GSIB, SIPC and How to Protect Yourself!

Issue LVI

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Today’s Bullets:

• Protected by FDIC?

• What’s GSIB?

• and SIPC…?

• Sweeps and Excess SIPC

• Putting it all together

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Inspirational Tweet:

Jonesy @HedgeyeDJ

GSIB Global Systemically Important Banks You will be hearing this acronym alot in the coming days.

Good call, Jonesy, and spot on.

With all the action in the banking world this past week, we’re hearing a whole lot of acronyms being tossed around, namely GSIB, FDIC and SIPC.

But what the heck do they mean, why do you *need* to know, and most importantly, how can knowing all these help you and your family protect your hard-earned money and savings?

While there’re far more exciting things to talk about and focus on this week, like NCAA Final Four brackets and buzzer-beating bangers, there is nothing, and I mean nothing more important to your personal finances than what we’re going to cover today.

So, pull up a seat, turn off the TV, and let’s get through this quickly and simply, as always, shall we?

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🤑 Protected by FDIC?

We all witnessed the sudden and monumental collapse of Silicon Valley Bank (SVB) this past week. We saw how quickly the tide can turn and how banks with poor risk management can be left standing, tide-out, short-less.

I mean that both figuratively and factually, as any of you who read last week’s Informationist would know.

If you didn’t read that article or want to refresh on FDIC and what it covers, etc., you can that here:

🧠 SVB, the FDIC, and Are You Really ‘Insured’?

For my TL;DR crowd: the sequence of events went like this:

SVB bought US Treasuries with its reserves, those treasuries fell in value as the Fed launched interest rates on a rocket ship 🚀 trajectory this past year, and when depositors got word that SVB was sitting on massive un-hedged Treasury losses, they rushed to redeem their deposits and move cash elsewhere.

SVB couldn’t meet all the redemptions and collapsed under the weight of its own fractional reserve banking leverage.

A classic run on the bank.

Had SVB executives been more focused on a simple little thing called interest-rate risk, they would have hedged their US Treasuries with swaps to protect themselves, and thereby their depositors.

Because they were unhedged (no shorts), the tide went out (depositors asked for their money), and they were left standing—

you get the point.

But hey, the executives still sold their stock in time and paid themselves nice fat bonuses before the collapse, and the FED and US Treasury stepped in to make sure depositors were made whole and not bailed-in.

So all’s well that that ends well, right?

Right?

Yeah, no, not exactly.

Because for a few days there, it was questionable whether the depositors would be subject to a bail-in and lose any or all of their uninsured deposits.

If you’re wondering what bail-ins are, or want to review, I wrote an article recently all about them and the situation at Credit Suisse that you can find here:

Bank Bail-Ins: Can They Really Seize Your Deposits?

Bottom line: in a normal banking environment, when a bank fails, depositors are only protected for up to $250K of their cash deposits in the bank through FDIC insurance. Anything above that threshold is left unprotected and can be seized by the bank to help pay down debt or obligations.

The bail-in.

Now, because an SVB collapse was deemed systematically important during emergency meetings of the Fed and Treasury, all depositors were made whole for all deposits they had at SVB. Insured and uninsured.

The Treasury backstopped the whole bank.

Additionally, the Treasury opened a window where banks could secretly get loans for the full face value of their US Treasuries (regardless of where the Treasuries are trading in the market). Officially known as the Bank Term Funding Program or BTFP.

This BTFP adds liquidity in order to prevent more banks from collapsing.

Still, many investors are wondering if their own bank is safe. Would the Treasury step in and save them if their bank experienced a similar run and the handy BTFP didn’t help enough? Would they be protected for more than $250K, too? Or would they be subject to standard FDIC limits because they aren’t at a bank with a slew of venture capitalists and super-connected, ultra-important (startup, entrepreneurial) tech bros?

Good questions, and one of the reasons that many regional banks have experienced a sudden drawdown in deposits and the biggest banks in the nation have, in turn, seen a surge in deposits.

As reported by The Kobeissi Letter this week:

The Kobeissi Letter @KobeissiLetter

JUST IN: JP Morgan, Citigroup and other large financial institutions trying to accommodate customers wanting to move deposits quickly. In other words, regional banks are losing customers quickly. There is outsized risk with large deposits at regional banks. Large banks win.

Survival of the fittest? Or something else?

Yeah, something else. Something known as GSIB.

Let’s break that down next.