LogFAQs > #972145218

Was this whole discourse about SVB over the weekend fear mongering by various VC people? I don't think it's hindsight speaking, but it seems like there has always been a method for uninsured deposits to be made whole.

https://twitter.com/ArmandDoma/status/1634338645237956608?t=--2FY-Lk4ar_iDJCfEQ4pw&s=19

If a bank fails, FDIC takes it over and they try to sell the assets to buyers. And the buyer will most likely make them whole, worst case they lose 5-10%. It seems like the real risk was that the full amounts would not have been available Monday morning. But people were scared of the money just being completely gone, which is just not a realistic scenario of what would have happened.

https://noahpinion.substack.com/p/preventing-panic-in-the-banking-sector?utm_source=substack&utm_medium=email

The next question becomes: What can the government do to prevent or stop a wider banking panic? Well, it starts with the FDIC.

The latter is what the FDIC is doing now, with SVB. SVB has been put into receivership, meaning that its shareholders have been wiped out and its employees will, after 45 days of getting paid to help clean up their mess, be out of a job. The FDIC is even now looking for a buyer, or buyers plural, for SVBs assets.

Whether its one buyer or several is actually pretty important. In most bank failures, the failed banks assets and deposits are both transferred to one other bank in other words, if youre a yesterday you had an account at SVB, today you have an account at some other bank, and you dont lose a penny of your deposits. There have been hundreds of bank failures since 2008, and this is almost always what happens. The most famous example of this was Washington Mutual in 2008, which was an even bigger bank than SVB. When WaMu failed, its assets and deposits just got transferred to JP Morgan Chase, and depositors kept all their money.

Anyway, if that fails, the FDIC has to go to Plan B, which is to sell off SVBs assets to various different buyers and send the proceeds to the depositors. This is not the optimal plan because theres a basic tradeoff here. On the one hand, the FDIC can try to sell as much as possible quickly, to help SVBs depositors make payroll this week. On the other hand, it can take its time to sell some of the assets, in order to get a good price for them, so that depositors dont end up losing any of their money.