What moral hazard being created though? Most SVB customers, unless they are finance experts, are not in any position to do due diligence on how their bank invests its loans and are pretty blameless in my opinion. They weren’t capturing any real risk premium by banking with this bank.
Especially considering the government disallows people that aren't "qualified investors" from investing in specific asset classes entirely because people that don't meet that threshold are just too stupid to participate.
But they were by, for smaller but over 250k depositors, not spreading their deposits between multiple banks. Which can be done manually or through a sweeping account very very easily. Or, for larger depositors, having other safety mechanisms in place. Really depositors over 250k do need to take some moral responsibility, even though I think it is better that they be made whole to stave off a 2008 style financial crisis.
So what is the risk premium they were collecting? The time savings of not managing multiple accounts? Is it really desirable for larger depositors to carry the inefficiency of spreading their deposits across multiple banks, if the net liabilities of the banks end up being the same?
Net doesn't matter to the individual firm. And who should carry it? Everyone else who had the gumption to spend, what, a few man hours, to guarantee that they won't end up not being g able to make pay roll?
No, VCs who literally demanded they put their money there did. Guess who cries the most about bail out - VCs. The same people who wanted regulations to ease up, the same people that actually indirectly profited from bank taking higher risk.
It is ridiculous that the supposedly smartest groups whose literally did this to themselves gets bailed out.
They don't need to do extra due diligence. Just buy insurance for the excess amount above the FDIC limit. After all, they do benefit from the upside like cheaper mortgages for execs.
One way this could create moral hazard is that large depositors are happy to lend to quite risky banks at high rates because they know they will be made whole in case of a bank failure. Btw., this could also make deposits less sticky as moving for opportunity has no downside in such a scenario.
> Most SVB customers, unless they are finance experts, are not in any position to do due diligence
Someone wants to have it both ways - they are sophisticated investors and entreneurs when it suits them. Leaders of our time, telling the rest of us how to live.
Other times, they can't be expected to have basic financial literacy or consult a financial adviusor accessible to a regullar joe
> SVB is a 40 year old bank that's been doing business in the valley since the VC era started.
So it’s a fairly new bank, by the standard or banks, and the point remains, why did they choose to risk keeping money in excess of the $250K insurance backstop in one bank with no real track record?
Until this event the whole idea of the FDIC insurance fund was to ensure that people (not corporations) with relatively small nest eggs wouldn’t lose the whole thing and therefore starve if their bank made bad bets… once your nest egg grew beyond the backstop it was your right (and privilege) to assume the risk of losing it, if you wanted to.
Now because VCs and CEOs were essentially asleep at the wheels of companies that, for the part that have gotten this absurdly quick action from the government, consider $250K to be a rounding error, the rules have changed. That’s the special class… the kind of people who somehow think 40 years is a substantial track record for a business that’s big enough to underpin an economy.
> Until this event the whole idea of the FDIC insurance fund was to ensure that people (not corporations) with relatively small nest eggs wouldn’t lose the whole thing and therefore starve if their bank made bad bets.
Nope.
"The mission of the Federal Deposit Insurance Corporation (FDIC) is to maintain stability and public confidence in the nation's financial system."
