I agree that, in hindsight, SVB has not applied proper #riskmanagement, yet I think there is a misunderstanding about the concept of hedging. I also read a lot that SVB did not hedge its interest rate exposure. If you would have a system with unlimited guarantees for all banks, it suggest there is no risk in the system anymore, which isn't warranted, as the risk has just shifted from individual deposit holders to every tax payer, with the banks the main beneficiaries. To a large extent, rates (yields) should be a reflection of risk! Some banks can offer higher savings rates as they have lower costs, others are forced to offer higher rates as they are perceived as less solid.
That guarantee can be multiplied by using guarantees at several banks and by sharing accounts.īanks diversify with their commercial offerings, for example through interest rates on savings accounts and loans. This looks like we have not learned anything from 2008.Ī deposit guarantee is designed to give confidence to a large amount of regular (smaller) savers that their #money is safe. They are incentivized to take a lot of risk with those deposits, as when things work out well, the profits are for the bank, and when things do not work out well, the government backstops. What incentive do banks have when they know that deposits they receive are insured by the government for an unlimited amount? I have read several VCs and other investors calling to bail out SVB, and banking regulators to "ensure the integrity of the banking system, safeguarding that deposits in the US are safe".Ĭharlie Munger said "give me the incentive and I will give you the outcome".
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