Stop Calling SVB and Signature a Bailout
Regulators did something far smarter
Numerous people took to Twitter over the weekend bemoaning the “bailout” of two banks, Silicon Valley Bank and Signature Bank. Even The New York Times characterized the Federal Reserve’s actions as such.
This is wrong. A “bailout” suggests that taxpayer dollars are being used to save financial institutions or make stockholders, bondholders, and/or executives whole. Some of this was done during the 2008 financial crisis.
As of this writing, no taxpayer money is going to any of the banks’ depositors, and none is certainly going to investors and shareholders. Treasury officials have made clear that stock and bondholders of SVB and Signature are not being protected.
If it’s not a bailout, what is it?
On Sunday, March 12th, ahead of the Monday market open in Asia, the top financial regulators in the United States issued a joint statement. All depositors would be made whole starting on Monday morning by the Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund. They highlighted the following:
Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
Accordingly, no losses here will be borne by taxpayers. The banking industry will have to eat its own fallout through special assessments paid to FDIC.
In addition, shareholders and bondholders will not be protected by the government. Senior management was removed from both institutions.
The Fed, Treasury, and FDIC acted perfectly
Although I have major qualms about how they regulated these banks in the run-up to their failure, how these regulators acted over the weekend was swift and decisive. They identified potential systemic risk events, including a looming one from Signature Bank, and acted quickly to make all depositors whole.
This swift action immediately calmed the nerves of many who waited with trepidation for market news on Monday morning. Many people were planning to withdraw funds from any of their regional or small bank accounts.
Had regulators not taken this broad, sweeping action, there would have been a significant loss of confidence, primarily directed at the regional and smaller banks in the United States. Anyone with funds over the $250,000 FDIC threshold would have been incentivized to move funds out immediately and send them to a larger financial institution like JPMorgan.
Had they not acted in this manner, it would have created a two-tier banking system in the United States.
Tier 1: “too big to fail” banks that consumers know will never be allowed to default
Tier 2: regional and smaller banks that the government may not save
The potentially cataclysmic contagion effect for Tier 2 was massive before the regulator’s joint statement on Sunday. We could have witnessed bank runs across the country had regulators not decisively stepped in to assuage concerns. We could have also - almost overnight - witnessed a mass consolidation of an already concentrated industry into a handful of big banks.
Most importantly, regulators acted - at least thus far - in a manner that did not hurt the American taxpayer. Nobody’s tax dollars will be used to fund depositors at the institutions that lost money. Should other banks run into issues in the coming days, regulators have set up a fund where banks can post collateral (e.g., bonds) to access liquidity immediately (should they have too many depositors trying to access funds).
We need more safety and soundness in the ENTIRE system
Nobody who opens a checking or savings account should be worried about potentially losing all of their cash overnight. We cannot reasonably expect any average banking customer to assess the financial well-being of their banking institution. Nobody thinks of assessing the balance sheet of the bank where they keep their checking account.
Investors in stocks and bonds should reasonably be expected to understand the risks of investing in a company. Depositors should not. They are simply passing over the custody of their money for safekeeping.
In the coming days, I’ll be writing more on why and how these bank failures happened. As someone who has worked in compliance on Wall Street trading floors, I’ve seen how risks can escalate and have serious consequences.
I’ve also seen how regulators can bend to pressure from the forces around them. The Trump administration’s 2018 rollback of key Dodd-Frank provisions that previously applied to banks like SVB and Signature did not help matters here.
We should all take time to understand and appreciate the inherent risks in our global financial system. Before using words like “bailout” or pushing narratives about greed, or whatever fits into a specific political agenda, we should stop to try to understand the issues first.
Systemic risk in the global financial system has the ability to impact all of us, no matter what side of the political aisle you sit. By collaborating and thinking critically through these issues, we can hopefully mitigate the risks that overtook SVB and Signature, and bolster the safety and soundness of the entire financial system. The system may have serious flaws, but overall, it works well and we should have confidence in it.
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