Subject: Re: SVB bailout
So what is the bad thing that would happen if ALL deposits were covered by deposit insurance? Why don't we do it that way?

I have wondered the same and would support an experiment to try. But I will say if bank executives know *everything* is guaranteed, it seems they might be more likely to push the risk envelope. Push risk in search of higher yields, you're able to offer better rates. Better rates attract more deposits, ad infinitum.

At some point the risks are wayyyy too much, and kaboom.

The kaboom for SVC was having so much cash (yes!) and putting it in illiquid assets. Now that's true of every bank, but not every bank is so highly concentrated in one narrow sector, and most sectors aren't as volatile in their core business financing.

I've been thinking about why Berkshire can sit on such a mountain of cash, achieve such good returns, and be the Gibraltar that people look to in times of stress - unlike, well, banks . It occurs to me (having seen 'It's A Wonderful Life') that banks are subject to runs when everything wants their cash NOW, whereas Berkshire is sitting on insurance cash which not everyone can or wants to access at the drop of a rumor. So BRK's 'cash demand liability' is constrained, whereas a bank's is not. Ironic then that banks invest in long assets like mortgages and bonds, while Warren keeps Berkshire's cash more liquid in short term rollovers, eh?

Oops, tangent, sorry. Anyway, if you guarantee everything I think you encourage more risk, which at some point has to explode, and not in a good way.

I've heard floated that SVB should have been able to borrow from the Fed at par against their long bonds, rather than sell them. The Fed can hold them to maturity, even as SVB gets hit by a redemption tsunami. Instead they sold the bonds at a loss, creating the shortfall which they then attempted to plug by going public with a planned stock offering. (I believe had they announced a solution before the problem they might have been OK.)

In this scenario all SVB would have to contend with is the short term interest of a (below market and perhaps variable rate) Fed assist, not the jump-off-the-cliff finality of selling the bonds.