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The End of Silicon Valley (Bank)

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Re: The End of Silicon Valley (Bank)

#71

Post by tyre »

koheripbal wrote: post #36
irusensei wrote: post #16

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.

That's just a waste of capital and leads to zero business investments. It's exactly what happens in crypto because it's deflationary, and it's the main reason there is no crypto economy beyond the price speculation.

Yes, this is essentially correct. Every few months the idea of narrow banking is re-discovered and presented as a magic cure-all.

What played out over the past week was all fine. The FDIC and Treasury worked.

The contagion was the VCs freaking everyone out. It was a bad week for “leaders in tech” fomenting FUD when they could have been calming the situation down.

SVB had safe assets. They mismanaged interest risk. The government stepped in. It’s fine.

Thank god for centralized financial systems.

Re: The End of Silicon Valley (Bank)

#72

Post by javajosh »

softwaredoug wrote: post #57
mikewarot wrote: post #12

>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. 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. If you want to gamble the money, then yo…

Random internet tip: if you have any significant savings, and you don't need liquidity, it's been waaaay more profitable to buy 6 month treasury bonds

That was true last week. https://www.marketwatch.com/investing/bond/tmubmusd06m?count...

Re: The End of Silicon Valley (Bank)

#73

Post by ericpauley »

trompetenaccoun wrote: post #26
nsmog767 wrote: post #2

>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 e…

Limits were not "ignored", the companies simply have no other choice. The problem is systematic and by design. A medium sized startup/business handling only 25 million would need to bank with 100 different banks, obviously that's inconceivable in practice. And now look at some of the more prominent customers. Pinterest, Shopify, CrowdStrike Holdings, Beyond Meat, Andreessen Horowitz, Founder's Fund, Circle. The latte…

There is a straightforward hierarchy of cash management techniques that safely handles large sums of money. If Boglehead retirees can figure it out then why can't startups?

Deposit sweep cash management accounts offer FDIC sweeps up to ~3M (note that this is not just abusing some technicality, it reduces systemic risk by diversifying investments. The whole point of the FDIC is to prevent bank runs in the first place). Money markets provide short-term exposure to treasuries beyond that. In the 25M range, companies should absolutely be expected to manage purchases of treasuries. Again, if Bogleheads can figure it out for individual retirement savings then why can't businesses?

Re: The End of Silicon Valley (Bank)

#74

Post by coldtea »

ISL wrote: post #14
mikewarot wrote: post #12

>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. 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. If you want to gamble the money, then yo…

Those free services are the "interest" you receive in return for your deposits.

Don't give me interest then. Just store the money.

If I want interest I'd then switch to another type of account, that I explicitly allow to lend them out for this purpose.

In fact, they should have seggregated isolated-from-others-in-default accounts, with different fractional reserve percentages...

Re: The End of Silicon Valley (Bank)

#75

Post by mariodiana »

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.

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.

Re: The End of Silicon Valley (Bank)

#76

Post by SketchySeaBeast »

coldtea wrote: post #47
SketchySeaBeast wrote: post #24

Earlier quoted context omitted.

So by keeping my money with you I lose spending power at a rate of your fees PLUS inflation? Where do I sign up?

Combine it with another novel idea: the gold standard.

I know it's very trendy to advocated for that, but we do know that the removal of the gold standard was an attempt to keep the United State economy from melting down too, right? It's not actually a solution to all our economic woes. Sure, removing the gold standard created a new class of problems but going back isn't going to stop the ones we used to have.

Re: The End of Silicon Valley (Bank)

#77

Post by sramsay »

esja wrote: post #23
mikewarot wrote: post #12

>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. 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. If you want to gamble the money, then yo…

"depositors lend their money to a bank, for which they are paid interest, and banks lend that money out" ... isn't how banking actually works. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Yeah, it's the "and banks lend that money out" part that is wrong, and it's why banking is way, way more complex than people realize. There's a lot of "it's all very simple" going around (here and elsewhere). It is not simple.

Re: The End of Silicon Valley (Bank)

#78

Post by jameshart »

trompetenaccoun wrote: post #26
nsmog767 wrote: post #2

>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 e…

Limits were not "ignored", the companies simply have no other choice. The problem is systematic and by design. A medium sized startup/business handling only 25 million would need to bank with 100 different banks, obviously that's inconceivable in practice. And now look at some of the more prominent customers. Pinterest, Shopify, CrowdStrike Holdings, Beyond Meat, Andreessen Horowitz, Founder's Fund, Circle. The latte…

So isn’t this one of those cases where the market is supposed to respond?

If FDIC genuinely topped out at 250k, and there exist customers who have more than 250k they wish to deposit, the market should be able to respond by providing private insurance for cash balances over 250k.

Your premium would presumably depend on the balance and the risk profile of the institution where you’re keeping the balance. Insurance providers would want to audit institutions at which their customers are holding those balances to make sure they have a risk profile consummate with the insurance premiums they’re collecting.

You, know, like insurance companies do.

Should lead to private banking accreditations that have the same imprimatur value as ‘FDIC insured’, but privately funded, right?

Now people might say ‘too big to fail policies are why that kind of product doesn’t exist’; but it’s not like products like that were in widespread use before 2008… has the banking industry just always assumed that federal insurance is effectively unlimited?

Re: The End of Silicon Valley (Bank)

#79

Post by [deleted] »

soumyadeb wrote: post #34
trompetenaccoun wrote: post #26

Earlier quoted context omitted.

Limits were not "ignored", the companies simply have no other choice. The problem is systematic and by design. A medium sized startup/business handling only 25 million would need to bank with 100 different banks, obviously that's inconceivable in practice. And now look at some of the more prominent customers. Pinterest, Shopify, CrowdStrike Holdings, Beyond Meat, Andreessen Horowitz, Founder's Fund, Circle. The latte…

There are better monetary instruments (like short term Treasury Bonds) to keep money at scale. Most startups don't have a team (CFOs etc) but I am sure the larger ones don't keep cash like that.

[deleted]

Re: The End of Silicon Valley (Bank)

#80

Post by tyre »

trgn wrote: post #66
SketchySeaBeast wrote: post #24

Earlier quoted context omitted.

So by keeping my money with you I lose spending power at a rate of your fees PLUS inflation? Where do I sign up?

It's not that weird. It's basically a checking account. Lot of countries those have fees attached. It's also the historical origin of banks. strong men with vaults to store your coins. It's no longer attractive because of fiat currency, which has strong inflatuonary pressure; and because of the fish-in-water effect of two centuries of capitalism, people no longer can distinguish between savings and capital, the divid…

Narrow banks are no longer attractive because lending out depositors’ money has positive externalities. It’s used to fund mortgages and small business loans. That’s a positive.

Are there downsides? Sure, but what we saw this past few days is that the system worked. SVB was dumb, the federal government stepped in to save deposits, management was fired because they did dumb things, and the shareholders were likely zeroed out because they owned the company doing dumb things.

Yes, we could pull money out of the financial system, but that might well be worse for everyone.

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