There’s no shortage of news about the failure on Friday of Silicon Valley Bank, the country’s sixteenth largest bank. Much of the press is about who’s to blame, what will happen to Silicon Valley depositors, how much the failure will affect tech companies and investors, and whether there are other banks that have similar issues. We’ll know more tomorrow.
I think your logic is sound and it points to another wrinkle, hugely in favor of the banks. If a depositor has an account with, say, $500,000 in it, and only $250k is insured, why isn't the bank paying a higher percentage on the money over $250k? We are not only lending the money to the bank when we deposit it, but the over $250k is money we lend at higher risk. When two people with identical incomes and assets apply for loans, but one has an inferior credit rating, that borrower will have to pay a higher interest rate due to the higher risk to the bank. Of course, if everyone moved all that money out of banks to Vanguard, for example, banks would have to pay more interest to get the use of it. This is a huge windfall for banks. We get sucked into making deposits with little or no return partly because of the safety of it and we get no more return when it is less safe. It's good to be a banker.
What would be a more efficient vehicle? Something like crypto? The balance between debt and equity is can kicking at its finest or worst. Great article, brother. I felt that our government’s remediation of the default was valiant. Powerful. Sort of hot!
I think it's because the demand for deposits (pun) has pushed down market deposit rates due to the overflowing of QE money in customer pockets. Perhaps a better analogy to draw would be pre-pandemic deposit rates vs Treasury yields.
thanks David. Great read and very insightful & well thought out. No explanation yet on why Signature too but presumably the same issues. I'm just going withdrawing all my nickels and getting a bigger mattress.
I think your logic is sound and it points to another wrinkle, hugely in favor of the banks. If a depositor has an account with, say, $500,000 in it, and only $250k is insured, why isn't the bank paying a higher percentage on the money over $250k? We are not only lending the money to the bank when we deposit it, but the over $250k is money we lend at higher risk. When two people with identical incomes and assets apply for loans, but one has an inferior credit rating, that borrower will have to pay a higher interest rate due to the higher risk to the bank. Of course, if everyone moved all that money out of banks to Vanguard, for example, banks would have to pay more interest to get the use of it. This is a huge windfall for banks. We get sucked into making deposits with little or no return partly because of the safety of it and we get no more return when it is less safe. It's good to be a banker.
Great questions. Fascinating insights.
What would be a more efficient vehicle? Something like crypto? The balance between debt and equity is can kicking at its finest or worst. Great article, brother. I felt that our government’s remediation of the default was valiant. Powerful. Sort of hot!
I think it's because the demand for deposits (pun) has pushed down market deposit rates due to the overflowing of QE money in customer pockets. Perhaps a better analogy to draw would be pre-pandemic deposit rates vs Treasury yields.
thanks David. Great read and very insightful & well thought out. No explanation yet on why Signature too but presumably the same issues. I'm just going withdrawing all my nickels and getting a bigger mattress.