It’s Like Über, but for Deposit Insurance

In light of the Silicon Valley Bank bank run and subsequent rescue, David Dayen points out there’s a solution for businesses, known as Insured Cash Sweep, which chops up your money into FDIC-insurable units of $250,000. That would mean these businesses worried about losing their excess cash wouldn’t. Why SVB didn’t use this for its clients is… unclear, though given the bank officers’ recent behavior, such as paying out a bunch of bonuses right before the FDIC closed them, I’m guessing they didn’t want to spend the money to set this up.

Of course, the larger context is that Trump, Republicans, and some ‘moderate’ Democrats voted to decrease regulations which, had they still been in place, would have prevented the bank run (boldface mine):

Back up: How is it that Silicon Valley Bank [SVB], Thursday the 16th-largest bank in America by assets, is shutdown, in receivership, with every chance of a wild financial ride to come over the next week as every organization with more than $250K in any one bank frantically moves money around to try to get all of its deposits under the $250K FDIC insurance maximum?

…And the answer is:

“As a banking organization, our liquidity is subject to supervision by our banking regulators. Because we are a Category IV firm with less than $250 billion in average total consolidated assets, less than $50 billion in average weighted short-term wholesale funding and less than $75 billion in cross-jurisdictional activity, we currently are not subject to the Federal Reserve’s LCR or NSFR requirements, either on a full or reduced basis…”

What Dan does not mention is §401 of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act:

§165 of the Financial Stabiity Act of 2010… is amended… in the matter preceding paragragph (A), by striking “$50,000,000,000” and inserting “$250,000,000,000”…

supported by 50 Republican and 17 Democratic Senators (and by 225 Republican and 33 Democratic House members), and signed into law by President Trump.

If not for this action of “regulatory relief”, SVB would have been subject to the original Dodd-Frank NSFR, and would have been unable to have taken on the asset portfolio it took on, and so it would not have crashed—at least, not the way it did, and not now…

If we lived in a good world—one in which Dodd-Frank had, as it should have, established the principle that all commercial banking deposits are insured (and that banks pay insurance premiums on all of their deposits) and if the 2018 EGRR&CPA had not been passed exempting SVB from NSFR, et cetera, then Peter Thiel’s chaos-monkey appearance would not have made a difference. No one would have an incentive to pull their money out of SVB. If anyone had felt the urge, SVB would have had a very different portfolio—one without this mark-to-market loss and the expected-future-capital-gain offset—because it would have had to maintain its NSFR ratio above 100% throughout.

It’s fucking stupid all the way down. One other point: if this had been a bank in Michigan that lent mostly to small manufacturers (let’s less than fifty employees), would the titans in Silicon Valley call for helping the depositors?

You already know the answer to that question.

Added: It’s weird how the Fed argues it needs to raise rates to cause unemployment so they can lower inflation, but also needs to make SVB depositors whole to prevent job losses. I suppose some jobs are less inflationary than others.

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3 Responses to It’s Like Über, but for Deposit Insurance

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