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How much fear is in the air about SVB and the greater implications?
"Where does the government get all this money to cover depositors not covered by FDIC insurance?"
From what I've read so far, from the FDIC, which will then replace at least some of that expenditure by a special assessment (ie: in addition to the regular assessment) on the banking industry.
Additional "backing" comes from the Exchange Stabilization Fund (ESF) that has been used in past crisis and/or dollar-interventions.
One interesting aspect of the new BTFP facility seems that banks can use securities as collateral and get advances for 1 year at their par value (not current value). Rate will be 1-yr overnight swap rate + 10 bps. That sounds like a great deal!
Officials may be concerned about the potential for more widespread bank runs. This plan can help restore depositors' confidence in the banking system. I don't like the appearance of this plan (moral hazard) but it may have been the best choice available under the circumstances. Having said that, I don't know the full range of plausible options.
Check this out . DEPARTMENT OF THE TREASURY EXCHANGE STABILIZATION FUND Management’s Discussion and Analysis (Unaudited) Fiscal Year 2021 8 (Continued) reestimates (see Note 11). Amounts due to the General Fund also decreased by $9.6 billion, reflecting a decrease in the downward subsidy accrual compared to FY 2020. Net Position The Net Position of $42.2 billion at September 30, 2021 represents the combined total of the ESF’s unexpended appropriations and cumulative results of operations. The $479.3 billion (or 91.9%) decrease in FY 2021 was driven by the $478.8 billion rescission of CARES Act appropriated funds.
2022 report should be coming out soon, March . Seems to me to be a bit under funded
”A special assessment on banks will be implemented (as required by law) to cover Deposit Insurance Fund losses attributed to uninsured depositors.”
It sounds as if this (rescue package) is all pretty perfunctory - as it is provided for by law. And all the other banks knew in advance they are liable to pay this special fee to prop-up failing banks (err … the uninsured depositors of said). As many of us own shares in banks through various funds I suppose we were / should have been aware we may need to pony-up money to fund these types of rescue packages.
One may than wonder what all the sweating was about in the first place?
Well here's what I'm seeing: It's just a fact that in today's financial arena there are certain types of businesses that have a need to maintain very large amounts of cash which is readily available for deployment on short notice.
As far as I can see, the financial system, generally speaking, does not really have any mechanism to provide this "safe haven".
Now if the Fed, FDIC, or some appropriate government agency were to provide a "safe-deposit" facility for deposits over 250k, and charge a reasonable fee for providing that service, then depositors who did not use such a facility would have no recourse other than to blame themselves if they did not use such a service.
How could that be done? Well what if the FDIC or some other responsible government agency were set up to accept these large deposits, and then redistribute that cash in small deposit amounts to all of the banks in the FDIC system? This would certainly provide safety for that money, as for sure not all of the banks in the FDIC system are likely to get in trouble all at the same time.
I just think that businesses needing a safe haven for large amounts of cash should be able to have a simple and safe solution. They should be able to concentrate on running their primary business, and not be required to to operate an in-house financial group just to keep track of their deposits.
I didn't realize that such an option existed. But I'll tell you straight out: I wouldn't trust ANY private operation in the long run. That's just transferring the risk of loss from a poorly managed bank to a possibly poorly managed private concern. So they get in trouble: then what? I believe that such an operation needs to be an integral part of the overall government financial system.
Isn't that exactly what the FDIC & the government are doing right now with SVB?
Before Market open at 9:30 EDT on Monday, 13 March, 2023. Here is an extremely random list of how some banks fared at the Closing Bell, this past Friday: (And we shall see just what happens on Monday!)
CCBG. Tallahassee: +0.12% BHB. Bar Harbor, Maine: -1.78% OCFC, N.J. -3.64%. (The Big Loser on THIS list.) CAC. Camden, Maine: -1.47% and a 52-week new low. CATC. Cambridge, MA. -2.02% SSB. Winter Haven: new 52 week low, but CNBC.com reports a bounce-back: +1.26%
SMMF Eastern WV panhandle, Shenandoah Valley in VA. Also just took over and merged with Prov. State Bank in the Eastern Shore of MD: -1.46%.
UNB. Morrisville, VT: -3.42% BMO (owns the old Harris Bank out of Chicago in the USA:) -2.64% CM (owns PrivateBancorp in the USA:) -1.9%.
Thanks @Old_Joe From the write: 'Fed officials declined to provide a specific figure for the size of that new loan program, but made clear it would be large enough to cover trillions of dollars in potential requests.' Really, trillions ???
So, a full bailout did take place and has set a precedent regarding the $250K insured account ceiling. I suppose one could go to court with this, eh?; if one didn't get a full $500k at some future date.
@catch22- As you would know from our conversations over the years, I have no tolerance for government rescue of institutions or businesses that get into trouble due to stupidity or greed.
But it's painfully obvious that in today's financial environment there are certain types of businesses that have a need to maintain very large amounts of cash which is readily available for deployment on short notice.
It's absurd to leave our entire financial and banking system open to the inevitable mismanagement which is guaranteed to occur from time to time, and which then repeatedly threatens the entire financial system. I believe that we need to provide a safe place for businesses to easily and safely deposit large amounts of money without requiring those businesses to fend for themselves in managing those deposits.
To characterize such an arrangement as a "government takeover/nationalization" is ridiculous, when for all practical purposes that is exactly what the government is now forced to do in any case, to save the rest of the system from self-destruction.
Lots of reports (Bloomberg & elsewhere) that hedge fund manager Bill Ackman earlier today predicted an unraveling of the entire banking system starting Monday morning if the government didn’t step in and make whole the uninsured depositors at SVB. And that he called on Biden to do something.
My earlier swipes were perhaps devil’s advocacy. While a source of funding may indeed exist, it appears that high gov’t. officials including Yellen made the call to step in. So it’s not automatic. If it were automatic there’d be no need for FDIC insurance.
Two concerns. If more banks fail and if other banks need to pick up the tab to cover uninsured assets, where does this end? Wouldn’t that put an unbearable burden on an already stressed banking industry which is struggling to stay solvent under the oppressive weight of an inverted curve? Then there’s the fairness issue. If it’s an administrative call, who’s to say that large uninsured depositors at a California bank that fails get made whole, while at another failed bank in Michigan they suffer loss of their savings?
Of course I’m happy if the decision brings peace to those among us who’ve been concerned about the safety of their savings. No criticism intended. Just trying to get a handle where this is heading. BTW - U.S. equity futures up. But the dollar is plunging against every major currency tonight.
More - The Fed has established an emergency lending institution with deep / unlimited pockets and is encouraging regional banks to borrow for up to a year at very favorable rates. Sure sounds to me like re-starting the printing press.
"So it’s not automatic. If it were automatic there’d be no need for FDIC insurance."
@hank: For bank account amounts of 250k or less FDIC insurance is "automatic".
The problem is with accounts in excess of 250k: there is no government mechanism for protecting those accounts. There should be, and those depositors should pay a reasonable amount for that insurance. If a depositor chooses not to participate, they're on their own. If a bank gets into trouble, they're on their own.
@hank With a lot of threads today, tis like reading a short book here. I'll add this back from a previous post regarding the 2008 TARP program. Note: these 'loans' did carry interest and was expected to be repaid to the Treasury. The Treasury did have a profit when all was settled and done from the various loans. The Troubled Asset Relief Program (TARP) was instituted by the U.S. Treasury following the 2008 financial crisis. TARP stabilized the financial system by having the government buy mortgage-backed securities and bank stocks. From 2008 to 2010, TARP invested $426.4 billion in firms and recouped $441.7 billion in return.
---Perhaps the Treasury will have some profit for the efforts. I don't know the terms of the 'bail' monies.
Flashback: During the GFC, Bloomberg and CNBC became all-nighters. No info-mercials, etc. 24 hours of everything! SO, if what started Friday could have become systemic; then the actions taken were intended to deliver a full punch here and now. One can only imagine the meetings, phone calls and data crunching of banking records/data. Although, I watched Ms. Yellen this morning state that there would not be a bailout.
NOW, how about a full audit (any organization that is involved with the any form of banking in this country, plain and clear text without any of the cockeyed and perverted auditing standards that have taken place over the years) available to the public every month, online for free.
Overview: Still better than China, and that we have a 'form' of 'rule of law', as perverted as it may be.
@Observant1 hit the nail on the head - moral hazard. If the Treasury implicitly backs up every bank that botches things so badly that they create "systemic risk", then not only do we have the "normal" moral hazard created by insurance (indifference to risk) but aggravated moral hazard. One gets coverage only if one takes outsized risks with tons of money. (In essence, the TBTF problem.)
FDIC insurance is more than adequate for retail investors; they should not be standing in line to pull their money out - though many people still do that. Startups should not need fast access to all their cash. They need to meet payroll and other operating expenses. But they don't need fast access to all their cash from an investing round or a loan.
If they really do need tons of cash at a moment's notice, let them pay the banks for the service. Banks can shovel the cash into their vaults or do whatever the electronic equivalent is without putting a dime at risk.
I have sympathy for the employees of companies that tied up their money in SVB, but little for the companies themselves. Small depositors cannot be expected to investigate the soundness of their banks, so their deposits are insured. Businesses are different, and this gets us back to moral hazard.
@Old_Joe - I’m aware of the $250,000 automatic coverage and cap on FDIC insured deposits. My underlying point was that if the coverage of amounts beyond $250,000 were automatic than there would no longer be any need to distinguish between the $250,000 FDIC insured amount and greater amounts because if it’s automatic everyone’s covered anyway. In the end it’s all one when viewed that way. (ie - when the #*&# hits the fan the government will step in and cover everyone.)
@catch22. Thank you for the note on the 2008 TARP program. Yes - I seem to recollect the government recaptured that $$ along with interest. Let’s hope this new version (TARP 2?) operates in the same manner. There are scenarios one might envision where the $$ (or some of it) doesn’t get repaid. At any rate, ISTM the effect now will be to add liquidity to the system / increase money supply. So it should have a stimulative effect. We’ll have a better sense of that in coming weeks based on how higher risk assets (stocks, reits, commodities) perform.
Also, let’s see what the % rate the borrowers pay will be. I might argue that for the Fed to lend money at substantially below prevailing rates is one way of cranking up the printing presses without acknowledging it. Flooding any system with cash (even borrowed cash) is usually beneficial in the short run.
The rate on the BTFP 1-yr collateralized loans (for PAR value, NOT current value) is "1-yr overnight swap rate + 10 bps". The sweetener is not the rate, but that banks can get PAR value for their underwater securities, but after 1 year, those underwater securities go back to banks' balance sheets.
While no buyer has emerged yet for the US SVB Bank, there is news this morning that HSBC bought the UK SVB Bank for a song. News is pending for its other branches in 13 countries.
A dramatic reversal in the US futures from rally last evening to selloff this morning. Things may not be as rosy as they appeared first.
Depositors with big cash holdings are – reasonably – expected to be aware of the risks and spread their cash around several institutions. Businesses backed by venture capital, such as the customers of SVB, ought to have been advised how to manage their liquid holdings.
... the sight of depositors being made whole ... provides a disincentive for both depositors and banks to be prudent. There’s no reward here for SVB customers who banked more carefully.
As I wrote above, I take a darker view. It's not just the presence of reward (higher returns) but the absence of punishment that's a problem with risky deposits. There's no penalty (loss) for large depositors to be reckless with their savings.
However, it's not every bank failure that gets protection. It's not automatic. It's just the banks that take the most outrageous risks and lose that are directly protected by the government. On infrequent occasions, uninsured depositors lose money. That happens when a failed bank is not TBTF, but the the FDIC can't find a buyer that will assume all of the bank's deposit liabilities. https://www.fdic.gov/bank/historical/bank/
This unequal treatment has its own problems, as discussed in this 1990 paper (near the end of the quoted section):
A good first step... would be to cease the present practice of fully paying out uninsured depositors when bank failures occur. This practice, of course, is de facto insurance [emphasis in original] ... Paul Duke, Jr. reports that "many [bankers] support proposals to give depositors a 'haircut' a 10% of 15% loss on deposits above the [FDIC insurance limit] — when a bank fails. Two of banking's biggest guns, Citicorp Chairman John Reed and Chase Manhattan President Thomas Lebrecque, support variations of this proposal (WSJ, Aug 3, 'S9, A16). ... Such a shift in policy should not encounter insuperable opposition since it falls far short of enforcing the insurance limitations which legally already exist.
Since the Continental Illinois bankruptcy the federal banking and S&L authorities have adopted a too—big—to-fail policy. The policy is closely related to the unwritten policy of rescuing any faltering American corporation if it is large enough. The most notable cases so far have been Continental Illinois and Chrysler.
...In the beginning this de facto extension of coverage only applied to the banks and S&Ls which were large enough to have a wide financial influence. ... only the eleven largest banks were originally covered, hence the designation "too-big—t o—fail". The government however was rightfully criticized for this policy on the grounds that it put smaller banks at a competitive disadvantage, so, to correct this inequity the government has for several years made it a general policy to pay off all depositors in both large and small failed banks.
Wow... logged in to Schwab and the 3, 6, and 9 month Treasuries are well below 5%, like 40-50bps lower than they were Friday. Yikes.
Yes, I noticed the same @rforno. I don't want to over react, but I'd rather be safe than sorry, so I'm moving most of my Schwab MM $ into a 3 month treasury this morning, 4.64%.
I think a lot of people are doing the same thing, which will lower Schwab's income as they will loose fee money.
I bet the Sweep accounts at Fido are a lot stickier. If so, maybe this will encourage Schwab to eliminate requirement to buy MMF rather than Sweep. But a lot of people don't bother and probably leave balance in cash, so Schwab pays almost nothing there
Comments
From what I've read so far, from the FDIC, which will then replace at least some of that expenditure by a special assessment (ie: in addition to the regular assessment) on the banking industry.
One interesting aspect of the new BTFP facility seems that banks can use securities as collateral and get advances for 1 year at their par value (not current value). Rate will be 1-yr overnight swap rate + 10 bps. That sounds like a great deal!
This plan can help restore depositors' confidence in the banking system.
I don't like the appearance of this plan (moral hazard) but it may
have been the best choice available under the circumstances.
Having said that, I don't know the full range of plausible options.
DEPARTMENT OF THE TREASURY
EXCHANGE STABILIZATION FUND
Management’s Discussion and Analysis (Unaudited)
Fiscal Year 2021
8
(Continued)
reestimates (see Note 11). Amounts due to the General Fund also decreased by $9.6 billion, reflecting a
decrease in the downward subsidy accrual compared to FY 2020.
Net Position
The Net Position of $42.2 billion at September 30, 2021 represents the combined total of the ESF’s
unexpended appropriations and cumulative results of operations. The $479.3 billion (or 91.9%) decrease
in FY 2021 was driven by the $478.8 billion rescission of CARES Act appropriated funds.
2022 report should be coming out soon, March .
Seems to me to be a bit under funded
It sounds as if this (rescue package) is all pretty perfunctory - as it is provided for by law. And all the other banks knew in advance they are liable to pay this special fee to prop-up
failing banks(err … the uninsured depositors of said). As many of us own shares in banks through various funds I suppose we were / should have been aware we may need to pony-up money to fund these types of rescue packages.One may than wonder what all the sweating was about in the first place?
As far as I can see, the financial system, generally speaking, does not really have any mechanism to provide this "safe haven".
Now if the Fed, FDIC, or some appropriate government agency were to provide a "safe-deposit" facility for deposits over 250k, and charge a reasonable fee for providing that service, then depositors who did not use such a facility would have no recourse other than to blame themselves if they did not use such a service.
How could that be done? Well what if the FDIC or some other responsible government agency were set up to accept these large deposits, and then redistribute that cash in small deposit amounts to all of the banks in the FDIC system? This would certainly provide safety for that money, as for sure not all of the banks in the FDIC system are likely to get in trouble all at the same time.
I just think that businesses needing a safe haven for large amounts of cash should be able to have a simple and safe solution. They should be able to concentrate on running their primary business, and not be required to to operate an in-house financial group just to keep track of their deposits.
@msf, @yogibearbull- I would appreciate your comments on this.
https://www.intrafi.com/solutions/depositors/
Isn't that exactly what the FDIC & the government are doing right now with SVB?
U.S. says all deposits at failed Silicon Valley Bank will be available Monday
CCBG. Tallahassee: +0.12%
BHB. Bar Harbor, Maine: -1.78%
OCFC, N.J. -3.64%. (The Big Loser on THIS list.)
CAC. Camden, Maine: -1.47% and a 52-week new low.
CATC. Cambridge, MA. -2.02%
SSB. Winter Haven: new 52 week low, but CNBC.com reports a bounce-back: +1.26%
SMMF Eastern WV panhandle, Shenandoah Valley in VA. Also just took over and merged with Prov. State Bank in the Eastern Shore of MD: -1.46%.
UNB. Morrisville, VT: -3.42%
BMO (owns the old Harris Bank out of Chicago in the USA:) -2.64%
CM (owns PrivateBancorp in the USA:) -1.9%.
So, a full bailout did take place and has set a precedent regarding the $250K insured account ceiling. I suppose one could go to court with this, eh?; if one didn't get a full $500k at some future date.
But it's painfully obvious that in today's financial environment there are certain types of businesses that have a need to maintain very large amounts of cash which is readily available for deployment on short notice.
It's absurd to leave our entire financial and banking system open to the inevitable mismanagement which is guaranteed to occur from time to time, and which then repeatedly threatens the entire financial system. I believe that we need to provide a safe place for businesses to easily and safely deposit large amounts of money without requiring those businesses to fend for themselves in managing those deposits.
To characterize such an arrangement as a "government takeover/nationalization" is ridiculous, when for all practical purposes that is exactly what the government is now forced to do in any case, to save the rest of the system from self-destruction.
< end rant />
My earlier swipes were perhaps devil’s advocacy. While a source of funding may indeed exist, it appears that high gov’t. officials including Yellen made the call to step in. So it’s not automatic. If it were automatic there’d be no need for FDIC insurance.
Two concerns. If more banks fail and if other banks need to pick up the tab to cover uninsured assets, where does this end? Wouldn’t that put an unbearable burden on an already stressed banking industry which is struggling to stay solvent under the oppressive weight of an inverted curve? Then there’s the fairness issue. If it’s an administrative call, who’s to say that large uninsured depositors at a California bank that fails get made whole, while at another failed bank in Michigan they suffer loss of their savings?
Of course I’m happy if the decision brings peace to those among us who’ve been concerned about the safety of their savings. No criticism intended. Just trying to get a handle where this is heading. BTW - U.S. equity futures up. But the dollar is plunging against every major currency tonight.
More - The Fed has established an emergency lending institution with deep / unlimited pockets and is encouraging regional banks to borrow for up to a year at very favorable rates. Sure sounds to me like re-starting the printing press.
@hank: For bank account amounts of 250k or less FDIC insurance is "automatic".
The problem is with accounts in excess of 250k: there is no government mechanism for protecting those accounts. There should be, and those depositors should pay a reasonable amount for that insurance. If a depositor chooses not to participate, they're on their own. If a bank gets into trouble, they're on their own.
Simple as that.
I'll add this back from a previous post regarding the 2008 TARP program.
Note: these 'loans' did carry interest and was expected to be repaid to the Treasury. The Treasury did have a profit when all was settled and done from the various loans.
The Troubled Asset Relief Program (TARP) was instituted by the U.S. Treasury following the 2008 financial crisis. TARP stabilized the financial system by having the government buy mortgage-backed securities and bank stocks. From 2008 to 2010, TARP invested $426.4 billion in firms and recouped $441.7 billion in return.
---Perhaps the Treasury will have some profit for the efforts.
Flashback: During the GFC, Bloomberg and CNBC became all-nighters. No info-mercials, etc. 24 hours of everything! SO, if what started Friday could have become systemic; then the actions taken were intended to deliver a full punch here and now. One can only imagine the meetings, phone calls and data crunching of banking records/data. Although, I watched Ms. Yellen this morning state that there would not be a bailout.
NOW, how about a full audit (any organization that is involved with the any form of banking in this country, plain and clear text without any of the cockeyed and perverted auditing standards that have taken place over the years) available to the public every month, online for free.
Overview: Still better than China, and that we have a 'form' of 'rule of law', as perverted as it may be.
Good evening.
FDIC insurance is more than adequate for retail investors; they should not be standing in line to pull their money out - though many people still do that. Startups should not need fast access to all their cash. They need to meet payroll and other operating expenses. But they don't need fast access to all their cash from an investing round or a loan.
If they really do need tons of cash at a moment's notice, let them pay the banks for the service. Banks can shovel the cash into their vaults or do whatever the electronic equivalent is without putting a dime at risk.
I have sympathy for the employees of companies that tied up their money in SVB, but little for the companies themselves. Small depositors cannot be expected to investigate the soundness of their banks, so their deposits are insured. Businesses are different, and this gets us back to moral hazard.
Also, let’s see what the % rate the borrowers pay will be. I might argue that for the Fed to lend money at substantially below prevailing rates is one way of cranking up the printing presses without acknowledging it. Flooding any system with cash (even borrowed cash) is usually beneficial in the short run.
While no buyer has emerged yet for the US SVB Bank, there is news this morning that HSBC bought the UK SVB Bank for a song. News is pending for its other branches in 13 countries.
A dramatic reversal in the US futures from rally last evening to selloff this morning. Things may not be as rosy as they appeared first.
BTFP Term Sheet https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20230312a1.pdf
Swap Rates https://www.chathamfinancial.com/technology/us-market-rates
POTUS' remarks won't help much; he sounded very reminiscent of W during the GFC.
fwiw saying BBG just said the 2-year hasn't moved this much in 72 hours since Black Monday.
Wow... logged in to Schwab and the 3, 6, and 9 month Treasuries are well below 5%, like 40-50bps lower than they were Friday. Yikes.
As I wrote above, I take a darker view. It's not just the presence of reward (higher returns) but the absence of punishment that's a problem with risky deposits. There's no penalty (loss) for large depositors to be reckless with their savings.
However, it's not every bank failure that gets protection. It's not automatic. It's just the banks that take the most outrageous risks and lose that are directly protected by the government. On infrequent occasions, uninsured depositors lose money. That happens when a failed bank is not TBTF, but the the FDIC can't find a buyer that will assume all of the bank's deposit liabilities.
https://www.fdic.gov/bank/historical/bank/
This unequal treatment has its own problems, as discussed in this 1990 paper (near the end of the quoted section): https://scholarworks.umt.edu/cgi/viewcontent.cgi?article=10130&context=etd
I bet the Sweep accounts at Fido are a lot stickier. If so, maybe this will encourage Schwab to eliminate requirement to buy MMF rather than Sweep. But a lot of people don't bother and probably leave balance in cash, so Schwab pays almost nothing there