Depositors are not investors in a bank. They just want a checking account and to make payments. Why should they have to waste time spreading $250K chunks around multiple banks? It's inefficient.
Equity and bond investors are the only ones who should lose their shirts when a bank fails.
If we're the have a distributed payment system, then full deposit insurance and a flexible lender of last resort is the only sensible approach.
The alternative is everybody has their payment accounts at the central bank, which will then mean, by accounting identity, that the central bank will end up as the only depositor in every bank.
Which given that the central bank is the regulator who should be checking asset quality is perhaps the way to go. That way when a bank fails, the entity responsible for ensuring they don't stands the loss.
We need heterogenous banks who will lend on different criteria. Otherwise we'll end up in the situation where only the propertied will get bank liquidity.
However heterogeneity means that some banks, like SVB, will inevitably fail when they get it wrong.
Why do you need to hold that much cash in deposits though? There are alternatives that provide essentially the same kind of liquidity such as money market funds, which are used by other businesses. The rules were pretty clear: deposits are insured only up to $250k, anything above that isn't risk-free. If you don't want to have the slight overhead of finding alternatives for anything that supersedes that amount, you should have had to accept the risk that you might lose anything above those $250k.
Are you serious? How do you think companies that earn over 1M per month operate? Do you think they all receive the cash on the same day and make the payouts on that day itself?
> you should have had to accept the risk that you might lose anything above those $250k.
This laughably impractical. If you run any medium/large SaaS company you have payments continuously rolling in and you have to build up a balance to pay the salaries. The bank account is in a constant state of flux and a lot of times its at multiples of the insurance limit because a certain payment hasn't gone through yet, and a large advance just came in. Are you expecting every company to risk manage these large amounts in real time? Is that where companies should be spending their resources on? What's the point of having financial institutions and regulations when you're expected to micro manage basic aspects of the financial rails the whole economy runs on.
It sometimes feels people really like dunking on those impacted by this especially since there's a lot of schadenfreude about SV and especially the VCs that embarrassed themselves, but I feel like the correct answer isn't "hahahaha those idiot companies didn't make 100 bank accounts and perfectly shuffle everything in realtime", but "hm, isn't it a bit strange that we're incentivised to go to extremes with this relatively inefficient activity"
Or you could just insure your deposits like I am sure all big companies do.
Just like banks bigger than SVB remember to hedge their currency risks (Which one could argue that SVB with a 88b$ position probably should have considered also).
Actually, having started a company in Denmark, this was an offer the bank we got bank account with had.
It is actually laughable that you can assume that one can run a million dollar company without considering insuring your deposits.
IMO banks should be doing this anyway (insure deposits). I think most time founders are so engrossed in product-market fit and growth that finance is after thought. You're provided an "army" with VC cash and you are expected to be own an entire category with that army. It seems rational to me that most people would be thinking strategy and future attack plans rather than the extremely rare chance that the whole army itself gets kidnapped.
Ideally we as a society, should be able to offer people peace of mind to deposit large sums of money and not worry about it being lost. Expecting everyone to perform financial gymnastics just to keep their money feels like a complete waste of resources.
Maybe the solution is to create a tier A bank that gives you no returns, charges you a flat fee, and any amount of money deposited is guaranteed. I know people do that with treasuries, but thats a lot of extra steps to put money in and out.
Keep in mind, tiny teams with no "finance person" easily receive more than 1M as part of seed or series A. Very rarely is their first hire for managing that money. Should it be? Is it worth it? Or should you rely on the financial system and regulation protecting your own money.
I think you're strawmanning here. I'm not against deposit insurance. I merely suggested it should actually be part of the banking regulation.
Like maybe it's a default line item monthly fee to insure your deposits and you can choose to opt out of it. The default is to protect your funds. My guess is very few people will opt out, including me.
It is a part of the regulation, up to USD 250k, which appears to be a good limit for people who should be aware of doing stuff like this themselves (in EU it is EUR 100k, so the US more than doubles that amount).
I think this just shows the irresponsibleness of people with large deposits.
Depositors loan banks money. Of course they are investors. Debt investors.
The deal was you had a government guarantee (well FDIC, a government corporation) up until $250k, and anything past that was best effort. Typically, this effort involved finding a new private bank to guarantee the deposits. For amounts over the insured limit, typically there would be a delay. The whole "We're just going to loan the money and print it into existence and we're also going to do that for other banks and oh yeah we will charge every American account holder for it" is novel.
I believe the $250k limit is intended to encourage large accounts to invest in assets directly, and to have a limit to the FDIC liability in case of bank failure.
You're saying that like only investors should be exposed to risk.
Everything you do has an implied risk. If I buy a house I am not an investor. Yet if it gets destroyed and I don't have insurance the government won't make me whole again.
Why should big bank depositors be protected when home owners, farmers, cancer patients, &c are not? They are not investors either.
You buy storage service from a company. Either you insure your storage, you make sure the storage company insure the entire storage or you risk the uninsured part.
The article points out that the libertarians turn authoritarian after they loose the amounts they have not insured - they call for somebody to ad-hoc insure it.
(In the same vein as this comment: Why should I risk loosing my expensive paintings to fire of theft when I deposit it with a storage company?)
> The article points out that the libertarians turn authoritarian after they loose the amounts they have not insured - they call for somebody to ad-hoc insure it.
Some did that. Other tech bros, such as myself (and my next job was on the line, since the company that extended me an offer banked there), called to let the bank fail.
Equity and bond investors are the only ones who should lose their shirts when a bank fails.
If we're the have a distributed payment system, then full deposit insurance and a flexible lender of last resort is the only sensible approach.
The alternative is everybody has their payment accounts at the central bank, which will then mean, by accounting identity, that the central bank will end up as the only depositor in every bank.
Which given that the central bank is the regulator who should be checking asset quality is perhaps the way to go. That way when a bank fails, the entity responsible for ensuring they don't stands the loss.
We need heterogenous banks who will lend on different criteria. Otherwise we'll end up in the situation where only the propertied will get bank liquidity.
However heterogeneity means that some banks, like SVB, will inevitably fail when they get it wrong.