> A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there.
This kind of assumes that the risk matrix of an executive is singularly indexed on the long term viability of their institution. But the short term gain of bad behavior is still in full effect. Bonuses for the years up to this crisis have already been paid and were probably inflated based on the banks over performance due to its riskier posture.
And the consequences have been softened. There's a very good chance that the people responsible here have had their guilt assuaged by the reduction in impact. They are probably less likely to become the kinds of pariah that they probably should because while we should always consider decisions in the context they are made, humans seem to always adjust their assessments to final consequences.
I'm in agreement that the decisions here on the part of the government are probably the wisest in this context. But this crisis does hint that perhaps we need to reconsider the structure of this system a bit.
Alternately, it assumes that the risk matrix of an executive also includes:
1. Their reputation. How much less likely is it that a board of directors would think twice before hiring them to be a steward of shareholders' assets?
2. Their egos. How much less likely is it that people will be willing to invest time delivering projects whose value can be wiped out by poor risk management in the same way that SVBs has?
1. Their reputation. How much less likely is it that a board of directors would think twice before hiring them to be a steward of shareholders' assets?
One member of the SVB c-suite was the CFO fr Lehman in the run up to that catastrophe. So, BOD don’t appear to care. They keep on hiring each other, making massive mistakes, but walking away with $$$$ in bonus money.
I probably shouldn't have used the word singularly. I think reputation and shame matter to these people to some extent. But as I indicated in my comment, I think this outcome dampens the consequences for those incentives as well.
The unintended consequences here are having a guarantee on uninsured deposits.
Most people are unaware they are loaning money to a bank when they open a bank account.
You've effectively said that bank deposits are now risk-free, meaning that the government is back-stopping 9.2 Trillion of deposits (40% of all deposits).
Can banks still provide a yield for these guaranteed deposits? Are they still able to loan out these deposits? What are the new capital requirements for these deposits, are depositors allow to take their money out when a bank run is happening?
Yeah, I agree. I think this a situation where the individual decisions mostly make sense. But when you add them up, you get a system that creates some questionable implications.
This kind of assumes that the risk matrix of an executive is singularly indexed on the long term viability of their institution. But the short term gain of bad behavior is still in full effect. Bonuses for the years up to this crisis have already been paid and were probably inflated based on the banks over performance due to its riskier posture.
And the consequences have been softened. There's a very good chance that the people responsible here have had their guilt assuaged by the reduction in impact. They are probably less likely to become the kinds of pariah that they probably should because while we should always consider decisions in the context they are made, humans seem to always adjust their assessments to final consequences.
I'm in agreement that the decisions here on the part of the government are probably the wisest in this context. But this crisis does hint that perhaps we need to reconsider the structure of this system a bit.