FDIC Takes over Silicon Valley Bank
fdic.gov
fdic.gov
"- In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021.
- As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital. As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio.
- 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.
- The issue is that as the Fed raised interest rates in 2022 and continued to do so through 2023, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield.
- This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.
- However, yesterday afternoon, SVB announced that they had sold $21bn of their Available For Sale (AFS) securities at a $1.8bn loss, and were raising another $2.25bn in equity and debt. This came as a surprise to investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio."
[1] - https://twitter.com/jamiequint/status/1633956163565002752
But that's exactly the problem. With higher interest rates, those deposits will be looking for a higher deposit rate. With their assets tied up in low-paying long-term bonds, SVB will not be able to pay that higher rate.
It would only work out "eventually", if the depositors would accept a below-market rate until the bonds matured.
EDIT: This is indeed a solvency issue, not a liquidity issue, as also pointed out below.
They were stuck with assets earning <2% for 10+ years, meanwhile depositors were demanding higher returns (else they would put their money in other banks, in 6m tbills, 10yr treasuries, etc.. all of which paid a lot more).
And thus, "it's not a solvency issue as long as depositors are stupid and don't realize they can get more $$$ from other banks" ends up being quite misleading
The markets can stay irrational longer than you can remain solvent.
If a firm's assets will eventually mature and be worth more than the current liabilities, then a private rescuer can make a lot of money by bailing them out. If the assets will never recover or pay out, then someone will be holding the bag.
Mark to market is real. If you need liquidity immediately from the market, whether through a rescuer or otherwise, you do your accounting using that value and in SVB's case they were insolvent.
There are some possibilities. Perhaps there was no single buyer that also had the (potentially hundreds of billions of dollars of) liquidity you would need to rescue the bank. Perhaps there were buyers who could come up with that liquidity reasonably quickly (on the order of a week or a month) but certainly not in the 48 hours it took for the bank to be completely vaporized. SVB was intending on raising liquidity from the market, and just the act of announcing their intent to do so triggered the bank run in the first place.
Really it is not so obvious to discern between them at the moment that the crisis is at its worst.
> the value of SVB’s MBS plummeted.
How much 'plummeting' did they do in numerical terms? Something with those kinds of yields doesn't sound like it ought to be a super risky asset. The mortgage lending market tightened up a lot after the great recession...right?
Then Freddie packed my loan and sold it to others for something likely to be below 1.7%...
Not a few years ago. T-Bills were paying like 0.1% in 2021[1]
[1] https://home.treasury.gov/resource-center/data-chart-center/...
To make things more straightforward, let's just compress it to a 1-year time frame vs a 30-day bond. So a $100 MBS at 1.5% would pay you $101.50 if you held it for 1 year. If you have $100 in deposits and a $100 MBS bond, you're "solvent". But what happens if after 30 days, your depositor asks for his $100 back? You either need to sell your MBS or find other money to pay them.
If you try to sell the MBS to pay that $100 deposit liability and interest rates are about the same as they were when you bought it, you'd likely get around $100 and things are okay. If however, rates have spiked since then (like they have here), investors can either buy your bond that pays 1.5% or they can buy a new issuance 1-year bond paying 4% or 5%, or perhaps a 30-day bond paying 1.5%. So you need to give them a discount in order to sell your bond -- in this case it might be upwards of 30% or 40%.
So if you sell your MBS, you'll only get $60 or $70 for it -- leaving you a huge shortfall that you need to makeup from your other reserves. If you could convince your depositor to leave his money in the bank until that bond matures, you'd be completely fine -- but the timing mismatch and interest rate spike just kills the bank.
You answered your own question. People will very likely get most, or even all, of their money back, just after the gov is able to offload some of the assets. Problem is, if you're a startup, you can't just wait a few months for the cash to make payroll.
But why didn't they just hold money at the Fed given that they are a bank and they can?
It's literally splitting hairs between what the Fed Fund Rate is and what they got on their MBS.
Explainer post says end of 2021 they made that trade, in March the Fed raised the Fed Fund Rate to 0.20%, and by April it was 0.77%.
Had they waited just 5 months they'd have got a better Risk adjusted return by just keeping the money at the Fed
They expanded in some areas by buying other small community banks, specifically in areas where there was a big increase in income in the local area (from mineral rights, etc).
The smaller banks that they bought were in a situation where suddenly they had large amounts of cash incoming, and customers who were paying off / not taking out loans like they used to.
They didn’t have the reach (mostly confined to a small rural region) to use that cash to give out loans elsewhere so they looked to merge or be bought by someone who did.
Until I heard about those banks I hadn’t considered “too much money” was a problem.
That said, I think historically many banks can easily avoid the "too much money" problem by setting the interest they pay on deposits to be low, and maybe even negative.
Of course if you dump it all into unwise investments, that’s a problem.
(Yes, this is a gross over-simplification)
On my balance sheet, money I deposit is an asset: The bank owes me.
On the bank's balance sheet, money I deposit is a liability: The bank owes me.
https://www.federalreserve.gov/releases/h8/current/
Note that cash is a single line item. The banks could get that from other sources, such as loan repayments.
Individual investors don't even have that option and also have inflation to deal with. Banks don't.
That money isn’t doing anything to cover those expenses if some of it isn’t “working” to produce returns.
It’s not that people are greedily chasing returns, it’s that they don’t want to lose significant chunks of their capital due to loss of value.
Real rates were negative for 10+ years (and still are on the short end!). That's everyone paying for trillions of dollars of wars, speculation and bad investments. The bill has to be paid.
But as mentioned, none of this applies to intermediaries like banks. They aren't forced to take on any risk.
They sure were, and fortunately humanity took that free money and invested it in sustainable energy technology so that at least we got a bunch of infrastructure out of it.
Oh actually wait we just had austerity for some reason.
In double entry accounting, you mark any changes with both a debit and a credit. This allows you to see not only why one account changes (a single entry), but also the cause of that change (the second entry).
Double-entry bookkeeping makes sense once you understand the the invariants you have to keep, and why you need to track 5 different types of books. Some of those accounts work in opposite ways, such that credit to one is a debit to another.
It all works out and is essential for "debugging" problems (when money appears to go missing -- or worse, materializes and you don't know why). But there's some counterintuitive language and it'll mess you up until you accept it.
The answer usually being some variation of "Because that's the way the Financial Accounting Standards Board says to do it."
However single entry bookkeeping is FRAUD prone. Just change one number and your theft is hard to track down!
That is why the adoption of double entry bookkeeping was critical for allowing commercial institutions to outgrow a size where owners could individually trust all who were working for them with access to money.
The ledgers are not the source of truth. No: this is a journaled filesystem; the transaction log is the ultimate source of truth. When you detect faults you recover from the journal, if something isn't completely written into the journal then it does not exist. The zero-sum property exists on every individual transaction and each transaction has an ID and the ledgers point at these IDs for auditing purposes.
So why have the zero sum property? Well, for one thing, it creates a uniform access model, I can't just credit my account, I have to debit someone else's account and they can have rules that might prohibit me from doing so. By carefully setting up these accounts you can also do what's sometimes called "behavior anomaly detection."
So for instance normal financial cards kind of work by opening up your entire wallet to a cash register and asking the cash register to pull out exactly the amount that you owe, understandably this might not be desirable if you are tracking some in-game-gold transactions in an internet game. You can get as elaborate as you want but think for example of a quick-consistency-check rule saying that “accounts starting 4xxx (player balances) never transfer directly to each other, instead users are expected to put the exact sum of money plus a little 5% padding into one of their 5xxx accounts and then give someone else a token permitting them to withdraw from that account." Stuff like that. A developer tries to code something up that doesn't go through this process and runs into errors in testing and has to conform their code’s behavior to the less risky process so that nobody is ever opening their entire wallet to a griefer.
Double entry basically just means that for every transaction on your books, you are showing where the money/asset/liability came from and/or where it's going. If you enter that you paid $100 for the AWS bill, you need to indicate from what account that money came from. So you would debit AWS Expense and you would credit your Wells Fargo Checking Account. With modern software, this basically just amounts to entering the expense and specifying which account it came from.
Doble entry accounting is very similar to a checksum in that sense. It provides error detection. If you make a mistake in one of those two places, you will know immediately. As opposed to single entry, where you can carry that error indefinitely until somehow you catch it.
Wikipedia tells us that double-entry bookkeeping is first attested in the late 13th century.
But commercial institutions larger than the personal-trust threshold are attested as far back as written history goes.
[citation needed]? I don't necessarily doubt you but I'd like to see an example. The only thing I can really think of would be governments, but that was definitely personal trust (mixed with a little bit of threat of summary execution if the king didn't like you).
The smallest amount of tribute listed there is more than five and a half tons of silver. If we make the assumption that each of these districts was handled by a different person, we already have a staff of 20 people plus the king.
(Not to mention, the large majority of Achaemenid taxation was not collected in this form. It was collected in kind and stored in an empire-wide system of distributed warehouses. I assume metal tribute was centralized. If you think the warehouse administrators - who inventory the goods and are responsible for making payments out of them - are "responsible for money", you're probably adding at least a couple dozen more people.)
By contrast, https://www.theofficialboard.com/org-chart/exxonmobil suggests that the top two levels (including the board) of Exxon total 26 people, or (excluding the board as a level, but still including the CEO) 24 people. The CEO has 13 direct reports.
So if the argument is that ancient kingdoms were below the personal trust threshold because the king had a low - and therefore manageably trustworthy - number of direct reports, it appears to be the case that our largest corporations today are also comfortably below the personal trust threshold, so there was never any need to exceed the threshold and in fact we never have.
(This isn't quite an apples-to-apples comparison; maybe there are 20 tribute administrators who report to a high overseer of tribute who reports to the king. Maybe each tribute administrator is one of five reporting to a low overseer of tribute, the four low overseers report to a high overseer, and he reports to the king. I don't know. How many employees do you think Exxon has who are directly responsible for submitting revenue totals in excess of three million dollars?)
On the other hand, if we think Exxon is beyond the personal trust threshold by virtue of its geographic extent (huge!), or its total number of employees (huge!), or its total number of employees touching money with the potential opportunity to steal that money (still huge!)... I think we have to say the same thing about ancient palaces, and really about ancient temples. A temple might "only" employ a few hundred people, but that's more people than you can personally trust. An important temple employed a few thousand people.
In a business I hand you my money and trust that you will hand me back my profits.
A ancient government put someone in charge and demanded tribute. Failure to produce tribute resulted in an army showing up to collect tribute. It was so common as to be expected that the administrator, called a satrap, would collect excess tribute and live a lavish lifestyle. The king sent spies to root out the worst of the abuse, but it was an uphill battle.
Governments can be run this way because efficiency is not particularly essential to their profitability. But efficiency is required for commercial enterprises. It is not enough to collect money and let your subordinates enrich themselves. You want to track all the money and not let your subordinates cheat the enterprise to their personal profit.
> But efficiency is required for commercial enterprises. It is not enough to collect money and let your subordinates enrich themselves. You want to track all the money and not let your subordinates cheat the enterprise to their personal profit.
The first two sentences are obviously false; you want to track all the money, but you have no particular need to do so as long as some of the money is making its way to you.
But to be fair he did pretty much the same when I tried to explain programming.
Always important to step outside your software bubble once and a while.
OTOH, once you have double-entry bookkeeping in your brain, you won't want to go back. I now feel that, from the perspective of a business or consumer, money is never created or destroyed, it only moves between accounts.
Double-entry bookkeeping is creating of an audit-trail/error-evident data store; which is the purpose of the apparent duplication. But it can be viewed as a view of dataset reflecting a single source of truth, that documents value flows; every movement of value has a source and a sink, and the amount that moves from the source must equal the amount that moves to the sink. Losing the redundancy that allows error-checking of records, you could view each accounting transaction as a triple of (source, sink, amount).
You couldn't do bookkeping with actual books that way, and historically this way makes sense. Nor is it likely that the accountants are going to rethink their field from the ground up for the convenience of programmers.
That is actually how it works, if you don't have "flows" you don't have accounting postings and if you have to fix an error you redo the postings from the flows. In this sense I would say that the "flows" are the source of truth.
Now, on the other hand, it is especially designed to account correctly for that amount in order to keep your accounts correct and balanced. It is be much easier to lose track of things with single-entry accounting.
If you were accounting with pen and paper, you would write the transaction amount twice — positive in one column and negative in another. This maintains the invariant that money cannot be created or destroyed.
In terms of an abstract data model, though, each transaction is best thought of as a flow, or a weighted arrow. It has one amount and two ends: a source and a destination. The "double" in "double-entry" really just means that the arrow has two ends. Obviously every arrow has to have a head and a tail — it doesn't make sense for there to be no source or no destination.
The credit vs. debit thing confuses people a lot, and in my opinion is a red herring. If I could wave a magic wand, I would delete the words "credit" and "debit" from accounting because they are hopelessly inconsistent.
All you have to do is think of the conservation of money like the conservation of mass — when it moves, it leaves one place and arrives at another. The moment I stopped using the words "credit" and "debit", my understanding of accounting went from "I have no idea what I'm doing" to "Everything is intuitively obvious."
And if you wonder, if money cannot be created or destroyed, how does a monetary system handle the population tripling over the past 50 years?
The answer is national debt. The US national debt is just an artifact of this double entry bookkeeping. In order for there to be +money in the economy for the ever-growing number of citizens to do commerce with, the treasury incurs on itself -money. That's national debt.
The corollary then, if the US ever pays back all of its national debt, the economy will crash because there just aren't cash available for people to do commerce with. A +90trillion on the government balance sheet equals a -90trillion on the private sector balance sheet.
If the private banks have conjured up 100x the monetary base in 1970, then when the population doubles by 2020, the banks cannot multiply further up to 200x. The treasury has to expand the base while the banks keep their multiplier fairly constant.
There is ONE special actor (in the US) that can create money out of the thin air: the Federal Reserve.
It alone can "buy" securities by crediting banks with money created out of nothing. Banks simply see a transaction with a dollar amount on their accounts within the Federal Reserve, and that's it. The money just appears.
The invariant "money can't be created or destroyed" holds for everybody else, including individual banks.
> The answer is national debt.
That's completely incorrect. The Federal Reserve can arbitrarily create (or destroy) money even if the national debt goes away entirely.
Saying that the Fed can arbitrarily create and destroy money misses the point, that they then have to buy SOMETHING with those money, and there are strict rules about what they can buy, and it just happens that the Treasury controls the supply of the primary asset class that the Fed is allowed to buy. Once you clear out all the dance and ceremony, you arrive at the conclusion that the Treasury issues new money by issuing new securities.
That's true, simply because they're the most convenient way to manipulate the monetary supply. Not much else is readily available in the volumes needed.
But they are not _essential_.
> Saying that the Fed can arbitrarily create and destroy money misses the point, that they then have to buy SOMETHING with those money, and there are strict rules about what they can buy
Sure, the invariant: "money goes out, asset goes in" holds.
But they can buy quite a lot of different securities if needed. E.g. the Fed directly bought about $3T of MBS: https://www.newyorkfed.org/markets/programs-archive/large-sc...
Also, I would say transactions are actually “multi-arrows” since there can be multiple sources and/or multiple destinations. A Bitcoin transaction captures this structure more or less perfectly.
There is a reason why planes use 3+ CPUs running the same code, or why Google runs more than just one cluster of search.
In essence you are just recording transactions with source and destination accounts and the amount. And at least in principle you could just log all transactions in this way without any redundant information. If you insist on making the change to each account more obvious, then you will have to record the amount twice, once for each account, but if you are doing the accounting with a computer, then I would guess that you always just record the transaction and only show the amount twice with different signs for the two involved accounts. Or does bookkeeping for some weird reasons really record each amount twice?
There is a surprisingly common reason, but it isn't weird. Consider a paycheck. You have income, but then you split that up. Some pays for insurance premiums, some is withheld for taxes, some may be contributed to a retirement account, and some is deposited into a bank account. Earnings is a credit to an income account, but everything else is a debit to some other account. The total debits equal the total credits, but each credit and debit must necessarily be a separate entry, because they all affect different accounts.
That's equally true in programming. The problem is that it only helps you debug problems that it created or participated in...
The difference in accounting is that it's not "two entries for the same thing". It's a credit and debit entry. It's a source and a target entry. It's two different entries for two different things, even though some of the details (like the transaction that they actually relate to) will be shared.
(And they're treated as separate "rows", rather than as additional columns on a single row, because it's a many-to-many relationship. Very database-designy!)
Edit: maybe I wasn't clear and should have said "between" banks. Synchrony bank will give you 4% in a _savings_ account (https://www.synchronybank.com/banking/high-yield-savings/?UI...) while my local credit union and many big banks (ex: bank of America are at 0.01%) are still effectively 0%
In the past (<2008), cash accounts (savings/cds/etc) I remember there being a %1 or so between banks, but these days its huge.
That's really the big reason why savings rates vary so much between banks, if you have a bunch of consumer credit lines then high savings rates make sense, if you have a bunch of lower fixed-rate collateralized loans then you can't get away with lowering your spread so much.
There's other epicycles to this too. For example, a bank can just "buy" deposits through a correspondent bank (a bank-for-banks). So the direct connection between your kind of borrowing and kind of lending, particularly when its consumer / credit card stuff, can be tenuous. In SVB's case, though, all of the stuff happened in a tight echo chamber ecosystem -- SVB got deposits from tech cos, who got money from VCs, who were working off of capital call LOCs from SVB. So your observation is germane.
But that does not reflect risk.
For instance, now they take those $1m in cash and use them to make risky loans or investments. At face value the balance sheet is the same because they still have $1m in asset... except that the risk that this asset turns into eff all has significantly increased.
Theoretically they had assets, but most of them were just internal magic beans.
Until we all can self-bank!
Money for banks is what raw material is for manufacturing. What they are doing is risk management (analyzing risk, packaging risk, selling it, buying it).
The primary business of a bank is borrowing short and lending long - where short and long refer to the holding time: i.e. taking demand or short-duration term deposits and making mortgage, car and other types of loans.
If you do this badly, you can lose money due to duration risk (you might end up paying more on your demand deposits than your mortgage book is bringing in), but you also have liquidity risks because your depositors can ask for those deposits back faster than you unwind your lending.
If you have both of these occurring at the same time, you're then in severe difficulty, because the only way to repay your depositors is by borrowing money ... which is going to be harder if you look unprofitable ... and that very borrowing can exacerbate the perception of a bank in trouble.
That's basically what happened here.
Do they? Reserve requirements are almost non-existent. A better way to put it is that banks pretty much have a state-granted privilege for creating money and in the form of loans.
Banks create money from nothing to lend out:
> Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.
> This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.
* https://www.bankofengland.co.uk/explainers/how-is-money-crea...
> This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Money is a psychological construct of humans to facilitate trade and the exchange of goods and services. Some societies don't (didn't) even have money/currency: everyone kept a mental 'tally' of who gave or took things, and there were social expectations of giving "gifts" for repayment. Physical tokens (bones, shells, gold, paper, etc) came later.
When you decrease the reserve requirement, you're unlocking reserves that were previously locked up to back your deposits so that they can be loaned out to other customers, who will then promptly either directly or indirectly end up depositing their loaned amount into the banking system again, where the part that remains after the reserve requirement once again gets loaned out, deposited back in, etc.
In effect, because you're making this money go around, you're increasing the total supply of money, because these deposits are the money supply, and there can and often is more than a $1 net increase in overall deposits for each $1 deposited with a bank. Another way to state it is like so: you deposit $1, bank loans out $0.90, someone else deposits that $0.90, their bank loans out $0.81, so on and so forth for $10 of net deposit generation for a $1 initial deposit at 10% reserves held.
Of course, individual banks can elect to lock up more reserves than necessary, which would negate this effect.
This primer from the Bank of England is very clear: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
This says otherwise.
https://fred.stlouisfed.org/series/TOTRESNS
Lots more real evidence here https://fred.stlouisfed.org/categories/123
And in Canada, Australia, etc, they are zero:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
It's not like banks suddenly loan out all the money. The Fed page has a FAQ and you can look up related papers.
From the FAQ: "For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework."
People see the change, which is a good move for good reasons, and flip out, just like goldbug times or when CPI get adjusted and so on. A simple way to look at it for a long time there has been a idea battle between what's called endogenous and exogenous money creation (somewhat overview of the debate [1]), and over the past 50 years, most central banking systems have evolved as market needs evolved, to allow banks to lend beyond reserve requirements as long as they soon replenish, which was done via overnight lending windows through central banks. The practical effect is there has not been a "reserve requirement" except in name only for decades. Banks can lend whatever they want, and only have to borrow back to the old requirement which is simply an inefficiency.
This is summed up in one sentence on the Wikipedia article on reserve requirements as "Under this view, reserves therefore impose no constraints, as the deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth" [2]
Under the new system, the Fed changed other rates to account for this bookkeeping trick, with the same net effect on the banking system, but under simpler and more transparent accounting. They're not idiots.
So, since this was the reality of banking, the FED changed how things are tallied. Just like when CPI changed some terms to handle changes in reality, changes that were well documented, for good reason, people not reading carefully got upset and were sure they got cheated somehow.
So setting the old rate to zero and adopting the new methods for monetary control are the same pattern: terms change, in practice things are actually better off, but people used to the old term are upset and mischaracterize it as some a sign of financial calamity or underhandedness.
It's not. When people dig this out during an unrelated bank issue as some smoking gun it's worth stopping the nonsense in it's tracks in the same vein as COVID or climate or goldbug nonsense.
[1] https://www.sciencedirect.com/science/article/pii/S109094431...
In fact, reserve requirements became meaningless because banks had (and continue to have) so much more in reserves than they were ever required to have under the prior system.
If banks choose to keep lots of reserves (because you’re paying interest on them), it’s hard to change the willingness of banks to lend by changing the reserve requirement, right?
In economic terms, the supply of reserves is meeting the demand curve for reserves in an inelastic region.
So the Fed decided to announce a new approach; the so-called “ample reserves regime” where short term interest rate control would be achieved by administered rates rather than by the reserve requirements of the “limited reserves regime” that went before.
If this sounds very far from the quotidian business of deposit taking and loan making: that’s because it is.
Try this thought experiment. You and I are in a bar. We order drinks but oh no the bar's card machine is down and you don't have cash. No problem I'll lend you a tenner.
1) Am I a bank?
2) Did I first contact the state to check it was ok to create money in the form of a loan to you?
I go back to the bar on another day on my own. Oh no! Their card machine is down again! This time I don't have cash on me. No problem the barman sees me all the time I can have the drink this time and pay up when I next get there and either have cash or their card machine is working.
3) Are they a bank?
4) Did they first contact the state to check it was ok to create money in the form of a loan to me?
The answer to all these questions is obviously no. Credit is created throughout the economy at all levels and it is not a special function perculiar to banks.
A better example would be if you were in the bar alone, and had no money, and instead just wrote an IOU on a bit of paper with your contact details. If we lived in a mythical 100% trustful utopia, then the barman would just accept this as money and so would anyone else in future who the barman needed to pay for anything. But we obviously don't live in such a society so unfortunately no, not anyone can just create money!
The explainer videos I have seen are wildly wrong. I learned this stuff by reading the Basel accords [2], working with banking regulators and central bankers, working on banks' capital reserve models etc. That is to say I know how this actually works because I have been inside the sausage-making process for good or ill - I didn't learn it second-hand from someone who probably also learned it second-hand which is the feel I get from these videos.
Almost any time you see someone "explain" fractional reserve banking it is about 99% probably total bullshit. It's got to the point where "fractional reserve" is almost a trigger phrase for me - I know when I hear it that it is highly likely the speaker doesn't know what they are talking about. Almost like when you hear the word "fiat currency" you know it's very likely someone is going to try to shill you some crypto. An explanation which is not nonsense is here. [3] Fractional reserve banking means the bank doesn't need to keep the full amount of deposits in reserve, but can use some percentage to make loans. These loans are assets the bank has, but as with the example I gave above where you lend to a friend, no additional money is created in this process and when a bank does it, it's not fundamentally any different.
[1] You can find the definitions of M1 and M2 money and a good explanation of what's included in the definition of "money" here https://www.investopedia.com/terms/m/moneysupply.asp
[2] Which are not secret by the way - you don't have to be initiated into the templars or something to understand them. They are boring as all hell to read but otherwise reasonably understandable with a little bit of background https://www.bis.org/basel_framework/
[3] https://www.investopedia.com/terms/f/fractionalreservebankin...
Yes, it creates credit that people think is money. I suspect that's a big problem with it. People think their money is in the bank. Instead the bank is just extending them some credit that they can pass on to others when they "purchase" something.
When a bank gives someone a loan M1/M2 increases (unlike in your loan-between-friends example). The increase in "currency in circulation plus deposits" is the very thing that those numbers try to measure.
You can look at it either way; or indeed you can take a third view, the fractional reserve theory of money, which suggests that the banking system as a whole creates money in aggregate, but not individual banks.
All of these are theories with their adherents and none has yet been proven right or wrong. The only wrong position is a failure to acknowledge that discussion is still open on this point, or to believe that these are anything other than macroeconomic models.
> The only wrong position is a failure to acknowledge that discussion is still open on this point
Saying that bank lending doesn't increase M1/M2 money supply is wrong. I don't think that discussion is still open on that. It's just how those things are defined. That's the only thing that I asserted.
Right. That is the basic definition of the financial intermediation theory of money. It's actually a predominant view in the literature: for example, the Diamond-Dybvig model is based on the assumption that banks are not special as intermediaries; and it won the Nobel Prize for its authors in 2022.
If money supply is "currency in circulation plus deposits[, etc.]" how does bank lending not increase the "currency in circulation plus deposits[, etc.]" amount?
(Of course lending between friends doesn't: the $100 bill in circulation is the same as before and the friendly IOU is not a deposit nor included in the [, etc.]")
This is not, prima facie a bad theory, right? Go take a look at JP Morgan's balance sheet. The asset and liability sides of the sheet are basically loans and investments (on the asset side) plus deposits and outstanding debt (on the liability side), and these balance.
One may also say that turning up the heater doesn't increase the temperature of a room - because I open the window at the same time.
Anyway, my point was that saying that bank lending is like lending money to a friend and "You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed." doesn't make sense.
M1 would change if it was defined as "currency in circulation plus debts between friends" and the "oh, but my friend would sell the debt to the central bank or whatever in the end so there is no change in money supply" argument seems goalpost moving. The original analogy doesn't work and bank lending does increase money supply everything else being equal.
On the one hand, you go to a friend and say "hey, can you lend me $100; I'll pay you back $105 in a year?" and your friend agrees.
On the other hand, your friend puts $100 into a 12 month CD, and the bank pays him a 2% interest rate. The bank then turns around and lends $100 to you as a 12 month personal loan with 5% APR.
Can you not see why there are some who would say "it is obviously wrong to suggest money has been created in the second case, but not the first" or indeed "in neither case has money been created"?
By the way, in case it is not obvious: the fact you don't have a compelling rationale to make me believe your description of the world, and I don't have a compelling rationale to convince you of my view of the world is why there are multiple competing theories.
I am not trying to tell you that you're wrong; just that you're not right.
I'm just claiming that saying that M2 money supply doesn't change in the second case is wrong because it has been defined to measure exactly that. Under the assumption that money has been created in the second case, but not the first - whether we find that obviously wrong or not is irrelevant.
> the fact you don't have a compelling rationale to make me believe your description of the world
I'm only trying to make you believe that the thing that seanhunter wrote is seems incompatible with his own definition of money supply which makes the bank loan situation different from the friend loan situation.
These are macro theories; they don't tell you anything at all about an individual loan - only aggregate behavior of the entire system.
The only think I've been repeating all along is that in your own example
On the one hand, you go to a friend and say "hey, can you lend me $100; I'll pay you back $105 in a year?" and your friend agrees.
On the other hand, your friend puts $100 into a 12 month CD, and the bank pays him a 2% interest rate. The bank then turns around and lends $100 to you as a 12 month personal loan with 5% APR.
In the second case, the friend has given the bank $100 and won't see it back for a year, and will then get $2 interest. The bank then lends you $100 which it won't see back for a year, and will then get $5 in interest.
The cases are economically the same; except in the second case, the bank takes the net interest margin of $3.
The second case, scaled up hugely, is observably what happens in the real world; it's not my theoretical construct. I refer you again to JP Morgan's balance sheet - the extent to which assets (mostly loans) exceed liabilities (mostly deposits) is simply the equity of the bank. That's the whole point of a balance sheet; it balances. If deposits exceed loans then, well, we saw what happens there, right?
You can't break half of the balance sheet off and say "look, these loans are increasing deposits at other banks; M2 has gone up"; that's literally meaningless.
But that's literally the definition of M2. You look at the currency in circulation, the deposits at banks and other things not present in that example and you add them up.
(I'm not sure why would you think that I'm not aware that the balance sheet of a bank is full of deposits and loans among other things, by the way. The whole discussion is about banks taking deposits and making loans!)
>The fractional reserve banking process creates money that is inserted into the economy. When you deposit that $2,000, your bank might lend 10% of it to other customers, along with 10% from five other customers' accounts. This creates a loan of $1,000 for the customer needing a loan.
>The bank essentially created $1,000 and lent it to the borrower.
The above explanation was always my understanding. Is this a case of semantics?
You might enjoy this light reading: https://www.investopedia.com/terms/n/npv.asp
There is no reason to lock money in 10 year notes, it can stay as cash or go to money market or short term obligations.
As for money markets, don’t those get invested in treasury bills/notes anyway? Why go through a “middleman” when one has enough volume to invest directly?
Short-term obligations may not provide the yield that their financial structure requires.
10-year notes, in certain situations, provide an optimal combo of yield and risk. Provided, of course, that nothing major happens to the economy which wasn’t the case here. Then again, who’s good at predicting that?
In the end, it seemed like, given what was true at the time the decision was made, SVB made a rational choice.
Yeah, but the market price basically stays at $1 and whenever they "break the buck" it's a huge deal.
10 year loans "break the buck" so often that it's extremely strange SVB didn't do anything about it.
Basically they should have invested in securities that were safer and fluctuated less, but they got greedy chasing yield and got found out.
Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
The BOE is simply pointing out in the link that they are the only proper bank in the UK. All the others borrow from the BOE to make loans. Commercial banks don't "create" money any more than the BOE "borrows" it from elsewhere.... The BOE creates money and lends it to commercial banks who put up a deposit and make a reasonable case for credit.
This, plus the other effects (like what the BoE calls “prudential regulation”) are the reason why you don’t see banks with zero deposits and a trillion pounds of loans.
Credit vs quantity theory of money is basically a concern of monetary policy (like: what is the expected effect of quantitative easing?) and doesn’t really bear on decisions at the level of individual banks or borrowers: things look consistent with both theories.
Like: it doesn’t matter whether classical or relativistic mechanics are “true” if you’re only following the flight of a baseball.
- the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan)
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
At this point the money literally came out of thin air, there's more total currency in the system then there was before.
It might seem like an irrelevant nuance but it's pretty important to understanding how the money supply works
So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.
It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right"
Currency is just a physical representation of that unit.
Perhaps because of the insurance from central banks this problem is avoided.
If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.
You can say the loan is a number in a database, but once it’s withdrawn from the bank the bank can’t just go into the database and undo the loan.
Your example doesn't make much since because any bank has many good loans and a capital reserve to deal with the few bad loans.
Economists actually refer to the USD in your account as bank money because it did not come from the government. You could just as easily think of that money in your account as a bank issued stablecoin pegged to the dollar that's convertible to dollars.
Maybe that’s already implied in your description but they don’t need to borrow from anyone if they had enough reserves to start with.
Yes. Money isn't 'real' in the sense people typically mean. It's an accounting unit, so it's exactly as real as a liter or a kilometer.
Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while.
Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.
> Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
It's just not true. The banks do transfer literal cash from deposits out of the system through loans. The cash in banks didn't come from thin air.
Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash".
And yes, the bank deposits are "out of thin air" -- https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money.
https://www.bankofengland.co.uk/explainers/what-is-money
In the UK, as an example:
> 96% is electronic
> 4% is cash
USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy.
In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system.
ABOUT THAT TERM "OUT OF THIN AIR"
I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out...
> commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise
Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used. This article to me is just weird, arguing it's not out of thin air, while everything being described says just that, only that their understanding of "out of thin air" is subjectively different than that of many other people. But there is no difference in knowledge and opinion about the underlying mechanism, only disagreement about some fuzzy term that some like to use and some apparently hate for whatever reason.
For arguments about definitions I would like to point to "Disputing Definitions" (6 min read) https://www.lesswrong.com/posts/7X2j8HAkWdmMoS8PE/disputing-...
According to your theory, what is the total amount of deposits at this bank after making the loan?
If, as you say, banks were lending deposits, then the total amount of deposits cannot possibly have changed and that new loan of £100 would have to come out of some other customer's bank account.
I would be pissed if my bank account balance suddenly dropped and the bank told me, sorry we have lent your money to someone else.
So this is clearly not what's happening.
If someone comes to take out a loan for $1000 and withdraw the money what would happen? They'd go get the money everyone left there and give it to the new customer. Now they bank has no money because they just lent all the deposits. $1100 in deposits and $1100 in loans
Incorrect, banks create deposits when they issue loans and only require reserve balances sufficient to satisfy net flows of funds between institutions.
They can also borrow those reserves.
So deposits are required to increase profitability, and of course a minimum level of profitability is required to be solvent, but banks in now way “lend out deposits”.
TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low.
So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement.
In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have.
Or not? And if not, why not?
Which means banking system as a whole creates 'private money' when flows of 'central bank money' between banks are balanced, but each individual bank cannot do it faster than others, otherwise these flows will be negative and it will be losing 'central bank money' and/or hard assets (which would be sold to acquire 'central bank money').
In your worldview, can you explain how it is possible for a bank to have far more loans on their books than they have deposits (see: fractional reserve banking)?
The answer in the US is simple: the Fed.
A bank can make an infinite amount of loans. They are not constrained by anything.
The only "limitation" they have is the future default rate of the people who accept loans from them.
The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan.
Now, many banks take customer deposits. I think there are 2 reasons they do that:
1. Deposits may be less expensive than borrowing from the Fed.
2. Account holders are warm leads for future loans.
But in principle, a bank doesn't have to take any deposits.
Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?
I don't know. I don't work at a bank.
But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.
tl;dr yes, banks create money out of thin air. It's been this way for decades.
They are constrained by capital and/or reserve requirements
> The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan.
Nope. Banks can borrow against their government securities from Central Banks by "rediscounting" them during discount windows, should they need extra liquidity. Note that this is not the preferred method since Central Banks usually charges a premium. These are secured loans.
See https://www.federalreserve.gov/monetarypolicy/discountrate.h...
That's incorrect, there are very strict limits on the solvency ratio placed on the banks that you usually deal with.
https://www.investopedia.com/ask/answers/052515/how-are-risk...
If none of the loan money was redeposited than the bank couldn’t create new money.
I've worked for a bank, both on the 'banking' side and on the IT side. One of the first things that gets drilled into your head is that banks create money. With every loan on the books more money gets put into circulation. There are some restrictions on how much you can put into circulation and there are some restrictions on how much cash you have to have on hand compared to the number of deposits that you have lying around.
But a bank could easily (as long as the bank is 'solvent' according to the rules set by the local central bank) write loans well in excess of it's deposits, technically it need not have any deposits at all.
Fractional reserve banking is about having more deposits (on the liability side) than reserves (on the assets side).
I won't say that it's not possible for a bank to have far more loans on their books than they have deposits (they could finance themselves differently) but I'm not sure if that actually happens. Can you give an example of a bank having far more loans on their books than they have deposits?
Also why link an article from the UK when the subject is a US bank? There are differences between the two countries banking systems and monetary policies.
Banks have a serious problem in their hands as they have to figure out a way to keep buying assets that they have to buy by law, while the Fed is going to keep increasing the interest rates via selling their MBS portfolio at a rate that makes "yesterday's treasury or MBS" the loser.
If action is not taken we haven't heard the end of this.
No, it's cash.
If I deposit $1m in cash at the bank, the bank suddenly has an extra $1m liability and an extra $1m cash asset.
The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.
> The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.
They do change: Cash is a (risk-free, modulo safe storage) asset, the deposit is a liability. This has consequences for all kinds of metrics vital to the running of a bank.
The deposit creates a cash asset and an equal liability for the increases account balance.
Other transactions have other effects.
Yes, it is initially cash. But if the bank wants to make any money, it needs to convert that cash into some other vehicle for generating interest.
https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...
That $1M you're depositing is presumably the liability of another bank.
I don't think that's right. There are banks outside the US that hold US dollars that the Federal Reserve has no jurisdiction over. They create more currency through fractional reserve lending for their local currency as well as any dollar denominated loans they make. I don't see how those are liabilities of the Federal Reserve, but maybe I'm missing something?
It doesnt matter if the US dollars is held outside the US. The dollar represents a promise by the fed to pay, and thus is a liability to the fed.
Of course the fed has the power to create and destroy dollars.
So to banks outside the US. That's how fractional reserve banking works. If I go to the UK and deposit $1m USD, and they loan out $900k of that to you, that UK based bank has created $900k.
To my sibling: Missing is the fact that US dollars are bank notes issued by the Federal Reserve. Issuing a note creates a liability.
https://www.federalreserve.gov/monetarypolicy/bst_frliabilit...
The value being in MBS now is a result of a separate transaction (well, a lot of them, probably) where (in aggregate) the bank takes a bunch of money from its cash assets and trades them for an (initially) equal value in MBS assets.
It becomes a problem when the MBS assets lose value, and the bank needs cash to cover withdrawals.
MBSs tend to remind people of '08 when MBSs lost value because too many had a bunch of garbage loans which defaulted, causing MBSs' face values to decrease. In this case, the fact that they were MBSs is mostly a coincidence. If SVB had invested in Treasuries, they'd be in the same world of hurt that they're in today.
Not necessarily, if they were investing/laddering in short term Treasury Bills (< 52 weeks) instead of longer dated bonds things might have panned out differently.
”97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.”
Treasury Bills from 6 months ago had yields of 3.37%.
(Often, the asset comes from the bank making a loan. You can pay later.)
Let debt be a graph where the nodes are people (with ledgers) and the edges are all of the form "alice rents $x from bob for y% APR". Actions that resolve/relax graph are payments of the form "alice pays bob $z", that lead to all balances being 0. Let the edges decay to null when balance is 0, such that a 'resolved graph' is simply a list of nodes with no edges, meaning 'no one is in debt to anyone'.
From this we can infer:
1. There is only one logical 'debt graph' in the world since they can (and do) all join.
2. The people running the graph do not want the graph to die, ever.
3. The profit of the debt business is proportional to transactions over time,
which is proportional to edges of the debt graph.
4. They want to (add, prevent from decay) as many edges as possible.
Thanks for this, I am now also having some thoughts.
A few thoughts to add:
1. Should individuals inherit edge weight from their employers/governments? What should this inheritance be like? If I have no debt but have very little in savings, and if my company has debt to some other company which they have to default on, leading to my getting laid off, I can still be affected by debt.
2. I do not think it is accurate to think if "the people running the graph". I think it's more accurate to state local laws such as: any node which has more outgoing weight than incoming weight (i.e. net lenders) wants to prevent edges from decaying as much as possible while simultaneously making their borrowers more financially stable.
3. Would it be possible to quantify each vertex's credit-worthiness from just the labels you mentioned on edges? Would we need to add any other weights to the edges? e.g. the lender's estimate of the borrower's credit-worthiness?
Also, I think it's reasonable for individuals to inherit edge weights from their governments, as a way to model taxes, national debt, etc.
Now “They want to (add, prevent from decay) as many edges as possible” becomes “They want to encourage different parties to lend each other things they want”.
In a sense Alice also buys physical capital to use them, but she's not using physical capital because of its specific qualities but instead because of the money the products it produces will fetch when sold on the market. Alice wants a vacation because she wants to go to Paris or New Zealand or whatever. Alice wants a machine part because she wants the money it will make her. Two very different categories of thing!
I bring this up not exactly as a critique of your analysis, but instead because none of the discussion in this thread is particularly tethered to the process of production, and it's specifically the disruption to production that makes the SVB collapse troubling.
The problem with formulating it like this is it makes readers think that the set of people is a small-ish set of globalists or capitalists (or insert conspiratorial "others" as appropriate). But the set is far from small: basically anyone who ever wants to acquire debt for any reason (most common reasons include "attend college", "buy a car", or "buy a house"), or anyone who wants to profit from lending money to people, which is a fancy way of saying anyone who wants to invest money (such as buying stocks or bonds).
Or in a larger macro sense, positive central bank interest rates create a requirement for everyone to acquire some debt in order to counterbalance the drag.
It is troubling that the debt industry will attempt to increase the total debt in the world however it can. This is like a doctor attempting to increase the total sickness in the world - which is evil (not a word I use lightly, btw). But to say that either debt or medical industries should 'die' because perverse incentives exist seems wrong to me.
If I'm not mistaken, Debt: the First 5000 Years and the Dawn of Everything books examined this.
Your graph is a formalization of such relationship, no?
The basic nature of finance is that some people have money they don't immediately need and others have needs they can afford over time but not upfront.
It's basically a layer on top of money in general, which is a way of decentralizing value production. Instead of pairwise trades, money serves as credit for value creation, recognized by 3rd parties.
The people running the graph are everyone with excess money or the ability to acquire it. Basically, everyone but the poor.
It produces a grand, generational historical narrative, but it's also a form of pyramid scheme and guaranteed to run out of runway at some point when the graph, rather than expanding, finds ways to get by with different trade flows that ignore the center - and each time that happens, you get a massive economic crisis, elites vying for power and drumming up scapegoats to avoid heat, but also waves of material change(different lifestyles and work arrangements).
So there is downside to debt in that it can reinforce hierarchies, but also upsides in that the network itself is acting to transfer useful information about material needs. All things that, having becoming so much more digitally connected in the last 30 years, we can probably revise again to become more abstracted.
2. There is noone running the graph
3. This is true of all econonomic activity in a free market economic model. The assumption underlying market capitalism is that on net rational actors will only perform transactions which add value to them. Therefore the profit of the system is proportional to transactions over time which is proportional to the edges of the "financial transaction" graph. Debt is not required for this observation to be true - it's intrinsic to the model or the transactions won't occur.
4. There is no "they" other than "all the participants in the financial system". On net everyone participating in the financial system is doing so for their own benefit and therefore are invested in keeping the system running.
So given an interest per annum of 1% (for example), a $1m deposit would add $1m liquid, non-earning assets while also adding $1.01m to their liabilities. So, effectively, they’d have $10,000 in unsecured liabilities.
To counter that imbalance (as well as protect the cash from the effects of inflation), they’d have to put some of that cash to work via various investments.
Not quite. It actually has both.
Yes, it owes $1m to the depositor, but it also has $1m in cash now, at least for a while. Until it does something with it, like loaning it out or investing it in some debt instrument. The cash is an asset, as is the loan or debt instrument it exchanges the cash for.
This isn't really an over-simplification as it is wrong. When someone deposits $1m in the bank, the bank's assets increase by $1m in cash, while liabilities also increase by $1m and owners' equity is unaffected. The problem is that for interest-bearing deposit accounts, those liabilities increase over time, which decreases owners' equity in the absence of a sufficiently appreciating asset (such as a good loan or cash flow-generating security). Further, the bank has certain operational costs that must be paid, and investors must make some return or they'll pull capital from the bank (that's a simplification for publicly traded banks like SVB). In practice, it seems that banks need about 3 percentage points above the interest rate they pay on deposits to cover these costs, based on the typical spread between the Prime rate and the Federal Funds rate, though I imagine this necessary yield has a much higher variance for smaller banks.
When interest rates were effectively zero and their deposits increased by a huge amount, SVB decided to buy long-term bonds w/ 1.5% interest to cover the extra liability over time so that assets would grow with liabilities. Then interest rates went up. Cash assets stopped growing, but liabilities remained the same, so they started selling their bonds. Bonds lose value when interest rates increase, so their bonds sold for a loss, decreasing asset values. In the last 48 hours, depositors got spooked. SVB's equity effectively went negative, since asset values decreased below outstanding liabilities. That's typically when the FDIC steps in to liquidate a bank.
For banks, assets must in general be growing faster than liabilities. If the bank experiences a situation where assets are not growing relative to liabilities, they need to have sufficient capitalization (i.e. owners' equity) to weather the storm.
So you need to lend it out, and charge interest, and use that interest income on your loans to pay the interest on your deposits.
Sounds like SVB made a lot of loans or investment purchases quickly, and then some of those went bad.
They got greedy.
Total non-sense and greediness.
They didn't get greedy, they failed to anticipate the speed and amount that interest rates would rise.
In retrospect this was a huge risk. They locked up way too much money in long term securities for how flighty their deposits could be.
they got some bonds which had an interest rate risk, in order to earn a higher interest. This is "greedy", but it would've been fine under normal circumstances, since they did not break any banking regulations.
Think about it from the other end. You have a mortgage. But the bank needs money now and asks you to prepay your mortgage. What do you do?
Up until I switched to a neobank late last year to get some actual yield on my savings, I'd been using the same brick-and-mortar checking and savings account I opened in high school.
A: We have too many depositors! We are not getting enough yield to pay interest without taking on risk.
B: What if we reduced the interest we pay on deposits?
A: Then we'd stop getting new depositors! Our only option is to take on risk.
You are right, this feels like a very unsympathetic problem to have. If you are a regulated bank you need to act like a grown-up and understand that overworking the soil and underworking the soil will both give you a bad yield in the end.
they wanted a higher return so they increased their risk and blew up.
- set your rate of paid interest on demand deposits quite low - what's going to happen, some people will pull their deposits? That's fine, that's what you want.
- re-deposit those excess deposits at other banks, taking only their meager interest payments on demand deposits
The math here works fine. As long as there's some difference between the rate you're paying on deposits and what you're getting, no matter how small, you're fine. And if you need cash quickly, hey, those are DEMAND deposits at other banks, you should be able to withdraw them immediately. You can spread the risk of a run on your bank around to every other bank.
You can always buy crypto if you think you have too much money. Or find a nice Ponzi scheme and invest in that.
So I need to lend it out so I can make the spread and I’m not just bleeding it money
Its not so much this as deposits are bank liabilities.
It really is just a matter of money making. They didn't want to accept the low yield, but certain safety, and accepted a higher yield, but with risk. It caught up to them.
On its face, such a purchase would only be done assuming rates and markets will remain the same. I wish I could say that accusing a bank of making such a naive purchase means that interpretation is wrong, but these banks keep doing things like this since it's always worked out before. I'm sure it's much more complicated, but sometimes that's because it should have been a lot less complicated.
Did they expect interest rates to stay at 0 for 10 years? That is illogical.
Maybe the market expects a likely range of 1%-2%. Maybe the market expects a likely range of 0%-5%. Those could both have an expected value of 1.5%, with much different levels of risk for this use case.
I'd like to learn more about the dramatic drop in MBS - elsewhere, downthread, it is asserted that they have dropped 30-50% ?
I understand the inverse relationship between bond price and yield ...
... but I am surprised that an asset yielding ~1.5% drops 30% in value when treasuries of similar duration rise to 3-4%.
Are there other factors at play with MBS in early 2023 - such as increased delinquencies - that are putting downward pressure on their price ?
If you're investing in bonds without building a ladder you're honestly doing it wrong. With the past 15 years of easy money and low yields it might have seemed pointless given rates barely moved, but completely giving up on any ability to capitalize on higher yields if rates move up is just poor investing :/
In this case it's a little more complicated since you also get the principal back in pieces, but you can calculate the price today to create the equivalent of a 3% yield instead of 1.5%, and you'll get a significant price reduction.
Let's assume you buy a $100 bond with 0% rate for 10 years. For simplicity, let's assume it's a riskless bond. Now, let's suppose those same bonds now pay 5% a month later. Well, the smart thing to do would be to sell your 1-month old bond and buy the new one. Of course, everyone is doing the same thing so the price has to drop until the bonds are equivalent. You would get $100/1.05^10 = $61.39. Of course, the old bond still pays 0% but now, on paper, the price of the bond should grow 5% every year as we get closer to maturation.
Going to the real world, it would be something like 4.5% (current Fed rate - expected to be higher) minus 1.5% (the MBS rate they have) is 3% difference and so $100/1.03^10 = $74.41. Now, you said 10+ and so doing the same thing with 15 years is $64.19. This is also not including the fact that MBS is strictly worse than treasuries in terms of riskiness and so it's easy to imagine 50% off.
Emphasis on the exponential decay relationship between market price and time-to-maturity. If you change that 10 to a 30, the bond is worth $23, and if you change it to a 50, it's $8.72. For a bond that pays $100 at maturation.
I think laypeople intuitively guess that long-dated bonds are safer, because that is sort of how it feels when you are borrowing money to buy a house. But in terms of the market value of the bond, you add exponentially more interest rate sensitivity as the time-to-maturity increases.
So a bond with five years to maturity would lose 5%, and a bond with ten years to maturity would lose 10%.
If SVBs bonds had a ten year maturity when purchased, that's probably nine years remaining when interest rates increased from 1.5% to 5.0%, so that's 9 * 3.5 = 31.5% reduction in value.
If they bought $80 billion of these, that's a $25 billion dollar loss.
If their shareholders equity was $16 billion, then that's zeroed and a combination of depositors, the FDIC (for insured deposits) and other creditors would have to eat the remaining $9 billion.
Do we now have people making decisions on stuff like this who are too young or clueless to remember what happened with the 2004-2007 mortgage backed security bubble that popped in the 2008-2009 financial crisis? Seriously? Did nobody learn the lessons on this? Countrywide and other originators of MBS and CDOs?
I'm not sure you learned the lessons. Other than MBS being coincidentally involved, this has literally nothing to do with 2008.
The MBS wasn't even the problem here. If they had 10Y corporate bonds or Treasury notes paying the same rate, they would have had the same problem.
A bubble 15 years ago? We're in a massive housing price increase bubble now.
Buying $80bn of MBS in the middle of a well-known housing price bubble is catastrophically stupid.
I think heavy exposure to a single type of long-term asset for a retail bank is always going to be a bad investment decisions, because risks materialize, and correlated risks tend to materialize together, and when a retail bank suddenly lacks liquidity...
In 2008 MBSes were bad because the underlying value of the investment turned out to be bad. That's not happening this time. All that's happening is the same thing that happens to any bonds -- when rates increase, older lower-rate bonds lose value because why would anyone pay full price for them when they can get a new one with a higher rate?
This situation today has nothing to do with the failure of the MBS'S to payout like 08.
This is a pretty insane bet. Why didn’t they ladder the maturities to have a lower average duration and less risk?
Sounds like an insane investment decision.
The economic good times are when confidence, trust, risk taking are all high. That music stops when people lose confidence, the Great Financial Crisis, just like all recessions are fundamentally a loss of confidence. This causes people with funds to claw them back, and retreat into their castle, and wait for the bad times to blow over. This is what happens when the economy collapses. When prices and asset liquidity crash. When rates go up. When you can’t borrow anymore and when you have to pay back the money you are borrowing, because it’s in the fine print that they can ask for it back whenever they like. Then inflation goes up. Borrowing rates go up. Asset prices go up, unless no-one has confidence in that particular asset (eg stocks or property where those companies are based).
Consumer leverage is not a bulwark against recession.
You are confusing the Great Recession with the Great Depression.
The 2007 crisis and subsequent Great Recession was contributed to by the 1999 repeal of that rule, adopted in response to the Great Depression; there were several efforts to restore it after the Great Recession, but none succeeded.
I think the financial crisis ended in 2009, when at the time there was fear that Citibank would be the next to collapse. A rule change was made to allow banks to value "hold to maturity" assets at the purchase price instead of the current market value, so that they could avoid an insolvent balance sheet. The problem for Silicon Valley Bank was apparently that they needed to sell some of the assets and take the loss.
* https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...
Yep, all of SV is truly made of bumbling idiots. That whole solution is truly hilarious and watching all these clowns lose their money is going to be fun.
I don't think the depositors, investors, or VC's that pushed for SVB were idiots. SVB was a good bank, with a good reputation, and good services that got mismanaged into oblivion.
Very blatant weaponization of FUD to drum up deposits for their investments in Brex, Ramp, and Mercury.
And if B2B is relevant, well, have an accoubt, or multiple, at a bank with Stripe integration to handle customer payments anf refunds. And keep everything else at different banks.
The problem is that SVB tied up their liquidity for 10 years at a yield far lower than they would get with more secure investments after the FED's rate hikes.
The specific assets they invested into are immaterial.
The irrational exuberance in price increases in this segment of the market over the past 4-5 years is not sustainable.
It is not logical, sane or normal for houses that were valued at $150k five years ago to now be valued at $400k in some suburbs and metro areas.
How much would you spend on the house if you're only alternative is to watch your capital disappear
If I'm worried about 10% or 20% disappearing to inflation, I'm certainly not paying 2x on an investment to prevent that.
Capital needs somewhere to go as long as money keeps being printed. If there is more capital than profitable investment opportunities, it will flow into housing.
As a thought experiment to illustrate the point, imagine a world where there are no investment opportunities and the only place to store value is cash or housing. In this case, housing prices will continue to climb because money keeps being accumulated and there is no place to put it.
Of course this is a hyperbolic example, but I think our world is moving closer towards it as truly valuable Investments dry up. Certainly in the short term, and possibly in the longer term as well
Narrow banking never works because at the first regulatory lapse (my employer got fined 200M because we used whatsapp, not even for committing crimes), BAM no money left for deposit liabilities.
And dont forget here that as long as people eventually pay their mortgage in the expected default risk, the money will eventually come back, at an opportunity cost.
[1] - https://twitter.com/jamiequint/status/1633956163565002752
That tweet is unattributed verbatim from https://www.livemint.com/news/world/explainer-silicon-valley...
[EDIT:] See the thread, it seems that the story may have stolen from the tweet! Pretty shocking for one of India's biggest business publications (and with 2 million Twitter followers).
When interest rates raise, previously issued bonds lose in value because there are more attractive ones available.
It's like if they missed the Chapter 1 lesson about investing into bonds.
You can see that managing money responsibly is not one of their values.
I’ve seen a few conservative tweets trying to tie DEI and ESG into SVB’s collapse in a weird attempt to tie it to a cultural war. It just doesn’t make any sense. DEI and ESG are side shows for just about any company and probably pay for themselves as marketing and employee retention for a Silicon Valley focused bank.
The values “We keep learning and improving”, “We take responsibility”, and “We speak and act with integrity” would all play into managing money responsibly.
Not enough to put it on the page where they discuss things they value as an enterprise. Seems kinda important to leave out. And speaks to the failure of competency.
They don't value merit, they value meeting arbitrary quotas to look good, and now they met their end. Totally relevant.
1) You wrote the Mint article.
2) Mint took the text from your tweet unattributed.
3) ???
Wow, this appears to be the case, at least judging from the timestamp on the first reference I could find: https://twitter.com/livemint/status/1634091187442266112
That's massive journalistic malpractice!
Let's be clear, the issue wasn't that the Fed raised rates to a historically average level, it was that they were manipulating the bond market in 2021 with trillions of dollars of QE.
Over the last few years the Fed has basically done a pump and dump on the bond market, and SVB being a bank was basically forced by regulation to buy long-dated bonds for yield.
I've seen a lot of people speak critically of SVB and I get it, but I think people should take a minute to ask why the hell bonds were yielding such a low amount in 2021. I just wonder how much longer we're going to blame, banks, crypto investors, bond investors, equity investors, home buyers, etc for what's happening to the value of their assets. When central bankers make government bonds trade like meme stocks this is what happens. Perhaps if we didn't do that, SVB and many others wouldn't be in this position.
They bought $80b of fixed-rate bonds at historically and artificially low interest rates in a time of massive QE. Even based on the information available at the time, this is not a surprising outcome at all.
The charge of "manipulating bond markets" is pretty absurd - their mandate is to influence inflation and employment via interest rates. Of course it has an impact on bond markets.
>They did a pretty good job during COVID
One word: "transitory".
Note all the months since July 2022. It's good to read the source material rather than hyperventilating news articles.
* 2016: 0.01
* 2017: 0.20
* 2018: 0.27
* 2019: 0.10
* 2020: 0.21
* 2021: 0.30
* 2022: 0.61
* 2023: 0.27
Raw monthly data: https://data.bls.gov/timeseries/CUSR0000SA0&output_view=pct_...
I was skeptical that month-over-month CPI had come down to reasonable levels over a wider time window, but it is much lower than the same period a year ago, and close to recent historical norms outside that inflationary spike. I am eager to see Tuesday's numbers for February inflation.
I just don't know if I'd call it a "pretty good job," is all. They were caught-off guard and didn't move quickly enough.
The idea that they aren't doing a good job because they aren't perfectly precise with their timing is misguided. It's a crazy hard job.
You'll have to support thay with something. Again, the language of their correspondence over the past few years says otherwise.
Unless, of course, you are expecting the Fed to predict the war in ukraine, the energy crisis, etc.
And in any case, people who take the Fed's predictions at face value, and base their financial positions on it, can only blame themselves when the Feds do something contrary (as they are always entitled to). These predictions aren't promises.
It has been. We're barely at 1.5-2 years in length and it looks to be either stabilized and perhaps dropping.
A number of folks estimated that the COVID recovery stimulus would take about this long to work its way through the system, using Korean War spending as an analogue:
* https://www.piie.com/blogs/realtime-economic-issues-watch/in...
The fact that energy and food prices spiked due to geopolitical events threw a monkey wrench in the works temporarily, but now that those have stabilized, so has inflation.
The first half of stopping a panic is always easy if you're the Fed with the exorbitant privilege to print money with virtually no immediate ill effects. The second half is the hard part and they've failed 11 times out of 10.
They acted as aggressively as possible to remedy a short term problem, which just created longer term problems. Its easy to throw money at a problem and worry about the consequences later.
SVB wouldn’t have failed if the Fed hadn’t artificially suppressed rates to the extent they did, for example. And Id venture there’s a lot more to come on the economic front. Many assets became extremely overvalued which makes the larger downside on price more disruptive… commercial real estate is a big one to watch in the coming years
If inflation remains entrenched we may require a GFC style hard landing to quench it.
The fed did head off an immediate disaster through suppressing the rapidly widened credit spreads, but everything after that will likely be remembered as a failure
Because after all the purpose of society is to serve the market, not the other way around, right?
In retrospect, the Chief Risk Officer leaving and not being replaced immediately was a bad sign: https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...
100% speculation: the CRO told them loading up on long term bonds was crazy, and that they'd just have to eat lower earnings. The CEO/CFO disagreed, and the CRO didn't want to have any part of it. Hindsight is 20/20, but... this really was a disaster waiting to happen.
"A risk officer typically anticipates and manages regulatory, operational, competitive or other risks faced by a firm."
That looks like _non-financial_ risks. If that was the role of the CRO at SVB, the risk for this event probably should have been with the CFO?
One of the principle, statutory purposes of the Federal Reserve is to conduct monetary policy to achieve maximum employment and stable prices. That means it's the job of the Fed to manipulate interest rates.
The Fed knows that there is no real ongoing inflation. The devaluation of the dollar already occurred and the new price has to propagate through the market. Their actions have no effect on the cause or broader course of apparent inflation only on who “wins and loses.”
Can you cite any metric showing there is "no real ongoing inflation"? CPI, PPI, PCE, and other less-commonly used metrics all indicate ongoing inflation. It would be interesting to understand how you've arrived at the conclusion there isn't ongoing inflation.
>The devaluation of the dollar already occurred and the new price has to propagate through the market.
The DXY has been uptrending for nearly a decade, even more rapidly so since mid-2021.
It's a dual mandate. If I'm not mistaken, we recently reached pre-pandemic employment levels. There is no way we would have reached this point without low interest rates through the pandemic.
Other countries have the same inflation rate that we do, but with lower employment rates. Ours is a better position to be in.
(this is not to excuse the greed of the bankers - this crisis is the purest essence of capitalism, it's inherent contradictions on full and gory display.)
The Fed can’t end the invasion of Ukraine or cure avian flu or speed up cargo ships. They can raise rates and that’s about it.
No, the economists at the Fed do not think that. Or rather, they try to find out what is driving inflation in any given situation, like they did with this 2022 study:
> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
* https://www.frbsf.org/economic-research/publications/economi...
Having unstable prices for staple goods will lead to unrest very, very quickly, which in term results in a downturn in the econonmy, which in term leads to even more unstable prices and thus more unrest.
These actions which the fed has never before undertaken (qe and zirp and even buying corp bonds) were to blame for the bubble, and the problems caused by unwinding it.
QE and ZIRP is the original sin here which created the dilemma the fed now faces - hard inflation or hard recession. They didn’t solve the GFC or Covid, they just postponed the impact and made it far worse.
I have absolutely no objection to counter-cyclical monetary policy but the monetary policy has become the cycle.
When the assets haven't even moved in the same direction, I don't know how you are going to blame federal policy to counteracted the recessionary impact of covid for moving them. Whereas the fed has caused significant damage & also been ineffective at fighting the current supply-side inflation caused by Russia's war of aggression.
No one expects that real estate will skyrocket and tank like shitcoins (even in 2008, the residential real estate market didn't bottom out until 2012). But that doesn't mean that Federal Reserve policy has been good.
I'd highly recommend the book (or audiobook) "The Lords of Easy Money: How the Federal Reserve Broke the American Economy" for anyone who is interested in a historical summary of the FOMC.
That’s what happens when people buy meme stock. I think the failure of the goverment and the bank are unrelated here.
Is this true?
Sticking to unrealistic goals seems to to be the downfall of a lot of financial institutions (and probably a lot of other companies). Same happened with Deutsche Bank in the 2000s. The CEO declared that they wanted to achieve higher ROI and to achieve this they had to start doing ever riskier stuff until it blew up in their faces (and the taxpayer generously bailed them out so they could keep their big bonuses).
In this case you’re sort of right in that they found have hedged a bit more by diversifying into more shorter term assets.
Hindsight and all.
And even if that white knight or even off-white-ecru knight did come along and want to buy the bank next week, what if they don’t decide to make every depositor whole, for those holding cash above FDIC limits? They certainly don’t have to do that. They could just buy the loan book. Or the warrants or early debt for a number of Silicon Valley startups. They can be vultures, not Santa Claus…
I think people don’t quite grasp what could be coming next.
Agreed on that. The FDIC will make the best deal possible for depositors, but they'll spend a very busy weekend figuring out what that maps to in reality.
We don't know yet.
Just by coincidence Wells Fargo is having "technical glitches" affecting account balances the exact same day this happens.
The wisdom on the street is that the FDIC will not let that happen as it would potentially cause a run on every bank outside the top 5. If there is a bank large enough to make every depositor whole without causing stress, then the FDIC (on a 10 year time frame) is handing you $100B "for free".
What will probably happen:
- Regulators will sell SVB to a bigger bank at a greatly reduced price which makes it worthwhile for the buyer.
- Depositors will be able to withdraw up to $250k cash starting Monday (the FDIC insured amount).
- Funds above that will eventually be recoverable in phases with the first chunk available by the end of next week (because SVB does have billions in cash, the issue is with the long-term value of their investments not meeting regulatory requirements.)
- If the system works properly, it's highly likely depositors will get 100% back. It may just take a little longer.
- There will be an investigation of the bank and its board's Risk Committee. Things aren't looking great for the CEO and the former Chief Risk Officer who unloaded some of their stock but that's more of an 'insider trading' beef against those individuals (ie unrelated to the bank's failure). So far, in terms of risk management, it doesn't appear SVB did anything out of bounds or even unprecedented.
Arguably, as conditions changed last year they chose a particular investment strategy which would normally have worked out but instead hit a pretty unlikely perfect storm of external factors including the Fed raising rates really fast. We don't have all the info on who knew what and when but my guess is: if there's "wrongdoing" here, it's probably more stuff like not taking the corrective steps they took this week sooner. They may have been hoping to "play through" the rough patch and it could have worked - but this time it didn't because there was a run by their unusually close-connected depositors in the tech startup community.
(Note: some folks are arguing that the Fed itself created a volatile situation for this bank (and others) by doing pretty unprecedented things which rapidly impacted the bond markets and other securities tied to Fed rates. I find this argument not entirely unreasonable. We won't know root causes until regulators unwind this.)
For what crime?
If someone unintentionally but ineptly writes code that crashes Amazon on Black Friday, did they commit a crime?
Yes, they sold the treasuries and took a bath. But if that was their best option, it speaks very poorly to the other "assets" they held on their balance sheet.
We may find out in the coming days that they had a big position in Silvergate, which went bankrupt yesterday, and they had to mark their position to zero, creating the need for liquidity.
https://www.msn.com/en-us/money/other/billionaire-investor-b...
It's crazy to realize how brazen Wall Street bankers and Hedge Fund managers are when it comes to asking for taxpayer dollars during distress, while decrying any attempt to add to that taxpayer dollar pool from their billions in earnings when the times are good.
This in theory creates a diverse non-correlated system of capital deployment with the best projects winning over the bad ones.
However when the central bank offers interest rates that a private bank cannot match even when it's deploying into safe and endorsed assets like MBS then some weird stuff happens...
The Fed can promise risk-free returns at whatever rate they want but once it exceeds the private banks', then the banks no longer serve any purpose. If there were a way for individuals to hold accounts directly w/ the Fed, they'd all do that. Money will be sucked away from banks that deploy capital in the private sector and squeeze into ones that just passthrough to the Fed's like money market funds.
With high enough interest rates, the Fed can end up sucking up liquidity even from good and safe projects and cause widespread asset collapse b/c the entities that are supposed to be doing price discovery can't compete anymore.
https://www.bitsaboutmoney.com/archive/deposit-insurance/
I should add: apart from 2008, bank failure has historically been quite rare
You mean it's not a solvency issue? It sounds like a textbook liquidity issue.
https://twitter.com/AhmadBaracat/status/1634293096639787008?...
They also could have hedged the interest rate risk. Likely there will be policy change as a result of this. Banks over some AUM requiring stricter regulations
The Fed is complicit in encouraging moral hazard through distortion of the bond market. Pretty much every crisis in the modern era is precipitated by fed policy from years earlier
They could have just stored the money in the proverbial vault. But if they do that, then they have to charge the depositors a fee to be a customer. And competition has pushed in the other direction.
And probably more importantly that whole "profit" goal.
Would be interesting to see where that money came from. That has all the markings of a pump before a dump, the dump being 2023. They didn't even have to dump, they just had to stop the pump to auto dump once the interest rates went up.
SVB opened themselves up to an attack vector and one thing the banking industry likes to do now and again is consolidate and shakeout. That amount of inflow in good times can make you do funny things. The better way to go about it is be scrappy always, and expect the attacks.
There were way too many companies in this bank, it had too much concentration of startup/VC/PE money. Regulations will probably have to be made around this now more robust.
HBS is even realizing too much optimization/efficiency is a bad thing. The slack/margin is squeezing out an ability to change vectors quickly. This is happening from supply chain to credit to food and more.
The High Price of Efficiency, Our Obsession with Efficiency Is Destroying Our Resilience [1]
> Superefficient businesses create the potential for social disorder.
> A superefficient dominant model elevates the risk of catastrophic failure.
> *If a system is highly efficient, odds are that efficient players will game it.*
would you mortgage (no pun intended) your family’s entire financial health on something that works “in general”?
(i think HN needs a black bar, we are all screwed)
You take a collection of n mortgages and rank them by how likely they are to default, and then you divide them up into say 5 different securities each containing n/5 mortgages. The top 20% will be considered the least risky and the bottom 20% the most risky, and yields will reflect that. There are also rules on what risk level different asset managers are allowed to take on, so random retirement accounts wouldn't take the bottom 20%. No problem yet.
But then some "spherical cow" style math was applied to these things. If mortgage defaults are independent events then mathematically you can smooth out the risk even from the high risk ones by just grouping a bigger number together. So they took say 5 different shit tier mortgage collections, lumped those mortgages together to create another pool of size n, and repeated the process. Now the top 20% of that pool was given a very low risk rating, yet it still paid a greater yield than the original pool's top 20%, so why wouldn't an investor want to get in on this high yield safely rated security?
And it didn't stop from there, the bottom say 20% of those pools were again pooled together to create more supposedly safer securities.
This could've held up for a long time in a vacuum, as long as mortgage default rates didn't change too much. But part of what incentivized this system in the first place (and in turn what this system incentivized) was to hand out mortgages like candy basically.
So it was a house of cards waiting to fall, and once some of these securities faltered it also caused a bank run on a wider set of MBS structures that probably could've held out if not for the panic. Plus big failures like Lehman Brothers and Bear Stearns had impacts on firms that went beyond MBS activity, so there were some crazy cascade effects too.
Anyway, there's nothing inherently wrong with MBS, it's just important to know what you're buying. This situation is weird because it's not that the security itself is unsafe, it's the context in which they are using it that is risky. Though I suppose it relates on the high level that they probably thought "this security is rated very safe and it gives relatively high yield" without an actual understanding of the risk involved in their use case.
They bought bonds when interest was low, now interest is high and they’re worth less.
SVB wouldn’t have lost cash on those bonds if they didn’t experience a bank run.
Not disagreeing that MBS is irrelevant, and yeah the risk rating of the bond wasn't a problem as this will pay what it said is would. Just saying it was a stupid move to buy such a large amount of such a long term bond when interest rates can't go anywhere but up and you're using borrowed money to do it. From that perspective it was a risky move.
apart from the loss of $1.8bn and the delta of the interest - growth from their assets.
Isn't everyone still going to get their money back - the percentage of the loss that SVB has which should be less than 5-9%? Sure FDIC has to liquidate all the money from the assets and it takes time. But at least the impact is not going to be as hard as losing all the money like FTX or Maedoff in 2008 right.
The recovery rate for the Madoff Ponzi is 88.35%: https://www.justice.gov/opa/pr/justice-department-announces-...
Why can’t so many folks who are doing well enough just act with basic common sense and integrity these days?
Capital has a special meaning to banks, and deposits are absolutely not capital from their point of view of the bank (they are from the point of view of the depositor). To the bank, deposits are on the liabilities side of the balance sheet.
A bank’s capital is only equity put in by shareholders and retained profits from previous years. This is important, because how much a bank can lend is only determined by the amount of capital they have, not the amount of deposits (since deposits are on the wrong side of the balance sheet for lending from).
This is exactly a definition of liquidity issue... Owning enough assets but not being able to cover short term liabilities.
In opposition to not owning enough assets to cover liabilities.
Every bank borrows short term (you can walk up and withdraw your money at any time) but lends long (e.g. mortgages, though SVB writes few of those). The recent management grabbed some very long federal bonds; as rates have risen the resale value of those long term assets (paying a lower interest rate) fell. They can't unwind that position and cover all possible demands.
FDIC will transfer the accounts to another bank, guaranteeing the 250K at least (I believe SVBs own liquid assets could cover that) and may use its own asset base to cover the balance, siezing SVB's other assets and stuffing them into FDIC's piggy bank. It's not like those government bonds won't pay out...eventually.
That's not normal; FDIC works quite hard to find a bank willing to take over - usually they can work out what the "cost" is to take over, and FDIC pays the receiving bank that amount to "eat" the dying one.
If they don't announce they have a bank to assume SVP by Monday, it's quite abnormal.
So I don’t think there was much for Chase to buy. SVB has been in decline for a while
So if you marked to market all those long term bonds and then sold SVB to a bigger bank at the resulting (possibly negative) valuation. Why wouldn't a big bank take that deal?
This arrangement usually results in all depositors being made whole, and the FDIC fund not taking any, or many, actually losses, because most of the loans will still pay back, at least partially
They also do this before seizing the bank, so that it's all very orderly and calms any panics
SVB was looking for a buyer on the open market and that failed--no surprise
That the FDIC also could not find a buyer that they could subsidize and announce the same day as the seizure is very damning. I would be shocked if someone comes in later and tries to buy it
Also, the fact the seizure happened in the middle of the business day, and not at the close of business yesterday points to a somewhat disorderly and rapidly deteriorating condition. I think maybe the run picked up a lot faster than they expected
Even WAMU (a huge FDIC action) was done after banking hours closed on the west coast. https://en.wikipedia.org/wiki/Washington_Mutual
I would surmise that the news spread fast among the tech demographic the bank services and the run is really bad.
We don't know the timeline here, but speculating that "it must be bad" because things didn't happen overnight isn't really responsible.
If so, then the difference doesn't imply much about the banks asset level, just the idiocy of its bosses.
A lot of folks (like the top of thread) want to suggest that because it didn't play out like the 60 minutes story, it must mean something significant. That story barely touched on the weeks of leg-work the FDIC did for that particular bank, for example. If you weren't paying close attention, you'd miss it.
https://money.stackexchange.com/questions/129772/has-anyone-...
The oft quoted 'nobody has lost money' is from the FDIC, and specifically says 'insured deposits.'
Agreed. The FDIC report shows $209b in assets and $175b in deposits.
Even if they took the full $15b estimated loss to liquidate their HTM bond portfolio, they'd have $20b to spare before not being able to cover deposits.
Am I misunderstanding?
Unfortunately much of their balance sheet is illiquid (consider loans they've made to venture-backed businesses, and of course a poor choice they made in government debt maturity).
Thus a liquidity crisis; technically also insolvency, but not gross mismanagement and excessive leverage by any means. Unwinding it will be quite routine (see my reply to kmod).
https://twitter.com/business/status/1634211584657571843?s=20
The first half is what FDIC insurance means. The FDIC helps distressed banks in a variety of ways, including insuring deposits under $250K, but typically all depositors are made mostly whole again.
Typically, but no guarantee. And on what time frame, nobody knows.
I suspect many depositors will be taking losses in this failure
https://www.ocregister.com/2009/03/20/depositor-losses-final...
In fact, to the extent ordinary bank failures don't result in paying back all or almost all of the sum owed, the regulator has been far too slow to step in and more aggressive regulation is needed.
1. Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired. It's totally possible (and regularly done) to spread out cash among several financial institutions to protect against this very issue.
2. Any regular account with two or more signers (very typical for a business account) is insured up to 500k.
3. If spreading out your 6- or 7-figure assets to multiple institutions is too much of a burden, literally every business bank has special accounts or add-on features that either raise the FDIC default limit of 250k, or supplement it with external insurance. Again, if any startup's financial handlers didn't recommend this: fire them because they entirely failed to do their job.
https://www.usbank.com/bank-accounts/fdic-deposit-insurance-...
Is it typical for business accounts to be owned by someone other than the business?
Banks that primarily serve ordinary workers typically have over 50% of total deposits in accounts that are under the limit, and are fully insured.
But for SVB, less than 3% of deposits are in accounts with less than $250k.
The cold, hard fact is that if the bank doesn't have sufficient assets to pay back depositors, no regulatory sleight of hand changes that fact.
There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't co-opt the power of the state to force ordinary people to subsidize them when their bets go bad.
It would be hideously immoral to bail out fabulously wealthy VCs with funds from taxpayers and small depositors.
That's not true. As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. Even if liquidating assets forced a 15% haircut, depositors will be made whole.
If a bail out is necessary, it's likely in the form of a short-term loan to make depositors whole sooner rather than later. And, such a bail out can/should be structured as a loan with significant interest in which case it's not really a cost to taxpayers.
The cold, hard fact is that if the bank had sufficient assets to let depositors withdraw their cash, then they wouldn't be in receivership now.
You can argue that they actually do have sufficient assets, but they just can't access them right now, and we just need to wait ten years for bonds to mature.
But that argument only makes sense if you also say that large depositors should wait ten years to get their money out.
Naturally, a dollar that you might receive ten years from now is worth a lot less than a dollar you can actually spend today, and if regulatory sleight of hand obscures that essential fact to bail out the 1% of the 1%, that would be extraordinarily unjust.
It is not a cold, hard fact that they don't have sufficient assets. It's entirely possible that after liquidating their assets (on the time scale of months), they can make depositors whole even after factoring in the time cost of money.
It's possible the $80 billion in mortgage-backed securities they bought yielding 1% and maturing in 10 years might be salvaged. They're now worth far less than they paid because interest rates are up to 5% and nobody wants to buy bonds that yield 1%.
Maybe this receivership will bork a thousand startups, throw a bunch more people out of work, and cascade into a larger recession, driving interest rates back down to 1%, and restoring the value of the mortgage-backed securities, and making the bank solvent again!
Or maybe a recession severe enough to drive interest rates back to 1% would also be severe enough to prevent homeowners from paying their mortgages, which wouldn't be great for the valuation of mortgage-backed securities.
This is not obvious at this time. This is not a cold hard fact. They absolutely, undeniably had assets in excess of depositor liabilities at the end of Dec 2022. They incurred losses since then. The accountants are still accounting.
> and no regulatory sleight of hand changes that fact.
There literally is regulatory "sleight of hand" to do this, and the FDIC has a demonstrated history of doing it, many times. When banks like this fail, they shop the assets and existing customers around to other banks, and critically: will pay the acquiring bank to close the gap between assets and liabilities + provide liquidity while assets mature.
> There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't force ordinary people to subsidize them when their bets go bad.
The FDIC is entirely funded by insurance premiums paid for by the banks themselves. They are not tax payer funded.
Your fear is causing you to spread misinformation and scare people more than necessary.
Were these assets marked to market, or were there billions in unrealized losses even then?
> regulatory "sleight of hand"
When claims on the FDIC exceed premiums paid, they are absolutely backed up by taxpayers.
There's a cap on what deposits are insured, it's not a secret. Large depositors knew their funds were not insured.
It's not "sleight of hand" to shop the assets in the market, maximize recovery, and make all depositors whole if possible. By all means do this!
But using FDIC funds to bail out uninsured depositors, or monkey business with quasi-government agencies backed by taxpayers paying above-market prices for securities, or agreeing to accept below-market interest rates on loans is definitely "sleight of hand" to obscure a direct subsidy to extraordinarily wealthy people.
By no means should insurance premiums paid on insured deposits be misappropriated to bail out uninsured depositors.
Wealthy individuals constantly try to game the system. Not letting the games they play hurt the rest of us is an entirely proper role for the government to take on.
I agree that it's a good move for the government to use taxpayer money to prevent an economic collapse. But that's still the lesser of two evils: the government should be working harder to disincentivize the kind of behaviors that make wealthy individuals think that playing these sorts of games is worth the risk.
I'm not sure what "working harder" should entail (I'm no expert on this sort of thing; others are), but I think it's pretty clear they're falling short.
Contractual obligations often prevent this, btw. Many SVB customers had loans with SVB, which prevented them from using other banks.
Wealthfront offers me as an individual better tools for managing risk that it sounds like people who banked with SVB were getting.
Looks like not just startups, e.g. Roku had ~500M in SVB
https://edition.cnn.com/2023/03/10/business/roku-svb-cash/in...
https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
If the asset/deposits balance hasn't changed much since December (which I'm not sure is the case), depositors are likely to eventually be made whole for the deposit amounts, but liquidity issues and facilitating sale of assets to make that happen may result in substantial delays. For depository accounts businesses relied on for regular operations, that...may still create substantial additional costs that will not be compensated.
So, in a more holistic sense, it seems likely that depositors will not be made truly whole for the impacts, even if they eventually recover deposits.
In a extreme example, getting $100 in 10 years is not as good as getting $70 next month.
- "it had reserves in excess of its liabilities" - "They can't unwind that position and cover all possible demands"
I'm guessing that you're thinking of some sort of valuation of their assets that says something like "well they're really worth more than they're currently valued at", which is a common claim on this story but it's a pretty bold one?
The closure of the bank was due to a classic bank run after depositors panicked upon hearing of the decrease in value. They had 45 billion in withdrawals in a single day, out of ~175 billion in deposits. No bank could survive that.
An analogy: you (hypothetically) keep your money in some 6-month CDs, with about a month's worth of expenses in your savings account in case something unexpected comes up. Then you lose your job and by the end of the month you haven't found a new job. You could liquidate your CDs, but the early-liquidation penalty might mean you still won't have enough to pay your bills. If only you could wait for maturity.
So yes, at mark-to-market firesale prices that means SVB can't pay out in full today to every account holder and so FDIC has to step in. But FDIC (who has a very large balance sheet) also seizes those assets. They give the accounts to another bank. Then FDIC can unwind those seized assets in whatever timely fashion it wants.
There's a second factor: in a secular banking crisis they may pay out only the guarantee (currently $250K; for a while (during the GFC IIRC) it was temporarily $500K. But we are not in a secular banking crisis; not only has the Fed completely restructured bank reserve requirements in response to the GFC but SVB is a single, small bank, not even a regional one, with a run-of-the-mill crisis. This is the kind of failure that you put all the new hires on because they can learn without any up-to-the-minute crisis stress. This is what they learned during onboarding :-). In such a situation it's better to pay out move than the $250K, probably several million, to prevent any "contagion" (since SVB has "Silicon Valley" in its name).
I have no special knowledge of FDIC's internal thinking: they could make them whole now, or make up to $250K whole now and pay out some later, or yes, they could force a few people to take a haircut. Those (small number of) panicing VCs would be better off calling their senators than their portfolio companies.
PS: BTW hypothetical you has more options than those above: you could take out credit card debt, perhaps tap a HELOC you might already have in place, etc. SVB had similar options: they did have a $15B fire sale and got an investment from General Atlantic. It wasn't enough.
The reason why depositors are going to lose money I think is because the fire-sale valuation of the assets << valuation on the books. I think depositors will lose a fairly big chunk of their money, maybe 10-30% if not more.
Their money was not sitting around in cash. It was in bonds which lost a lot of value in the last several months. They also have more exotic investments in the startups they work with, which depending on how it works, could get a really bad valuation as well.
SVB was the 15th largest bank in the US. That's not a small bank.
The account holders' accounts, and likely all the loan portfolio, will go to another bank. The new bank will adjust its reserves from the Fed in the usual way, and may get some capital from the FDIC (warning: I am not au courant how the latter works post the GFC).
The FDIC uses its own large (and augmentable by congress, not that it matters in this case) balance sheet to back some or all of the deposits. It seizes all of SVB's assets and unwinds them as it decides to...with the proceeds going to FDIC.. Whether it dumps them on the market or holds to maturity is the FDIC's decision and has nothing to do with what happens to SVB. The people who went to SVB HQ and the people who decide what to do with SVB's assets are completely different people.
Read my reply to kmod.
> SVB was the 15th largest bank in the US. That's not a small bank.
The money center banks are the ones that matter. Most retail deposits are held by a handful of banks. Being the 15th largest bank is not like being the 15th university in the rankings (i.e. not that different from the top 10) but more like being the 15th biggest car company. I wouldn't call FDIC's balance sheet "enormous" but it can handle SVB without breaking a sweat.
If I had $1m in my account and it was invested 100% in MBS around in 2021, it could take 10 years to actually get the whole $1m back, and only be worth like $800k now. I have effectively lost that 20% because you could just give me $800k now and I could put it in a MBS myself to get the same results.
That means it didn't have a liquidity crisis, and it didn't have reserves in excess of it's liabilities, it had a solvency crisis, and it has more liabilities than it has assets (before even considering the haircut it's assets will suffer at liquidation prices).
The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. So SVB was sailing along nicely whilst it's bond portfolio slipped further and further under water, and wasn't required to recapitalise when it should have done.
[1] https://ir.svb.com/financials/annual-reports-and-proxies/def... [2] https://www.wsj.com/articles/bond-losses-push-silicon-valley...
EDIT: To be clear, think of it this way. I have a piece of paper saying you'll give me $100 in 1 year plus 1% interest that I bought for $98.
No-one buys that piece of paper for $98 today, because they can get the same deal with better interest. But that doesn't change the fact that I will get $100 for it.
If deposits hadn't shrunk, $100 would go to SVB in 1 year and everything would be fine, it's the fact that they have to sell it so far ahead of maturity that's the problem, we just didn't notice this phenomenon in the past few decades b/c rates fell and prices went up.
This is not because SVB has a particularly risky book (we're talking treasuries here), it's because they didn't account for declining deposits (itself a very stupid, but unique bad decision unrelated to their risk tolerance).
I don't think that's right. It would be a liquidity crisis if the market value of everything they own is higher than their liabilities but they can't find a buyer at this time. You are saying that a liquidity crisis is when they can find a buyer but everything they have is worth less than their liabilities. That's not the case.
This is not accurate, and the inaccuracy is the difference between solvency and liquidity.
If svb had longer (ie weeks), they still wouldn't be able to cover their debts. Its not a matter of needing time to arrange buyers for their assets; their inability to pay isn't related to liquidity today or tomorrow, it's related to their asset's value. If they snapped their fingers and marked to market all their assets, they would be in debt because they're insolvent.
How do you calculate that precisely? That seems like a fuzzy distinction, considering that the value of things change over time.
Not really. Insolvency is by definition time independent. If you owe more than you have, you're insolvent. It doesn't really matter if you might make enough to cover the difference in the future.
In practice, you might get away with it if no one forces the issue upon you, but that doesn't change the math of whether or not you could pay your debts.
Liquidity is different. It is time dependent by definition. Some things take time to structure, deal, and sell. You can also get away with this in practice.
They can both have similar effects when they happen, but their causes are sharply different. I have a house I can sell to cover my mortgage, but couldn't sell it in less than a couple weeks or maybe even months. Illiquid but solvent.
If you think it is anything else you are just being an apologist.
This isn't true. If you eat at a restaurant but forget your wallet, you can't pay your bill but you're still solvent. You have assets to cover your debts. "Can't pay your bill" is too broad a statement to be meaningful. There are many complicated financial instruments and needing time to make a payment doesn't automatically make you insolvent.
I don't know the answer, but I see both sides. As of today, their liabilities exceed their assets worth, so it does feel like solvency fits.
They NEEDED to raise capital.
Their liabilities > assets.
They were 100% insolvent.
If the interest rate goes up while you are holding your low interest bonds, that means that your future cash flow from the bond (the repayment) is literally worth less than what it was. Your bond payments have a lower real value due to the higher interest rate of the surrounding environment and the increasing price levels, despite being the same nominal amount. That's why the bond's price plummets in the market, which is why this is a solvency crisis: because the assets really are not good for the liabilities at present value, which is the only kind of valuation that makes sense here.
1 2023USD =/= 1 2033USD
Those aren't the same currency.
Solvency is whether you could go to market today (or soon) and show more assets than liabilities.
The asterisk is that the liabilities are generating interest, but this is fine because (one very safely assumes) that’s covered by the interest on the long-duration assets SVB bought.
Depositors now expect higher interest rates which cannot be covered by those assets. They will withdraw their deposits and move them to a bank that can offer higher interest rates.
Those are short term liabilities. The ability of depositors to withdraw their funds is part of the liability.
If the bank wanted to raise long term deposits it would have had to pay much higher interest rates.
Once they withdraw the bank can not raise additional funds because all other depositors have better interest rates in other banks.
No amount of time will cure this situation, the values of those bonds will not recover. This is not some temporary panic.
The only way for the situation to improve is if interest rates go down in the short term. Unless that happens, the bank remain insolvent.
SVB's systemic risk was just that the vast majority of their depositors are startups, and can corralled into action by VCs. Thiel decided all the startups he backed should withdraw all their money from SVB at once, and knew the rest of the VC world would follow suit.
I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.
Of course here it blew up, but even marked to market assets will depreciate in value if a bank tries to liquidate tens of billions of dollars worth.
Which table in the 10-K would I look at to see this?
Does that really matter though? Anyone can buy and hold to maturity. The market price indicates that that's not good business.
You go ahead and think that...
https://www.svbsecurities.com/team/joseph-gentile/
Joseph Gentile is the Chief Administrative Officer at SVB Securities.
Prior to joining the firm in 2007, Mr. Gentile served as the CFO for Lehman Brothers’ Global Investment Bank where he directed the accounting and financial needs within the Fixed Income division.
The Demise of Silicon Valley Bank - https://news.ycombinator.com/item?id=35098607 - March 2023 (64 comments)
The previous major threads appear to be these (did I miss any?):
SVB in talks to sell itself after attempts to raise capital fail - https://news.ycombinator.com/item?id=35094466 - March 2023 (270 comments)
Ask HN: How is the SVB situation affecting your startup? - https://news.ycombinator.com/item?id=35094447 - March 2023 (130 comments)
Banks lose billions in value after tech lender SVB stumbles - https://news.ycombinator.com/item?id=35087666 - March 2023 (9 comments)
Bank run on Silicon Valley Bank? - https://news.ycombinator.com/item?id=35086836 - March 2023 (791 comments)
What I don't get is all this pro-SVB, anti-VC sentiment, how "some VC's yelled fire in a crowded theater" and caused the poor bank to collapse. Isn't it just common sense though, to protect your money? The bank fucked up by doing risky reckless things, it got exacerbated because the customer base is not as diverse as a big bank - it's all startups that are subject to the same patterns, and SVB is not as big for the govt to bail out, so the bank customers did the only logical thing which is to withdraw your money before it disappears, yet they get lectured for doing that.
https://twitter.com/msuster/status/1634203251758469120
https://www.linkedin.com/pulse/few-thoughts-svb-jeremy-solom...
Instead, they waited until it was way too late (by most accounts, the fed is going to do another 50bps hike next) and all it took was some fear for the house of cards to come crumbling down.
This does feel like a regulatory failure though. Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this.
They would have had to recapitalize way earlier if that was the case.
This is the kind of thing you could get a Nobel prize for, if it was backed with data and people agreed with the conclusion.
Of course Bank of England had to bail out their pension funds for very similar reasons so it's not like this is something they're unaware of.
My guess is that come Monday they backstop all of this and only the shareholders of SVB get wiped out, sort of like the reverse of Bear Sterns (bailed out early) vs Lehman (allowed to fail). It's not "fair", it's just risk.
They absolutely deserved to fail.
The government allowing them to fail is actually a sign of the system working.
You would think that they should prevent such risks, right? If the bank loses their collective shirt on a bad bet, they will eventually fail to meet their reserve requirements, right? I don't see how you create a stronger incentive without specifically telling bankers how to do their jobs.
Is this one possibly one of the 'the Fed broke something' scenarios that might lead to quicker rate cuts ?
SVB had plenty of warning to sell securities. They didn't even have to do it overnight. They had plenty of time to slowly roll-over their bonds and sell MBS. This wasn't a surprise "gotcha" by the fed.
SVB probably should have realized that continued interest rate cuts were gonna nuke their MBS, and sold them at a loss earlier, so they could recapitalize in safer instruments like short term treasuries.
What I’m learning about reserve requirements is that this would have actually reduced their “assets in reserve” though because they were allowed to use the maturity price of the MBS for that accounting. So selling them at a loss and buying short term treasuries would have reduced the amount of assets in reserve by that calculation, even though it would have been the same amount of assets (at the time of the transaction) in mark-to-market value AND safer against further interest rate increases.
I’m guessing this dilemma at some point got so bad that they literally could not recapitalize anymore without becoming insolvent, at which point their only option was to hold the MBS through further losses
It would be very damaging for their credibility if they hiked by 50bps after already doing 25. Of course it depends on what’s the CPI next week but if it’s good/as-expected 50bps would be very surprising
If they wanted 0.5 they could just hike it by 0.25 and add another 0.25 later. Exactly the same outcome, less turmoil in the financial markets. Powell’s rhetoric seems to have staid about the same for the last 6 months.
Also the fact that their rapid rates hikes were the direct reason behind the second largest bank collapse in US history adds another dimension. Obviously I’m not saying it’s their fault. But well if bond prices go down even more than expected more banks might end up in the same situation.
It is all relative, not all relevant
Anything is liquid if you will lower the price enough
Surely they did sell those treasuries without any hiccup. (I'm not 100% certain about the MBS they hold but the main problem is that the fair value is down and not the discount relative to that price that would be required to sell quickly.)
There is no "fair price". Price is a scaler, it has no morals or ethics
It's not true that "Anything is liquid if you will lower the price enough" if we understand liquidity in the usual sense.
Bonds and stocks are liquid because the bid-ask spread is small. It doesn't matter if you bought the bond at $1000, if you can get $799 for it and it would cost you $801 to buy one you may be unhappy but your problems are unrelated to liquidity (of course that $800 market price has nothing to do with ethics or morale).
A lingot of gold is more liquid than a gold tiara.
A participation in a private company is not liquid. Being able to sell with a large enough discount doesn't make it a liquid asset.
PS. the sentiment still makes no sense, SVB customers did not sign up for the bank to gamble with their money and they have a full moral right to do whatever it takes to get their working capital back the second they start to sense any trouble. These withdrawals are not just stupid meme stock lulz, this money belongs to the customers.
Many banks, even the big ones like Bank of America, Wells Fargo, and Chase, do not want to do this for random new small companies with no history and unknown founders. SVB was -- I believe -- founded in part to fill this gap.
Beyond that, there are also come contractual relationships between some VCs and SVB that require some VC portfolio companies to hold their deposits (at least some amount of them) with SVB. (I don't entirely understand this point, but even if I'm getting it wrong, the previous point is enough.)
The point is that they are supposed to have capitalization requirements and regulations that show they actually have more assets than liabilities.
But in reality they don’t so fractional reserve doesn’t work here. In fractional reserve the bank still has assets worth more than liabilities. That’s the whole point of the regulation.
This bank doesn’t meet that basic requirement.
This is due to the rate hikes, yes, but just like all the recent events if the bank had properly adjusted its portfolio after the hikes, making losses and having a shitty stock price for a while, it would have been able to weather this storm. The storm came because the bank never adjusted until too late. It waited until it was negative from asset devaluation due to interest rate hikes
It's the same dynamic as the toilet paper shortages at the beginning of covid: most people weren't panic buying because they thought that there wouldn't be enough toilet paper to go around if everyone kept cool, they were panic buying because they knew not enough other people were keeping cool.
If it looks like the only reward you'll get for keeping your cool is a few weeks with a dirty bottom, it's hard to avoid joining in the run.
Bank runs are fascinating psychological dilemmas to me. On one hand the SVB CEO was correct - everything would have been fine if every depositor hadn't run for the door. But, when a bank says "please don't run for the door", it's already too late.
https://www.barrons.com/articles/svb-financial-stock-sale-ce...
So ok, we've "punished" SVB's management's poor money-management practices, but in the process we've also punished a lot of companies who had millions of dollars but now only have $250k (with uncertain future access to some portion of the remainder).
Good job! Stick it to those SVB execs! Talk about cutting off your nose to spite your face... or I guess cutting off the noses of others...
PS. people didn't withdraw to spite anybody, this is not kindergarten. They started withdrawing because they don't want their small companies to die and need money for payroll, it's really the only sane thing to do.
Each individual depositor has to make the bail/stay decision with extremely limited knowledge of what everyone else is going to do. They know that the market is freaking out at SVB's sale, and they know VCs are sending panicked emails to their startups telling them to bail. They know that if enough people actually do bail they may lose everything they have (in excess of $250k).
Presented with that information, the only rational move for a depositor is to bail. It's weird to blame the VCs for making the only good choice available to them.
> You're talking as though the SVB depositors are some sort of hive mind capable of acting in concert. They're not.
… is patently absurd. Startups and the VC market are all about meme copying, on everything from which front end stack or build system to use to how to write a “regretful” layoff announcement on LinkedIn, to (apparently) management of funds.
The boards are incestuous with respect to the ecosystem, and absolutely capable of acting in concert, as constantly demonstrated.
Memetic spread is not "acting in concert" in the way I meant it or in the way that OP was demanding. There is no common goal in the kinds of behaviors you're referencing.
And even if you're B2B, if you're 999th in line and your customers are 1000th in line, you're even more screwed. If you're first in line you at least have some remaining assets even if you have no customers. If your assets evaporate at the same time as your customer base then you have nothing.
Not all bank runs are systemic in nature.
The fact that the Feds did not maneuver this is another interesting datapoint.
TP was a result of people shifting from commercial toilet paper to home toilet paper, and supply chains not keeping up. Not from panic buying, fwiw.
https://www.washingtonpost.com/national/coronavirus-toilet-p...
(there are other better sources i'm sure)
> However, because grocery stores and other retailers usually only keep several weeks’ worth of toilet paper in their warehouses, the sudden increase in demand — largely fueled by panic-buying and hoarding — has quickly depleted stocks.
> “Consumers are experiencing nervousness and they are buying more than they should, depleting inventories of an industry that is very lean,” Gonzalez said. “It will take a couple of weeks for people to understand they have enough, and the inventories will increase on the shelves.”
Again, there are similarities to SVB. There were legitimate concerns about SVB's solvency that triggered a run. The same goes for toilet paper: there were a few legitimate hurdles which were made many times worse by panic buying.
[0] https://cnr.ncsu.edu/news/2020/05/coronavirus-toilet-paper-s...
It's just never that simple.
I think you'll find a lot of the people complaining are people who got hit and are bitter about it.
e.g. some CFO's seem to be complaining about VCs - the CFOs likely didn't do their job, one part of it is "treasury/cash management". Some VCs are complaining about other VCs - probably they weren't paying attention and their portfolio companies got hammered.
Remember - SVB dusted ~$15 bill on their long term bond bet, it was almost their entire equity base. Pulling your money out was the only sensible action.
> Also, I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. If some depositors get spooked and take their money out, and other depositors evaluate your balance sheet and decide things are fine and keep their money in, and lots more depositors keep their money in because they simply don’t pay attention to banking news, then you have a shot at muddling through your problems.
But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say “hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,” then all of your depositors will take their money out at the same time. In fact, Bloomberg reported yesterday:
Unease is spreading across the financial world as concerns about the stability of Silicon Valley Bank prompt prominent venture capitalists including Peter Thiel’s Founders Fund to advise startups to withdraw their money. …
Founders Fund asked its portfolio companies to move their money out of SVB, according to a person familiar with the matter who asked not to be identified discussing private information. Coatue Management, Union Square Ventures and Founder Collective also advised startups to pull cash, people with knowledge of the matter said. Canaan, another major VC firm, told firms it invested in to remove funds on an as-needed basis, according to another person.
SVB Financial Group Chief Executive Officer Greg Becker held a conference call on Thursday advising clients of SVB-owned Silicon Valley Bank to “stay calm” amid concern about the bank’s financial position, according to a person familiar with the matter.
Becker held the roughly 10-minute call with investors at about 11:30 a.m. San Francisco time. He asked the bank’s clients, including venture capital investors, to support the bank the way it has supported its customers over the past 40 years, the person said.
Nah, man, you don’t get to be a successful venture capitalist by taking a long view or investing in relationships or being contrarian. I’m sorry, I’m sorry, this is unfair. Of course they were right — Silicon Valley Bank did collapse, and if you got your money out early that was good for you — but that is largely self-fulfilling; if all the VCs hadn’t decided all at once to pull their money, SVB probably would not have collapsed.[6]
[1] https://www.bloomberg.com/opinion/articles/2023-03-10/startu...
Probably is doing a lot of heavy lifting without telling how? Because in the first paragraph, Levine himself says SVB wasn't diversified or large enough to make it through £16b write down on their HTM investments: https://twitter.com/RagingVentures/status/163357916752972595...
[1] https://adamtooze.substack.com/p/chartbook-200-something-bro...
They bought a bunch of long dated stuff. The credit quality isn't the problem here, it's the sensitivity to interest rates rising. The value of those long dated bonds fell by $15 billion - almost equal to their total equity capital. It was 40% of their assets. On top of that, they had flighty deposits - not grandma with her $100k in the bank which is FDIC insured, startups with millions in the bank who knew they weren't insured. It was incredibly stupid to be so heavily weighted in long term bonds. As dumb as it gets in banking.
All major banks don't have the same problem. The vast majority of them had/have a portfolio of assets with a weighted average duration significantly shorter than SVB because they understood there was a risk of interest rates rising significantly from the extremely low levels they were at. And most banks have stickier deposits than SVB. So - all banks lost money on their long dated assets, but not the same % of their equity capital (because it's a lower % of their assets) and not with depositors who are likely to pull money fast.
In more mature industries, people would have been confident that the government wouldn't let their bank go under, because the government usually doesn't, and as a result the government usually doesn't have to. Instead, startup culture is so low-trust that we shot ourselves in the foot.
London, 10 March, 2023: Silicon Valley Bank UK, the financial partner of the innovation economy, today moved to confirm to its UK clients, partners and external stakeholders its financial position as a standalone independent banking institution that is regulated and governed by the PRA in the UK.
Silicon Valley Bank UK has been an independent subsidiary since August 2022 with a separate balance sheet to the SVB Financial Group and an independent UK Board of directors. Silicon Valley Bank UK fully abides by the UK regulatory requirements as covered by the Financial Services Compensation Scheme and by the Financial Ombudsman Service. SVB UK, Ltd. is ring-fenced from the parent and its other subsidiaries.
Notes to editors
Funds from client deposits placed with SVB UK, Ltd. are managed in the UK for the benefit of our UK clients. None of our operations in the EU outside our UK Subsidiary are licensed to or take deposits.
https://www.svb.com/press/release?Channel=45991&Account=SVB_...
"SVB Online Banking (US, UK, Canada Branch Accounts) will be unavailable throughout the weekend."
https://www.bloomberg.com/news/articles/2023-03-10/svb-s-uk-...
>The FDIC prefers to close a bank over the weekend, shutting it down on Friday and reopening Monday, Steven Kelly, senior research associate at the Yale Program on Financial Stability, told me.
>“The midday takeover suggests the bank couldn’t responsibly operate until the end of the day,” Kelly said.
[0]https://www.bloomberg.com/news/live-blog/2023-03-10/the-fall...
It's straightforward to reckon their exposure to interest rates: they had $90B in 10-year fixed rate bonds, so they lose $9 billion per % of interest increase. They must have known that a 4% increase in interest rates would put them underwater, but they did it (and were allowed to do it) anyway. It'll be interesting to learn about the process behind that decision.
The whole point of capitalization stress-tests is to determine that banks can withstand a certain amount of withdrawals.
It of course is going to be much much more likely on a bank that only has 3% FDIC - I have no desire to "run" on my bank because I am below the $250k limit, and even if the accounts were frozen for a week it wouldn't be that worrisome.
But if I were a startup with $100m at SVP, I would have been freaking out earlier this week.
Not only is there the 250k FDIC limit, but that's leaving money on the table. At least put it in highly liquid and stable securities of some kind so you're not bleeding it. And, of course, accounts can get locked out. Anything over a couple million should be split across two different institutions minimum.
Suppose you have 500 engineers each making on average $200k (some make above, same make below). That is about about 17000 / month or 8500 biweekly. It takes time to transfer money. What options do you have for storing the money that is immediately payable. Stocks are volatile. Treasury bills or bonds could work, but it would be a good idea to have it such that the money is deposited a day or two early so you can make pay roll.
500 * 8500 = 4.25 million, so even a medium-size startup simply using SVB for their payroll checking (due today, so they should have had it in by yesterday, and recall ACH processing times of 2-3 days) could easily have a few million sitting in a checking account as part of weekly practice.
Additionally, there is at least one person at the company whose full-time job is to handle this. Making a transfer every Tuesday or Wednesday or whatever is well within a workload. When I say "sitting in checking" I quite obviously mean more than two weeks by "sitting".
Also, I was mostly referring to series-A startups that have, for example, single digit millions in the bank. Keeping that all in checking is dumb. Larger companies that are moving millions each week can afford to have special arrangements with their bank or banks to limit liability independent of FDIC. A line of credit, perhaps, that is paid off a week or three later, secured by a bundle of securities held at the same institution, for example. I'm fairly sure a bank run can't touch those.
There are so many possible solutions to this problem.
Maybe it's because I've been burned hard by banks before, but I'll never trust them to not do precisely what SVB did here (in some fashion). Everything's great until it isn't.
EDIT: Engineers making $200k isn't $200k in cash comp, either, FYI. (And anyone with 500 of them has more than one bank account already.)
What? The third-world banking system of the US often takes MUCH longer than that.
ACH transfers are also 24 business hours.
The check clearing thing is called Check 21 and it was a big thing back in 2004 when it went into effect.
https://www.federalreserve.gov/paymentsystems/regcc-faq-chec...
One concern is that depositors will realize they can get better returns on money market funds and withdraw from banks en masse.
zero risk is not a thing
Once their HTM assets’ market price fell enough that rebalancing would force them to admit to insolvency by recomputing their reserves, they literally could not do anything with them except hold and pray that they make it, which may have just made things worse. Who knows how long they’d really been underwater
How would that have helped?
Once that 100B falls to 95B due to interest rate hikes they could sell them all and buy 95B of short term treasuries instead, insulating them from any further rate hikes
https://www.usatoday.com/story/entertainment/celebrities/202...
The fed's move in interests rates was bound to break something. This is the first big name and, while banks are taken over by the FDIC often and it never makes the news, this one will be especially interesting bc it is Silicon Valley Bank. Naturally, people and the media will associate with the rest of silicon valley, bringing extra scrutiny to every brand name tech company, especially the ones that are still barely profitable.
And any accounts over $250K, poof.
Edit - this has been the first fdic takeover since 2020, so no, it does not happen often.
Given how much media attention silicon valley gets, for better or worse, the name of the bank would have some affect.
Tech and fintwit are both blowing up on SVB, there are like 4 SVB related posts on HN front page, I even some reddit posts.
This will be big in the media, and therefore the public conscience.
Here is a chart that shows the number of bank failures over the past decade [0]. As you can see, having a year with 0 failures is actually the outlier. The average annual bank failure over the past 20 years is roughly 20 per year and the median number is 8 per year.
The reality is they try to protect as much of the assets as they can and even those over 250k will probably not lose as much as they would have without the FDIC
Sure you get to hold onto funds for a day or two later, but it also puts your payroll at risk if the bank is failing.
(Seriously I worked for an org that changed payroll from Thursday to Friday and I’d be first to file with the labour board for missed employment payment if they blamed the weekend or bank failure for missing a payment).
Unless you experienced that time, it really hard to understand the pervasive denial of what was obviously happening.
You'll see the same thing happen this time around, and will have an equally hard time conveying just how strong the denial was.
To speculate about where that first shoe might be in this case and who's wearing it, it might help to consider where the buck ultimately stops.
Dont forget it was Lehman that failed first, Bear got special treatment amongst the Citi, AIG, et al bailouts.
That's not quite true; the FDIC will pay uninsured depositors an advance dividend within the next week.
"advance dividend: A payment made to an uninsured depositor after a bank or thrift failure. The amount of the advance dividend represents the FDIC’s conservative estimate of the ultimate value of the receivership. Cash dividends equivalent to the board-approved advance dividend percentage (of total outstanding deposit claims) are paid to uninsured depositors, thereby giving them an immediate return of a portion of their uninsured deposit. Sometimes when it is projected that all depositor claims will be paid in full an advance dividend will be provided to unsecured creditors."
[1] https://www.fdic.gov/bank/historical/reshandbook/glossary.pd...
This chart of historic bank failures paints a different picture:
Also means we may be about to start seeing a lot more of them again, assuming we're getting closer to the next big recession.
That's a giant assumption.
I'm not claiming it's definitely going to happen, but if it is about to happen, we can expect to see a lot more of these failures to start happening, based on that graph.
I didn't realize there were that many bank failures during the Great Recession myself. I thought it was only a handful, just a few high profile ones.
https://twitter.com/alistairmbarr/status/1634275645235793920
And banks usually aren't crazy amounts short. But they're short enough to got under.
Why do you believe this? The FDIC said it will provide certificates that you had deposits. These certificates help you make claims in court proceedings as they liquidate.
> The FDIC will pay uninsured depositors an advance dividend within the next week.
The FDIC will examine the books and estimate how much of the uninsured it can pay now, and pay that as an immediate dividend.
> Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers.
If I had to bet, most people who have money in a bank today think this is how banks work.
But in reality, when a bank receives money, a bank will take some percentage of their customers deposits (90% or so), and then invest that money trying to make a return on it. This works as long as all customers don't try to withdraw their money at once.
But when enough customers... say 10% of the customers try to withdraw money from the bank at once, since 90% of the money was in other investments, the money isn't really there, and you get a bank run.
Silicon Valley Bank is not new, the whole reason we have FDIC insurance is to protect against bank runs. As long as this is the system we follow, we will continue to get bank runs.
I feel like the entire banking system is broken because "The money isn't actually there". There needs to be a better way then relying to the government to bail out banks who make bad investments. Either a bank should be backed 1 to 1, or there should be some other way to keep hold of your money.
Probably invest then. Why would the bank put its money in the bank if you are not?
But from time immemorial banks work by taking money from you (short term) and selling it to someone else (long term). Originally the banks were "protected" by being able to claw back the long term at anytime; but that caused even worse problems.
FDIC provides a way for "common people" to be protected from this; the other option would involve something like the USPS offering cash-only banking for people.
Which services? And those services would need to be something that I can only provide by being your depositor (otherwise I'll get beaten by someone who provides those services without the added burden of holding and securing your physical money.
You've basically designed a system that increases the costs of being a bank, and eliminates the main source of profit, and hand-waived over how to close that gap.
I suspect it's simply unprofitable to run a bank in the model you've provided. I suspect the only way to make that system work is by saying "banking is a public good, it's OK if it runs at a loss" and making it a gov't provided service. I don't really see a path to private banks existing in the model you outlined.
You're right, in this model it wouldn't be nearly as profitable to be a bank as it is now. Potentially, it could be a "public good" provided by the government, or it could be like a lot of the brokerages who provide investment services and charge a commission on top.
Also, you're right it would be very hard for banks to be anywhere near as profitable as they are now if assets are backed 1:1.
But in some sense, banking is already viewed as a public good since the FDIC is backing all of the bank deposits. So at the moment we kind of have a weird hybrid situation where banks are kind of pseudo-private, but also backed by the government.
Then you could have banks handle the process of matching lenders to depositors. With varying systems...
Now imagine you've finally settled on a cost structure that can pay all of your insurance, operating costs, payroll, and everything else. You charge monthly fees and you might also charge per-interaction fees to do anything or talk to anyone.
Then a competitor comes along that operates in a fractional reserve manner. They not only offer zero fees, they actually pay customers interest to keep their money in the bank. There is a risk of failure, but it's rare and all evidence points to customers not suffering massive losses when it does happen due to various regulations. Inconvenient, yes, but it's unlikely that you're going to lose all of your money.
The majority of your customers would leave for the competitor bank.
As time goes on it's becoming more obvious that the current status quo is unstable. Our financial institutions regularly engage in ponzi like activities and we've become accustomed to near catastrophic collapse at the end of every business cycle.
If we are going to stick to fractional reserve banking then we need to come up with better reasons why otherwise I feel like the entire system needs to be reevaluated.
the best reason is to allow more risks to be taken.
A 100% reserve system means that a bank would not be able to make loans that they'd want to make (aka, a customer wants the loan, and they can service it, etc).
A 100% reserve system would seize up at a small shock much more easily than a <100% reserve system. The reason is that if a bank required 100% reserves, they would not lend money (even to another bank), even if the lending would've been profitable. This means a bank must standalone on an island, rather than as an inter-connected network with other banks.
You pay for <100% fractional reserve system with some risk of bank runs. If the majority of people can get a gov't backed guarantee that they would be made whole, these runs tend to be minor or not happen at all. And overall economic activity is smoother due to more liquidity available to lubricate everything (e.g., it's easier to get loans to do things to provide more economic activity).
Also, in your model, where does money for loans come from? How are borrowing costs impacted by a major source of funds for loans going away?
This is such a great question. It has depth and nuance. If I understand it correctly, it comes from a place of wanting stability. Why wouldn't anyone design a banking system that is fully backed and stable? Who the hell wants these violent booms and busts? This looks like something that can be kept stable right from the get go.
I hear you. The main reason I can think of is that "banking is crookery".
The old goldsmiths were crooks who understood fractional reserve. Imagine if we were to ban the current system and asked banks to hold every deposit 1:1, they could - for a small fee. But that will mushroom a black market of lending for interest. All the banking crooks will have no choice but to go to the black market. This will cause the black market to grow faster than stable banking, which will lead to more unregulated chaos.
The only alternative I can think of is equity-based islamic finance style banks. While these banks have interest in varying forms, they don't have as much asset risk because the interest rate is largely meaningless because lending/borrowing is not the main way to earn money.
How banks actually work was described well by the Bank of England. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Not completely wrong, after all.
Notice the issue that SVB had was a huge influx of deposits and not enough loans.
It generally works because while any one depositor's funds are short term, the pool of such deposits is generally stable. A good chunk of today's deposits will fund tomorrow's withdrawals. Banks also have elaborate instruments like commercial paper and the Fed discount window to cover short-term liquidity gaps. A bank with assets it can't sell quickly enough can generally borrow briefly from some other bank to cover the term gap. But there is a limit on how much such borrowing a bank can do, and SVB has hit it.
It seems that SVB made a classic mistake of putting a lot of "hot" money into long-term assets, thus taking on interest rate risk. They probably should have put the surge of deposits into shorter-term instruments, but that would have forced them to reduce interest on deposits or their own profits.
So it looks like in this case SVB chose MBS with a pretty low interest rate and long maturity, which they now have to sell due to the bank run you mentioned.
People don't want to lose their money to inflation, so banks are implicitly required to make up for that. Also, it's just too tempting for them not to use the money that is collecting dust.
Hopefully people will emerge from this with a better understanding of Bitcoin's advantage to normal fiat system, which is something that is severely lacking in discussions I see here in HN.
It's more difficult just to hold onto wealth than most people see. It'd be nice if everyone holding the currency weren't implicitly taxed through dilution, forcing them to passively invest, creating bubbles... and still being taxed on the so-called gains. These passive investments are more about stashing wealth in something with a limited supply (stocks etc) than about the actual business they're investing in, making them not all that different from the concept of a broadly-adopted cryptocurrency. Difference is they have to keep fleeing from one "save haven" to another as the money moves and the bubbles pop.
The point of a bank is to loan money. That's it. This is how they make money. They need deposits so they can loan money. They pay the depositor a part of the interest on the loans they write. They don't exist to sell services because that's a really bad business. They provide services to attract deposits so they can write more loans. That's what banks are.
> ...and then invest that money trying to make a return on it.
No, they don't do that. They loan the money. If they can't loan it then they put it into a variety of safe places that can earn some interest, among other things. But they don't gamble depositors money. Investment banks may, but that's an entirely different thing.
Because people want economy to be self-regulating. What is the correct amount of money in circulation? What are interest rates? Let the market decide. Banks is how market decides, basically.
How you think the banking system works is how "educated" people think it works and even that isn't correct, by the way. There is no reserve. The funds aren't real. It's all just made up numbers. There have been several Hollywood films made about it (e.g. The Big Short and Margin Call). It's almost so stupid you think there must be something else to it, but it's just people playing with numbers.
> To protect insured depositors, the FDIC created a new entity called the Deposit Insurance National Bank of Santa Clara, or DINB. DINB will maintain Silicon Valley Bank’s normal business hours, with banking activities resuming no later than Monday, including online banking and other services, the FDIC said. Customers with accounts in excess of $250,000 are being told to contact FDIC direclty
> The company’s main office and all Silicon Valley Bank branches will reopen on Monday,
> Uninsured depositors will get a receivership certificate for the remaining amount of their uninsured funds, the FDIC said
Keep in mind 93% of SVB's assest were not FDIC insured.
> Silicon Valley Bank Had About $209.0B in Assets
> Svb Is First FDIC-Insured Institution to Fail This Year
Their recent attempt to raise money via shares and debt sales failed,
>> Silicon Valley Bank Had About $209.0B in Assets
I'm not an expert, but aren't deposits in a bank liabilities? Assets are things like treasury bills and loans held by the bank.
I think this is Google's first hit when one searches this, but I do not believe this is correct. Here is a source saying the opposite, as an example.
A liability, in general terms, is something owed to another (e.g., a deposit)
https://courses.lumenlearning.com/wm-macroeconomics/chapter/...
And another more reputable source:
Edit: Seems that this is what's explained in the investopedia article you linked to:
"When someone opens a bank account and makes a cash deposit, he surrenders the legal title to the cash, and it becomes an asset of the bank. In turn, the account is a liability to the bank."
So, I think the person you are responding to is trying to explain the distinction between a bailment and a loan.
Let's pretend that someone had a safety deposit box with $1B at SVB. They'd get to keep the full amount, because that is a bailment. The money never becomes the bank's.
In contract, if someone deposited $1B at SVB, then the actual money becomes the property of SVB. And the depositor then is a creditor to SVB - they have an unsecured load to SVB of that amount. But after SVB gets taken over by the feds, they have to stand in line with the other creditors and get what they get. They aren't guaranteed to be made whole.
"The deposit itself is a liability owed by the bank to the depositor. Bank deposits refer to this liability rather than to the actual funds that have been deposited. When someone opens a bank account and makes a cash deposit, he surrenders the legal title to the cash, and it becomes an asset of the bank. In turn, the account is a liability to the bank."
The ACCOUNT is the liability, the CASH is the asset.
edit: Judging by a quick downvote trigger-finger, there seems to be some folks having trouble believing this; check this out from the source: https://www.federalreserve.gov/releases/h8/current/ ... look at the category names of where deposits and loans are listed.
The deposit itself is not a liability. The deposit account is. There are many ways to get money into a DDA. The bank will never give you your original paper currency back.
The (say) $100 cash I deposited to the bank becomes both an asset (they have "my" $100 in the vault) and a liability (they own me $100). So the accounting equation still balances.
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
The 10Y treasury was worth $100 in 2021, but today is only worth $80. The bank still owes Alice $100 (a $100 liability), but the asset's value has declined. This has caused... issues... culminating in the past week of events.
Therefore although bank runs aren't normal, they will almost surely happen to you if you put yourself in a situation where a bank run would destroy you. So you have to work as if bank runs are normal, or they will be normal.
You may hold 100K in treasuries today, but if your employer can't make payroll, you're gonna sell to pay rent.
Can you clarify this part?
I'm not super familiar with the intricacies of banking, so my guess is that this is simply due to part of it I don't know about, but...given all the "creative financial instruments" I've heard about since the runup to the 2008 crash, I have to wonder if this "market force" was at least partly due to something SVB was doing that wasn't terribly wise.
A startup-focused bank probably shouldn't have been investing into 10Y, 20Y, or 30Y US Treasuries, when their customers might only have 2 or 3 years worth of life in them.
So yeah, there's a bit of stupidity here for sure. But its the kind of stupid that I can imagine a lot of banks making.
Funny it seems like VC GPs were on the horn yesterday to withdraw, and I know a number of LPs telling me last Sun/Mon they'll be "out of the country" next month. Looks like some folks had early info.
If I deposit $100 into a demand account, I expect to get $100 when I demand it.
If you want to sell me $100 in the future for less today, that's something worth considering, but that wasn't the deal depositors had.
Would an incident like this make other banks shore up their defenses about this sort of thing happening to them, or will more banks fall due to market conditions in general?
So yeah I imagine all the banks nervously looking at eachother. Who is going to pussy out the first and cause them all to tumble over.
Was Silvergate bank not FDIC-Insured?
It might not come to that, since the specifics of the bank's financials will determine whether everyone eventually gets their money back.
(I'm needlessly mean, I know.)
"SVB is our bank, I got in touch with a member of the senior team there and got the following message to share. (My own interpretation is I'm comfortable and I'm not planning to pursue it further at the moment)"
Wow FDIC is fully calling it a failed bank. Just yesterday they were releasing statements saying they’re in a good position. Uncle Sam just fully opened Pandora’s box and made the judgement public!
"Company is 200 years old and we will go for another 200 years more!"
2 Days later
"Whoops, all the moneys gone. Bye!"
[1] https://twitter.com/parkerconrad/status/1634237386564730882
> In many cases, startups exclusively banked with SVB because doing so was listed as a covenant of their debt!
> So CEOs across the tech sector on March 9 faced a hard choice: You can pull your deposits from the bank in order to save them, but then you would be in breach of covenant, and at risk of default on your venture debt. Of course, the alternative was that you risked losing everything if the bank failed. Many chose to hold tight as SVB’s outright failure seemed outlandish even a few short hours ago.
why??
The irony is, if this doesn’t resolve itself relatively soon, we won’t be able to pay down the loan precisely _and only_ because of the terms of the loan that they set in the first place.
I don’t know yet how it’s all going to shake out, but I’m pretty excited to have the experience of trying to navigate through all of it.
Top 1% of U.S. banks is not "relatively small." Technically regional, but had locations across the country. I'm in Utah there's a location across the street from my office.
> why
It was tech-forward and offered debt financing based on ARR.
Why do >90% of online retailer companies use Shopify? If it's better, people will use it.
"Through our relationships with more than 50% (approximate) of all venture backed companies in the US, and with funds and corporations across the globe, SVB Capital’s family of investment solutions give you unmatched access to this unique asset class."
Their online operations have to be drastically changed. Did their ATM cards stop working yet?
The FDIC usually takes over banks at the close of business on a Friday, using the weekend to audit and reorganize. That this happened at the end of Thursday hints that the situation was bad, so bad that another day of withdrawals would have been too much.
(I think it helps to log out? If you're in read-only mode)
If you need to talk to someone immediately: 800-273-8255
it's an 800 number, perhaps you should be clear to where you're directing people: the American National Suicide Prevention Lifeline.
I get that you're trying to be light-footed around the topic, but I feel as if I must point out that not all people that need to talk to someone even have the concept of self-harm on their mind.
If you actually just need to talk to someone , try a Warmline. [0]
Some gallows humor from twitter: "Imagine raising $100m for your AI enabled dog washing app - and your bank sets it on fire before you can".
Original: https://twitter.com/88888sAccount/status/1634028258500169731...
Gonna be quite a show, this.
Not as extreme maybe, and less fraud got us here, but $assets < $deposits
whereas an exchange shouldn't have a position at all
and a hedge fund normally doesn't allow withdrawals at all (without vast notice)
>> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
Two things got SVB down. First, a rapid change in interest rate got their assets repriced down. It did not need to be fatal, this happens to all banks when interest rates rise quickly.
Second, its customers did a ran and went to pull their money. If all depositors of the BoA or Chase pull money out, those banks will collapse, too. This is highly unlikely for the BoA -- if folks start saying that BoA will collapse most depositors would shrug it off; the diversity of its base will make a run highly unlikely.
But as SVB was a much smaller bank and had a lot of similar customers (startups advised by similar VCs) the ran was seen as plausible at which point it was over -- customers pulled enough money to kill the bank. This is the price we pay for the flexibility of the current banking system that allows people to get loans and free checking accounts. My 2c.
The only job for these execs was to know which way the wind is blowing and they showed themselves to be not much better than every other rabid fool that bought GME etc. thinking things would never change and bull runs and low rates would last forever.
What I meant by VCs have a tiny fraction of their fund as cash is that cash is held by LPs and is called upon only when the VC funds a startup. When a VC raises a $1B fund they don’t get the money, they get commitment that the money will be available. So this means that this failure shouldn’t affect VCs ability to invest in the future as most LPs didn’t hold their money in SVB.
[1] https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03...
The majority of VCs use this product simply to help smooth working capital needs and to be able to make new investments without needing to call capital sooner than LPs would prefer (also to juice IRRs), but there's almost certainly some minority that have basically taken an advance on their entire fund size, or at least a large portion of it. And now any of that cash still held at SVB is obviously at risk.
> most LPs didn’t hold their money in SVB.
At the very step of funding, do LPs wire the money to a single bank (SVB) and then the VC dispurses it to the startup in one lump sum? Or do the LBs wire the money to the startup's bank account (at SVB)?
I've heard that UHNW individuals also individually banked with SVB. Wouldn't they have their money at SVB?
Also, wouldn't the VC's long-term relationship w/ SVB give them (the VCs and the startup they're funding) much more leeway with what the bank considers acceptable behavior (ie not money laundering and worth filing an SAR over)? Now that those relationships are gone and the VC has to go through the front door and deal with, say, BankOfAmerica or Chase like the rest of us chumps; doesn't the loss of that relationship materially hurt the broader environment?
Money there to to be spent over the next six months is now not available.
Payroll in Silicon Valley is going to be a mess this week.
Companies that lend to startups short term are going to have a busy time.
Except the last couple years have been bonkers with little revenue / spending alignment during fundraising. Early stage burns are above that level, which makes the situation worse for current crop of co's. Ouch and good luck :(
Update: yes, seems like the insurance part is pretty quick
https://twitter.com/MMikeMMa/status/1634245929481175040/phot...
I've seen several versions of this sentiment here. What are people basing it on? I don't know much at all about the situation.
first HN said there was no problem
then HN said everyone will get their money back
what next?
HN is full of dreamers, the kind who wander into traffic
But if you're curious, and want a layman no-jargon version the press release from the FDIC is pretty good.
I mean this in no uncertain terms. HN users know nothing about this and are regurgitating pure rubbish over and over again in this thread. If you're concerned, don't even trust me, but go read the press release. CA put out one too.
If I had a nickel for every time I heard this from actual friends in the past couple decades, or for when I said it myself a few times... :)
https://www.cnbc.com/2023/03/09/svb-financial-falls-more-tha...
That seems an odd position to allow to build given the current macro. Post-Fed changing their mind on inflation, the course was charted.
I'm guessing they held to avoid taking losses, and at some point it became untenable?
Do you think that long maturity bonds are more conservative than short maturity bonds?
No. Nobody does. That’s why they typically yield more.
Why do you say that he doesn't?
Within the set of long-maturity bonds, Treasuries are conservative. That doesn’t make them conservative per se.
What exactly makes you think that the "(i.e. super conservative)" remark is not about "long maturity bonds" - which is the think that he just referenced?
He didn't mention Treasuries at all. I find quite difficult to interpret the "super conservative" as being about some kind of long-maturity bonds relative to another kind of long-maturity bonds.
We shall see.
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
No bank is gonna buy another bank until that is cleared up.
Who is going to buy this bank? I wouldn’t take it if you gave me 40b. That’s why they had to make a new bank.
By a Thiel-backed company, after he initiated the bank run?
It’d be like a traditional bank not reselling mortgages to Fannie Mae. You can’t have $1B of demand deposit liability and $1B of 10-year treasuries because a rate hike will wipe you out immediately if you need liquidity.
https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
Every one in the past few years looks like it was acquired.
And the point is that there may be many reasons why a bank may want to acquire a smaller failed one to integrate it in its operations but "the previous owners used to have a well-capitalized business until they somehow lost it all" is not a strong reason on its own.
(The investors don't actually know the money won't grow as fast... the Fed could decide to drop interest rates tomorrow, or something else could intervene making it sensible to drop interest rates. But "not growing as fast" was the very likely scenario).
Once everyone decided to pull, they were tanked because no bank keeps 100% liquidity.
SVB disclosed they took massive losses from high risk, high duration assets and were desperate for cash. Investors took large (up to 60% over 24h!) losses, paper or otherwise, to get out of the stock. That can't be just concern over not growing as fast, that's concern about solvency. VC's and depositors saw the same writing on the wall, but it was SVB who wrote it there.
If they were able to cover their normal operations, they wouldn't have needed the emergency equity raise.
The thing that killed SVB was the bank run. They would have been fine with the raise. Panic set in and killed them. FRB is not in a better position, but nobody is panicking, so they’ll survive.
Doesn’t feel much different than a yield farming crypto bank going under when they are forced to fire-sale thinly traded sh*tcoins and take a beating.
Liquidity is a key feature of banks and it relies on trust. Without it, they have nothing. Trust isn't some ancillary thing for a bank. It is almost everything.
Source?
SVB had an unusual amount of long-duration assets. Most banks maintain a buffer of low-yielding, highly-liquid on-the-run Treasuries.
Maybe ZFRB was just a really, really bad idea.
The only difference is that panic set in and there was a bank run, largely led by VCs telling startups to pull their money.
Say you are a Small Company with $5mm in a recent fund raise that you have at SVB. You use that $5mm to make payroll, pay amazon, your office, AT&T for your fiber, buy macbook airs for your employees, etc...
Now - you are listening to the recent news, and it looks like SVB is going to be taken over by the FDIC. If that happens, you will be insured up to $250K, but the rest of your $5mm, all $4.75mm is now frozen. You will be given a certificate for the uninsured funds, and you will be in line to be paid back, but (A) Not immediately, and (B) you may lose part of your funds.
You, as a rational CEO, would probably want to put your money in, say, Wells Fargo, where it wouldn't be frozen, and you wouldn't lose any of it.
That was the basis of the liquidity event that just happened.
The main question is whether they were forced into these investments via regulations. It's likely they could have bought shorter dated treasuries and been fine. In the end, regulations may change such that banks can only buy short dated treasuries... or limitations on the level of duration they can hold.
They're not being punished for losing money; they're being punished for not having the money put somewhere it could grow faster.
I can't escape the feeling that America has lost its grip on what banks are supposed to be for.
Duration risk is risk. Taking on 10-30y maturity is not "risk free"
Many of these banks are holding Munis and other non-treasury bonds, which are not free of credit risk and can be worth 0 in some circumstances. I don't know about SVB's balance sheet, just speaking generally
What you mean to say is there's no credit risk. Not the same thing as you can't lose money. Saying you are guaranteed X dollars 30 years from now does not mean much at all if people need money today. This is not "safe" or prudent
Also, $5 today is not the same currency as $5 in ten years.
This has nothing to do with America, this is you not understanding duration risk.
... so SVB not only didn't have cash, it didn't have assets people were willing to buy / loan against to cover enough withdrawals to stop the run even though those assets had guaranteed ROI, which is interesting to me. Not enough lenders / potential creditors think some 10-year T-bills (and bailing out one of the biggest banks in the country on the lender's terms) is worth it?
Interesting.
No, it's because they didn't properly manage their assets to serve existing depositors if those depositors wanted to withdraw. Locking up money for 10 years has obvious liquidity consequences. I knew that when I first learned what a "CD" is when I was like 10.
What I'm having a hard time wrapping my head around is what the investors saw that made them decide to all withdraw at once.
Correct, but the GP’s point was that it was not “startup creditworthiness risk”, the thing SVB was most ridiculed for taking on.
This sounds like risk taking to me.
Their problem was that their risk management didn't keep up with the changing times (rapid interest rate changes).
Please go on and tell us more HN tropey things like "oh they shouldn't have sold customer data!" or more things that could be an autogenerated robot comment by ELIZA.
Their risk management might have overeindexed on the post recession era but the bank itself lasted through some pretty wild rate shocks.
Mostly, though, all this talk about them like they're a neobank is because everyone appears to think they are one.
SVB was an old stodgy banks that companies went to instead of the new kids like Mercury, specifically because of the trust. They have terrible UX and mobile app but at least they were solid and had a 40 year track record.
Some claim that these accounts are insured/protected up to $125m, but I can't find any info online to corroborate that.
We really don't need a bunch of fake money flying around. It's time to have every dollar in the wild be a real dollar.
Certainly we can argue about the precise percentage of the fractional reserve, but keep in mind that "100%" is not a panacea.
If I wanted to put money to productive purposes (at risk, with reward) I would do so myself. I'd buy bonds, stocks, options, lend money out, whatever. I already do this.
Whatever I keep in cash, without investing, is intentionally kept as cash, and I want that part to be zero risk, I don't need the bank to help me invest it at nonzero risk.
CASH is cash. Keep it in a vault. The cost of holding it is not nothing.
The same traits are present with every industry. How many BS oil fields are funded but turn out to be over hyper. What about real estate scams?
Right wing media has done a great job of changing the conversation from big oil to big tech and many people here are helping, maybe with geniue intention, but foxnews or whatever is attacking tech because it's mostly liberals not because they are concerned with the industry's practices
edit: replace "bankruptcy" with "receivership" as the latter is usually a faster process than the former.
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.
Is the 3% figure from SVB or an estimate from another source?
why is that?!
you have to keep some cash somewhere to meet short term expenses (like payroll)
> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits
I have a hard time believing they lost 20% of their assets in the last 70 days. The shortfall, if any, should be minor.
The FT reported a couple weeks ago that they had an unrealized loss of $15B in bonds: https://www.ft.com/content/0387e331-61b4-4848-9e50-04775b4c3...
I think we'll have a much better idea of the shortfall, if any, over the weekend as the FDIC tallies up the remaining assets and deposits.
Bear Stearns in 2008 was an investment bank, they were not hawking FDIC insured accounts.
We won’t stop you from doing X, but the fees are higher because you’re more likely to default.
As things are every time so thing like this happens either taxes go up, the national debt goes up, or we trigger inflation to solve it.
That’s not how underwriters work. They look at your behavior and your business and they grieve you a quote based on how crazy you seem. And they do that with a bunch of legal verbiage about what they will cover.
Edit: I just noticed that it says that in the link of the thread. I'm tired and I didn't read it carefully, my mistake.
https://americandeposits.com/history-and-timeline-of-changes...
Plugging that into any online inflation calculator, $1 in 2010 is $1.33 in 2023. So FDIC insurance should really cover $333,000, and people could lose $83,000 or more due to coverage not being raised.
This is one of 1000 examples of how deregulation and defunding government programs often backfires on the people calling for it. It's almost like the people who casually deal in hundreds of thousands of dollars don't know the value of the dollar, because they got that money by skimming it from their employees.
You make this sound like the avg citizen called for this, because this is who gets screwed in these situations. The heads of banks and the banking industry called for it, and not one of them will even notice the blip in their lives.
Their investment in SVB represented 0.6-0.7% of their total fund. I assume that the FDIC takeover means it's a total loss.
Was this a manufactured bank run?
https://www.bloomberg.com/news/articles/2023-03-10/why-svb-w...
We truly live in a world.
FDIC insurance of 250k is a months salary for <25 engineers. Less than 3% of depositors hold less than 250k.
FDIC takeover does not necessarily mean that SVB will cease operations permanently. I haven't yet read of depositors not being able to withdraw vs when FTX was collapsing. With FDIC taking over, seems they're going to liquidate more assets to pay off creditors and depositors. Or sell the bank to another financial institution. SVB is Top 20.
Washington Mutual was also a top consumer bank that FDIC seized and was sold to JP Morgan. JP Morgan ended up assuming responsibility of the depositors.
I have a friend that uses SVB for his startup and now all his funds are frozen. The big question is how long will the money be locked up for? Could it be 6+ months?
Even _if_ depositors are made whole those loans could still be called in and wreck a lot of startups.
They may try to sell their loan books to another bank in order to meet withdrawal- which may be very challenging in the current environment.
SVB did exactly this with some of it's mortgage backed securities (a much deeper market) and took a significant hair cut to par value. This was the move that kicked off the bank run. If they tried to do it with corporate loans it'd be even more bloody.
The bigger issue is that the loans that they made are not properly collateralized because SVB accepted startup equity as the collateral. After all, startups and their founders typically don't have a ton of assets to offer up as collateral on loans at the beginning. If the startups are unable to operate because they no longer have access to their funds, then the value of that collateral is unknowable and the borrower has limited (if any) ability to make regular payments. That would mean that any institution interested in purchasing the loans from SVB would have to go through on a case-by-case basis to assess the true risk associated with each loan. IMO, that makes it very unlikely that we'll see a major institution step in over the weekend. Over time, perhaps those loans will eventually make it to stronger banks, but it will take time, that many startups don't have.
Buying SVBs loans make no sense unless SVBs customer liabilities (eg tech deposits) are guaranteed.
I think we will see fed and regulators coordinate a shotgun wedding between SVB and one or several TBTF banks to stem contagion by Monday if not sooner. If not - tech (and the wider market) will be in existential crisis.
I wonder what, if any, consequences fall their way other than the obvious professional embarrassment of a missed call.
Is Stripe adversely impacted by this given they recommended to merchants to use SVB and probably accounted for a large portion of deposits into SVB (from payment transactions)
It’d be a Jedi move for Stripe to straight up acquire SVB. Imagine how strong of an offering they could create then.
I'm sure a lot of startups will be in trouble, but those that are working with decent investors probably had help protecting the assets.
That's literally what they told me they did, and what I was trying to say happened here. It's possible he was misled, but he seemed pretty knowledgeable about this. The money initially came from Softbank, who helped with the process.
Also, $250k per depository per bank. You can also distribute the money across multiple banks to get higher insurance levels.
As an intuitive measure, extrapolate this idea to Apple or Microsoft, which keep ~$10B in cash on hand and also need to protect it.
Literally cash, as in deposits? Or highly liquid assets such as T-Bills?
What SIPC does is similar to FDIC but it basically comes down to "If you buy stocks via Vanguard, Vanguard guarantees that those stocks actually exist and that if they fail you get them, and SIPC helps with that".
Making sure that if there's X in cash or cash equivalent at noon on March 9th, 2023 PST there's still X in cash or cash equivalents at noon on March 10th, 2023
These are companies, sorted by PPP loan size who had SVB as their servicer.
Emphasis on for a while. Stock and bond holders (man, did the latter miss the ball) will absorb losses.
Market cap doesn’t matter. Balance sheet equity.
Given that they had only $5bn of long-term debt - and $173bn of deposits - it seems that bond holders cannot absorb much (even though it's not very likely that they receive anything).
SVB owned a bunch of mortgage backed securities and treasuries - both of which are down 30-50% from their peaks, which coincides with our last venture capital boom. SVB was buying at the top because they had so much capital to deploy.
Maybe instead of cashing it out, depositors could be given a treasury worth 30% less than SVB paid for it, that pays out 1% a year in interest, redeemable at face value in just 20 short years.
Across all banks, there are over $600b in such losses. If they can hold those securities until they mature, all is good. If they need to sell them earlier, the losses become real.
https://twitter.com/grdecter/status/1634091448743219201?s=46...
That's an odd bit of logic. If interest rates stay the same and nothing of interest happens for the next 20-30 years, then those banks will lose the spread between the interest on those instruments and the interest they're paying (SVB was paying 4.5% on savings!) for 20-30 years. That money needs to come for somewhere. The net present value of that loss is a very similar number to the unrealized mark-to-market loss of value of those instruments.
It's almost tautological that being able to hold those instruments to maturity requires that they remain solvent for the term of those instruments, which means that the money to cover their losses must come from somewhere.
Now everyone involved can gamble that interest rates will go back down in a few years and those short interest rate positions will recover, but that's a gamble, not a certainty. Of course, the Fed does have a bit of an interest in pushing rates down if needed to avoid bank failures...
Didn't management/CEO/someone high up in the company say something like "We're safe unless everyone pulls out their money" the other day, indicating that they were de facto insolvent?
and yes, the ceo did say that yesterday, which is likely why this happened
Under ZIRP, the depositors weren't getting anything, and so making 1.5% on MBS was fine. In the current interest rate environment, depositors won't be satisfied with a zero yield on their deposit accounts, and the MBS don't pay enough to cover it, so either they lose depositors because they're not paying competitive interest, or they take a loss every day because their investments don't cover the cost of the deposits.
Ultimately keeping the bonds on the books as HTM just spreads out the loss over the lifetime of the bonds rather than recognizing it right when interest rates change, but the result is the same.
As a whole it's like <30% FDIC insured in the whole US banking industry.
> they’ll probably get all their money but it will still be bad
They may not. Even for banks where most assets are FDIC insured, you'll see that not 100% of deposits are returned. Selecting a random recent one:
https://closedbanks.fdic.gov/dividends/bankfind/Dividendinde...
~95%.
https://twitter.com/GRDecter/status/1634208652595699713?s=20
"Only 2.7% of SVB deposits are less than $250,000. Meaning, 97.3% aren't FDIC insured."
Not a good situation at all.
I'm sure some people are out meaningful amounts of money, but I'm not sure what a typical account looks like.
https://www.depositaccounts.com/blog/indymac-depositors-are-...
Bank deposits are special and there will be no clawback. However, depositors who lost money will be first in line at the bankruptcy court.
https://nypost.com/2023/03/10/nypd-called-to-silicon-valley-...
Likely many companies won’t be able to do mid-month payroll.
Someone will setup a market for the FDIC warrant on uninsured deposits, but that will take time.
If your company can't access your money to access payroll for X months, you might as well as be dead.
And
After that its a question but typically depositors will know the answer very quickly because their claims come first.
From the PR
>The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds
This is a 100% standard FDIC statement and not unique to SVB btw.
https://www.investopedia.com/terms/a/advance-dividend.asp#:~....
Even if each owner had all 14 types, they only get $3.5mil in insurance. And the bank has, allegedly, somewhere around $200bil in deposits.
Otherwise no financial institution is actually insured against it's entire book. That would be insanely expensive and financially complicated at the scale banks operated at. For example, JP Morgan Chase has $3.7 TRILLION in liabilities on the books. Where the hell is an insurer going to get $3.7 trillion to gamble?
Could be some of these companies have other types of insurance against this, but for a lot of small startups this is way down the list of things you'd get private insurance for.
1. FDIC insurance only covers $250k. FDIC insurance is mostly to reduce personal risk, so individuals feel comfortable keeping their own money in the bank. This is key to the banking industry because individuals are much more likely to horde physical currency than businesses are.
2. Who would insure the bank for unlimited deposits? If it's a non-governmental organization how would depositors know the insurance company is good for it? If it's a governmental organization then the taxpayer would essentially be a codified safety net for corporate risk taking. The insurance is more political palpable (and affordable) if it's seen as protecting individuals from bad banking practice then if it's seen as a bailout.
3. Banks ideally are the safe organization to hold cash. A bank failing is seen as a failure not only for the individual bank, but for the set of regulations that banks must follow. One bank failing reduces trust in all other banks, so it's in the industry's best interest to accept regulations that prevent bank failures.
This isn't like FTX where your "assets" are worthless IOUs written to yourself.
The bank has assets. Just not enough to cover all liabilities. That's why you see the term "haircut" being used a lot in these threads.
The only guaranteed amount is 250k.
Depositors will see all of their insured money back, uninsured deposits will be recovered based on available assets and/or terms of any resale by the FDIC, but could be lost in whole or substantial part. Large depositors could potentially see substantial losses.
I wonder how many businesses will be forced into a fire sale due to inability to raise cash to cover short-term liabilities. I'm sure some private equity firms' mouths are watering right now.
SVB had $210b in assets yesterday.
> Liquidity Requirements. Category IV organizations with greater than $50 billion in WSTWF, as well as Category I-III organizations, are subject to LCR and net stable funding ratio (“NSFR”) requirements and must maintain high-quality liquid assets in accordance with specific quantitative requirements. However, the above-mentioned Category IV organizations, as well as Category III organizations with less than $75 billion in WSTWF, are subject to reduced LCR and NSFR requirements. Category III organizations with greater than $75 billion in WSTWF and all Category I-II organizations are subject to the full LCR and NSFR requirements. As of December 31, 2022, we have less than $50 billion in WSTWF, therefore, we are currently not subject to LCR and NSFR requirements.
Any other financial institutions that was exempted under same conditions as SVB should also be looking at the quality of their liquid assets.
https://www.investopedia.com/terms/s/solvencyratio.asp#toc-s...
Defn. (informal) A company is illiquid if they can not service short term liabilities/debt as it comes due. This includes the ability to quickly sell assets to raise cash.
According to what we hear Silicon Valley Bank is/was illiquid: They were struggling to _liquidate_ at well below the maturity value of the MBS to serve their liabilities -- withdrawals. They were not able to service the withdrawal rate (there were withdrawals/wires frozen for hours yesterday).
In essence, driving themselves towards the insolvent side (hopefully not, because if they are insolvent now (discounting the equity value) we are going to have contagion.
These things trade on the open market and adjust to interest rate changes. What really happened is that they bought a bunch of securities backed by depositors that lost value at mark-to-market. This is poor risk management, not some unfortunate unavoidable issue caused by a bank run. They are insolvent at market prices - illiquidity would be more like they have a bunch of contracts or snowflake assets (like buildings, or a security that doesn’t trade on the open market).
As a depositor, saying “in 10 years you will get the full value of your deposit back” is bullshit: you could give me the actual reduced value now, and I could invest it in the same kind of instrument, and in 10 years I’d also have the full value back - but I could do other things with it too, which may be preferable considering it’s my deposit that I may need to spend now rather than in 10 years.
The fear is that many other banks are in the same position, that they are technically underwater and vulnerable to runs because the true value of their deposit-backed assets have decreased due to interest rate increases, but that SVB was affected first because their customer base of VC-backed businesses just happened to have their withdrawal:deposit ratio increase the most.
SVB had the unique situation of being the canary in the mine, as they had to get a lot of MBS during low interest rates of 2021/2020. Your question is the jackpot one, yes: how many other banks are following closely by.
If the Fed continues or increases the rate hike I would be surprised if we don't hear more -- assuming no other action.
The silver lining might be that SVB might give the heads up for the Fed, FDIC and government to act.
If the present value of a bank’s assets are lower than the present value of deposits, that is insolvency: calling it illiquidity just because the bank doesn’t want to sell its actually-liquid underwater assets right now is a cop-out.
It isn't hard to dump those funds into a money market fund backed by short-term commercial paper or even short-term Treasury bills. Or to just buy the Treasury bills outright. Such holdings are quite liquid and can be absolutely secure.
Use the bank account for clearing, keep a couple million in it and sell assets as needed to top-up the account or to prepare for known cash outflows.
I'm sure there are cost and complexity trade-offs. But "don't lose the cash" would seem to be priority #1 and worth some trouble.
I suppose the idea was that SVB managed all that for you. But one look at its financials shows the asset/liability term mismatch, and interest rate risk, so the risk of loss of cash was nonzero. So they were NOT managing maturity risk for these large depositors, and, well, now look where they are.
FDIC wrote:
> As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
So to me that sounds like those „risk-free“ assets will get liquidated too.
I‘d love to hear an actual professional confirm/deny this. Because if it‘s true, then the real risk-free assets are gold, in your teeth, real-estate and BTC.
If the securities are in an account at another institution that certainly wouldn't be a problem.
"Oops, looks like Santa misplaced his bag with all your money! Don't worry, his elves are busy looking for it all over the North Pole."
So many fitting status codes to chose between I don't know what to do!
Silicon Valley Bank, founded in 1983, has had a long and incredible journey leading up to its acquisition by the FDIC in 2023. As a bank that specializes in working with the technology and innovation industries, it has been at the forefront of many of the industry's most significant developments.
The bank started its journey as a small community bank in Santa Clara, California. At that time, it was known as the Santa Clara Valley Bank. The founders, Bill Biggerstaff, Ken Wilcox, and Bob Medearis, saw an opportunity to create a financial institution that focused on serving the unique needs of the technology and innovation industries.
In the early years, the bank faced many challenges as it worked to establish itself as a leader in the industry. One of the biggest obstacles was convincing investors and regulators that the bank's specialized approach to banking was viable. The founders knew that they needed to build a strong foundation and establish a reputation for being a reliable and trustworthy financial institution.
Over the years, the bank grew and expanded its reach, opening offices across the United States and in key global markets. It also broadened its focus beyond just technology and innovation to include life sciences, healthcare, energy, and more. This diversification helped to insulate the bank from the ups and downs of any one industry and made it more resilient in the face of economic uncertainty.
Throughout its journey, Silicon Valley Bank has remained committed to its core values of innovation, excellence, and customer focus. It has always been willing to take calculated risks and to push the boundaries of what is possible. This approach has paid off in many ways, as the bank has been recognized as one of the most innovative and respected financial institutions in the world.
In 2023, Silicon Valley Bank achieved a major milestone when it was acquired by the FDIC. This acquisition was a testament to the bank's success and the strength of its business model. It also signaled a new era of growth and opportunity for the bank, as it now has the backing of one of the most respected regulatory bodies in the world.
Looking ahead, Silicon Valley Bank is poised to continue its incredible journey and to make an even greater impact on the world. As the technology and innovation industries continue to evolve and grow, the bank is well-positioned to help fuel that growth and to support the entrepreneurs and visionaries who are driving it forward. With its deep expertise, strong relationships, and unwavering commitment to excellence, Silicon Valley Bank is poised to remain a leader in the financial services industry for many years to come.
He lived truly to his name! Founded a bank that processed bills with a big number of staff.
"Dear Sveebles and Sveeblettes..."
https://www.youtube.com/watch?v=KIh6NEBL8BU
It's pretty interesting.
Bank going bust should mean stakeholders in the lending business losing their money. The whole federal reserve system can be preserved. Just raise capital to meet the minimum and don't use money from people who just want an account.
Then again, you never know what tomorrow/next week/next month will bring. It may not only be SVB, it may be that they just happened to be first.
Realistically 250k for 2 weeks pay probably can cover between 30-60 employees, if founders and some key senior folks can willing and are able afford to defer maybe stretch to 75.
How humiliating. At least this isn't an epidemic.
But a small scrappy startup with not super high burn rate might be hugely impacted. Large startups with high burn rate are pretty much screwed though and are gonna have to downsize pretty aggressively and quickly.
Looking at a graph of SIVB share price, this definitely seems like yet another blow to efficient market hypothesis. Many of SIVB's woes have been known for months. While it's obviously difficult to predict a bank run, to see a stock go from a share price of ~270 to 0 in 2 days, with many billions in equity value wiped out, is astounding.
While it may emerge that bank is indeed insolvent after the accounting that is not yet the case , so the value is only unknown not necessarily zero.
Also the market value includes the estimated risk which is very higher when there is lack of clear information and uncertainty.
After the dust settles , risk is becomes better understood with more information then shares can be better priced
Alternatively the assets are fully liquidated with which all depositors and bond holders are made whole anywhere between $45B and zero would be left
https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...
So if you buy stock via Vanguard, and Vanguard mismanages itself into death, you still own the stock and eventually it'll be at another broker.
Details: https://www.fdic.gov/resources/deposit-insurance/
Not Covered: https://www.fdic.gov/resources/deposit-insurance/financial-p...
Now all those unprofitable startups will be falling like dominoes as now the money is tied up in the bank with withdrawals disabled.
Keep your accounts lower than 250k
For full precision, if you're concerned about this, be aware that it's 250K per depositor at a given bank, rather than per account. That is, all your qualifying accounts at the bank are considered as one pool and 250K of that is insured. More detailed information, including how joint accounts are handled, here: https://www.fdic.gov/resources/deposit-insurance/financial-p...
It's not even the case that they did it for the returns, because the returns were negative. Is it a regulation thing that forced banks to overinvest in long-term bounds?
[1] https://www.svb.com/news/company-news/silicon-valley-bank-pa...
I’m sorry to see this happen.
9 am We’re currently experiencing a liquidity issue with our SVB partner and are investigating
11 am Access to 23% of accounts is now restored
12 noon The issue is worse than we first thought. We are taking remediary steps to prevent contagion of the issue
1 pm We aim to have access to under-250k accounts back up by Monday Eastern 9am. Status of larger accounts is unclear as we assess the scope of the damage
Etc…
It’ll be cool if FDIC was posting this kind of info over the weekend…but they probably want to avoid that because it just be fueling the social media speculation mill but it would be good I think.
It's in The G Word, their episode on Money. https://www.netflix.com/ca/title/81037116
At least its toll free...
20/20 hindsight: they were too niche and not diversified. It would've been a slam-dunk to send out flyers to local property owners in the South Bay Area and Santa Cruz Mountains.
For my consulting LLC, I went with Comerica because I figured SVB had the issues of being like a credit union but without CU behind it.
If I were in a founder's shoes today, I would stick to a credit union because they're potentially more flexible and it promotes a local co-op rather than a corporation out to monetize customers with an unknown risk profile.
* Are you profitable?
* If not, how long is your runway?
* Where does the funding come from and who influences the high level plan/direction?
* How do you make money?
* What's preventing you from making more money?
* What is the company's growth plan for the next 1 year? 5 years?
* What are the big challenges you see coming up?
* What have you identified as your competitive advantage?
Definitely don't take my word for it, just throwing this out there as maybe a starting point for more research.
> Some banking experts on Friday pointed out that a bank as large as Silicon Valley Bank might have managed its interest rate risks better had parts of the Dodd-Frank financial-regulatory package, put in place after the 2008 crisis, not been rolled back under President Trump.
> In 2018, Mr. Trump signed a bill that lessened regulatory scrutiny for many regional banks. Silicon Valley Bank’s chief executive, Greg Becker, was a strong supporter of the change, which removed the requirement that banks with assets under $250 billion submit to stress testing by the Fed, and changed requirements for the amount of cash they had to keep on their balance sheets to protect against shocks.
https://www.nytimes.com/2023/03/10/business/silicon-valley-b...
But that information is not going to come from Fox News, so the system is working as intended then?
If Trump deserves more blame, its because the reason the idea was bad was much more fresh at the time of his action.
"SVB Online Banking (US, UK, Canada Branch Accounts) will be unavailable throughout the weekend, but will resume next week in accordance with the guidance provided by the FDIC. Please check this page again next week for availability. Our apologies for any inconvenience this may cause."
That's the current login page for Silicon Valley Bank. The main page still doesn't show they're down.
It will be annoying and stressful, but basically ok.
Someone holding a receivership certificate likely can sell it or borrow against it.
> I worked at a startup that took in over $100m in investment, and I was curious so I asked the cofounder how they protected that. According to him the money was divided up into chunks smaller than $249k, pushed off to a custom entity made just for the purpose, and then invested in bonds or CDs on a rotating basis.
Basically if you have a ton of money having it sit in a bank account is one of the worst things you could do with it, so most people who bring in a lot mostly just keep operational expenses in their bank account while leaving the rest of the money in other financial instruments.
The rest is limbo until the bank is liquidated and the remaining money is distributed.
What are the insurance limits for companies? Same as individuals? I get the sense that most of SVB's deposits were from startups and small companies. And I also get the sense that $250K is not much room for a startup trying to make payroll to employees with Silicon Valley wages.
WTF is Silicon Valley if they can't make a bank that is just supposed to sit there and not do much - not collapse.
I loathe to say this but maybe the CrytoBros need to come back?
Bank collapses should happen as often as regular buildings collapse for no apparent reason.
It's a bad look if there is less trust in regular banking.
[0] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
https://www.wsj.com/articles/washington-is-the-systemic-risk...
https://www.nytimes.com/2023/03/10/business/silicon-valley-b...
If so, would be interested to know if anyone knowledgeable in accounting rules could speculate a bit here what has happened - has any event forced a revaluation of assets on the books due to accounting rules for example?
Why would FDIC take over an unliquid bank instead of the bank just loaning money by the Federal Reserve?
The Federal Deposit Insurance Corporation (FDIC) is a US government agency responsible for protecting depositors and maintaining stability in the banking system. When an unliquid bank fails, the FDIC may step in to take over the bank and manage its operations.
One reason the FDIC may take over an unliquid bank instead of the bank just loaning money from the Federal Reserve is that the bank may be insolvent, meaning it does not have enough assets to cover its liabilities. In this case, simply borrowing from the Federal Reserve would not solve the underlying financial problems of the bank.
Taking over the bank allows the FDIC to manage its operations and assets, and potentially sell off its assets to recover some of the losses for depositors and creditors. This process is known as "resolution" and is intended to minimize the impact of a bank failure on the broader financial system.
Additionally, if the FDIC determines that the bank is not viable in the long term, it may choose to liquidate the bank, selling off its assets and using the proceeds to pay off depositors and creditors.
Overall, the decision to take over an unliquid bank instead of simply loaning money from the Federal Reserve depends on the specific circumstances of the bank and the broader financial system.
If it hasn’t, this would be a helpful way to provide liquidity to startups with SVB deposits.
Rates will eventually top out - they just had made a very bad bet at 1.5%/10 yr.
Rates are 5% now, so a spread of 3.5%. If rates go above 8.5% (which they were, from 1973 to 1992) then the acquirer is in basically same hole as SVB, no?
Ouch for startups that didn't pull.
I believe SVB will be open for business on Monday
My guess is they take a week to look through the books, determine an absolute floor for the value of assets, and use that floor to proportionately pay out uninsured depositors.
So, some additional funds will be available soon. We don't yet know how much.
The rest will probably be locked up while the process plays out. I've heard different timelines for that.
Does this settle the question of insolvency then? I didn't see that term in the other announcement.
Agreed with the first part, amazing how quickly Tan and Sacks turned to government for a handout. If they get one, that will only incentivize bigger problems next time.
Not crypto hype, not bad loans, but long term bonds... It's sounds very conservative and responsible.
Here's a good thread https://news.ycombinator.com/item?id=35094447. on affect to startups
Interest rates have gone up, so the bonds they bought have lost value. They tried this week to fix that by selling part of the portfolio and raising capital, but did it in a ham-handed way and triggered a bank run.
When the economy is generally healthy and your clients are diversified, deposits remain fairly stable. If this had happened, SVB likely would not have needed to sell the low-yield mortgage backed securities to cover liquidity. SVB is very exposed to the venture community and very impacted by the changing climate.
What does this mean for the company I work for, are they screwed?
SVB still has lots of assets, they just aren't very liquid and it's possible the value (if you sold them all today) isn't quite enough to cover all deposits.
From Atlas, employee stock option taxes and it's IPO fundraising might be all on the line.
set up your stock sales.
hire a risk officer.
what else?
They have to pay backbas usual, right?
Hundreds of startups will become illiquid as a result of SVB's collapse, and there will be major layoffs here in the next 90 days as founders realize that they lost their funds and cannot raise in the current VC environment.
Everyone I know pulled yesterday.
Margin Call is such a timeless, great movie!
I’m here for one reason alone. To guess what the music might do a week, a month, a year from now. And standing here tonight I’m afraid that I. Don’t. Hear. A. Thing.
Just… silence.
"And there are a lot of smart people in Silicon Valley. It's a hell of a lot easier to be first."
Slowly, then all at once.
Events like these are similar to Enron and Theranos. No, I'm not excited to see "the energy industry" or "the medical industry fail", but that's not really what it was, was it?
People knew free money was dangerous, planned for a return to sanity (QT) in 2018-2019, and were financially punished for acting responsibly by believing the Fed would follow its roadmap.
They may get their day in the sun now and I cant blame them for being happy at the first signs of a temporary return to reality.
You may not lose money. The money isn’t gone yet. The restructuring may save the money. There’s a playbook for this sort of thing.
Separately, this is going to cause a lot of finance vultures to look at other banks who also have MBS portfolios on their books. The show's only beginning.
Not all mortgage backed securities are subprime CDO squareds.
Someone will buy SVB, and they will put capital in as part of the purchase.
If there were fewer assets then deposits, then yes the 250k+ accounts are probably out of luck.
Whatever bank/organization that wants to have SVB's customers, probably. If an even bigger bank comes in, one which can take on those lukewarm assets for a decade without risk, then they can immediately position themselves as the "new SVB" and get a bunch of VCs and startups as customers. I assume that they could stand to profit some from such an arrangement, but I'm not a banker, so maybe not?
The government, to protect the economy
If I'm the FDIC and I have the opportunity to return 100% of the funds to depositors at the cost of just holding on to a bond for a few more years than I otherwise would, that seems like a tradeoff I'd make to stabilize a lot of companies. (I'm of course biased here)
i suspect the real number will be closer to 40% than 1%
Edit: this is actually a serious question, if someone knows the actual answer.
I understand that ideally the government wouldn't want to hold onto the bonds, but is there any statutory (or other real) reason why they would _have_ to sell them at less than face value? If you could guarantee 100% of deposits could be returned by just holding onto the bonds until maturity, that seems like a worthwhile trade.
What we do know for sure though, is that this process will take months, maybe years, to play out and many startups will run out of money long before this is resolved.
Do they get the investments from the banks or do they park the investment money in this bank?
And why this bank, when there are many more risk averse institutions out there?
Many startups aren't particularly sophisticated financially and just kept their capital in cash in the bank.
John Ray?
Edit. I just realized, in the us, if there is no bidder, the fdic can close down the bank or run it itself.
Unfortunately, harder now for startups, mind that all those startup dreams from laid off FANG staff just got their rug pulled.
No. It sounds like they bought a bunch of safe, long-term load-backed assets. When interest rates went up, the value of the assets went down. This isn't a problem if no one withdraws before the loans are due, but if they do, they have to sell the assets that declined in value.
I know SVB was like a "high tech bank" that partnered with things like Stripe Atlas, but is there any reason that startups were using it for their regular operating funds? Other than the name, was there something that actually made this bank particularly suitable for them?
But it works better at a criminal bank. Particularly one that might open a bunch of extra accounts for you when you aren't looking. Obviously that means opening the first account won't be the problem either.
Get a big criminal bank and they won't freeze your account for dumb reasons. Or smart reasons.
So just follow the settlements with the federal government, its advertising.
I had to explain to chase large wire transfers after banking with them for years. I had small amounts of money held in AML lock for months with BofA and Chase.
* With-in a week or so uninsured accounts will get 40-60 cents per dollar
* In years when the liquidation process is finished they will have gotten 5-20 cents more in addition per dollar
* Shareholders will get nothing in this scenario
Are there any better guesses or any flaws that makes this guess unresonable?
* IndyMac Bank: In 2008, IndyMac Bank, a large savings and loan association, failed and was taken over by the FDIC. At the time of its failure, IndyMac had $1 billion in uninsured deposits. The FDIC estimated that it would be able to recover only 50 to 80 cents on the dollar from the bank's assets. As a result, the FDIC paid advance on uninsured funds of 50% of the uninsured amount, or $500 million, to the bank's depositors.
* Washington Mutual: In 2008, Washington Mutual, a large bank, failed and was taken over by the FDIC. At the time of its failure, Washington Mutual had $4 billion in uninsured deposits. The FDIC estimated that it would be able to recover only 30 to 50 cents on the dollar from the bank's assets. As a result, the FDIC paid advance on uninsured funds of 30% of the uninsured amount, or $1.2 billion, to the bank's depositors.
* First National Bank of Nevada: In 2008, the First National Bank of Nevada failed and was taken over by the FDIC. At the time of its failure, the bank had $200 million in uninsured deposits. The FDIC estimated that it would be able to recover only 90% of the uninsured amount from the bank's assets. As a result, the FDIC paid advance on uninsured funds of 90% of the uninsured amount, or $180 million, to the bank's depositors.
The question basically asks humbly what factors may be special now and are important in this specific case and queries others humbly on how to think about this.
From the release.
"The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and of beer gives facilities to gluttony and drunkenness"
MARX, Karl
Capital Vol. III Part V - Division of Profit into Interest and Profit of
Enterprise. Interest-Bearing Capital
Chapter 25. Credit and Fictitious Capital*Imho, this is a great argument for the return of Free banking (including crypto) as we see time and again that regulations do not work. Fail early and fast, let the market innovate and pick its winners and losers.
That's quite a lot of extrapolation from one bank failure.
SVB got an exemption from those regulations.