u/jh937hfiu3hrhv9: What are SVB's assets? Does the depositer's refund come from bank reserves or the FDIC?

SVB's assets are largely longer-term Treasuries and government-backed mortgage securities. These securities have little risk of loss if they're held to maturity, but they lost paper value as interest rates increased - so when SVB lost deposits and had to sell assets, they had to bear those losses.
While depositors have immediate access to their funds—which may needed to be funded in the short-term by the FDIC—the FDIC will only lose money if its sale of the assets (and/or liabilities) of SVB is less than enough to cover all the depositors. And, if the FDIC's insurance fund dips below what it determines to be sufficient coverage for the system - it will levy the banking system for the shortcoming. — Steven

u/SockPuppetsUnite45: Does this mark the beginning of the end for bank deregulation legislation that is framed as 'right sized or tailored regulation'?

Unlikely. Tailoring as a broad and general concept is something that seems pretty logical: a community bank with less than $1 billion in assets and does mostly just basic lending shouldn't face the same type of regulations as a megabank with $3 trillion in assets. How exactly that all shakes out is very complicated (and, as you implicitly suggest, offers a lot of room for mischief). But certainly, this has likely made both lawmakers and regulators much less sympathetic to arguments from banks, say, between $100 billion and $250 billion in size, that they don't pose risks to the economy. — Victoria

u/boazg: Are we expecting a chain reaction of more banks collapsing due to the global nature of panic these days?

The Fed has intervened to insulate open banks against liquidity concerns related to the open banks. Preventing a contagion likely played a role in invoking these systemic risk authorities for banks that are otherwise not central to the financial system. Crisis-fighters largely lost their authorities after the 2008 financial crisis to protect individual banks from contagion without first closing them. So, responding so forcefully to these relatively insignificant banks' failures so forcefully hopefully limits contagion to any banks that may actually be more prone to spreading financial wildfire.
the other thing worth noting is that this has primarily been a run on one kind of business model: banking tech/VC/Silicon Valley - which itself is facing belt-tightening as the Fed has raised interest rates steeply. We have not seen signs of contagion large, diversified banks - which are actually experiencing deposit inflows. — Steven

u/Longjumping-Ease-353: How can financial journalism be improved to prevent future black swan events? Like Enron, theranos, maddoff, SBF, we work, Lehman bros and SVB?

Sam here: Great question. Victoria and I were talking about it offline. On the one hand the Theranos story was a product of tremendous journalism.With that said, a lot of it has to do with building up knowledge around finance, markets, regulation, policy etc. That takes time and commitment to the profession. The other thing to remember is that the media landscape's wider and thinner than it was when there were multiple daily papers competing for the same market. Markets are much larger, but journalism's shrunk. Time and investment is the only way that improves.

Hey all, there was a duplicate post of this AMA, which may be taken down, so we're sharing some of those thoughtful Qs and responses here:

Nah, they've got a lot of good assets. But the real reason another bank would want to buy them is relationships with all those customers (a big chunk of whom are tech startups). - Victoria

they have different views about the effectiveness of govt intervention, but again the schools really only speak to macroeconomic interventions

Sam here: Great question. Victoria and I were talking about it offline. On the one hand the Theranos story was a product of tremendous journalism.

With that said, a lot of it has to do with building up knowledge around finance, markets, regulation, policy etc. That takes time and commitment to the profession. The other thing to remember is that the media landscape's wider and thinner than it was when there were multiple daily papers competing for the same market. Markets are much larger, but journalism's shrunk. Time and investment is the only way that improves.

Sam here: They've also got a loan book that a lot of private equity firms are reportedly circling.

SVB's assets are largely longer-term Treasuries and government-backed mortgage securities. These securities have little risk of loss if they're held to maturity, but they lost paper value as interest rates increased - so when SVB lost deposits and had to sell assets, they had to bear those losses.

While depositors have immediate access to their funds—which may needed to be funded in the short-term by the FDIC—the FDIC will only lose money if its sale of the assets (and/or liabilities) of SVB is less than enough to cover all the depositors. And, if the FDIC's insurance fund dips below what it determines to be sufficient coverage for the system - it will levy the banking system for the shortcoming.

- Steven

The Fed has intervened to insulate open banks against liquidity concerns related to the open banks. Preventing a contagion likely played a role in invoking these systemic risk authorities for banks that are otherwise not central to the financial system. Crisis-fighters largely lost their authorities after the 2008 financial crisis to protect individual banks from contagion without first closing them. So, responding so forcefully to these relatively insignificant banks' failures so forcefully hopefully limits contagion to any banks that may actually be more prone to spreading financial wildfire.

the other thing worth noting is that this has primarily been a run on one kind of business model: banking tech/VC/Silicon Valley - which itself is facing belt-tightening as the Fed has raised interest rates steeply. We have not seen signs of contagion large, diversified banks - which are actually experiencing deposit inflows.

-Steven

Victoria again: Nah. They had to have owned the assets as of March 12: https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20230312a1.pdf

It will definitely be a major factor in how the Fed is thinking about what to do next on interest rates. Inflation is still high -- 6 percent over the past year -- but it's steadily dropped since the middle of last year. That said, it's shown signs the last coupe of months of mostly moving sideways rather than moving convincingly down.

All of that to say, this is a tricky place for the Fed. What we saw with the banks was an example of how rate moves can suddenly hit, with a delay, in unpredictable ways. And so they have to be worried about going too fast and breaking something else. But they might still do a small increase later this month because they're still worried about inflation. It's about risk management at this point.

- Victoria

Sam here: Was talking to Steven about this offline and, as he put it to me, shocking is a point of view. Not to sound like a reporter who was caught flat-footed -- I swear that never happens -- I do think the speed with which this run occurred, and the level of financial sophistication of the industry it most heavily impacted, was fairly shocking. But I definitely defer to Steven on this.

Unlikely. Tailoring as a broad and general concept is something that seems pretty logical: a community bank with less than $1 billion in assets and does mostly just basic lending shouldn't face the same type of regulations as a megabank with $3 trillion in assets. How exactly that all shakes out is very complicated (and, as you implicitly suggest, offers a lot of room for mischief). But certainly, this has likely made both lawmakers and regulators much less sympathetic to arguments from banks, say, between $100 billion and $250 billion in size, that they don't pose risks to the economy.

- Victoria

I'm not sure any of them have much to say at all! Those schools have strong macro theories, but little to say about financial dynamics and bank balance sheets. This was a lesson we very much learned in 2008 and are still grappling with. - Steven

Great question Tyler, Sam here: At this stage it's extremely unlikely lawmakers would agree on a bill that would lead to any substantial changes --- like Warren and Porter's rollback of the Dodd-Frank rollback -- would make it across the finish line. Not enough Dems support it and it's a divided Congress. On the other hand, there are definitely signs that bank regulators are looking at things like capital requirements and better supervision. On the latter, one of the issues that's been raised is that regulators didn't spot the problems with SVB's investment portfolio/depositor concentration. Fed Vice Chair Michael Barr is overseeing a review of that as we speak.

Liquidity and capital regulations are helpful against general downside banking risks. They can do little if the market bails on your business model. PacWest's business looks very similar to SVB's even if their balance sheet looks stronger. Being a bank to tech/Silicon Valley doesn't look like a viable business model in this interest rate environment - hence the counterparty run. When your counterparties run as a bank, you're out of business. No amount of capital or liquidity can save you.

- Steven

So, legally the answer to this is, not a new policy. What actually happened is that the Fed, FDIC and Treasury invoked a "systemic risk exception" to the requirement that the FDIC try to minimize losses to its deposit insurance fund. That requires there to be some sort of threat to the financial system or the broader economy. (As an aside, the agencies haven't really laid out their full justification for that, but the central reason seems to have been staving off financial panic).

It might be hard to keep suggesting that every bank poses that kind of risk! And of course, that's not what Congress has said -- the deposit insurance limit is set at $250,000. That said, this could spur a change in deposit insurance law sometime in the future.

But the answer is actually more complicated than that. The Fed also unveiled an emergency lending program that, for the time being, will allow banks to put up the type of collateral that SVB dumped for cash loans that will help them meet withdrawal requests. So for now, the government has basically facilitated banks being able to handle more panicky behavior by depositors (although it depends on whether they have enough of the right type of assets). And that's sort of an indirect backing of depositors for now!

- Victoria

Hey there, Sam here: It had less to with the losses than it did the depositors' reaction to those losses. Remember this bank was pretty concentrated, venture's a big deal but it's also a little bit of a small world. So when word got out that SVB was taking steps to repair its investment portfolio, depositors -- startup founders, VCs, etc. -- fled en masse. $42B gone in a day -- likely would've been more if CA regulators and FDIC didn't step in. Hard to survive that kind of run.

>ITinMN

Hey, Steven here from the Yale Program on Financial Stability! Indeed, financial distress was definitely an expected outcome of the Fed's interest rate hikes. They very explicitly wanted to tighten financial conditions - and banks are huge part of the financial sector. The Fed is (awkwardly?) also in charge of bank supervision - i.e. making sure banks are resilient. And it has a financial stability mandate. It seems the Fed wants tighter financial conditions, but only outside the core banking system

Thanks for joining us! Victoria here. This is a fantastic question. The U.S. has nearly 5,000 banks (and another 5,000 or so credit unions), so that's a lot of competition. Part of what's strange though, is a lot of that is a vestige of when we used to have restrictions on banking across state lines. So consolidation is perhaps understandable.

You don't want too much concentration in the megabanks (think JPMorgan Chase or Bank of America, which each have more than $3T in assets, compared to SVB, which had roughly $200B). And regional banks like SVB are probably better able to compete with those banks than the little guys. But there's certainly room to debate we don't need as many banks as we have now.

- Victoria