Any article, tweet, or comment section on this issue is rife with willfull ignorance of basic banking practices, chief among this being the strawman multiple bank accounts.<p>The FDIC limit is not just some technicality that businesses abuse with many accounts, it is a recognition of that fact that banks like SVB, which hold large deposits from a small number of highly correlated depositors, are fundamentally more risky than banks with a large number of smaller uncorrelated depositors. Sweeping large deposits across banks and properly investing in treasuries reduces systemic risk and prevents bank runs in the first place. The de facto removal of FDIC caps defeats this diversification and protection.<p>The current dollar value of the cap also makes sense. Unlike what plenty people are trying to claim, there is no amount of money for which that current system is unsuitable. Deposit sweep accounts cover up to $3M (and diversify across banks, <i>exactly the point</i> of FDIC limits). Money market funds provide short-term treasury exposure above that, and businesses with many millions liquid should absolutely be expected to invest in treasuries. If Bogleheads can do it in their retirement accounts why can't $10M+ startups?<p><i>Maybe</i> the SVB depositor bailout was necessary in this case to prevent broader panic, but it sets a grim precedent for depositor behavior that ultimately makes the system more brittle and reliant on government handouts (which despite rhetoric to the contrary, will be paid for by the taxpayer/bank account holder).
>The federal government’s action is, in my estimation, the right thing to do for this moment in time. There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything? Banks, meanwhile, are now motivated to pursue even riskier strategies, knowing that depositors will be safe.<p>I don't believe this is a binary issue, but a lot of the "pro-bailout" rhetoric is essentially "well of course we need to know we'll get our money back if we deposit it in a bank." This is clearly the best ideal. But that's not how it works! And FDIC limits were real but ignored in this case!
>Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest.<p>That's not why I have a bank account. It's how you avoid paying fees to get checks cashed. If you want interest, you put it in a savings account, or a CD, also in a bank. The only safe alternative is savings bonds.<p>If you want to gamble the money, then you invest in stocks, bonds, etc.
I have this innovative idea for business. Imagine you charge money from depositors for keeping their money in a big safe vault. No trading or lending their money. You just keep it safe.
This is one of the better articles written about the whole debacle…<p>Also demonstrates VCs shortcomings (lack of diligence?) in the affair… which is probably why VCs are shouting about it and pointing fingers at others rather than examining their own failure in this
> There will, though, be long-term consequences for fundamentally changing the nature of a bank: remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything?<p>Because if the bank doesn't give any interest, people will keep the money in either a competing bank that gives interest or in cash or in other instruments that pay interest.<p>What a full backstop removes from the interest is a risk premium. You already see that at Chase or BoA accounts. The risk premium is zero so the interest they pay is much lower than other banks. But this is where other banks get an opportunity to compete for deposits.
There's a huge leap taken by this piece with distressing casualness.<p>"This action effectively means the $250,000 FDIC limit is meaningless: all deposits in any bank are presumably insured by the full faith and credit of the United States."<p>Exceptional circumstances sometimes call for exceptional measures. A bank with 85% of its accounts over the $250k limit where most of the depositors are contractually locked-in companies is <i>not normal</i>. Moreover the contagion nucleus in this network were a few culpable super-spreaders with exceptional power. Other banks don't face <i>that</i> threat either.<p>Banking policy must be written to include exceptional circumstances, but the idea that all banking policy needs to be rewritten to burden smaller banks with situational precautions which are impossible for them to encounter is dangerous idiocy. Don't write housing codes that require 9.0 earthquake tolerance in areas primarily hit by hurricanes!<p>Furthermore it's dispiriting to see generous tit-for-tat given such a cynical portrayal. If two people have knives to each others throats you don't win by just not being the first to cut, you win by <i>putting the knives down</i>.<p>This situation was exceptional, and the panic was triggered by people with outsized network influence who should have known better. So maybe, just maybe, we deal with the reality of the situation rather than assuming it must be a harbinger of total change.
Can someone shine some light on[1][2]?<p>If true, it would seem that some of this panic would have been engineered in order to save VC capital at the expense of the rest of us?<p>---<p>edit: We really need an analysis of @Jason and @DavidSacks w.r.t [1][2]. They were touting Doomsday on their AllInPodcast[3] but with [1][2] I'm starting to wonder...<p>[1]: <a href="https://twitter.com/innoc_bystander/status/1634773053304610818" rel="nofollow">https://twitter.com/innoc_bystander/status/16347730533046108...</a><p>[2]: <a href="https://twitter.com/ddayen/status/1634925785550319616" rel="nofollow">https://twitter.com/ddayen/status/1634925785550319616</a><p>[3]: <a href="https://m.youtube.com/watch?v=CEee7dAk25c">https://m.youtube.com/watch?v=CEee7dAk25c</a>
Has the low cost of online banking removed the need for fractional reserve banking? Why does a basic checking account need to have economy destroying risks?
> "the answer will almost certainly be far more stringent regulation on small banks"<p>And that regulation won't look kindly on lending to anything new, different or weird.<p>A lending model like SVB's won't be supported by regulators.
Out of curiosity, did anyone ever believe the "rainforest" metaphor for Silicon Valley, that entrepreneurs and investors were more interested in global/"community" success than their own individual wins, and that they wouldn't react egotistically when real money was at stake?<p>Stratechery asserts this was "probably true" in 2012 but not longer true, and that Uber was one of the first cases where short term/individual wins became more important, even if they destroyed trust.<p>I find it hard to believe this "let's all of us win together" was <i>ever</i> true.
> Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest.<p>This may be how banks think about themselves, but I'm pretty sure that most consumers, even businesses, don't think about them this way. Would anyone use a bank if it didn't enable certain types of transactions (credit cards, wires, ACH) and didn't include any sort of risk reduction?
"remember, depositors are a bank’s creditors, who are compensated for lending money to the bank; if there is no risk in lending that money, why should depositors make anything?"<p>No, depositors get interest to compensate for inflation.
The way capitalism works is this. Rich people have the responsibility of knowing what to do with their money. If they don't know what to do with it, it won't be long before they're no longer rich. Perhaps people are sympathetic towards FDIC deposits up to 250 thousand dollars. (That isn't capitalism, either.) But at some point people need to evaluate whether or not a bank — or anyplace else, for that matter — is a safe place for their money. If it isn't, the money shouldn't be there.<p>Of course, this takes work. That's called reality. This is now the second major banking crisis in 15 years. That's called death throes. The system we have is a mess. And bailouts aren't helping. With respect to the system, bailouts are doing the job of alcohol in staving off delirium tremens.
We are sooooooooo screwed!<p>VC money is completely frozen. It's an insane tragedy. There needs to be a bank where we can put our funds above 250k that is insured but also heavily regulated.
This is still a better situation than 2008, where banks were bailed out to the extent that management even stayed (despite deserving prison), and shareholders lost nothing.<p>So that's the worst possible outcome, today's is probably second worst. But I don't see what would be better. Ben talks about loss of trust now, but we'd actually lose more trust if depositors weren't bailed out, and probably contagion would spread and many banks would fail.<p>Thinking about an endgame, I think extending this all out into the future, its hard to see banking remaining in any way a free market. Either it becomes state sanctioned and protected profit making, which it already is for the big 4 banks, or banking just becomes fully nationalised, and basically a state run commodity.<p>You can't get out of it being more and more centralised. I just don't see another way. And when it becomes fully centralised, the question is, does Jamie Dimon actually do anything, or is he basically a state actor with a billion dollar salary?
Is it just me or has Stratechery gone downhill in it's analysis (or at least put too much mindshare on mid-market B2B SaaS startups, AdTech, and B2C).<p>A number of the Stratechery articles I've read recently seem to remain in that whole echo chamber and don't seem to extend that well into other segments in the larger innovation industry.