SVB goes under

[chasesfish]

Looks like bank accounts at SVB are now backed by the US Treasury.  Investors in the public stock and bonds of SVB likely hold worthless investments.

WASHINGTON, March 12 (Reuters) - New policies adopted on Sunday by U.S. banking regulators will "wipe out" equity and bondholders in Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) of New York while protecting all customer deposits, a senior U.S. Treasury official said.

https://www.reuters.com/business/finance/us-treasury-says-silicon-valley-bank-signature-bank-not-being-bailed-out-2023-03-13/

Interesting consequences.

I don't think they had any other choice here, but a new generation of corporate depositors just learned about US Treasuries and Insured Cash Sweeps.   That's going to be painful for bank earnings.

[bwall]

As usual for these boards, great comments and analysis on the banking events of the past few days. I think there is more useful information here in a compact area than just about anywhere else I've been able to find. Thanks for linking to your blogpost @chasesfish.

I saw a reference to First Republic Bank getting a $70 billion backstop last night. I know that they are a regional bank out of San Francisco that focuses on High Net Worth individuals and sure enough, in pre-market trading their stock is getting hammered, as @ChpBstrd correctly called on the 10th.

Here's my question: Their stock was at $115 last week (market cap around $22billion). On Friday it closed at $81 (market cap $15b) and premarket today it's trading at $30 (!!!). At a stock price of $30, it'd be trading at a tangible book value of .25 (If I can read a balance sheet correctly). With a $70billion Fed backstop, what am I missing?

[gary3411]

Looks like bank accounts at SVB are now backed by the US Treasury.  Investors in the public stock and bonds of SVB likely hold worthless investments.

WASHINGTON, March 12 (Reuters) - New policies adopted on Sunday by U.S. banking regulators will "wipe out" equity and bondholders in Silicon Valley Bank (SIVB.O) and Signature Bank (SBNY.O) of New York while protecting all customer deposits, a senior U.S. Treasury official said.

https://www.reuters.com/business/finance/us-treasury-says-silicon-valley-bank-signature-bank-not-being-bailed-out-2023-03-13/

Interesting consequences.

I don't think they had any other choice here, but a new generation of corporate depositors just learned about US Treasuries and Insured Cash Sweeps.   That's going to be painful for bank earnings.

Oh yea, like I said above, being a mid-size bank that caters to anyone but consumers, is probably not a viable business at this current moment.

[gary3411]

As usual for these boards, great comments and analysis on the banking events of the past few days. I think there is more useful information here in a compact area than just about anywhere else I've been able to find. Thanks for linking to your blogpost @chasesfish.

I saw a reference to First Republic Bank getting a $70 billion backstop last night. I know that they are a regional bank out of San Francisco that focuses on High Net Worth individuals and sure enough, in pre-market trading their stock is getting hammered, as @ChpBstrd correctly called on the 10th.

Here's my question: Their stock was at $115 last week (market cap around $22billion). On Friday it closed at $81 (market cap $15b) and premarket today it's trading at $30 (!!!). At a stock price of $30, it'd be trading at a tangible book value of .25 (If I can read a balance sheet correctly). With a $70billion Fed backstop, what am I missing?

Well, that tangible book value doesn't include all of the deposit outflows over the last 5 days, so it could be much much lower.

[CrankAddict]

My uninformed read of all the above is basically "crisis averted."  But I'm sure I'm missing something.  Are there hypothetical ways that this could still fall into a systemic death spiral even with the govt offering a full backing of these previously uninsured accounts?

[ender]

My uninformed read of all the above is basically "crisis averted."  But I'm sure I'm missing something.  Are there hypothetical ways that this could still fall into a systemic death spiral even with the govt offering a full backing of these previously uninsured accounts?

Never underestimate what fear driven masses can cause.

[gary3411]

My uninformed read of all the above is basically "crisis averted."  But I'm sure I'm missing something.  Are there hypothetical ways that this could still fall into a systemic death spiral even with the govt offering a full backing of these previously uninsured accounts?

Never underestimate what fear driven masses can cause.

Right, the margin for error is quite large, currently. Certainly larger than it was in 2008. But it can still happen, if enough people freak out and lose faith.

[roomtempmayo]

"Raise until something breaks" policy just found the uncle point.

And if the Fed's response is to stop raising rates to preserve banks and the banking sector, we'll essentially have a passive bailout where the public will have to pay an inflationary cost for banks' risk. 

[roomtempmayo]

Question: As the bankers watched the yield curve inversion, inflation rate, and slowing deposit rates continue; I just wonder why they didn't sell their depreciating long bonds at a loss in favor of the short-term, higher-yielding money market to remain liquid? They surely had a few very good years prior to all this. Maybe there just wasn't enough time. Perhaps the recent inflation rate recent slow-down served as a head fake?

Specifically with SVB, their Chief Risk Officer and Chief Investment Officer turned over and were new to the position in early 2022.  Yes, they should have sold some and generated liquidity earlier, but were likely under pressure to "not show a loss".  Their resumes / backgrounds plus the series of events would suggest they were not qualified for the job.   CRO was with AIG in 2008 and was never a deputy CRO at a major US bank or a CRO at a smaller regional bank.  The experience was with an international conglomerate.   The CIO came from a 17 branch bank they purchased in Boston.

They failed because of the $42bil withdrawn in one day.  Had that been spread out over even a week or two, the funds could have been replaced with high cost deposits (brokered CDs, fed window borrowings, ect) and the bank would have been handicapped with a higher cost of funds but survived.

Good write-up, @chasesfish . 

Is there any hard and fast rule on when bank regulators step in?  Ultimately someone, somewhere in the economy is going to eat all the interest rate risk that's out there, and whether or not the Fed forces the bank to realize that risk before or after they step in would seem to matter a great deal for who is ultimately left holding the bag. 

I imagine this same issue is floating in mortgage backed securities right now as well.  Who's going to ultimately take the loss on  a bundle of <3% mortgages when bonds are at 6%?

[dividendman]

I hate that the fed can just give out the loans with treasuries as collateral at 100% of the face value of the bond even though some have dropped by 20% or more. Why not just give loans up to the market value of the bond? Let the banks take the hit.

Every time banks get into trouble they get these perks. Ridiculous.

[CrankAddict]

My uninformed read of all the above is basically "crisis averted."  But I'm sure I'm missing something.  Are there hypothetical ways that this could still fall into a systemic death spiral even with the govt offering a full backing of these previously uninsured accounts?

Never underestimate what fear driven masses can cause.

Right, that's what I was trying to imagine.  What would this even look like?  If the govt is guaranteeing all banks at this point then what is the purpose of a run?  Where do you put the money after you pull it out?  How is bank "B" any more robust than bank "A"?  For the most part, these depositors need some kind of bank.  Or are we imagining less directly related circumstances like people aren't scared of their bank folding, but now they are much more scared of an impending recession, or being laid off, so they aren't going to buy a house/car/vacation, etc?

[ChpBstrd]

Question: As the bankers watched the yield curve inversion, inflation rate, and slowing deposit rates continue; I just wonder why they didn't sell their depreciating long bonds at a loss in favor of the short-term, higher-yielding money market to remain liquid? They surely had a few very good years prior to all this. Maybe there just wasn't enough time. Perhaps the recent inflation rate recent slow-down served as a head fake?

Specifically with SVB, their Chief Risk Officer and Chief Investment Officer turned over and were new to the position in early 2022.  Yes, they should have sold some and generated liquidity earlier, but were likely under pressure to "not show a loss".  Their resumes / backgrounds plus the series of events would suggest they were not qualified for the job.   CRO was with AIG in 2008 and was never a deputy CRO at a major US bank or a CRO at a smaller regional bank.  The experience was with an international conglomerate.   The CIO came from a 17 branch bank they purchased in Boston.

They failed because of the $42bil withdrawn in one day.  Had that been spread out over even a week or two, the funds could have been replaced with high cost deposits (brokered CDs, fed window borrowings, ect) and the bank would have been handicapped with a higher cost of funds but survived.

Good write-up, @chasesfish . 

Is there any hard and fast rule on when bank regulators step in?  Ultimately someone, somewhere in the economy is going to eat all the interest rate risk that's out there, and whether or not the Fed forces the bank to realize that risk before or after they step in would seem to matter a great deal for who is ultimately left holding the bag. 

I imagine this same issue is floating in mortgage backed securities right now as well.  Who's going to ultimately take the loss on  a bundle of <3% mortgages when bonds are at 6%?

There were other ways these and other banks could have potentially managed the risk. They could have bought extra insurance, used swaps or swaptions, bought futures on the federal funds rate, put options, etc. I'm not sure which risk management strategies were allowed in their specific case, but they could have done something. Hell, even I avoided bonds in early 2022 and I'm not even a CRO. Probably they could not justify the minor expense of hedging against what would become the fastest series of rate hikes in at least 50 years. Back when banks were operating on razor-thin margins, maybe even hedging expenses were squeezed out!

Regarding the question about all those mortgages, I've been side-eyeing mortgage REITs for the past 18 months. They were buying your 3% and 4% mortgages a year or two ago, and financing those purchases with short-duration debt. In theory, mREITs should be printing outrageous losses now because their short-term financing costs are higher than the yield on many of the mortgages they hold, and the homeowners aren't letting those mortgages go! In reality, mREITs are masters of hedging (retail banks could learn a thing or two from them) and covered most of their losses in 2022.

Unlike banks, mREITs must mark-to-market every quarter. Thus the stock price has gone down alongside book value, but earnings somehow keep coming for as long as the hedges hold out. I suspect, though, that mREITs will have to renew their hedges soon, and not at the same favorable terms things were trading at in 2021. At that point, we might flip from positive cash flow to deeply negative cash flow. OR, maybe they'll figure out how to hedge in new ways.

[maizefolk]

If the govt is guaranteeing all banks at this point then what is the purpose of a run?  Where do you put the money after you pull it out?  How is bank "B" any more robust than bank "A"?  For the most part, these depositors need some kind of bank.  Or are we imagining less directly related circumstances like people aren't scared of their bank folding, but now they are much more scared of an impending recession, or being laid off, so they aren't going to buy a house/car/vacation, etc?

The government may be implicitly guaranteeing all deposits at all banks, but as I understand it they've only explicitly done that for SVB and Signature, right? So people might still want to move money. And business CFOs who have been getting panicked calls all weekend may be even more incentivized to move the money to be able to say that they did something rather than just having to tell everyone, "Well it sounds like the fed would almost certainly bail us out if our bank fails."

In terms of where they'd move it, one option I've seen described is that businesses might decide to use a lot of the money currently sitting at banks to buy extremely short term treasuries paying approximately 5%. Right now that market is perceived to be extremely liquid, the interest rates are well above what many bank accounts are paying, and they won't run the risk that their bank account balance is actually backed by long term treasuries their bank bought back when those were paying 2% which have lost a lot of value.

[nouseforausername]

@maizefolk Those short term bills aren't paying that anymore, re: That move was made / is being made.

[chasesfish]

@caleb Ultimately shareholders of banks are going to eat the risks.

My opinion on the failures thus far is this:

SVB & Signature Bank were so big that there were only three potential buyers:  USB, PNC, and TFC.   The regulators don't want the big 4 to get bigger and they were too big of a fish for anyone else to swallow.

Those three likely said no to taking on SVB's loan book, which are loans USB and TFC refuse to do and PNC dabbles in.

None of the three would touch Signature Bank's crypto / know your customer risks.

I'm surprised that Signature Bank was essentially taken out back and shot with a $4.5bil market cap on Friday instead of being told to raise equity, but it may have been making a statement to everyone else about dabbling in crypto.

I expect down rounds of equity issuances, not failures for the likes of FRC, PACW, and WAL.   They have more traditional lending books (valuable) and more traditional deposit bases (more valuable).   The executives probably choose a down round instead of selling because they keep their cushy jobs with the former.   If the FDIC determines them too big of a risk to stay afloat, they'll be merged into another bank.   Those three are also small enough to have more suiters than the three I listed above.

Disclaimer:  I made purchases today based off this opinion of both FRC and PACW preferred shares.  I won't touch the common, but love the risk/reward bet right now in the preferreds.  It's a 50-70% chance of failure and I think the odds are in the 10-20% range.   YMMV, I'm also already FIREd and it's only a percent or two of net worth at risk.

[simonsez]

Was it fishy that executives sold off several million in company stock a few weeks ago or that 2022 bonuses were paid out in the nick of time before insolvency or is this just standard/coincidental?  CNBC reports that the low level associates received about 12k for their bonus scaling up to 140k for those higher up.  So that seems like a decent amount of cash.

If the company was truly in the process of paying out bonuses already and it just happened to coincide with the run - I wonder what effect that had (in addition to executives cashing out beforehand) in catalyzing insolvency.

[mistymoney]

Was it fishy that executives sold off several million in company stock a few weeks ago or that 2022 bonuses were paid out in the nick of time before insolvency or is this just standard/coincidental?  CNBC reports that the low level associates received about 12k for their bonus scaling up to 140k for those higher up.  So that seems like a decent amount of cash.

If the company was truly in the process of paying out bonuses already and it just happened to coincide with the run - I wonder what effect that had (in addition to executives cashing out beforehand) in catalyzing insolvency.

the bonus may be just on schedule, but there was a lot of selling of stocks, so that should be investigated I think.

But the bonus situation could be looked at too!

[seattlecyclone]

So if I'm running a bank now. It seems the best business model would be to take as much risk and score as much profits as possible, try not to be detected by regulators, and as long as you are not the first to go belly up, you are golden. From a shareholder perspective, that is probably worth the risk. What are the chances of being first one to go bust? Rather small. You no longer have uninsured depositors looking over your shoulder with the threat of a run if you start acting irresponsibly (in a sophisticated way that a regulator may not be able to pick up on).

The business model for banks to maximize profits has basically always been to acquire as many deposits as cheaply as possible, and get as large of a return on those deposits as possible. That means taking risks right up to the point where the regulators shut you down. The key is staying on the right side of that line. I don't think there's anything that has fundamentally changed here, except for maybe where the line is (given this new short-term lending option available for banks that have taken a bit more risk).

[catccc]

My company solely banks with SVB. (tech startup).

All $25 million of our capital is tied up with them. Only $250k is insured it sounds like.

We will get our $250k next week and our employees will get paid next week. After that, is the grave unknown of what will happen.

It sounds like the hope is another bank or brokerage will purchase the assets and then start divvying out the uninsured amounts to companies. Over 90+% of the $160 billion dollars in that bank are uninsured funds.

Is it common for banks to hold high levels of uninsured funds? Was this ratio in part because they do things differently in Silly Valley? Are there so many casually rich people there that just don't know any better?

The banks don't determine the level of insured funds, the FDIC does, and limit is $250K per entity per bank.  It's been $250K since I first learned FDIC insurance existed while depositing a paycheck from my first job at age 14 in 1993.  Meaning if I bank at WF and have any number of accounts with them, I'm covered for up to $250K max across all those accounts.  If I bank with WF and BoA and have $250K at each bank, I'm covered for $500K.  The uninsured amount depends on the depositor balances and the banks can't directly control that. 

Seems like a simple hedge to use multiple banks to protect yourself as the depositor, but when you're a start up with $25M in capital, it's not scalable.  So it's not individuals, its companies that carry large cash balances that are at risk.

[MaybeBabyMustache]

Was it fishy that executives sold off several million in company stock a few weeks ago or that 2022 bonuses were paid out in the nick of time before insolvency or is this just standard/coincidental?  CNBC reports that the low level associates received about 12k for their bonus scaling up to 140k for those higher up.  So that seems like a decent amount of cash.

If the company was truly in the process of paying out bonuses already and it just happened to coincide with the run - I wonder what effect that had (in addition to executives cashing out beforehand) in catalyzing insolvency.

the bonus may be just on schedule, but there was a lot of selling of stocks, so that should be investigated I think.

But the bonus situation could be looked at too!

I work for a tech company in California, and our bonus schedule is listed out 12 months in advance. There are also state specific requirements around bonus payouts that apply specifically in California. I have no idea if there was anything weird about their bonus payout, but it's possible it was paid out as planned.

[seattlecyclone]

Seems like a simple hedge to use multiple banks to protect yourself as the depositor, but when you're a start up with $25M in capital, it's not scalable.  So it's not individuals, its companies that carry large cash balances that are at risk.

Exactly. If you're a startup that employs 50 tech people, your biweekly payroll alone is likely going to exceed $250k. A CFO should be able to spend their time on more important things than shuffling cash around between dozens of banks because they have legitimate concerns about them failing.

[chasesfish]

Was it fishy that executives sold off several million in company stock a few weeks ago or that 2022 bonuses were paid out in the nick of time before insolvency or is this just standard/coincidental?  CNBC reports that the low level associates received about 12k for their bonus scaling up to 140k for those higher up.  So that seems like a decent amount of cash.

If the company was truly in the process of paying out bonuses already and it just happened to coincide with the run - I wonder what effect that had (in addition to executives cashing out beforehand) in catalyzing insolvency.

That's bank / regulatory schedule.  Bonuses for bankers get finalized in mid January, approved by the board at the next meeting, then paid out sometime in February / early March.   The CEO did exercise stock options and sell them, which is a bad appearance.   Unfortunately there's probably 10-15 people total out of all the bankers involved in what took SVB down.   The other employees got a bonus that was some percentage of their salary and are out of a job.

[Daisy]

This whole thing has got me wondering. Maybe the mid-size bank is simply not a viable business in the modern world.

Unless FDIC rules are changed, there is really nothing from stopping this from happening again, and again. Especially once folks become relaxed and forget about the last one. Either these banks are going to be regulated to death, or deposit holders will only trust the largest couple. Either way, same outcome:

Would it be so bad to have a mix of credit unions, big 5-6 banks, brokerage firms, and some fintech non-banks? IDK the answer to that, but it seems like we could all still live a prosperous life in that scenario.

Yes, it would be so bad. Local financial institutions are the backbone of their communities and helping those smaller communities thrive. When you deposit with a local bank or credit union, those funds are used to lend to businesses & individuals in those communities. When you deposit at one of the big four FIs, who the heck knows where they are lending those funds? I want deposits in my local area supporting my area, not some business or individual clear across the country.

I switched to a local bank after the 2008 debacle "in protest". My father was a banker. His bank had been bought out years ago and is probably incorporated into one of the big banks these days. He knew the industry well and suggested I bank with the longest standing local bank that has been in business and proudly independent for close to 100 years now.

[harvestbook]

The other employees got a bonus that was some percentage of their salary and are out of a job.

I read in the CNBC article that all 8,000+ employees would be kept on.
Average salary of $250k getting millions in bonuses and the CEO selling $3 million of shares a few days earlier.
Sounds like the kind of industry we should all be happy to support. And hey, it subsidized crypto too, so Bitcoin is now too big to fail. Rises 15 percent on the revelation that the government will backstop it. Oh the irony.

[Daisy]

"Raise until something breaks" policy just found the uncle point.

And if the Fed's response is to stop raising rates to preserve banks and the banking sector, we'll essentially have a passive bailout where the public will have to pay an inflationary cost for banks' risk.

Is it the bank's risk or the Fed's irresponsibility?

I get that the Fed is raising rates to curb inflation, but they are doing it vastly more quickly than anyone ever imagined. They kept interest rates too low for way too long and now they are making up for lost time. It was not responsible to have the rates so low for so long to begin with.

[Daisy]

My company solely banks with SVB. (tech startup).

All $25 million of our capital is tied up with them. Only $250k is insured it sounds like.

We will get our $250k next week and our employees will get paid next week. After that, is the grave unknown of what will happen.

It sounds like the hope is another bank or brokerage will purchase the assets and then start divvying out the uninsured amounts to companies. Over 90+% of the $160 billion dollars in that bank are uninsured funds.

Is it common for banks to hold high levels of uninsured funds? Was this ratio in part because they do things differently in Silly Valley? Are there so many casually rich people there that just don't know any better?

The banks don't determine the level of insured funds, the FDIC does, and limit is $250K per entity per bank.  It's been $250K since I first learned FDIC insurance existed while depositing a paycheck from my first job at age 14 in 1993.  Meaning if I bank at WF and have any number of accounts with them, I'm covered for up to $250K max across all those accounts.  If I bank with WF and BoA and have $250K at each bank, I'm covered for $500K.  The uninsured amount depends on the depositor balances and the banks can't directly control that. 

Seems like a simple hedge to use multiple banks to protect yourself as the depositor, but when you're a start up with $25M in capital, it's not scalable.  So it's not individuals, its companies that carry large cash balances that are at risk.

Yes, the amount insured has been $250k for a long time. It's weird that it is not indexed to inflation.

[bwall]

Yes, the amount insured has been $250k for a long time. It's weird that it is not indexed to inflation.

I recall the insured amount was raised from $100k to $250k in the throes of the Great Financial Crisis in order to build confidence in banking. It'd been at $100k since the.... 1970s? I think it was FDR who first rolled out FDIC insurance in 1933. The amount then was much lower, maybe $1000 or $10,000?

Read more about deposit insurance here:
https://www.fdic.gov/bank/historical/firstfifty/chapter1.pdf

[JupiterGreen]

Yes, the amount insured has been $250k for a long time. It's weird that it is not indexed to inflation.

I recall the insured amount was raised from $100k to $250k in the throes of the Great Financial Crisis in order to build confidence in banking. It'd been at $100k since the.... 1970s? I think it was FDR who first rolled out FDIC insurance in 1933. The amount then was much lower, maybe $1000 or $10,000?

Read more about deposit insurance here:
https://www.fdic.gov/bank/historical/firstfifty/chapter1.pdf

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

[maizefolk]

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

In inflation adjusted dollars:

1934: $110k
1966: $140k
1969: $160k
1974: $240k
1980: $360k
2008: $350k

Looks like the FDIC limit was actually growing in real terms until the 1980s. Since then the insurance limit had one adjustment that brought it roughly back to the 1980 value in inflation adjusted terms although it has lost about 1/3 of its value to inflation between 2008 and today.

[gary3411]

Yes, the amount insured has been $250k for a long time. It's weird that it is not indexed to inflation.

I recall the insured amount was raised from $100k to $250k in the throes of the Great Financial Crisis in order to build confidence in banking. It'd been at $100k since the.... 1970s? I think it was FDR who first rolled out FDIC insurance in 1933. The amount then was much lower, maybe $1000 or $10,000?

Read more about deposit insurance here:
https://www.fdic.gov/bank/historical/firstfifty/chapter1.pdf

I read somewhere that FDR was against any FDIC insurance, due to the moral hazard. Obviously he still signed the bill.

[bwall]

I read somewhere that FDR was against any FDIC insurance, due to the moral hazard. Obviously he still signed the bill.

FDIC insurance was quite the innovation for it's time. Up until then, there was very little bank regulation and banks were viewed with great suspicion, as some people still do today.

Back then, a bank was just a company that borrowed money and lent it out at a higher rate. Anyone could (and did!) open a bank and then close it at their whim. For a depositor, there was no way to be sure if the bank would be around to return the money.

FDIC insurance changed all that. Any 'normal' person could be sure that their money was safe in the bank. Banks also had to meet certain requirements and owners of banks also had to pass a background check.

[JupiterGreen]

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

In inflation adjusted dollars:

1934: $110k
1966: $140k
1969: $160k
1974: $240k
1980: $360k
2008: $350k

Looks like the FDIC limit was actually growing in real terms until the 1980s. Since then the insurance limit had one adjustment that brought it roughly back to the 1980 value in inflation adjusted terms although it has lost about 1/3 of its value to inflation between 2008 and today.

Thank you, the inflation adjusted dollars elucidate the topic.

from the FDIC website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage."

Are banks unwilling to increase the insurance amount? Or do you know if there are other reasons for this stagnation? $250 does seem low. Say you made $350 off the sale of your home, you'd have to split the money into two different accounts. I've never made that much on a sale of a house, but it wouldn't be too unusual in higher priced areas (or with a paid off house).

[Michael in ABQ]

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

In inflation adjusted dollars:

1934: $110k
1966: $140k
1969: $160k
1974: $240k
1980: $360k
2008: $350k

Looks like the FDIC limit was actually growing in real terms until the 1980s. Since then the insurance limit had one adjustment that brought it roughly back to the 1980 value in inflation adjusted terms although it has lost about 1/3 of its value to inflation between 2008 and today.

Thank you, the inflation adjusted dollars elucidate the topic.

from the FDIC website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage."

Are banks unwilling to increase the insurance amount? Or do you know if there are other reasons for this stagnation? $250 does seem low. Say you made $350 off the sale of your home, you'd have to split the money into two different accounts. I've never made that much on a sale of a house, but it wouldn't be too unusual in higher priced areas (or with a paid off house).

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

Perhaps this event will lead to a push to increase the limit to $400-500k to keep pace with inflation.

[chasesfish]

The five member board sets the insurance rate, which was last increased in the late 2000s.

https://www.fdic.gov/about/leadership/

Businesses have numerous products available to them, namely an Insured Cash Sweep (ICS) offered by most banks.  A generation just learned about the product. 

Asked a banker friend this morning about the limits on the product, his bank's limits were $150mil.

[bwall]

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

I asked a banker once about this years ago (see bold). They explained to me that a joint account counts as one account, not two. In order to get $500k of insured deposits, a married couple would have to have two separate, non-joint accounts. If this is the case, the married couple cannot then have a joint account and enjoy $750k in FDIC insurance, just as an individual cannot have, say, five different accounts in five different variations of their own name, each insured up to $250k

I point this out not to be contrary, but to focus on an easy misconception that I also shared before my conversation with the banker. If I'm wrong, (and as a married individual with a joint account I hope I am), please correct me.
 

[Michael in ABQ]

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

I asked a banker once about this years ago (see bold). They explained to me that a joint account counts as one account, not two. In order to get $500k of insured deposits, a married couple would have to have two separate, non-joint accounts. If this is the case, the married couple cannot then have a joint account and enjoy $750k in FDIC insurance, just as an individual cannot have, say, five different accounts in five different variations of their own name, each insured up to $250k

I point this out not to be contrary, but to focus on an easy misconception that I also shared before my conversation with the banker. If I'm wrong, (and as a married individual with a joint account I hope I am), please correct me.

FDIC seems to indicate it's $500k for a joint account: https://www.fdic.gov/deposit/diguidebankers/documents/joint-accounts.pdf

The wording is not as clear as it could be, but the examples provided seem to match up with my interpretation.

JOINT ACCOUNTS (12 C.F.R. § 330.9)
II. Insurance Limit
Each co-owner of a joint account is insured up to $250,000 for the combined amount of his or her interests in all joint accounts at the same IDI. In determining a co-owner’s interest in a joint account, the FDIC assumes each co-owner is an equal owner unless the IDI records clearly indicate otherwise.

Example 4
Facts:
Cathy and Rich Rush have a jointly held CD (with equal withdrawal rights) at ABC Bank
for $500,000. They want to know if they are fully insured.

Answer:
In this case, Cathy and Rich co-own only one joint account. The FDIC assumes each of
the two depositors owns half of the joint account. Cathy’s half of the $500,000 is
$250,000; therefore, she is fully insured. Similarly, Rich is fully insured since his half of
the account is $250,000.

[MoseyingAlong]

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

I asked a banker once about this years ago (see bold). They explained to me that a joint account counts as one account, not two. In order to get $500k of insured deposits, a married couple would have to have two separate, non-joint accounts. If this is the case, the married couple cannot then have a joint account and enjoy $750k in FDIC insurance, just as an individual cannot have, say, five different accounts in five different variations of their own name, each insured up to $250k

I point this out not to be contrary, but to focus on an easy misconception that I also shared before my conversation with the banker. If I'm wrong, (and as a married individual with a joint account I hope I am), please correct me.

The info you were given is incorrect or out of date.

Per the FDIC's website, for joint accounts, the coverage is $250,000 per co-owner.

https://www.fdic.gov/resources/deposit-insurance/brochures/deposits-at-a-glance/

[catccc]

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

Thanks for doing the research... Apparently I remember incorrectly from my teenage years.  Although the still seem too infrequent, esp. in this inflationary environment.  I wonder if it will be revisited anytime soon?

[iluvzbeach]

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

In inflation adjusted dollars:

1934: $110k
1966: $140k
1969: $160k
1974: $240k
1980: $360k
2008: $350k

Looks like the FDIC limit was actually growing in real terms until the 1980s. Since then the insurance limit had one adjustment that brought it roughly back to the 1980 value in inflation adjusted terms although it has lost about 1/3 of its value to inflation between 2008 and today.

Thank you, the inflation adjusted dollars elucidate the topic.

from the FDIC website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage."

Are banks unwilling to increase the insurance amount? Or do you know if there are other reasons for this stagnation? $250 does seem low. Say you made $350 off the sale of your home, you'd have to split the money into two different accounts. I've never made that much on a sale of a house, but it wouldn't be too unusual in higher priced areas (or with a paid off house).

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

Perhaps this event will lead to a push to increase the limit to $400-500k to keep pace with inflation.

As a former banker who dealt with customer deposits day in and day out, it was not at all uncommon for customers to have balances well above the FDIC-insured amount. In fact, I had one customer (consumer) who had $30MM on deposit, the overwhelming majority of which was not insured. This isn’t something I necessarily recommend people do, just saying it is done.

Not in direct response to your comment, but based on other comments on this thread…Using the various ownership categories it is possible to have quite a bit on deposit and keep it insured (although not anywhere near the $30MM I just mentioned.) Of course, there are also options such as IntraFI to deal with one bank yet keep large deposits insured.

[chasesfish]

Looks like Credit Suisse is going to tank the market this morning.

Here we go....

[ATtiny85]

Looks like Credit Suisse is going to tank the market this morning.

Here we go....

It is funny (in a horrible way) that the short-term system is so fragile.

[Daisy]

Yes, the amount insured has been $250k for a long time. It's weird that it is not indexed to inflation.

I recall the insured amount was raised from $100k to $250k in the throes of the Great Financial Crisis in order to build confidence in banking. It'd been at $100k since the.... 1970s? I think it was FDR who first rolled out FDIC insurance in 1933. The amount then was much lower, maybe $1000 or $10,000?

Read more about deposit insurance here:
https://www.fdic.gov/bank/historical/firstfifty/chapter1.pdf

Oops, my bad, you are right. I actually heard someone commenting on this today and realized my post was wrong.

[Daisy]

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

In inflation adjusted dollars:

1934: $110k
1966: $140k
1969: $160k
1974: $240k
1980: $360k
2008: $350k

Looks like the FDIC limit was actually growing in real terms until the 1980s. Since then the insurance limit had one adjustment that brought it roughly back to the 1980 value in inflation adjusted terms although it has lost about 1/3 of its value to inflation between 2008 and today.

Thank you, the inflation adjusted dollars elucidate the topic.

from the FDIC website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage."

Are banks unwilling to increase the insurance amount? Or do you know if there are other reasons for this stagnation? $250 does seem low. Say you made $350 off the sale of your home, you'd have to split the money into two different accounts. I've never made that much on a sale of a house, but it wouldn't be too unusual in higher priced areas (or with a paid off house).

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

Perhaps this event will lead to a push to increase the limit to $400-500k to keep pace with inflation.

As a former banker who dealt with customer deposits day in and day out, it was not at all uncommon for customers to have balances well above the FDIC-insured amount. In fact, I had one customer (consumer) who had $30MM on deposit, the overwhelming majority of which was not insured. This isn’t something I necessarily recommend people do, just saying it is done.

Not in direct response to your comment, but based on other comments on this thread…Using the various ownership categories it is possible to have quite a bit on deposit and keep it insured (although not anywhere near the $30MM I just mentioned.) Of course, there are also options such as IntraFI to deal with one bank yet keep large deposits insured.

So what do you suggest a person with so may assets in cash do to protect themselves? This encourages people to not stay in cash and invest in stocks, businesses, real estate, etc...I would think.

[bwall]

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

I asked a banker once about this years ago (see bold). They explained to me that a joint account counts as one account, not two. In order to get $500k of insured deposits, a married couple would have to have two separate, non-joint accounts. If this is the case, the married couple cannot then have a joint account and enjoy $750k in FDIC insurance, just as an individual cannot have, say, five different accounts in five different variations of their own name, each insured up to $250k

I point this out not to be contrary, but to focus on an easy misconception that I also shared before my conversation with the banker. If I'm wrong, (and as a married individual with a joint account I hope I am), please correct me.

FDIC seems to indicate it's $500k for a joint account: https://www.fdic.gov/deposit/diguidebankers/documents/joint-accounts.pdf

The wording is not as clear as it could be, but the examples provided seem to match up with my interpretation.

JOINT ACCOUNTS (12 C.F.R. § 330.9)
II. Insurance Limit
Each co-owner of a joint account is insured up to $250,000 for the combined amount of his or her interests in all joint accounts at the same IDI. In determining a co-owner’s interest in a joint account, the FDIC assumes each co-owner is an equal owner unless the IDI records clearly indicate otherwise.

Example 4
Facts:
Cathy and Rich Rush have a jointly held CD (with equal withdrawal rights) at ABC Bank
for $500,000. They want to know if they are fully insured.

Answer:
In this case, Cathy and Rich co-own only one joint account. The FDIC assumes each of
the two depositors owns half of the joint account. Cathy’s half of the $500,000 is
$250,000; therefore, she is fully insured. Similarly, Rich is fully insured since his half of
the account is $250,000.

Thanks for posting. I'm very glad to hear that joint accounts are insured up to $500,000. I specifically asked the banker that exact question and was surprised by the (now-I-know-to-be-false) answer. It's a bit disappointing when strangers on the internet know more about banking than the banker. But, that's what makes these boards great!
FWIW: The gentleman I spoke to was in charge of customer service, middle aged and with a career in banking, not a random underpaid teller straight out of school.

[gary3411]

Here is the FDIC insurance timeline:

1934, FDIC insurance is $2,400, but is raised to $5,000 midyear
1966, raised to $15,000
1969, raised to $20,000
1974, raised to $40,000
1980, raised to $100k
2008-2010, temporary raises it to $250K
2010, permanently raised to $250k (as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act)

In inflation adjusted dollars:

1934: $110k
1966: $140k
1969: $160k
1974: $240k
1980: $360k
2008: $350k

Looks like the FDIC limit was actually growing in real terms until the 1980s. Since then the insurance limit had one adjustment that brought it roughly back to the 1980 value in inflation adjusted terms although it has lost about 1/3 of its value to inflation between 2008 and today.

Thank you, the inflation adjusted dollars elucidate the topic.

from the FDIC website:

"The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage."

Are banks unwilling to increase the insurance amount? Or do you know if there are other reasons for this stagnation? $250 does seem low. Say you made $350 off the sale of your home, you'd have to split the money into two different accounts. I've never made that much on a sale of a house, but it wouldn't be too unusual in higher priced areas (or with a paid off house).

There are virtually no consumers who would keep more than $250k in a single account for a significant amount of time. Assuming it's a joint account the insured amount of $500k.

For a larger business $250k or $500k wouldn't make a meaningful difference if you've got millions or tens of millions in cash.

Perhaps this event will lead to a push to increase the limit to $400-500k to keep pace with inflation.

As a former banker who dealt with customer deposits day in and day out, it was not at all uncommon for customers to have balances well above the FDIC-insured amount. In fact, I had one customer (consumer) who had $30MM on deposit, the overwhelming majority of which was not insured. This isn’t something I necessarily recommend people do, just saying it is done.

Not in direct response to your comment, but based on other comments on this thread…Using the various ownership categories it is possible to have quite a bit on deposit and keep it insured (although not anywhere near the $30MM I just mentioned.) Of course, there are also options such as IntraFI to deal with one bank yet keep large deposits insured.

So what do you suggest a person with so may assets in cash do to protect themselves? This encourages people to not stay in cash and invest in stocks, businesses, real estate, etc...I would think.

Money markets, treasuries. Or simply split between 3 or 4 accounts to reduce risk. Remember, if you are earning interest, you are taking risk, period.

[gary3411]

The more I think about it, one huge problem with our 'system' seems to be the fact that a large business purchasing a medium sized business has been temporarily made de facto illegal by the current FTC and DOJ. I always knew this wasn't a 'good' thing in terms of competition, market function, and long term growth, in general. But, I never quite realized when applied to banks how fragile it makees our system. If allowed, I am confident some large bank would have swooped in last week and bought SVB, possibly before the deposit outflows even started, and this thread would have never even been created.

[bwall]

I don't think they had any other choice here, but a new generation of corporate depositors just learned about US Treasuries and Insured Cash Sweeps.   That's going to be painful for bank earnings.

Add me to the list of those learning about Treasuries and Insured Cash Sweeps.

I'd heard of ICS many years ago at the beginning on my career when it wasn't relevant. I'd since forgotten the name and it's pointless to walk into a bank and stumble around trying to describe something you only vaguely know about and of course don't know proper term for--everyone feels kinda stupid. Now I know what to ask for at the bank. Thanks!

[Sibley]

Colleterial is also an option, though I see it mostly in conjunction with investments, and cash balances may be throw into the mix as an afterthought.

[ChpBstrd]

The more I think about it, one huge problem with our 'system' seems to be the fact that a large business purchasing a medium sized business has been temporarily made de facto illegal by the current FTC and DOJ. I always knew this wasn't a 'good' thing in terms of competition, market function, and long term growth, in general. But, I never quite realized when applied to banks how fragile it makees our system. If allowed, I am confident some large bank would have swooped in last week and bought SVB, possibly before the deposit outflows even started, and this thread would have never even been created.

It wasn't so long ago that we were decrying "too big to fail" banks created by mergers and able to hold the economy hostage.

[dandarc]

What is likely to happen is the bank's assets will be bought up by one of the major banks with an agreement with the FDIC to make all depositors whole, even the uninsured amounts. Probably by Monday. Because there is a huge incentive to just about everyone to keep this to a blip.

I've seen this prediction too and I understand that technically SVB is solvent (if they could only reallocate or wait for funds to mature and of course if there wasn't a run at all). But what I'm wondering is what bank is going to want to take this on with the 1% bonds in place? If they fire sale those bonds it doesn't seem like they will have enough money to cover all the over 250k account. Plus since the run was psychological, the bank that takes this on might end up with a run too. I guess if it was broken up between financial institutions, the psychology part could be mitigated.  And we could be looking at another government bail out of some sort....but Americans are still pretty salty about 08 (especially Millennials).

Anyway, it's going to be interesting to see how this plays out.   

thanks @chasesfish

The difference is the low-interest rate mortgage bonds are not also experiencing massive increase in default rates at the same time on the underlying mortgages. The sale that triggered the problem was of U.S. Treasuries. So a bank that can afford to hold them to maturity can make out like a bandit this time around.

The other thing is, this might pressure the Fed to slow, stop, possibly even reverse on the interest rate hikes - it that plays out, bond values stabilize and start increasing quickly. A bank large enough to take on this risk and hold for even a few years is likely to make out very well.

Plus this is a potentially cheap way to gain some customers.

This is by far the most likely scenario. In fact, it's the only scenario. Otherwise, sheeesh, look out below.

Took longer than I thought it would but: https://www.npr.org/2023/03/27/1166180710/first-citizens-bank-to-acquire-silicon-valley-bank