An interesting discussion continues in comments in my posts about Silicon Valley Bank, see here and here. In my ongoing research I’ve found some food for thought. This article by Peter Santilli in the Wall Street Journal reports the size of some deposits in the bank:
You don’t get a lot of those to the pound.
And here are some interesting observations by Laura He from CNNBusines:
Hong Kong
CNN—The collapse of Silicon Valley Bank (SVB), which courted Chinese start-ups, has caused widespread concern in China, where a string of founders and companies rushed to appease investors by saying their exposure was insignificant or nonexistent.
What are we talking about?
BeiGene, one of China’s largest cancer-focused drug companies, said Monday it had more than $175 million uninsured cash deposits at SVB, which represents approximately 3.9% of its cash, cash equivalents and short-term investments.
“The company does not expect the recent developments with SVB to significantly impact its operations,†it said.
Zai Lab, a pharmaceutical firm, announced that its cash deposits at SVB were “immaterial†at about $23 million.
The closure of SVB “will not have an impact†on the company’s ability to meet its operating expenses and capital expenditure requirements, including payroll, it said.
Other companies that publicly assured investors included Andon Health, Sirnaomics, Everest Medicines, Broncus Medical, Jacobio Pharmaceuticals, Brii Biosciences, CStone Pharmaceuticals, Genor Biopharma and CANbridge Pharmaceuticals.
Mobile ad tech firm Mobvista and wealth management firm Noah Holdings said their cash holdings at SVB were “minimal†or “immaterial.â€
So here’s my question. Should the federal government underwrite the uninsured deposits of foreign companies, particularly when the companies themselves are declaring those deposits “immaterial” or unlikely to “significantly impact” their operations and why? I also wonder how many of these companies are state-owned or de facto state-owned.
Note that these are uninsured deposits which means that the deposits aren’t covered by the FDIC and the FDIC service charges haven’t applied to them.
Update
My reading of the statutes empowering the Federal Deposit Insurance Corporation suggest that the FDIC is specifically prohibited from covering deposits above the $250,000 limit in the absence of an act of Congress. Perhaps someone better informed than I can comment on this.
Again, The FDIC does not take over a bank, liquidate its assets, and send checks to insured depositors.
The FDIC arranges for it to be bought by another bank. The sale includes insured and uninsured depositors. Bad assets may be carved out, and the FDIC may “cover” a portion of the insured depositors – sweeten the deal.
The FDIC rarely covers more than a small percentage of the total amount of insured deposits. If their funds are inadequate, they borrow money from the government, and a special levy is charged to member banks.
There may be some “arm twisting” by the FDIC and/or other regulatory agencies, but they cannot force another bank to become insolvent through the purchase.
I believe they’ve already had one auction but there were no takers. I think they’ve scheduled another.
I think it is pretty obvious that deposits above $250,000 will be covered either by the Federal Reserve, itself, or by Dept. of Treasury, itself, and not by the FDIC. There may be some shenanigans (It’s St. Pat’s day.) in Congress, too.
The fun part begins if no one will make a reasonable offer for SVB. Does $1 (one dollar) count? Who, then, takes it over? The Federal Reserve? Treasury?
The coverage of non-insured deposits was made under the “systemic exception” that is in the FDIC’s governing statute. My understanding is the “systemic exception” can be invoked with the approval of 2/3 of the FDIC board, 2/3 of the Federal Reserve Board, and the Treasury Secretary after consulting the President.
Its made clear in the FDIC press release, (https://www.fdic.gov/news/press-releases/2023/pr23019.html).
Note, the systemic exception only covered the non-insured deposits of SVB and Signature Bank. Which is why the Fed coordinated the Big Banks actions to save First Republic Bank.
The coverage of all non-insured deposits was made under the “systemic exception” that is in the FDIC’s governing statute. My understanding is the “systemic exception” can be invoked with the approval of 2/3 of the FDIC board, 2/3 of the Federal Reserve Board, and the Treasury Secretary after consulting the President.
Its made clear in the FDIC press release, (https://www.fdic.gov/news/press-releases/2023/pr23019.html).
Note, the systemic exception only covered the non-insured deposits of SVB and Signature Bank. Which is why the Fed coordinated the Big Banks actions to save First Republic Bank.
SVB management spent the last year arguing that the bank was not of systemic importance. Hence the title of my previous post “Schrödinger’s Bank”. It’s not of systemic importance so it can avoid scrutiny but it is of systemic importance to protect depositors who had non-insured deposits.
Said another way if SVB if of systemic importance then so is every bank and the provision you cite is meaningless.
16th biggest banking the country. Sort of hard for it to not be important. Also, if this was a liquidity issue not so much solvency, how much money do the taxpayers really lose? (Lets not pretend the taxpayers arent making up losses if they occur.)
Steve
Kiss your complaints about income inequality goodbye.
We should be following the law scrupulously without carving out exceptions when it suits. Banks should be allowed to fail, stockholders should be allowed to lose money, and companies with excessive cash deposits should be allowed to lose them. That’s how capitalism works. Ameliorate harm done by bank failure to those who need it.
The approach that is being taken maximizes moral hazard. Why don’t shareholders, big depositors, etc. scrutinize the actions of these banks more closely? Because they know through experience that they will be held harmless.
BTW “important” and “systemically important” are not synonymous. Every bank regardless of size is important and a run on any bank has the potential to spread. If that’s how “systemically” is construed, we should just nationalize that entire industry.
I am ok with he bank failing. I dont honestly know what to do with depositors. In theory if depositors know they will lose money they will be more careful. In reality, most people dont have access to know all of the risks a ban may taking. If a ban takes big risks then the bankers may benefit as well as the shareholders. The depositors dont benefit but if the risks fail the depositors may get hurt along with the bankers and shareholders.
Also, on the issue of moral hazard, it seems to me that for the bankers in particular, you cannot eliminate the incentive to take inordinate risks. The payoffs can be so large, as saw in the 2000s and as it certainly looks like with the SVB CEO, that all you need is one big score and you are set. So what if the bank fails. The incentives for bankers do not necessarily align with the bank, shareholders and depositors.
Steve
When was the last time any depositor actually took a haircut in a bank failure? I have not been able to find any going back several decades. Either the Fed guarantees deposits, or the FDIC arranges the sale/transfer of assets to another bank, or some other arrangement is made to make depositors whole. The vast majority of depositors – if not all of them – have been made whole in every crisis going back several decades.
So I tend to think the FDIC limit is mostly a fiction. It exists on paper, but not in reality.
“Said another way if SVB if of systemic importance then so is every bank and the provision you cite is meaningless.”
I don’t think it’s systemically important in isolation. However, it doesn’t operate in isolation. One bank run can create a social contagion that causes other bank runs. SVB wasn’t the only bank overexposed to the risk of interest rate increases. Saving SVB sends a signal that stops the social contagion before it can get rolling. So SVB was systemic in the sense of being a catalyst, not because the banking system can’t survive its failure.
I share CuriousOnlooker’s understanding, and I was amused whenever I first read that the check-and-balance for exceptional circumstances is a vote between institutions with similar interests and levels of risk aversion. Though the ultimate costs will get passed to the banking industry through a special assessment, if there are any. There are some other related authorities, the Treasury has a fund that it can access that was created when the U.S. went off the gold standards, and the Federal Reserve can operate programs applicable to all banks that would effectively override the insurance limitation.
@Tasty, just to break this down into pieces, SVB is in receivership and FDIC is in control of all of its accounts for the purpose of winding them up. It may try to sell/transfer the entity to another bank, but as Dave mentioned, there was little interest in the first auction. Apparently banks that took over other banks during the Great Recession faced penalties and litigation as successors in interest that they hadn’t expected, so don’t want take over SVB to be the government’s punching bag. Maybe they’re just holding out for a better deal. But unless something like that happens the receivership just keeps collecting checks on loans, managing its investments, and perhaps looking for ways to package bundles of assets for auction.
@PD Shaw
It will eventually be bought, and I predict it will be sooner rather than later. From what I have seen, there were no bad assets, and it was simply an old fashioned bank run. So, it was not on any troubled list, and no arrangements were made.
Back in 2008, the various regulatory agencies brought pressure on the eventual buyers to make the deal. The FDIC has some regulatory leverage, but not as much as other agencies. The FDIC can include a cash incentive in the form of covering insured deposits.
Ultimately, the best way for uninsured depositors to get their money is to let it remain on the ledger.