How to protect your money in America, if you have a lot of money

"Silicon Valley Bank's failure makes many Americans grateful for deposit insurance, which protects accounts holding $250,000 or less. But the SVB episode also illustrates the dangers of deposit insurance. A banking system dominated by government insurance, plus too-big-to-fail protection that effectively insures all deposits at the largest banks, lacks essential market discipline, is systemically unsafe, is more likely to see episodes like SVB's failure, and is more costly to taxpayers and bank customers.

Historically, unprotected well-informed depositors, especially other banks, gauged and responded to each bank's risk, creating an incentive for banks to manage risk responsibly. Uninformed depositors -- like those now at risk at SVB -- were free riders on informed discipline. Now, informed depositors can easily get around the $250,000 limit on insurance, which eliminates their incentive to monitor banks. The recent disappearance of the interbank loan market means that banks don't monitor each other to gauge creditworthiness as short-term borrowers of reserves either. That leaves only bank regulators to mind the store, and they often lack incentives and knowledge to measure and punish risk on a speedy basis. That's how predictable messes like SVB happen.

How do informed investors skirt the limit and get all their deposits insured? In two ways. First, they deposit millions at a bank participating in the Certificate of Deposit Account Registry Service, or Cdars, which swaps deposits among many banks so that a depositor can have millions covered with all transactions handled through a single lead bank. Second, they deposit funds at a too-big-to-fail bank, where all deposits are effectively riskless. Title II of the Dodd-Frank Act of 2010 lays out how the Treasury bailout would occur and be funded.

A century ago, bank regulators saw their job mainly as examining banks and forcing them to publish accounts in the local newspaper so that informed lenders and depositors could act on accurate information. Runs on deposits occurred under the old system, but the record of fragility has been exaggerated and misunderstood, and the U.S. historical experience was an extreme case. Most countries had occasional bank failures but rarely suffered a systemic crisis. Canada never did. The U.S. was prone to systemic crises because of idiosyncratic factors of regulation. Branching restrictions, which weren't eliminated until 1997, created a system of thousands of small, isolated and undiversified banks and a pyramidal liquidity management system that sometimes collapsed under stress.

Deposit insurance was absent from nearly all other countries' banking systems before 1980, and from the U.S. (with some temporary exceptions) until 1933. It was adopted for political reasons, and it hasn't been a stabilizing influence. Virtually every academic study of deposit insurance shows that it promotes, rather than reduces, banking system fragility, with major costs borne by the insurers -- which means ultimately by insured depositors and potentially taxpayers. The popularity of deposit insurance reflects public ignorance about its costs and about how a disciplined, uninsured banking system could operate as an alternative.

Informed depositors respond to troubles at banks early, with withdrawals that pressure banks to reduce their riskiness. When discipline resulted in bank failure, that often had a bright side: Risky banks in receivership were prevented from digging deeper holes at depositors' expense. Consequently, for most of U.S. history, depositors' losses on failed banks were small.

Even the tardy uninformed discipline exerted on SVB today likely will have a similar effect. Based on publicly available data about SVB's portfolio, its deposits and its capital footings, the cost of bailing out uninsured depositors is likely to be very little, because the run on SVB happened before the bank became deeply insolvent.

Generous deposit insurance, with the amplifications of Cdars and too-big-to-fail protection, has been undermining market discipline for many years. A new factor is the Federal Reserve's quantitative-easing and interest-on-reserves policies, which have eliminated the interbank market for borrowing reserves, further reducing incentives for institutions to monitor one another's risks and punish transgressors by denying them access to credit.

It's clear that many SVB clients lacked financial sophistication. SVB attracted companies to hold deposits greater than the $250,000 insured maximum by paying roughly 0.6 points greater interest than its competitors. That should have signaled inordinate risk taking (via long-duration securities holdings). But depositors saw only opportunity, not risk -- practically the definition of an unsophisticated depositor.

One CFO told me he wasn't so much responding to the higher interest rate as doing what he saw every other Silicon Valley startup doing.

He had no explanation -- other than ignorance -- for why he didn't protect his money via Cdars or a too-big-to-fail bank.

One might be forgiven for wondering whether IT entrepreneurs learn anything in business school. (Don't ask me; I'm conflicted on that one.)

This episode points to a continuing failure of regulatory discipline, which lacks the incentives and smarts of the market, to substitute for market discipline. It also points to the need for business managers to learn more about banking, and for the Fed to learn that its own monetary-policy mismanagement for many years has lots of consequences for reducing financial stability. Those consequences include the insidious elimination of interbank discipline by ending the last vestige of informed discipline on imprudent risk management by banks.

---

Mr. Calomiris is director of the University of Austin's Center for Politics, Economics and History and a professor of financial institutions at Columbia Business School. He served as chief economist of the Office of the Comptroller of the Currency, 2020-21." [1]

1. Deposit Insurance Encourages Bank Failures
Calomiris, Charles W.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 14 Mar 2023: A.19.

Kaip užsidirbti rimtų pinigų bankininkystėje: potvynis atslūgsta, o Silicio slėnio bankas jau nuskendo

  "Finansų rinkose potvynis jau kurį laiką išnyko ir vis dar traukiasi. Perfrazuojant Warreną Buffettą, mes pradedame gerai matyti, kas plaukiojo nuogi. Tai nėra gražu.

 

     Silicio slėnio bankas praėjusią savaitę buvo netikėtai ir žiauriai apnuogintas pusiaukelėje į paplūdimį, prie jo apatinių kūno organų prispaudęs mažėjantį kapitalo padidinimo rankšluostį, kurį greitai išplėšė panikuojantys indėlininkai. Po bergždžių CPR pastangų bankas galiausiai pateko į reguliuojančių gelbėtojų glėbį.

 

     Minia pasipūtusių kriptovaliutų vaikinų prieš kurį laiką atsisakė jų dizainerių kurtų maudymosi kostiumėlių, o dabar, sparčiai traukiantis vandeniui, jie arba bus iššluoti į jūrą kartu su kai kuriomis juos aprūpinusiomis finansinėmis institucijomis, arba, kaip mato Samas Bankmanas-Friedas, juos sulaikė paplūdimio patrulis, ir jie mikčioja, bandydami paaiškinti, kaip tiksliai sumokėjo už tą brangų namą su vaizdu į vandenyną.

 

     Gerai, kad atsiras daugiau raudonų veido ir grėsmingų finansinių nudistų. Ten, sekliuose vidutinio dydžio bankų sektoriaus vandenyse, saujelė institucijų tupi vis žemiau ir žemiau desperatiškai bandydamos paslėpti jų nykstantį turtą. Tai yra skolintojai, kurie per nulinių palūkanų „naują įprastą“ epochą buvome užtikrinti, kad ji buvo begalinė, finansuodami rėmėsi dideliais neapdraustais indėliais, o tada grąžino pinigus į ilgalaikį turtą. Begalybei mažėjant ir palūkanų normoms kilus per pastaruosius metus, jos buvo suspaustos abiejose balanso pusėse. Kalbant apie įsipareigojimus, didieji indėlininkai nebėra tokie lengvabūdžiai, o jų federaliniu požiūriu neapsaugoti karšti pinigai ieško saugesnio uosto – paspaudžiant išmaniojo telefono programėlę. Kalbant apie turtą, bankų turimų iždo obligacijų ir hipoteka užtikrintų vertybinių popierių vertė smarkiai sumažėjo. Savaitgalį vyriausybės žingsnis, siekiant išsaugoti net neapdraustus indėlius SVB gali padėti nuraminti vandenis.

 

     Kiekvienos finansinės krizės metu komentatoriai daug šneka apie riziką, susijusią su jūsų turto ir įsipareigojimų neatitikimu pagal trukmę, tačiau, tiesą sakant, visada buvo taip, kaip jūs uždirbate tikrus pinigus bankininkystėje. Niekas niekada neuždirbo pragyvenimui, imdamas nemokamus pinigus iš indėlininkų ir kišdamas juos į banko saugyklą. Ir nors atrodo, kad kai kurie SVB rizikos valdytojai galėjo geriau skirti savo laiką apsidraudimo strategijoms, o ne socialinio teisingumo skatinimui, nėra taip, lyg jie būtų nukreipę indėlininkų lėšas į nelaimės ištiktų Nigerijos princų sąskaitas ar tulpių svogūnėlių prospektus. Kas žinojo, kad 10 metų JAV valstybės obligacijos (Treasurys) bus toks didelės rizikos statymas?

 

     Tai atveda mus prie didelių berniukų ir mergaičių vandenyje su kiaušiniais ant veidų ir nieko žemiau juosmens – vadinamųjų lyderių, atsakingų už mūsų vis gilėjančią netvarką, tų, kuriems turėtų būti tikrai gėda dabar, kai jų tuštybė ir pasitenkinimas buvo nuslopintas ir atidengtas. Neatsargūs bankininkai nebuvo vieninteliai, kurie manė, kad didelė finansinė banga yra nuolatinė.

 

     Nereikėjo būti ironistu, kad patirtum niūrų malonumą praeitą savaitę vykusiame Senate posėdyje, kuriame senatorė Elizabeth Warren priekaištavo Federalinio rezervo banko pirmininkui Jerome'ui Powellui, kad jis padidino palūkanų normas, kad pažabotų infliaciją, o tai, tikriausiai, padidino nedarbą JAV.

 

  Senatorė, kuri daugelį metų žodžiais ir darbais tvirtino, kad federalinė valdžia gali ir toliau pumpuoti pinigus į ekonomiką, dabar yra įsiutus, kad centrinis bankas pavėluotai bando užgniaužti infliaciją, kurią ji padėjo sukurti. Kaip jis drįsta pakelti tarifus, kad atkurtų stabilumą?

 

     Tai buvo tarsi šou, kai padegėjas spjaudosi pasipiktinimu ugniagesiui, kuris ką tik sugadino jo antikvarinių daiktų kolekciją antigaisrine priemone.

 

     Vienintelė analogijos bėda ta, kad šiuo atveju gaisrininkas kaltas tiek pat, kiek ir padegėjas. Daugelį metų Fed, vadovaujamas pono Powello – ir jo pirmtakės, dabar paslaugiai dirbančios iždo sekretore – skatino tikėjimą, kad nulinės palūkanų normos ir kiekybinis palengvinimas iki trilijonų dolerių balanso išplėtimo yra nerizikinga veikla, kuri galėtų lengvai apverčiama be žalos. Kai finansinio ir fiskalinio nelaikymo logika pasitvirtino – kaip visada – ponas Powellas ir Janet Yellen ne kartą bandė mus įtikinti, kad dėl to kilusi infliacija buvo „laikina“.

 

     Bus daugiau skausmo – dalis jo bus siaurai sutelkta, o daugiau – plačiai paskirstyta visoje ekonomikoje.

 

     Mes, kaip visuomenė, išsiversime su kai kurių bitkoinų investuotojų nuskurdimu. Netgi išgyvensime, žlugus kelioms antrojo padalinio finansinėms institucijoms.

 

     Tačiau technologijų įmonės ir kiti, kurių pinigai Silicio slėnio banke dabar nepasiekiami, primena, kokią žalą investicijoms ir verslumui gali padaryti pernelyg išsiplėtusios finansinės sąlygos. O naujoji „nauja normali“ (kaip ir senoji normali) vidutinių vienaženklių palūkanų norma tikrai nuims karčių derlių iliuzija daugiau. Bent jau šiuo klausimu M. Warren yra teisi – tai tragedija, kad FED turi atleisti tiek daug žmonių iš darbo, kad nužudytų infliaciją, kurią jis padėjo sukelti.

 

     Tai yra skirtumas tarp darbo vyriausybei ir darbo sau. Kai esate darbuotojas, smulkaus verslo savininkas ar iniciatyvus investuotojas, niekas nepagailės jūsų ir nepadės, kai potvynis užges. Bet jei esate iš vyriausybės, visada yra kas nors, kas paduos jums švarų rankšluostį ir padės jums grįžti į saugumą." [1]

 

1. Free Expression: The Tide Goes Out, and Silicon Valley Bank Already Drowned
Baker, Gerard.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 14 Mar 2023: A.19.

How Do You Make Real Money In Banking: The Tide Goes Out, and Silicon Valley Bank Already Drowned

"In financial markets, the tide has been going out for a while and is still receding. To paraphrase Warren Buffett, we are starting to get a good look at who has been swimming naked. It isn't pretty.

Silicon Valley Bank was suddenly and brutally exposed last week halfway up the beach, clutching to its nether regions the shrinking hand towel of a capital raise that was quickly snatched away by panicking depositors. After futile CPR efforts, the bank eventually collapsed into the arms of the regulatory lifeguards.

The crowd of cocky crypto kids ditched their designer swimsuits a while ago and now, with the surf rapidly retreating, are either going to be swept out to sea along with some of the financial institutions that supplied them or, like Sam Bankman-Fried, find themselves in the custody of the beach patrol, trying to explain how exactly they paid for that pricey house overlooking the ocean.

It's a good bet there will be more red-faced and imperiled financial nudists. Out there in the shallowing waters of the midsize banking sector, a handful of institutions are crouching lower and lower in a desperate bid to hide their shriveling assets. These are lenders that, during the zero-interest "new normal" era we were assured was infinite, relied on big, uninsured deposits for funding and then recycled the money into long-dated assets. As infinity shrank and interest rates rose in the past year, they've been squeezed on both sides of the balance sheet. On the liabilities side the big depositors are no longer quite so flush, and their federally unprotected hot money is seeking -- with a tap on a smartphone app -- safer harbor. On the asset side, the value of the Treasury bonds and mortgage-backed securities the banks hold has plummeted. The government's move over the weekend to save even the uninsured deposits at SVB may help calm the waters.

In every financial crisis there's a lot of tut-tutting from commentators about the risks of duration-mismatching your assets and liabilities, but in fairness that has always been how you make real money in banking. No one ever earned a living taking in free money from depositors and stuffing it in the bank vault. And while it seems that some of SVB's risk managers might have better spent their time investigating hedging strategies rather than promoting social justice, it's not as though they were funneling depositors' funds into the accounts of distressed Nigerian princes or prospectuses for tulip bulbs. Who knew that 10-year Treasurys would be such a high-risk bet?

Which brings us to the big boys and girls in the water with egg on their faces and nothing below the waist -- the so-called leaders responsible for our deepening mess, the ones who should be truly ashamed now that their vanity and complacency have been exposed. Imprudent bankers weren't the only ones who believed the high financial tide was permanent.

You didn't have to be an ironist to take grim enjoyment in the spectacle of a Senate hearing last week where Sen. Elizabeth Warren berated Jerome Powell, chairman of the Federal Reserve, for hiking interest rates to curb inflation, presumably raising unemployment in the process.

The senator who in word and deed has been insisting for years that federal authorities can keep pumping money into the economy is now furious that the central bank is trying belatedly to smother the inflation she helped generate. How dare he raise rates to restore stability?

It was like listening to an arsonist spitting outrage at the firefighter who has just ruined her collection of antiques with flame retardant.

The only problem with the analogy is that in this case the firefighter is as much to blame as the arsonist for the fire. For years the Fed under Mr. Powell -- and his predecessor, now helpfully secretary of the Treasury -- encouraged the belief that zero interest rates and quantitative easing to the tune of trillions of dollars in balance-sheet expansion was a riskless exercise that could easily be reversed without harm. When the logic of financial and fiscal incontinence asserted itself -- as it always does -- Mr. Powell and Janet Yellen repeatedly tried to convince us that the resultant inflation was "transitory."

There will be more pain -- some of it narrowly focused and more of it widely distributed throughout the economy.

We will get by as a society with the impoverishment of some bitcoin investors. We will even survive the collapse of a few second-division financial institutions.

But the tech firms and others whose money at Silicon Valley Bank is now inaccessible offer a reminder of the damage that the unraveling of overextended financial conditions can do to investment and entrepreneurship. And the new "new normal" (like the old normal) of mid-single-digit interest rates will surely reap a bitter harvest for millions more. On this at least Ms. Warren is right -- it is a tragedy that the Fed has to put so many people out of work to kill the inflation it helped let rip.

That's the difference between working for the government and working for yourself. When you're an employee, a small-business owner or an enterprising investor, nothing spares your blushes -- and hurt -- when the tide goes out. But if you're from the government, there's always someone to hand you a fresh towel and help you back to safety." [1]

1. Free Expression: The Tide Goes Out, and Silicon Valley Bank Already Drowned
Baker, Gerard.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 14 Mar 2023: A.19.