The Good News As Regulators Make SVB Depositors Whole, But No Bailout for Shareholders

I deleted a post here where I noted that the US government should not bail out the failed bank’s Wall Street investors. I had argued that we must avoid privatizing profits, and when problems arise, we socialize losses. But bailing out investors is not the same thing as making  depositors whole; investors should have full access to their funds. Apparently, the street-level usage of the word “bailout” confused our community, drawing from the comments (you can read the piece here).

Yes, giving people access to their money even when above the insured limit should not be seen as a bailout in this age; bailout is when you are protecting investors/shareholders in that bank or practically saving the bank: “Regulators need to conduct a backstop of depositors. We are not asking for a bank bailout.”

 The good news today is that the government is not going to bail out shareholders of Silicon Valley Bank but will ensure depositors have full access to their funds: “Depositors will have access to all of their money starting Monday, March 13. …Shareholders and certain unsecured debtholders will not be protected,” the US Government has noted. That was what we asked for!

What the US government did here is exactly what the Nigerian government did when Bank PHB failed in Lagos; it protected 100% of depositors’ funds but wiped out shareholders. That was a great call even though I ended up losing access to my brokerage account as Bank PHB’s brokerage unit managed it for me. (I contacted the companies I had invested and normalized all via their registrars)

Yet, the failures of SVB and Signature Bank (New York) will not be the last. The world has to solve the Russia and Ukraine war to bring inflation under control. I am hoping there is a playbook to consider peace there as they play the financial excel sheets in Washington DC and London on these banks. If inflation remains and governments continue to fight it by raising interest rates, banks will continue to have issues because their balance sheets will keep getting worse. Removing the Ukraine war equation may help.

Finally, shina ya eyes; the next bank depositors may not be lucky

Shares of regional banks continued to fall in premarket trading Monday, even after U.S. regulators set out new measures to shore up confidence in the financial system. Authorities announced Sunday that all depositors at Silicon Valley Bank will be granted access to the entirety of their funds in the failed lender from Monday, in the wake of its collapse. The Federal Reserve will also create a new lending facility, while federal authorities are “extending protection” to depositors at a second bank, the Signature Bank of New York. State regulators shuttered that financial institution on Sunday.

Investors are worried about the health of other fast-growing lenders. Shares of First Republic fell as much as 70% premarket after saying the Federal Reserve and JPMorgan Chase helped it shore up its finances.

HSBC is set to buy the bank’s U.K. subsidiary for roughly $1, securing about $8.1 billion of deposits.

SVB, a major lender to tech startups and venture capital firms, spiraled rapidly after announcing Wednesday it had sold part of its portfolio at a $1.8 billion loss and was trying to raise more capital.

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