 80’s not to bank at just one bank. But most people running companies now weren’t around for that. Diversification carries an inherent operational cost and companies got lazy/cheap and stopped practicing good banking habits.

> The SVB situation was bad enough that the FDIC opted to make creditors whole, but they don’t always do this.

Is this not the first time that they've done this?

> Diversification carries an inherent operational cost

You would think a Fintech startup would have an app for that. Heck, how many companies are outsourcing payroll anyway? Can't ADP do this on their back end? But, of course, now nobody will, because the FDIC did it for free. The least the FDIC could have done was give everyone a haircut instead of making them 100% whole.

> Is this not the first time that they've done this?

The US averages roughly 3-4 bank failures per year, so no, this is definitely not their first time (SVB was the largest, though). This is a core function of the FDIC.

> Can’t ADP do this on their back end?

I suppose they could, but if there was a market incentive to create a tool like this, then why doesn’t it exist already? I’m not sure, but granting a non-banking 3rd party access to all of your financials does seem like a risk.

That they've made every depositor whole above and beyond the $250k limit.

> if there was a market incentive to create a tool like this, then why doesn’t it exist already?

As mentioned elsewhere because people had forgotten the lessons of the S&L crisis. There would have been a market for it now had the FDIC not stepped in and said that they'd fully backstop everyone, regardless. Even if the FDIC had just given deposits above $250k 95% back instead of 100% back, there would be a market for such a tool.

> but granting a non-banking 3rd party access to all of your financials does seem like a risk

Maybe, but doesn't ADP already have this access, as it's doing payroll for you anyway?

Most banks do not have this problem. The fundamental problem with SVB was that it was a bank that didn’t really act like a bank.

Most banks don’t have a depositor base consisting of one specific type of class and industry, they’re typically diversified. Also, most banks benefit from rising interest rates and organize their offerings to capture the benefits of rising interest rates. SVB has to be one of the only banks in recent history to bet against interest rate hikes by investing heavily in interest-rate sensitive instruments. The whole thing was a risk management nightmare and they didn’t even have a risk management officer when they failed.

No need to solve a problem that doesn’t exist for banks that know what they’re doing. SVB were complete idiots.

No surprise to me, I figured all along the rescue was for the "tech bros", a bit surprised about Zhipin. I am sure that will inflame US Politics for he next few weeks.

> “The American people are going to pay the $16 billion bill to prevent the collapse of Silicon Valley Bank,” Kelleher

That’s the biggest lie ever told, unless someone can enlighten me on the contrary.

For a govt that is > $30 trillion dollars in debt, the taxes don’t even begin to cover its obligations. In other words, the American peoples’ taxes ($2-3T) will barely cover the interest on existing debt. That number also includes taxes collected from non-nationals on US soil, btw :)

So, who is really on the hook - when a govt will literally print itself more money? It’s a good question for economists…

UPDATE: I thought about it a bit and the answer came to me. On the hook are treasury bond holders and anyone with USD cash/in their banks. Not just the American people.

Taxpayers as such are not going to pay one dime to cover what would otherwise be losses to depositors at Silicon Valley Bank. The FDIC bills the actual cost of deposit insurance to banks, not to the federal government. It is a cost of doing business, and not a particularly large one either.

No one should expect bank fees to change very much to cover losses like this. Borrowers might have to pay slightly higher interest rates and that is about it. Compared to the other causes of high interest rates it is hardly worth worrying about. Rounding error territory. The prospect of severe losses to uninsured depositors in the event of a bank failure is a much worse problem.

Someone will pay in the end. Unfortunately it won’t be the people who should.

Do these companies have a need to have hundreds of millions of dollars of cash readily available? If they had bought treasuries and put it in a Schwab account it would be safe even if Schwab went bankrupt right?

> If they had bought treasuries and put it in a Schwab account it would be safe even if Schwab went bankrupt right?

Yes, because Schwab is at best a custodian and cannot dip into customer funds for anything at all.

But they wouldn't be safe from certain bookkeeping errors or internal theft because SIPC insurance also isn't very high.

Hundreds of millions might be better kept at Treasurydirect.gov, due to SIPC coverage limits. Though I'll admit ignorance on knowing exactly how insurance over there works, but it'd be a REALLY bad look if the government lost your treasuries and didn't compensate for it.

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