Banks have lost all excuses to be making money out of other people's deposits. If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them.
There's absolutely no excuse left for why banks get to invest any of their clients money. They get free leverage from their clients for free. They can send it to zero and the entire risk will be held by the government. That's absurd.
Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
>If those deposits are guaranteed by the government, and backstopped by the government, then there's absolutely no reason banks should be able to invest any of them.
>Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.
You are missing something crucial here - treasury bonds are a loan to the government - this is all by design.
Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
> because the Treasury needs banks to purchase government bonds
Does it? Or is this just how the system is currently designed?
50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
>Does it? Or is this just how the system is currently designed?
Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds.
The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money.
>50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.
It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well.
You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.
That does not address the second question at all? The bonds need to be bought by someone, but you gave no argument why this someone has to be banks and why banks need tax money for bailouts on top of that.
It was explained, maybe you didn't connect the reasoning.
First, there are no entities that have the amount of capital needed to keep the bond market moving besides banks. This is a $50 trillion market that makes the stock market look like a lemonade stand. I would suggest you do some research on the bond markets, it will become immediately apparent why only central and private banks have the capital necessary to drive it.
It's the nature of a credit/debt based system, which is currently in a booming credit cycle (although perhaps the end of the cycle)
As to why do banks need tax money for bailouts?
The banks don't need tax money, if you're willing to let banks fail - which would likely be healthy in the long run.
But in the short term, Joe Middle Class can't get a car loan to get a car, Wealthy Sally can't get a business loan to start a company and employ 50 people, Minimum Wage Mike can't get a home loan after saving up money for 25 years.
It's certainly a shame that banks basically face no consequences and the taxpayer has to pay for it. But people's perspective on bank bailouts changes quickly when they realize the "side effects" are their credit cards no longer exist and their loan rates tripled.
The banks need to buy treasuries, because they treat bonds as a risk free financial instrument. Everyone else would have to recognize the risks inherent in those bonds and thus demand higher interest. The federal government can't afford that.
The reason why banks need to be bailed out, is because they treat treasuries as risk-free financial instruments. If they didn't get bailed out from time to time, they'd have to recognize the risk in buying treasuries.
So our banking system needs somewhere to park capital risk free, and it’s economically desirable that’s in a place that doesn’t create other distortions such as asset inflation or malinvestment. So we have treasuries as a tool for the financial system.
But there seems to be a premise in this thread that the US Gov needs (as in has no other possible choice, even via legislative change) to sell treasuries in order to fundraise.
I accept that’s sort of how the current system works in that effectively the US Gov creates capital/spend in the financial system via various programs and investments and attempts to offset inflationary effects / currency deflation effects by taxation and other revenue before finally encouraging other parties to allocate capital out of the system in the form of treasuries to make up the shortfall.
Effectively as I see it a treasury is then a promise not to spend capital for the term in exchange for the promise you’ll get the expected present value of that capital returned at the conclusion of that term (or in the case of TIPS/I-Bonds, the best approximation of the actual present value of that capital at that time).
Amongst other features, this neatly “allows” the US Gov to allocate an equivalent amount of capital to a purpose it considers appropriate while theoretically lessening impacts compared to simply spending that money without the offsetting treasuries.
But I’m not entirely sure there’s some sort of fundamental rule that the US Gov with the support of the Fed “needs” anyone to buy treasuries - together they could, as an example I’m not necessarily advocating, provide a safe haven facility for anyone who wanted it and continue to influence the monetary system and zero-risk rate of return (eg by the Fed paying interest on reserve accounts as they have since 2008) while otherwise having the Fed simply create the currency the government requires for deficit expenditure (eg by directly buying treasuries from the Gov if we perpetuate the illusion) and using other fiscal policy to control the inflationary/distortion effects of this spend.
That is, I’m not sure it’s the case that the US Gov exactly needs the banks to borrow treasuries because it could not afford them not to. Rather, the value of treasuries is as a measure to absorb excess liquidity, provide safe haven, and adjust risk behaviour in the financial system.
My open question is whether the current system is the only way, yet alone the best way, to practically achieve this goal?
you think inflation is a problem now, wait until Congress has the literal power to order the Fed the print money which is effectively what you are proposing.
I do not trust the Fed, but I Sure as shit do not trust the US Congress.
Paper money is a "Federal Reserve Note". It comes from the federal reserve not the Treasury
The Treasury creates coins or bonds. This is one of the reasons congress has floated the idea of the 10 trillion dollar coin. As it is within their power to order the Treasury to mont that. They can not order the federal reserve to make a 10 trillion dollar bill
Of course it is the fed who prints the money in the US and has dual inflation/unemployment targeting mandate. In other countries this role is typically performed by the central bank.
The debt ceiling doesn’t control spending because it is a misnomer. The money has already been spent. The debt ceiling controls whether the government will honor the obligations it has already made.
And that is cheaper? How much more expensive would a "correct" interest rate be compared to bailouts+economic fallout+loss of public trust you get from the current "risk-free" fantasy?
Trying to keep up the growth half a century ago was the last thing that (at least the West) needed to do - and it was already aware of that at that point.
I'm very much not saying that the outcome wouldn't be disastrous, but IME default is clearly unconstitutional, and so if statute and circumstance conspire to make default the only option then violating some statute to prevent default is appropriate, potentially to the point of just printing what we need to meet our obligations.
People can learn how to use Treasurydirect.gov instead of using their bank as a lousy bond broker. Inflation protected bonds, that you can buy only $10k a year of are some of the highest yielding risk free investments that exist. Banks should just make money off fees and hold short duration Treasury bills only.
Other institutions that have LPs should lend to businesses, students and home owners.
But then you don't have the convenience and liquidity of a bank account. The system works because the bank can invest the aggregate deposits of all depositors and still be ready to cash people out as needed (of course, barring a situation like this one, which is what the deposit insurance is for).
The majority of people don't need daily bank accounts. The only reason why we are using them is because to dollar notes have not kept up with inflation. A $500 bill from 1900 would be a $17,500 note today. Two of those notes provide more liquidity than the majority of bank accounts in the US.
>Who will loan the government tens or hundreds of billions of dollars besides the banks? The [Fed/Treasury/FDIC] has no incentive to prevent banks from loaning customer deposits, because the Treasury needs banks to purchase government bonds
War bonds were bought by people directly. I see no reason why we can't have the same today. God knows the US needs a WWII sized investment in repairing infrastructure.
Individuals purchasing war bonds helped, but didn't pay for WWII.
The war cost a little over $300 billion. $50 billion of that was through individual purchases of War Bonds, the rest came from banks and taxes.
Bankers and merchants have always funded the United States. A representation of Robert Morris, the "financier of the American Revolution" is painted in The Apotheosis of Washington, the fresco decorating the ceiling of the rotunda in the Capitol building where he is shown receiving a bag of gold from the god Mercury. Soldiers and supplies were paid for with "morris notes" which was a proto-currency of the US that was backed by Morris' personal fortune.
Yup. The reasonable UX here is that you as a retail customer get to pick what assets your deposits should go into, and you take the risk. Bank just gets a minor cut for doing the admin work.
And yes, that means if you picked “10y treasuries at 1.56% interest rate” back in 2021, then 80% of your deposit would now be gone. You should have picked “3m treasuries at 0.1% interest rate”.
This whole idea that a bank deposit is some magical asset that you can never lose anything on (other than through inflation) is a leaky abstraction. Like with all leaky abstractions the happy path is great, but when it starts leaking it can get real bad.
So people rather than banks would now be sitting on hundereds of billions of losses. Instead of depressing bank profits those losses would be depressing consumption or home purchases.
Depressing home purchases might well be a good idea. Right now people treat them as investments rather than mere housing, and as a result that market is thrown entirely out of whack.
Indeed, home prices increasing at more than a modest rate is a bad thing for everyone in the long term.
Homes should be investments in the same way that a factory or warehouse is an investment. You buy instead of renting in order to fix the cost of doing business over time, not to speculate on potential future values.
Yes, with "Land Bank" being a big thing now, with people just buying up land and holding it to simply fight inflation, things are just going to spiral out of control one way or another.
The US government already sells billions of dollars worth of various types of bonds to consumers every year. How is what you're proposing any different, and how would you entice more people to buy them than are currently buying T-bills, T-bonds, I-bonds, etc.?
Who is going to buy them? Most US citizens have less than a month's worth of income in their savings account. I'd be surprised if they enough confidence in their own income to tie even half of that up in war bonds.
Many (most?) Americans have no savings account. Not because they are poor but because a savings account is largely an obsolete anachronism. The common tactic of conflating "savings" with "having a savings account" is intentionally misleading.
Per the US government, the median US household has $1000/month they could invest after all ordinary expenses.
Perhaps we'll be forced to accept that we cannot continue to have "endless growth" with a declining workforce. The cost of Labor is going to go up at all levels, and that will mean smaller profits and more inflation until things stabilize and enough of us are incentivized to do productive work.
> Does this mean all American banks (indirectly bank customers) will pay to cover depositor losses that exceed insurance funds?
That assumes banks balance this liability by reducing payments to customers rather than reducing profits. That's a common and completely misleading claim by businesses - if they are taxed or fined, they pass it on to their customers (obviously, it's an attempt to create political support for the business).
The reality is that the ability to raise prices (or lower interest rates on deposits) depends on the elasticity. If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank.
Another consideration is that if they could squeeze more out of customers, they'd probably already be doing it. By that theory, at least, they've already optimized or that and can't charge more.
> If you raise prices on your bottle of water at the supermarket, then people will just buy the bottle next to it - the water-maker will be paying and fee or tax increases out of their profits. If you have the only bottle of water in the desert, you can charge whatever you want. I would think that regular savings deposits, at least, are easily moved to another bank.
However, this fee is levied on all member banks of FDIC, which is basically every bank. Thus, it creates the most natural ground for collusion, i.e. everyone implicitly agrees to pass on the fees to the customers.
More than that, a bank account is probably one of the stickiest "purchases" an average individual makes in their lives, unlike a single-use water bottle. How many people do you think has the time and energy to switch to a new bank every time there is a fee increase? Is it the individual's fault for not doing so?
You're not supposed to talk about that! "If something we don't like happens we'll have to raise prices!" seems to be taken at face value all the time. It's true that in an idealised perfectly competitive market a measure which increases the costs of all producers equally will raise prices across the board, but this is absolutely not realistic.
As you say, the what really matters is (perceived) elasticity. If a company thought they could increase profit by increasing prices then they'd just do it. Conversely if they get fined or regulated or whatever but, as expected, it doesn't affect their elasticity curve then they'll leave prices where they are. If they were acting rationally it was already at the ideal point.
Normal/poor people don't put enough money into banks for it to represent much of their earnings. IIRC, from that image that was circulating around, much less than half of the deposits of even BofA are from accounts <$250k. So I don't think accounts like your grandma's are going to bear any percentage of the brunt of this.
> Normal/poor people don't put enough money into banks for it to represent much of their earnings.
This is hurtful in more ways than one.
Banks routinely charge all kinds of fees from account maintenance to whatever Wells Fargo did for years.
Retail banks won't let the Federal Reserve open a bank account for everyone by default with the Fed.
Either what you say is true and the retail customers are insignificant, and banks must offer no fee accounts. If not, they can't block federal reserve from creating default USD accounts for everyone.
Or they are an important part of the bank's marketing strategy or whatever. In this case, banks must lose the ability to gamble customer funds.
> Retail banks won't let the Federal Reserve open a bank account for everyone by default with the Fed.
Actually the FED is opposed to this themselves. A company called the narrow bank was going to try this. The FED refused them a banking license, all the way to court.
The FED wants deposits reinvested into the economy.
> A narrow bank takes deposits and invests the money in interest-bearing reserves deposited at the Fed. Because that’s all these banks would do, they would be very low cost and hence could pass along to depositors the interest earned on reserves, minus a small fee.
> Narrow banks could attract many large depositors, who currently receive much lower interest rates on their deposits at ordinary commercial banks.
It feels like they were offloading their cost to a service that the government maybe offers at a loss.
It's not so much about the loss, its about the fact that banks lose their depositors. It is great for an economy that the 'savings' of people are used to safely invest in good ideas. This is the function of banks, and incidentally a function that really benefits from a profit motive.
Hence I believe the Fed was against this to keep the economy running by 'keeping money rolling'.
I am not convinced by this argument* because banks can already do that. I don't think that bank are "required" to invest client's deposits, so they can already just stash paper cash in a big vault. It is clearly a dumb strategy for a retail bank.
This proposal for narrow banking seems to employ the government as this vault, sort of like treasury bonds that can be freely withdrawn, which seems a more significant difference.
* I am not denying that this is what the feds claimed and/or believed
It’s deposit volume rather than number of accounts that are over $250k. I’m sure that most of the accounts are <$250k, but a single $1m account accounts weighs the same as 100 $10k accounts.
> Yeah, the fees and lower interest rates from this will be pretty brutal for the poor.
I'm fairly sure the poor aren't that affected by interest rates - the very definition of being poor is not owning much in the way of assets that could earn interest...
It's not only the earned interest on savings being discussed here, the OP was also including higher interest rates on the variable rate loans that most poorer borrowers qualify for.
They only need to cover 20 billion or so for SVB? In the grand scheme of all banks, that's not a ton. SVB wasn't some FTX oops it's all gone level fraud.
Assuming it's a one time charge and not a contagion, it sounds like why we have government and FDIC.
An assessment on banks costs shareholders of the bank, not accountholders. (Maybe it indirectly costs accountholders if banks lower interest rates on customer deposits, but these rates are generally not affected by a small short term shock).
It might seem unfair that shareholders of random other banks have to pay for this but no more unfair than accountholders of SVB paying for it.
I don't have a crystal ball but I have a strong guess about which of these options are most likely to be implemented.
Not only will tax payers likely pay for this but the most likely tax payers to pay are the ones with the least flexibility (stuck with variable rate debt, limited banking choices, no dedicated money managers working on their behalf) aka the poorest tax payers.
If my assessment is correct, they have somehow found and settled on a solution more disgusting than a generally distributed tax payer bailout.
4) Banks get their privileges revoked and they are no longer an oligopoly with privileges of being the only way to store dollars legally, and the only investment institutions who get to gamble their customers money while the government is insuring their loses but does nothing about their gains.
The Fed releases a digital dollar that you can bank without needing to be a part of this oligopoly. Banks are forced to give better terms to be attractive again, terms that will make up for the risk of the bank using your money. Deposits are no longer guaranteed because being in a bank is now a deliberate choice instead of something you're forced to do despite having money.
Banking is not competitive in any way. The small players are very risky to bank at. The big players get to be riskier because they are protected by the government.
They got to play with 10x leverage with their client funds for free. You can't barely get 2x leverage at broker, you pay interest rates much higher and they actually enforce strict margins.
Minewhile these people out of their privilege as bankers got to play with much bigger leverage, while paying zero interest rates to their counterparty which turned out to be fully paid for by the government in the end.
100% investment loss in this case is hardly enough, with the leverage levels banks can access they can literally collect pennies in front of a train and have positive expectation values for shareholders, while investing in negative expectation value investments.
And they did collect pennies in front of a train. Bought 10yr treasuries at historical lows. They paid their customers nothing for it.
VC investment strategy for VC bank. They took the zero or hero attitude until the end. Again, we're taking about people with already VC mentality of "worst case 100% loss, best case 1000%".
No wonder that once VCs recognized their own shadow they fled so fast.
And now they are pretending as if it's the fate of the banking system on the line.
VC bank, managed like VC venture for VC firms. They deserve to lose VC money.
Their loans are probably also worthless than they claim, but they managed to successfully swindle the Fed in the most VC way ever with the shortest deadline. I'm betting FDIC is going to pay twice as much as expected in the end.
> And they did collect pennies in front of a train. Bought 10yr treasuries at historical lows.
> worst case 100% loss, best case 1000%
See I don't understand how you can have 1000% return by buying treasuries, at any time. It was a stupid decision in hind sight, but the best case is order of magnitudes below 1000% return.
And you've put these two things right next to each other, what am I missing?
They would be perfectly safe have they dumped their deposits into T-Bills.
They didn't went for the 1000%, they went for the 5-10% extra and ended up losing everything.
Had they used T-Bills or even straight up depositing it against the Federal Reserve for NO return, they would remain liquid and could now reinvest into higher yield bonds as the rates have risen. Instead they now hold 1.5% 10 year HTM bonds that are now valued at 70% original today because the prevailing rate is 4.5%.
To clarify I don't know the actual strategy they took. I am responding to how they can have risk in "make safe loans" or "buy safe bonds" scenario.
> They would be perfectly safe have they dumped their deposits into T-Bills.
How is this different than what you described? If the rate increases beyond the coupon of a 10 year treasury, its value drops. Are you referring to extremely short term treasuries?
Thanks for explaining it so well. I was thinking that simply losing the bank was enough in this case, but you make a very good point, and this kind of insight is what's good about this site.
You seem to be conflating the bankers with the bank owners here. The former have done well, the latter have lost everything (total SVB dividends are less than the value of the bank).
Do you really think the owners and senior management of SVB ended up with nothing? What about the stock sales they made right before the FDIC took over, or the bonuses given out, or even their compensation during the years in which this high-risk interest rate scheme was going on?
They have orders of magnitude more money than most people, and will get away with no liability.
> What about the stock sales they made right before the FDIC took over
Is there a more clear cut case of insider trading? SEC should already been working on that now.
Anyhow, you're arguing that they SHOULD end up with nothing, that is an entirely different subject of its own. Because you're talking about punishment, while I'm talking about deterrence.
Punishment must be enacted from outside after the fact, while deterrence can be innate before it happens. These senior management could have years of cushy job and more equity, and now they have to rely on savings and have the SEC up their ass. It's clear which is more preferable.
Just wondering, if they know for sure that they will be sued afterwards, why would they sale their stocks? Why not do nothing and live with what they already have? Is there a possibility that they can get away with it?
> Is there a more clear cut case of insider trading?
Genuine question, is there any evidence that these trades were out of the norm, rather than a regular portfolio rebalancing that’s common with any employee who receives part of their comp in RSUs?
Honestly I'd like for there to be a decent look-back period to recover the funds from any stock sold ahead of time, as appears to have happened in this instance. Use the proceeds to help make depositors whole.
No proof at the moment, but from what I've read several of the executives conveniently sold a lot of their stock more or less at the same time right before this kicked off. Guarantee at least some of that was some insider golden-parachuting.
I would guess that these executives entered their sales months in advance as is relatively typical to avoid insider trading. You can look this up on the SEC website
And in the case of company failure, perhaps the lookback period should be extended beyond several months. I don't have nearly the financial or legal knowledge to suggest viable policy, but from what we know of how SVB failed it would have likely been visible well in advance of the failure to someone with access to the requisite information.
I don't know why people keep calling out the CEO stock sales, unless we find out something new this was almost guaranteed to have been done pursuant to a publicly filed 10b5-1 plan which has a 30 or 90 day cooling off period and must be filed when they have no material non-public information. So if the CEO could see this coming, anyone else could have too on the basis of the same information.
These things can come at you fast. They probably put in the trade instructions sometime last year and they are not permitted to make modifications to the 10b5-1 when they do come into material non-public information as that is itself insider trading.
Trading (or changing a 10b5-1 plan) while in possession of material non-public information, whether in your favor or not, is insider trading.
I don’t know if your are just ignorant or if your are intentionally misleading people but this system is widely abused. A stock sale can be schedule in your plan at the end of every month and you can elect to cancel a planned sale at any time. The CEO used exactly this type of sham plan to unload his shares. Look at the plan he filed this year and the plan he filed every year for the last three years.
> A stock sale can be schedule in your plan at the end of every month and you can elect to cancel a planned sale at any time.
Canceling a 10b5-1 is not in and of itself a violation, correct, but it can kill your affirmative defense as it jeopardizes the good faith element.
However, they would have had to have entered into the 10b5-1 prior to them coming into material nonpublic information in the first place for it to have been valid at all. My point is they made the decision to sell before they knew what was happening and filed a compliant trading plan.
> I think that's a good enough deterrence against bad things.
Nah. They should liquidate the owner's private property as well to cover uninsured depositor losses. Better than making them whole by printing money and having everyone else pay for it indirectly through inflation.
Do realize that the SVB bankers and shareholders remain completely screwed. This bailout does not save them. Nor will any FDIC bailout.
So the FDIC existing does not change how a bank behaves. From the perspective of the bank, bankruptcy and FDIC takeover are effectively the same thing.
Well that's far from the complete picture. It's not that the gov't is backstopping all bank stupidity -- the new facility simply says that for redemptions, US government bonds and MBS can be valued at face value not market value. Only for the purpose of ensuring liquidity for redemptions
Yes, they keep on inventing all kinds of new rules that effectively transform the assets that banks happen to be holding onto assets that are worth more. It's just printing money in an obscure way.
The bottom line is that letting banks invest their clients deposits, while clients - even startups that even know in advance they will need this money in short duration - will keep on blowing in our faces. It might be mortgage backed securities, or treasuries, or anything else.
It's always the same story: banks are leeching money getting rich from taking risks with everyone's money, and the risk is bailed out again and again and again by the government.
They are given government mandate to be the only way to hold money. And then a government privilege to gamble that money on whatever financial instrument that we currently pretend has no risk. And then when we discover it had risk after all, the government pays for the risk.
All the while, banks were leveraged 10x or 20x on the fake "no risk", paid 0 interest rates on deposits, and got to take all the profits from that risk.
The fact that even startups couldn't co opt away from this madness speaks volumes. They were getting leveraged with 10yr duration instruments with depositors base that they knew is burning cash.
If those startups wanted to buy 10yr bonds with their VC money, they would've done it. But the bank just got permission to gamble their clients money.
It's even worse because more than getting bailed out, the thing these VCs want the most is for the rate hikes to stop. They got to both break the system with their actions and get what they wanted.
They must pay salaries - about 2% of deposits. They must pay interest on deposits - now people are demanding 4%. They must pay some dividends too. So they must invest in something.
What's the point of cake if you can't eat it? You'd have to start charging for having the cake.
The current practice of limited investment is reasonable and helps keep the system self funded without much in the way of account fees. It's not as if banks are investing the funds in the equity market. Appreciate I'm commenting from afar and without emotion but these failures are normal. This kind of chaos makes the system stronger. And I think most commentators can agree that this is largely a symptom of a swift increase in the repo rate shortly after significant bond purchases by SVB. There are lessons to be learnt but I don't think if you were sitting on the SVB board and were part of the decision to purchase these low risk bonds did you in any way think it would lead to this outcome.
They didn't have risk officer for months. They lobbied to repeal regulations. And I don't blame them, that's their incentives.
At 10x leverage, when you're correctly assuming your customers will be bailed by the government instead of you getting criminally prosecuted, the worst you can lose is 100% of your money. With the kind of leverage you get in a bank, you don't even need to have positive expectation value investment to have positive expectation value for the bank shareholders.
even with completely trash odds of 50% chance of losing it all and 50% chance of earning only 20% with 10x free client deposit leverage, your expectation value is still 100%!
This is the moral hazard you're dealing with. At 10x leverage ratios of banks, they can take the worst possible bets and still win so long as their maximal loss is just losing all the investment.
You're just encouraging this behavior. This latest decision gives a huge incentives to all banks out there to blow out. Just the incentive structure alone is enough to collapse the entire financial system at this point. It was already eating itself and it's only going to get worse.
It's just a matter of time before they blow it beyond repair.
Why would customers being made whole (at the cost of wiping out all equity and possibly at some cost to other banks) affect the incentives of banks in this kind of situation? What would banks do differently if account holders could lose everything over $250k? If they are happy to “gamble with 10x leverage” then presumably they don’t care about impact to their customers. If bank management risked jail time that might change incentives but doing that doesn’t seem to require a cost to account holders.
Customers should be diversifying in these situations. It’s easy enough to set up a sweep. Those that don’t for whatever reason shouldn’t get bailed out for their poor decision making. That’s de facto subsidizing any future banks that want to make risky investments.
This strikes me as more a perspective of someone whose lived so long in a stable system that they consider it a fundamental immoral failing when something does occasionally go wrong. The loaning of your clients money is the fundemental idea that banking works on, if you weren't able to grow your clients money through lending it you would have no reason to accept clients money in the first place.
Bank runs used to happen all the time. The fact that this is the first bank collapse we have seen in basically a lifetime is more of a miracle than anything else, and should be considered a stunning success that a bank collapse is a once in a lifetime event rather than a yearly occurrence that it used to be.
Define “invest.” Banks invest. That’s literally what they do.
People deposit their money rather than put it under their mattress, and the banks reward them by giving extra money to them.
Then the banks figure out a way to put that money somewhere else that rewards them more than what they are giving the depositors.
The point is, why doesn't the government just capture that revenue? Instead we are letting private companies keep those earnings, without taking on any risk.
Let's deposit at the bank of USA and cut out the middle man.
I see this issue in so many areas. Government orgs and companies have different organizational incentives and tradeoffs. When we substitute a government function with a wallet for contractors, we lose those tradeoff. But it's even worse because now the company has moral hazard.
There's absolutely no excuse left for why banks get to invest any of their clients money. They get free leverage from their clients for free. They can send it to zero and the entire risk will be held by the government. That's absurd.
Revoke banks ability to invest deposits. They can't get to have the cake and eat it too. They could offer higher interest rates for non guaranteed accounts which bear risk, or zero risk for the already zero interest rates.