SVB: All Depositors Have To Be Protected Or Risk The Entire Banking System
There seems to be some debate. The Biden Administration has come out and said there will be no taxpayer money used in the Silocon Valley Bank situation.
As for those with the bank, the deposits of up to $250K is covered under FDIC. While many question whether that is solvent, it could actually be backstopped. Of course, with the numbers we are talking for SVB, there are a lot of accounts that were greater than $250K. These are at risk.
Of course, this is something that Biden doesn't want to protect. There is a problem with this view. It will put the entire banking system facing peril.
People need to understand the impact of small business within the United States. To start, they employ 70% of the labor force. At the same time, they make up the middle class, or what is left of it. Finally, this is the meat and potatoes of most communities.
Another fact in this situation is that smaller banks (the non-national ones like Chase and BAC) make up a majority of small business loans and lines of credit to these types of businesses.
Wiping them out is devastating. Due to the situation with interest rates, they are already at risk. Not protecting the deposits will result in massive outflows.
Making Adjustments
The problem with non-business people, which politicians are, believe things are static. This simply is not the case and businesses adjust. No matter what the conditions, over time they adapt. This is true throughout history.
For example, there are many instances where, with coinage based monetary systems, there simply was a shortage. The government was ill-equipped to predict the monetary needs of the economy. This is no different than the central banks who believe they can predict and control it. Nevertheless, merchants still had to trade. They were able to figure out ways to conduct business.
So what happens if a bunch of businesses take it on the lip if they exceed $250K in SVB? They will adapt. It also will be a warning to all other businesses to get out.
Before getting into their most likely option, it is vital to state how $250K is not a lot of money. We are not talking about a personal bank account. There are companies that have a number of expenditured that exceed that on a weekly basis.
To put it in perspective, that is two weeks pay for 100 employees at the national average. We can presume that salaries at tech companies in Silicon Valley far exceed the average. Hence, we might be talking about the payroll account for 45 people. This, of course, does not include all the other expenses a company will have.
The point is that businesses continually have money flowing in and out. Even a relatively small business can see millions entering and exiting on a monthly basis. Depending upon where they are with their own cycles, they could have millions sitting in accounts at one time. It is also possible for a company to have a prudent reserve of $1M or more (although that might not all be in cash).
If these companies lose money, it will tell everyone you cannot trust the banking system and to make adjustments. As stated on a number of occasions, everything to do with money, finance, and ultimately, the economy has to do with confidence. Without trust, systems are doomed.
Exodus From Banking
My guess is that businesses, if depositors at SVB take it on the lip, will pull excess cash from the banks. Companies will leave the bare minimum in there moving the rest to brokerage firms. There why can buy short term Treasuries, most likely T-bills, earn a bit of interest, and be protected.
Remember, the threshold on brokerage accounts is much higher ($5 million I believe).
This is how businesses adapt. Naturally, the impact upon the banking system would be catastrophic. It would also have serious implications on communities as well as the overall economy.
We are already suffering from deflationary money and a shortage of dollars. As showed in the Z1, the USD money supply grew an average of 1.03% from Q3 2008-Q4 2022. To contrast, just the population growth of the US was an average .75% annually. That means the money supply barely outpaced the population let alone accounting for further investment, technological advancements, and the need to finance dollar based contracts globally.
If excess cash left the banking industry, many small banks would be wiped out. This means they would not be there to provide loans. That is how US dollars are created, by commercial banks lending. With less lenders, especially dealing with local businesses, the problem only compounds.
This is what is at risk for the Biden Administration.
As always, the flow of capital tells the entire story. If money starts moving en mass, it could create severe problems.
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