Not sure I follow the logic. SVB is done right? Saving the companies that banked there is very different than saving the bank. Yes, it might invite more risk by big banks if they know there is a parachute for their clients, but if we close the bank anyways or clear out all parties involved and they have large black marks then there are deterrents (theoretically at least). I like that the gov is acting more like a scrappy company here and getting some shit done when the stakes are high. I dunno, just spitballing here, curious about the counterpoint.
From the perspective of just the people working at SVB, I guess so? But from the perspective of people putting lots of money in one place, it's a reinforcing signal that the most important part of picking a bank is that it be big enough to get bailed out in case of poor planning.
> From the perspective of just the people working at SVB
Who had the former CFO of Lehman Brothers just before it collapsed on their executive team? These people will continue to fail upwards with taxpayer support as they always do.
See you in ten years when he's involved in the next one.
What is the advantage of encouraging people/companies to spread their deposits among multiple banks? Say people were really worried about losing anything over the FDIC limit and so kept multiple separate accounts. Then a bank fails and the government still has to cover the deposits, so what's the benefit? Is the idea that if people are worried about their deposits they won't put more than the limit in banks that are making particularly risky investments? Isn't it more likely though that anyone who would do that would just spread their money out regardless, and therefore there's no disincentive to the banks.
The bank isn't being bailed out though. The depositors are being covered by FDIC in the short term, while FDIC will sell assets seized from the bank. The bondholders and shareholders will take the haircuts. If that's not enough to cover the depositors, banks will be given a special assessment.
The banks left standing will be made to cover the deposits, insured or not, of other banks. It is rather remarkable and I'm not entirely certain it'll work - at what point the special assessment could be unsustainable. Presumably this special assessment isn't instant, and FDIC could just use accounting to make it politically and legally valid to consider it as a non-public and industry financed private bailout.
shrug will it work? I don't know. It really better.
>_shrug_ will it work? I don't know. It really better
The need to be able to field questions like these is why I feel we need open-source economic simultion packages. Does anyone think that people in the individual Fed reserve banks are running anything other than flat spreadsheets to model the financial system? Theyneed to develop economic modeling scripts (at minimum!) a field which is in its infancy. The datascience & modeling capability in HN would eclipse the forecasting power of an econometrics-focused Fed statistical modeling group.
I'd like to see a python library devoted to economic modeling w/ classes for central banks, investent & retail banks, applied into umpteen think tanks' different competing models.
"Yes, it might invite more risk by big banks if they know there is a parachute for their clients, but if we close the bank anyways or clear out all parties involved and they have large black marks then there are deterrents (theoretically at least)."
* As the gp said, it's done. The guarantee isn't new, it's how thing are done now. The Fed is not changing things by doing this, the Fed is doing things as they are expected to be done. Anything else would be changing things, anything else would panic people. Is the Fed "scrappy"? IDK, the "scrappy" efforts to stop crises began with the "plunge prevention team" in the 1990s and have continued more systematically since then, if you want to call that scrappy.
* As to whether there are black marks on people - only the companies who can whether to hire these people later can decide that. Financial companies hire people who've done time for financial fraud so it's questionable what sort of "black marks" the Fed could give if it wanted to (People mention the Lehman guy but was Lehman really worse than the others in 2008 or just a scapegoat - like fricken Martha Stewart. Was that guy involved in excess or just a random manager? I recall he was now managing a stock subsidiary that's being spun-off whole. But still).
