Honest Question - How Many of You Knew About FDIC Insurance?

[SamSwimmer]

There is plenty coming out about SVB's incompetence & extremely questionable actions (I'm being polite) prior to their collapse, but I have an honest question for folks on this board - How many of you knew about the $250k deposit insurance?

This isn't gotcha question - if you don't have a reason to know or aren't loosely tied to the financial industry, it's understandable. But 94% of SVB's depositors were over the limit. I don't want to see any employees of those companies not get paid, it's not their fault, but those depositors should have known better.

 

[-CarlHungus-]

I knew about it.

I mainly bank at Truist but have cash spaced out at Synchrony bank and brokered CDs . I was cash heavy recently for a number of reasons and paid attention to the $250k limit.

Our business though has to exceed the 250k limit though. There is probably a more sophisticated way to do it but we use a local bank and to make payroll have to keep over 250k in there.

 

[greengeezer]

I knew about the insurance, but I thought the insured amount was much lower. Like in the $100k range. I imagine the amount the government insures has risen over the years.

 

[greengeezer]

I knew about it.

I mainly bank at Truist

They recently took over one of the banks I use (BB&T). I don’t trust them. They use an uncomfortable looking font.

 

[-CarlHungus-]

They recently took over one of the banks I use (BB&T). I don’t trust them. They use an uncomfortable looking font.

Truist is just BB&T that purchased/merged with SunTrust.

 

[greengeezer]

Truist is just BB&T that purchased/merged with SunTrust.

I have banked at the same building for around 40 years. It has been Ronceverte National, One Valley, Seneca Trail, BB&T, and now Truist. I once jokingly told the bank president (a friend) that I wasn’t paying anymore for new checks because they changed the name every six months.

 

[SamSwimmer]

CNN is reporting Roku had $487 million of it's $1.9 billion in cash at SVB (26% of their cash & equivalents.) And Roku isn't alone. I'm trying to understand why those companies are being covered after the fact. Especially when the Feds are saying they'll cover SVB but likely not other banks going forward. It's not like this is some new insured limit that just got put in place.

 

[HerdandHokies]

I knew about it and I’d be surprised if anyone who watches the news and lived through the last major bank collapse doesn’t. Even if they don’t know the exact number.

My question is, what percent of those 94% were businesses? Businesses that have to make payroll, pay invoices, etc can’t be shuffling money around banks to stay under a limit.

 

[herdfan06]

I thought everyone and their mother knew about this, especially after the limit was increased to $250k in 2008.

 

[SamSwimmer]

I knew about it and I’d be surprised if anyone who watches the news and lived through the last major bank collapse doesn’t. Even if they don’t know the exact number.

My question is, what percent of those 94% were businesses? Businesses that have to make payroll, pay invoices, etc can’t be shuffling money around banks to stay under a limit.

So there aren't other options businesses could do (& should be doing) to prevent this very thing from happening? I'm willing to give some start-ups or small businesses the benefit of the doubt, but not these massive corps that clearly have the means & resources to prevent this from happening.

And frankly, if 94% of your accounts exceed this threshold, the bank isn't upholding their fiduciary duty (clearly.)

 

[-CarlHungus-]

I knew about it and I’d be surprised if anyone who watches the news and lived through the last major bank collapse doesn’t. Even if they don’t know the exact number.

My question is, what percent of those 94% were businesses? Businesses that have to make payroll, pay invoices, etc can’t be shuffling money around banks to stay under a limit.

Yes.

However, I believe there are sweep accounts that go in and out of treasures/checking and other services that can shuffle money around multiple banks daily in the background to minimize uni-bank exposure.

250K for a business is challenging, but keeping 7 figures in one bank seems like not a good plan. I wonder how many were over that million dollar mark.

 

[big_country90]

I have banked at the same building for around 40 years. It has been Ronceverte National, One Valley, Seneca Trail, BB&T, and now Truist. I once jokingly told the bank president (a friend) that I wasn’t paying anymore for new checks because they changed the name every six months.

Good people at that office.

 

[herdfan06]

Good people at that office.

Why aren't you at that office?

 

[greengeezer]

Why aren't you at that office?

He would have to change his name to “Little Country.” 😀

 

[big_country90]

Why aren't you at that office?

Well…primarily because it’s a couple hours from home.

 

[herdfan06]

He would have to change his name to “Little Country.” 😀

That's what his wife calls his...

 

[i am herdman]

Is it 250k per account? Or 250K per person at the bank?

250k is not a independtly wealthy sum of money even for an idvidual. For a medium business that would not be that much. For a large business that is nothing.

 

[HerdandHokies]

So there aren't other options businesses could do (& should be doing) to prevent this very thing from happening? I'm willing to give some start-ups or small businesses the benefit of the doubt, but not these massive corps that clearly have the means & resources to prevent this from happening.

And frankly, if 94% of your accounts exceed this threshold, the bank isn't upholding their fiduciary duty (clearly.)

I don’t know what the best banking practice is for a business. They’ve got to keep their money somewhere but you’d think there’d be, like, business centered banks that don’t leverage the money like this and expose themselves to this risk.

 

[herdfan06]

Is it 250k per account? Or 250K per person at the bank?

Answer

 

[i am herdman]

Answer

the answer is it is a gray area.

 

[greengeezer]

Speaking of banks, someone tried to make a withdrawal today at one of the local banks I use.

 

[herdfan06]

the answer is it is a gray area.

Looks like the blocks are fairly white on my end.

 

[Rock98Dog]

Fun fact about FDIC insurance - there is no time limit under which they operate for payment.

Legally they are only bound to pay, but they can wait a week or they can wait 100 years.

When things went to hell in 2008-09 I was working for Fifth Third. It was always a deposit driven bank. We were told relentlessly, we can turn every deposited dollar into $8 in loans - go get deposits. Well, when the collapse came they told us to get on the phone, call our customers and tell them to get their money out of our bank. We ran off multi million, non interest bearing, checking accounts. JP Morgan didn’t run them off, but you had to pay the bank to hold your money.

The reason for this is that banks pay in to the FDIC insurance fund based on their deposit levels. If they can’t lend the money back out, they are
Paying insurance premiums on dead money. This is why it’s interesting that the FDIC has an open calendar on when they have to pay claims.

 

[KyMUfan]

I knew about it and I’d be surprised if anyone who watches the news and lived through the last major bank collapse doesn’t. Even if they don’t know the exact number.

My question is, what percent of those 94% were businesses? Businesses that have to make payroll, pay invoices, etc can’t be shuffling money around banks to stay under a limit.

I answered this very question for you in another thread. There are ways around it. Overnight sweeps, collateral agreements, letters of credit, etc.

No. Every company, non-profit or government agency is aware of this exposure. It makes no difference how many companies banked at SVB. Here is an example of required financial statement disclosures related to this very issue.

"NOTE 12: CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At September 30, 2012 and December 31, 2011, the Company had $418,570 and $2,660,821 in excess of the FDIC insured limit, respectively."

There are hedges against this exposure - spreading excess cash around to different financial institutions, overnight repurchase agreements, collateralized accounts, etc.

I could go on but both the bank and the owners of these accounts had, or should have, knowledge of the level of exposure and the steps needed to limit such exposure.

 

[KyMUfan]

Fun fact about FDIC insurance - there is no time limit under which they operate for payment.

Legally they are only bound to pay, but they can wait a week or they can wait 100 years.

When things went to hell in 2008-09 I was working for Fifth Third. It was always a deposit driven bank. We were told relentlessly, we can turn every deposited dollar into $8 in loans - go get deposits. Well, when the collapse came they told us to get on the phone, call our customers and tell them to get their money out of our bank. We ran off multi million, non interest bearing, checking accounts. JP Morgan didn’t run them off, but you had to pay the bank to hold your money.

The reason for this is that banks pay in to the FDIC insurance fund based on their deposit levels. If they can’t lend the money back out, they are
Paying insurance premiums on dead money. This is why it’s interesting that the FDIC has an open calendar on when they have to pay claims.

While I agree with much of what you said the following is not correct.

We were told relentlessly, we can turn every deposited dollar into $8 in loans - go get deposits.

Loans to deposits can't be above 100% or you'd have an insolvency issue. With an 80% loan to deposit ratio you'd be able to turn $1 in deposits into $.80 in loans, not $8. I'm sure you were told that but that's simply not how a bank works.

 

[Rock98Dog]

It’s 100% not untrue if you understand capital ratios and leverage. For example, the current required Tier 1 capital ratio is 6.5%. The $8 in loans for every $1 in deposits puts you at 12% before reserve requirements on the loans.

In other words, a bank only needs $0.065 in available capital for every $1 in deposits. This leaves them $0.935 of every deposit dollar to invest. You never want to be at the regulatory minimum, so most banks try to stay around 8% at the
Minimum, not too much higher because that adversely impacts ROA.

Loan to deposit ratios are typically around 1:1 to 1.25:1 for most banks. The reason they are that low is because there just isn’t enough loan business on a macro level. So they have to use the excess capital to buy treasuries and bonds, which are lower yielding and suppress ROI. They do also balance risk, but higher yielding loans are always the preference.

Edit - here’s an article.

Loan to deposit ratios by region - Average individual bank ratios; information from 524 banks

www.thebanker.com

Understand if you look at a “US average” it is heavily influenced by the money center banks like JP Morgan, which has a 44% LTD ratio. When you look at regional banks, many, if not most, exceed 1:1.

 

[herdfan06]

It’s 100% not untrue if you understand capital ratios and leverage. For example, the current required Tier 1 capital ratio is 6.5%. The $8 in loans for every $1 in deposits puts you at 8%.

In other words, a bank only needs $0.065 in available capital for every $1 in deposits. This leaves them $0.935 of every deposit dollar to invest. You never want to be at the regulatory minimum, so most banks try to stay around 8% at the
Minimum, not too much higher because that adversely impacts ROA.

Loan to deposit ratios are typically around 1:1 to 1.25:1 for most banks. The reason they are that low is because there just isn’t enough loan business on a macro level. So they have to use the excess capital to buy treasuries and bonds, which are lower yielding and suppress ROI. They do also balance risk, but higher yielding loans are always the preference.

Don't sit there and pretend that you are an executive at a bank.

 

[KyMUfan]

Straight from the fed. And the reference used is the same % as I used in my example - 80%.

Banking Trends: The Rise in Loan-to-Deposit Ratios: Is 80 the New 60?

Economic Insights — Why has a common sign of liquidity risk risen among small banks? James DiSalvo and Ryan Johnston examine whether the trend poses a risk to the sector.

www.philadelphiafed.org

Banking Trends: The Rise in Loan-to-Deposit Ratios: Is 80 the New 60?

 

[KyMUfan]

When you look at regional banks, many, if not most, exceed 1:1.

Again, straight from the Fed.

Banks See Surging Deposits, Tepid Loans during Pandemic | St. Louis Fed

A surge in deposits in 2020 has created excess liquidity for banks. They are also facing tepid loan activity and lower yields on other types of investments.

www.stlouisfed.org

"Loan demand has not kept up with the increase in deposits, causing the industry’s loan-to-deposit ratio to sink from about 80% at year-end 2019 to 63% in mid-2021. Community banks have fared a little better: The loan-to-deposit ratio fell from 85% at year-end 2019 to 74% at mid-year 2021. Community banks typically aim for an 80% to 90% loan-to-deposit ratio because yields on loans exceed those of other assets, like investment securities."

 

[KyMUfan]

Lastly...

This leaves them $0.935 of every deposit dollar to invest.

If you have $0.935 of every deposit dollar to invest and you invest 100% of that amount in loans, you have a loan to deposit ratio of 93.5%.

LDR = Total Loans / Total Deposits

How to Calculate the Loan to Deposit Ratio, with Average LDR of the Big Banks

Deposits continue as the lifeblood of banks, and loans help generate income for the bank. The more deposits, the more loans, which leads to higher income. After the Great Financial Crisis (GFC) from 2007 to 2009, banks received much focus, and the meltdown caused bankruptcies and many banks to...

einvestingforbeginners.com

$0.935÷$1.00 = .935 or 93.5%. However this only factors in the reserve requirement and not the costs to close and administer the loan nor allowances for loan losses, which is typically around 1%.

 

[KyMUfan]

Don't sit there and pretend that you are an executive at a bank.

Prove me wrong.

 

[HerdandHokies]

Is the confusion here that KY is saying a bank can loan out .90 for every dollar in deposits it takes, while rockdog is saying a bank can loan out $9 for every $1 it retains?

Edit: because those are both roughly true. If a bank takes in $100 it can loan out $90 (or whatever the percentage is.) It shows $100 in deposits but only has $10 on hand. So KY’s way of saying it seems to be the way it’s said in the industry, but I can see someone understanding that as the bank loaning out 9x the money it has.

 

[herdfan06]

Prove me wrong.

I was responding to @Rock98Dog

 

[KyMUfan]

Is the confusion here that KY is saying a bank can loan out .90 for every dollar in deposits it takes, while rockdog is saying a bank can loan out $9 for every $1 it retains?

No confusion on my end. How can a bank loan out more money than they have in deposits to loan out?

You can leverage a bank's capital, but you can't leverage that same bank's deposits. I have referenced two separate Federal Reserve Banks' statements on loan to deposits and also presented how to calculate it.

 

[KyMUfan]

I was responding to @Rock98Dog

I know but that could have been interpreted in one of two ways. Unfortunately the loan to deposit ratio can only be under 100% to avoid liquidity issues for a bank. One of us is wrong. Someone, anyone, prove me wrong.

Interestingly SVB bank had a loan to deposit ratio of only around 41% which ordinarily would signify more liquidity to withstand a bank run but it couldn't.

 

[HerdandHokies]

I know but that could have been interpreted in one of two ways. Unfortunately the loan to deposit ratio can only be under 100% to avoid liquidity issues for a bank. One of us is wrong. Someone, anyone, prove me wrong.

Interestingly SVB bank had a loan to deposit ratio of only around 41% which ordinarily would signify more liquidity to withstand a bank run but it couldn't.

Check the edit I made to my post because I think I see what rockdog misunderstood.

Also, does that imply that 59% of SVB’s deposits were withdrawn in about 2 days? Because that is wild.

 

[Rock98Dog]

You are 100% wrong. I knew you would go look up the US average, which is why I cautioned against it. The top 3 banks in the country have over 40% of the deposits, the top 15 have over 74%. There are over 3,000 banks. So when I say “most banks are 1.0-1.25 LTD ratio” I am removing the bias of things like JP Morgan being at 44% LTD with over 16% of all US deposits. The money center banks are a different animal and make their money in different ways than regional banks.

The general rule is the smaller the bank, the higher the ratio. This is because revenue sources expand as the size increases. Money Center, Super Regional, Regional, Community, Local. Follow the trail, or even pick a bank that has grown over time and look at the trends in the ratio.

You seem to think I haven’t been following this closely for 30 years. Like I worked for 5th 3rd from 2004 to 2010 and didn’t watch the ratio drop from 1.1 to 0.9 to its current 0.6 and they grew from under $100 billion to where they are now. I didn’t work at Huntington Bank from 1999-2004 when they were at a 1.25 and have grown and stepped down to sub 1.0 in 2018 and now down to .77.

Last stop was People’s Bank which was only a $1.5 billion bank when I started in 2010, $4 billion when I left in 2015, and getting ready to break $10 billion when their Limestone acquisition closes in Q2. Ratio has gone from 1.1 to currently 0.82 as they have developed their insurance business, investment business, and leasing businesses they bought.

Until a bank is big enough to generate significant fee income from insurance, investments services, derivatives, etc. they have to stay at or above the 1:1 ratio to meet ROA and ROE expectations. Since most banks are too small to back those activities they fall into this category.

Finding a link and understanding what you’re reading are not the same thing.

 

[Rock98Dog]

Do this math:

If the top 15 banks control 74% of the deposits and have a loan to deposit ratio of 50%, what is the average loan to deposit ration of the other 3,000 banks is the national average is 62%?

 

[KyMUfan]

Check the edit I made to my post because I think I see what rockdog misunderstood.

Yes, I did and I understand the confusion now. You did a good job breaking that down. However that is incorrect.

Let's say you have $10,000 deposited in a bank. With a 80% loan to deposit ratio, $8k has been loaned to others. The 20% that remains is a reserve that can't be leveraged. It is hard to explain as well as understand.

Also, does that imply that 59% of SVB’s deposits were withdrawn in about 2 days? Because that is wild.

Probably not. Let's say the bank will invest 80% of its customers' deposits in either loans, Treasuries or securities. They bank needs to keep 20% of those deposits in cash to cover its reserve requirements, its cash operating needs and cash for its tellers and vaults.

Of the remaining 80%, in SVB's case half of that was invested in loans and the other half likely in securities or Treasuries. Loans, securities and Treasuries can be sold and converted to cash, however that can take days in the case of securities and Treasuries and weeks or even months for loans.

So if as little as one or two large depositors withdrew their funds (remember it only takes 20% of total deposits) it could cause a liquidity crisis like SVB experienced. They didn't have the available funds, nor could they get immediate access to other funds or available borrowings, to transfer the requested funds.

There is not enough cash printed for every deposit holder in the US to go to a bank to withdraw at the same time. Think about that. The whole system would collapse if that happened.

 

[KyMUfan]

You are 100% wrong. I knew you would go look up the US average, which is why I cautioned against it. The top 3 banks in the country have over 40% of the deposits, the top 15 have over 74%. There are over 3,000 banks. So when I say “most banks are 1.0-1.25 LTD ratio” I am removing the bias of things like JP Morgan being at 44% LTD with over 16% of all US deposits. The money center banks are a different animal and make their money in different ways than regional banks.

The general rule is the smaller the bank, the higher the ratio. This is because revenue sources expand as the size increases. Money Center, Super Regional, Regional, Community, Local. Follow the trail, or even pick a bank that has grown over time and look at the trends in the ratio.

You seem to think I haven’t been following this closely for 30 years. Like I worked for 5th 3rd from 2004 to 2010 and didn’t watch the ratio drop from 1.1 to 0.9 to its current 0.6 and they grew from under $100 billion to where they are now. I didn’t work at Huntington Bank from 1999-2004 when they were at a 1.25 and have grown and stepped down to sub 1.0 in 2018 and now down to .77.

Last stop was People’s Bank which was only a $1.5 billion bank when I started in 2010, $4 billion when I left in 2015, and getting ready to break $10 billion when their Limestone acquisition closes in Q2. Ratio has gone from 1.1 to currently 0.82 as they have developed their insurance business, investment business, and leasing businesses they bought.

Until a bank is big enough to generate significant fee income from insurance, investments services, derivatives, etc. they have to stay at or above the 1:1 ratio to meet ROA and ROE expectations. Since most banks are too small to back those activities they fall into this category.

Finding a link and understanding what you’re reading are not the same thing.

Can't keep a job??? Maybe if you understood loan to deposits you'd still be at one of those stops...