FDIC Takes over Silicon Valley Bank
https://www.fdic.gov/news/press-releases/2023/pr23016.html
khuey · 3 years ago
149 comments
https://www.fdic.gov/news/press-releases/2023/pr23016.html
khuey · 3 years ago
149 comments
mkmk · 3 years ago
Oldie but goodie on what actually happens when a bank is taken over. https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...
PascLeRasc · 3 years ago
That's fascinating. I'd love to watch a documentary about that.
khuey · 3 years ago
This 60 minutes segment from the Great Recession is the closest thing I know of to that. https://www.youtube.com/watch?v=TAE8i40A5uI
bgc · 3 years ago
60 Minutes followed an FDIC takeover in 2009, including when the agents actually walked into the bank’s headquarters: https://youtu.be/TAE8i40A5uI
TremendousJudge · 3 years ago
That interview with the chairman (chairwoman?) is just great. She straight up says that maybe they shouldn't bail out the big banks and instead apply a similar process to them.
supernova87a · 3 years ago
I just watched it -- aside from the very interesting mechanics of the FDIC coming in and taking over a bank, I thought Sheila Bair (the then FDIC chair) came off as very knowledgeable, realistic, and critical of the risks posed by big banks. She went on to become a university president after the recession / banking bailout.
mikece · 3 years ago
I know a couple bank VPs who have been the representative of the take-over bank in absorbing failed banks. They describe it in terms that most of us would recognize as taking over a failed project and re-architecting/refractoring it so that it can succeed (or making the call to discard all work to date and start over with a workable solution).
FormerBandmate · 3 years ago
This case is unique because of the sheer volume of non-FDIC insured deposits. Substantial risk of depositors not being made whole for a while, they’ll probably get all their money but it will still be bad
JumpCrisscross · 3 years ago
> Substantial risk of depositors not being made whole for a while
Emphasis on for a while. Stock and bond holders (man, did the latter miss the ball) will absorb losses.
dannyw · 3 years ago
What stock holders? Market cap was 2.5 billion pre-market, a small fraction of the 175b of deposits (as of Dec 31, 2022).
JumpCrisscross · 3 years ago
> market cap was 2.5 billion pre-market, a small fraction of the 175b of deposits
Market cap doesn’t matter. Balance sheet equity.
loeg · 3 years ago
Possibly forever, if the assets aren't there. A senior claim on $0 is still worth $0. There may be sufficient assets to pay back depositors, but we don't really know at this point.
kgwgk · 3 years ago
As of Dec 31 the total liabilities were $195bn.
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).
wbl · 3 years ago
That's $23 billion of non-deposit liabilities that will be junior to the deposits.
nostromo · 3 years ago
All their money? I doubt it.
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.
FormerBandmate · 3 years ago
They weren’t insolvent yesterday, they just had a rush of withdrawals. It will probably be upwards of 90 cents on the dollar, but that amount of money locked up in a possible credit crunch coupled with a loss of confidence in banks and the current startup environment is very bad
nostromo · 3 years ago
They weren’t insolvent because banks are allowed to pretend treasuries haven’t lost value so long as they intend to hold them to maturity.
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...
khuey · 3 years ago
In SVB's case I believe they are mostly mortgage backed securities (ironic, eh) rather than treasuries but yes. I wonder if this will spur any reflection on the accounting rules for HTM securities.
dehrmann · 3 years ago
I bet they bought mortgage-backed securities because returns on everything safer were essentially zero. Crazy-low interest rates for too long created this problem.
amluto · 3 years ago
> If they can hold those securities until they mature, all is good.
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...
capableweb · 3 years ago
> They weren’t insolvent yesterday
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?
ummonk · 3 years ago
That just indicates they didn't have liquidity to cover every deposit, which is true for basically every bank that doesn't charge you to store your money in a vault.
capableweb · 3 years ago
Which I guess makes it about semantics. If everyone takes out there money one at a time, one person each week, over years, they would be solvent. But if everyone did it at the same day, they wouldn't be able to handle it, making them insolvent.
kragen · 3 years ago
i think by that definition all fractional reserve banks are 'de facto insolvent', which would make this a definition of 'de facto insolvent' that isn't useful for fractional reserve banks, since it doesn't distinguish among classes of fractional reserve banks
and yes, the ceo did say that yesterday, which is likely why this happened
cameldrv · 3 years ago
Yes but supposedly if you mark their balance sheet to market, the net is approximately zero, i.e. they have just enough assets to cover liabilities with no reserve. In this case you could say that the reserve requirement is serving its purpose. The stockholders may be wiped out (depending on how much a potential buyer values the goodwill), but the depositors should get all their money back. Worst case I think depositors would take a small haircut.
eagleinparadise · 3 years ago
If you mark to market hold to maturity assets for any bank there are hundreds of billions of loses, fyi
PKop · 3 years ago
Yes so the key distinction is this bank had a bank-run against it that forced their hand. Fair to say any number of banks would fail if they faced a bank-run in current environment (depending on proportion of long dated bonds they hold)?
opportune · 3 years ago
If they have to liquidate their assets (mbs/treasuries) they’ll probably create at least some slippage, moreso in MBS, that may prevent them from recouping their value at current prices. Alternatively they can try to hold to maturity or spread out their selling but that will make depositors illiquid
cameldrv · 3 years ago
I don't think that holding to maturity really solves the fundamental problem though. The reason the MBS have lost value is because they have a low coupon compared to what you can get now. To execute the hold to maturity strategy, they would have to pay the depositors interest with the coupons from the MBS.
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.
opportune · 3 years ago
Oh fully agreed. They fundamentally lost depositors’ money by making bad investments - holding to maturity is just a way to argue that depositors will be made whole. The depositors may as well just be given the bonds/mbs themselves and allowed to hold to maturity or sell them to meet immediate needs.
dmoy · 3 years ago
It's a little unique because it's a top 20 bank failing. As far as I can tell, it's not super unique in terms of % of fdic insured deposits.
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%.
mwarkentin · 3 years ago
Looks like 2.7% of their deposits were > 250k. So yes, it seems relatively unique (there are only 5 banks on this list with <15%).
https://twitter.com/GRDecter/status/1634208652595699713?s=20
MR4D · 3 years ago
You've got that backwards. Reread the tweet you linked to:
"Only 2.7% of SVB deposits are less than $250,000. Meaning, 97.3% aren't FDIC insured."
Not a good situation at all.
dllthomas · 3 years ago
Aren't fully FDIC insured, yes?
lobochrome · 3 years ago
Yes - if you have 5M$ in the bank, you'll have 250k$ of that insured. Not that comforting.
dllthomas · 3 years ago
But if you put in $250k because you're responsibly splitting things across banks, and the interest you've made on it raised you to $252k, you're counted amongst the 97.3% and it's not a big deal.
I'm sure some people are out meaningful amounts of money, but I'm not sure what a typical account looks like.
niij · 3 years ago
It's 97.3% of deposits ($), not _depositors_
dllthomas · 3 years ago
Hm, you may be right, though "deposits are less than" is a really weird way to phrase it in that case.
hindsightbias · 3 years ago
SBF was a piker.
gnopgnip · 3 years ago
Have there been any cases in modern times, in the last 25 year or so where depositors lost money because they had more than the fdic covered ?
pirate787 · 3 years ago
50 cents on the dollar at IndyMac in 2008
https://www.depositaccounts.com/blog/indymac-depositors-are-...
dmoy · 3 years ago
Yes it happens literally every year. It's not usually a huge %, like it might end up being in this case.
katmannthree · 3 years ago
Are clawbacks a thing in this case for the people who did get [some] of their money out in time?
dmoy · 3 years ago
no
pclmulqdq · 3 years ago
Clawbacks are only poised to happen for big crypto failures (FTX) because the people who held money in those institutions aren't technically "depositors," and are considered a more generic type of creditor (which has a bankruptcy clawback).
Bank deposits are special and there will be no clawback. However, depositors who lost money will be first in line at the bankruptcy court.
dmoy · 3 years ago
note there is no bankruptcy court here. SVB will go into fdic receivership and almost certainly be sold off to another bank. Depositors are still first in line to get stuff back, but it's not through bankruptcy court. There is no court involved.
mikece · 3 years ago
From the looks of the news stories, it looks like the FDIC isn't as efficient in taking over a bank as it used to be:
https://nypost.com/2023/03/10/nypd-called-to-silicon-valley-...
ellisv · 3 years ago
I wonder if the FDIC is just as efficient but this situation is different.
Kye · 3 years ago
Possibly a forced rush job after that comment about solvency. I think the FDIC usually prefers to do secret operations under the cover of night to avoid problems. With everyone's eyes on the bank, that wouldn't be an option.
Animats · 3 years ago
When the FDIC takes over a bank, they usually have some local cops around, to deal with crowd control and calm down upset depositors. See the 60 minutes video. There's a police car parked in front of the bank, but the cops are not doing much.
ren_engineer · 3 years ago
will companies with money in SVB even be able to make payroll? Seems like this could cause huge issues in the short term and long term
sroussey · 3 years ago
Pipe, Clearco, Founderpath, etc, are going to have a busy month.
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.
martinshen · 3 years ago
Who do you think backs those Clearco loans?
formerly_proven · 3 years ago
Yesterday I read on here that "xyz doesn't mean SVB is going under like FTX did five minutes after doing that".
karpierz · 3 years ago
The difference is that SVB's depositors will see most of their money back, which is the point of the FDIC taking over.
dannyw · 3 years ago
When, though?
If your company can't access your money to access payroll for X months, you might as well as be dead.
w10-1 · 3 years ago
"When, though": now. The article says checks continue to clear, and branches open Monday, the next business day.
And
kasey_junk · 3 years ago
The press release answers some of that. Insured money is there on Monday. Uninsured money will get their first payout no later than next week.
After that its a question but typically depositors will know the answer very quickly because their claims come first.
delfinom · 3 years ago
Not quite, the uninsured money will be partially paid out depending on how the books look (since the FDIC has to liquidate the bank), however a chunk of the money can be in limbo for now via receivership certificate that tracks the amount you have claim to.
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#:~....
karpierz · 3 years ago
> All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week.
HDThoreaun · 3 years ago
So you'll get 250k plus an unspecified percentage of the other 93% of deposits the bank is holding. Startups have millions in SVB, it will be at least months before they have access to that.
delfinom · 3 years ago
Yep, the additional percentage paid out in advance will be based on the bank's books once the FDIC digs into it to estimate what can be recovered. The rest is after liquidation.
johnbellone · 3 years ago
I wouldn't be too sure about that. 93% of SVB deposits are uninsured.
jb1991 · 3 years ago
I'm super curious why in the world that in 2023, nearly all the deposits in the country's 18th largest bank are not insured ? what?
rcme · 3 years ago
The FDIC only insures up to $250K per account holder.
mynameisvlad · 3 years ago
FDIC insurance, regardless at which bank, only covers the first 250k per depositor per bank.
dragonwriter · 3 years ago
...per ownership category, of which their are, I think 14, and sometimes the insured party isn’t the depositor (e.g., “Employee Benefit Plans” are a category, and the plan participants are treated as the insured party for calculations in that category—and since its a separate category, it doesn't effect any single or joint accounts those participants happen to have at the same institution.)
mynameisvlad · 3 years ago
I had it in my comment initially and removed it. When the bank's deposits are several magnitudes more than the limit, I don't think that distinction will do anything but muddy the waters.
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.
karpierz · 3 years ago
You can't insure the vast majority of deposits; with what money would you insure all of the world's money?
johnbellone · 3 years ago
I am more concerned that large VC shops are doing deals with the 18th largest bank because "that's what we've always done".
dragonwriter · 3 years ago
Because deposit insurance only covers $250,000 per depositor per ownership class, and commercial bank customers often have deposits >> $250,000.
rafaelero · 3 years ago
Welcome to fractional reserve banking system.
delfinom · 3 years ago
FDIC is federal insurance and it's for the individual entities that deposited the money. It's capped at $250k per account at the failing bank. It's meant to protect the little guy and not the big guy that failed. It also encourages users to diversify their financial institutions if you are really packing money away in accounts that exceeds $250k.
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?
Macha · 3 years ago
By the government. Because government insurance is designed to protect individual accounts as that provides the greatest ratio of impacted voters/exposure.
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.
gtop3 · 3 years ago
The issue is in trust. Banking's value proposition is trust. The bank is trusted to hold deposits and to process withdraws. Adding insurance just changes the trusted entity. FDIC insurance exists to increase trust for individual deposits.
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.
dahdum · 3 years ago
FDIC insurance is to protect consumers and small businesses. I think of it as the same concept as accredited investors, once you have a certain amount of money, you get the freedom to dive into the shark pool and responsibility to manage that risk yourself. SVB was a high yield (4.5%!) bank. That comes with some risk.
kevin_nisbet · 3 years ago
But SVB also has locked in assets to be auctioned off. So it's going to depend on what sorts of haircuts occur on those assets sales.
karpierz · 3 years ago
"Uninsured" doesn't mean "all of your money is gone, sucks to be you", it means "you'll take a haircut proportional to the amount of missing assets from the pool." And yes, if the bank is a Ponzi scheme, then that pool is empty, but SVB's problem is liquidity, not overall solvency. The money is there, it's just locked at a suboptimal interest rate, which may cost you 10 - 20%.
This isn't like FTX where your "assets" are worthless IOUs written to yourself.
davidgerard · 3 years ago
May also be solvency - their assets are MBSes whose market value went down with the interest rate rise, that being the proximate cause of the panic that set off the bank run.
johnbellone · 3 years ago
Isn't that the definition of uninsured?
function_seven · 3 years ago
No. If I crash my car into a $80,000 BMW and totaling it—and I have no insurance—the other party will still be able to sue me and partially recover their losses. Maybe they get $63k from me and eat the other $17k.
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.
MrMan · 3 years ago
the assets the bank held are worth some % less than the amount they took in deposits but its not 90% less, its something like 20%. so on average, people will get something like 80% of their money back. I dont think the asset price declines were catastrophic.
CamelCaseName · 3 years ago
Only 2.7% of SVB's deposits will be covered by FDIC.
dllthomas · 3 years ago
I thought it was 2.7% of accounts are fully covered by FDIC? That's only going to be 2.7% of deposits by coincidence, and what it means for the others depends on just how dramatically over the limit they are... unless I miss something (which is plenty possible).
dllthomas · 3 years ago
Per another thread, it may in fact be 2.7% of deposits insured rather than accounts.
kgwgk · 3 years ago
We don’t really know yet if they will be getting most of their money back.
The only guaranteed amount is 250k.
dragonwriter · 3 years ago
> The difference is that SVB's depositors will see most of their money back
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.
manquer · 3 years ago
The assets are all regulated t-bills and MBS with real interests and secured by hard assets not made up first party coins with manipulated values
bell-cot · 3 years ago
"Denial isn't just a river in Egypt."
rvz · 3 years ago
Oh dear. It guess this is how the VC pyramid scheme collapses. $151BN uninsured deposits in the bank. [0]
Now all those unprofitable startups will be falling like dominoes as now the money is tied up in the bank with withdrawals disabled.
tarr11 · 3 years ago
Does this mean that SVB customers are going to lose deposits over the FDIC limit (250k?)
rekttrader · 3 years ago
For now yes, you get a note on what’s owed that remains and in time you get some of your money back post bankruptcy.
Keep your accounts lower than 250k
johnbellone · 3 years ago
Or better yet, don't listen to your VC's relationship people and put all of your money in one bank.
roflyear · 3 years ago
Many bank's terms are if you get a loan from them, you need to use them as your only bank (or only accounts receiving deposits, or something). It is negotiable but it is the norm.
alwaysbeconsing · 3 years ago
> 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...
trimbo · 3 years ago
No because SVB has assets with value to sell. That's the "dividend" the FDIC refers to in the press release.
ncallaway · 3 years ago
SVB's assets will be divided up and given back to creditors (including depositors). So remaining depositors likely will get something back eventually, but we don't know how much yet (10%? 50%? 85%). There will also likely be a delay in getting those funds back as the process plays out, which is probably more dangerous to many companies than the haircut (assuming the hair-cut isn't too severe).
marcosdumay · 3 years ago
That amount of confidence on the fact that the music would never stop is... I dunno, I don't get any good adjectives. I can't understand it.
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?
johnbellone · 3 years ago
You're getting downvoted because people are upset, but this is a real problem that could have been avoided. We'll come out of it stronger, but its going to hurt.
bagels · 3 years ago
Many people will not come out of this stronger.
NordSteve · 3 years ago
Only 3% of deposits in the bank are FDIC insured; other depositors will need to wait for the receivership process to run to get access to (what remains) of their deposits.
edit: replace "bankruptcy" with "receivership" as the latter is usually a faster process than the former.
ncallaway · 3 years ago
Where'd you get the 3% figure? The only thing I saw in the article was that it was not determined.
> 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?
NordSteve · 3 years ago
ncallaway · 3 years ago
Thanks!
NordSteve · 3 years ago
Likely number is bigger than 3%, as they had a giant outflow over the last couple days.
jb1991 · 3 years ago
> Only 3% of deposits in the bank are FDIC insured
why is that?!
NordSteve · 3 years ago
Because most of their depositors were business that kept >$250K (the insurance limit) in the bank.
tome · 3 years ago
Why would someone keep more than $250K in bank deposits? Isn't it more prudent (looking back no more than 15 years) to keep T-Bills or some other liquid security that isn't subject to a bank run?
blibble · 3 years ago
$250k isn't much for a company with employees
you have to keep some cash somewhere to meet short term expenses (like payroll)
tome · 3 years ago
Is it not possible to meet short term expenses with a short term loan which is discharged over a few days by selling liquid assets? Maybe banks just don't want to let you do that.
SpicyLemonZest · 3 years ago
It is, and no prudent company should have lost their entire war chest unless their funding arrived just yesterday. But when you're spending $10M or $100M a year, it's operationally challenging to make sure you never have more than $250K in the bank while you're doing it. (It's much, much better to be imprudent and have too much in bank deposits than miss payroll because you have too little.)
synu · 3 years ago
Because the insurance is for $250k and most depositors had much more than that.
pastor_bob · 3 years ago
Bill Ackman and Wall Street calling for a government bailout for all depositors:
NordSteve · 3 years ago
I can't see that happening in today's political climate. Imagine the stories juxtaposing coddled tech workers against the cost of the bailout.
bagacrap · 3 years ago
And what is the cost of the bailout, oh sage?
> 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.
lyrrad · 3 years ago
I think the asset figure did not include unrealized losses on bonds that they intended to hold to maturity as banks are not required to deduct those from their total assets. As deposits flowed out of the bank, they sold some assets and realized those losses.
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.
weard_beard · 3 years ago
AKA the inversion of long and short term treasury absolutely screwed them and JPow announcing additional rate hikes was the nail in the coffin.
twoodfin · 3 years ago
Could the Fed do this in a back door way? Buy the devalued bonds at above-market rates?
treis · 3 years ago
This isn't true. The bank is in receivership and which is a different form of bankruptcy. The FDIC will liquidate assets or find a buyer relatively quickly. Depositors will end up getting most or all of their money back.
sp332 · 3 years ago
The FDIC will pay uninsured depositors an advance dividend within the next week.
bagacrap · 3 years ago
Only 3% of accounts were under 250k. An account of $251k isn't part of the 3% figure, but is almost totally insured.
mbStavola · 3 years ago
It's kind of amazing how much optimism there was just an hour ago regarding SVB's position.
kgwgk · 3 years ago
« literally no one saw this coming a couple of [hours] ago. »
dylan604 · 3 years ago
are you quoting something from a couple of days ago?
kgwgk · 3 years ago
https://news.ycombinator.com/item?id=35096247
(I'm needlessly mean, I know.)
johnbellone · 3 years ago
There's a strong correlation here to people who have deposits in SVB. This was all but certain yesterday.
treis · 3 years ago
What are you talking about? Pretty much everyone I've seen has called this a bank run and said to get your money out since SVB announced they were trying to raise money. Techcrunch called the announcement shooting yourself in the foot.
fidgewidge · 3 years ago
Read the other threads. https://news.ycombinator.com/item?id=35088919
"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)"
treis · 3 years ago
I see one person saying that and a bunch of other people telling them why they're wrong
FormerBandmate · 3 years ago
Turns out Twitter making bank failure a meme didn’t really help anything at all. It’ll be very interesting to see what happens to uninsured depositors
albatross13 · 3 years ago
Probably a dumb question, but what determines if a deposit is insured or not at an FDIC insured bank?
ncallaway · 3 years ago
Deposits > $250k per depositor per bank are uninsured.
bagels · 3 years ago
Up to 250k is insured, amounts beyond that are not.
swift532 · 3 years ago
Not a dumb question at all. AFAIK it is the amount, in the USA it's $250K. Other countries have similar situations, most of the EU is 100K €.
albatross13 · 3 years ago
Awesome, that makes sense. Thanks!
abofh · 3 years ago
Investment products are not FDIC insured; Accounts over 250k are not FDIC insured; In this case, that's probably the bulk of 'uninsured' - large accounts, or creatively sold investment products.
bombcar · 3 years ago
Investment products can (and often are) FINRA and SIPC insured - but this is NOT an insurance against loss (FDIC doesn't insure your interest, just the principal which changes each time interest is paid, the moment FDIC steps in your interest-earning can go to zero) - it is insurance that you actually own what the investment says it is.
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.
ramses0 · 3 years ago
* Amount less than $250k * "Deposit Account" => not a "fancy investment interest account"
Details: https://www.fdic.gov/resources/deposit-insurance/
Not Covered: https://www.fdic.gov/resources/deposit-insurance/financial-p...
zeitgeistcowboy · 3 years ago
I'm not sure if this helps answer your question, but coverage is automatic if you have your funds in an FDIC insurance bank (most all of them) and if it's in a normal savings type account and then any amount 250k or less.
davidgerard · 3 years ago
First actual FDIC takeover since 2020, I think.
ellisv · 3 years ago
| The last FDIC-insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.
From the release.
_delirium · 3 years ago
The FDIC also maintains a "failed bank list" that is kind of interesting to browse (goes back to 2000): https://www.fdic.gov/resources/resolutions/bank-failures/fai...
sjkoelle · 3 years ago
strong "days since last fatal accident" vibes from that sentence
kerowak · 3 years ago
For comparison, alamena had 68m in deposits compared to SVB’s 175b
megaman8 · 3 years ago
yes but if you look at the decade before that, it was pretty common about 3-10 or so bank takeovers per year, from the link below.
game_the0ry · 3 years ago
2008 bear sterns vibes.
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.
yeahsure22 · 3 years ago
It’s not interesting because of its name, it’s the 18th largest bank in the US. A domino that big usually doesn’t fall alone. Also, FDIC hasn’t taken over a bank since 2020. This isn’t exactly a common occurrence.
game_the0ry · 3 years ago
> It’s not interesting because of its name, it’s the 18th largest bank in the US.
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.
mywittyname · 3 years ago
"Since 2020" is not a great metric, since a lot happened in 2020.
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.
bombcar · 3 years ago
Note that FDIC has a precise meaning for a "bank failure" - many more "failures" occur but FDIC gets there early enough and arranges for another bank to "take over" - more or less quietly. These are usually tiny community banks.
pbourke · 3 years ago
A failure in “First Community Bank of Left Buttcheek, GA” is not the same as the failure of a $200B institution.
pbourke · 3 years ago
It’s also the second largest U.S. bank failure. WaMu was considerably larger when adjusted for inflation - $300B in 2008 dollars (> $400B in 2023) vs SVB at $200B in 2023 dollars.
Ekaros · 3 years ago
I think big question really is has any other banks "invested" their deposits in similar manner. So could there be others that will go down if bank run is encouraged?
subarctic · 3 years ago
I know very little about this, but the wikipedia page says it's the second largest bank failure in the history of the US, so maybe you're underselling it a bit?
Pasorrijer · 3 years ago
I mean, potentially.
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
34679 · 3 years ago
Good luck to any companies with over 100 employees trying to make payroll and other obligations on $250k.
Scoundreller · 3 years ago
Maybe smart for orgs to do their payroll on a Tuesday or Wednesday instead of down to the wire on friday with everyone else.
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).
version_five · 3 years ago
Re Bear Sterns, there were lots of political reasons it was allowed to fail while others were protected. If I remember right something about them not helping with the Long Term Capital Management collapse for example. There will have been people who had the opportunity to help SVB and collectively decided it was better to let it fail. It will be interesting to understand the decisions that were made when the dust settles
Octokiddie · 3 years ago
Bear Stearns was the first shoe to drop. Intervening would have spooked the market. Later implosions were addressed because there was no alternative.
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.
Ancalagon · 3 years ago
When and where does the next shoe drop this time then?
Octokiddie · 3 years ago
It's possible we haven't seen the first shoe yet, and bank failures like this one are just the canaries dropping dead.
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.
banku_brougham · 3 years ago
great callback. revenge on Jimmy Cayne for when genius failed.
Dont forget it was Lehman that failed first, Bear got special treatment amongst the Citi, AIG, et al bailouts.
alex_young · 3 years ago
Bear was sold at a %90 discount (so not a complete loss) 1 week before Lehman failed.
Scoundreller · 3 years ago
I was surprised when it was supposed to sell for $2 but then they raised it to $10 for some reason even though it was a zombie bank.
jen20 · 3 years ago
This is simply not true.
fallingknife · 3 years ago
They did intervene with Bear. The JPM acquisition came with all sorts of backstops and guarantees from the Fed. Lehman was the one where they didn't intervene, which is why there was no acquisition.
borski · 3 years ago
> And any accounts over $250K, poof.
That's not quite true; the FDIC will pay uninsured depositors an advance dividend within the next week.
om42 · 3 years ago
My finance-foo is quite weak, what does advance dividend mean in this context?
aobdev · 3 years ago
Management at the now FDIC-controlled bank will estimate the value of SVB’s assets, such as loans and bonds, and give depositors a fraction of that value to be paid in advance of the sale of those assets. They do this to prevent the collapse of all those companies who were SVB clients, which would be bad for the economy.
jffry · 3 years ago
From an FDIC guide [1] I found:
"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...
borski · 3 years ago
Early repayment of some percentage of the uninsured deposits, prior to full liquidation and/or acquisition. Depositors have first access to funds either way.
ejb999 · 3 years ago
most likely a partial payment - i.e. you have 500K in the bank, 250K is insured and you know you will get it back - the other $250K nobody knows how much will be available when the dust settles, but maybe they (FDIC) feels confident they can give you 10% of that now, and keep making more payments as the picture becomes clearer on how much you can eventually get back. You won't get any final payments for many many months when everything is fully resolved.
eli · 3 years ago
And they'll probably get 90%+ back eventually. The bank's money isn't gone it just isn't liquid.
paulddraper · 3 years ago
It could definitely be less than 90%. But yeah, it's not just poof gone.
eli · 3 years ago
I think 100% is more likely than below 90%
mywittyname · 3 years ago
Edit - this has been the first fdic takeover since 2020, so no, it does not happen often.
This chart of historic bank failures paints a different picture:
cableshaft · 3 years ago
Almost all of those are during The Great Recession or the aftermath of it, so I think it's not that crazy of a claim to make.
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.
dragonwriter · 3 years ago
> 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.
cableshaft · 3 years ago
It is. It's also a prediction that a lot of executives and CEO's and pundits and politicians and bank managers are marking right now.
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.
ezekg · 3 years ago
And this chart paints an even different picture:
https://twitter.com/alistairmbarr/status/1634275645235793920
kmlx · 3 years ago
lehman brothers had total assets of $639B when it filed for bankruptcy on September 15, 2008. adjusted for inflation that's ~$800B.
scythe · 3 years ago
Lehman was an investment bank — they didn't take deposits. Wikipedia describes them as a "financial services firm".
TaylorAlexander · 3 years ago
Is total assets a useful measure here? I would be more interested in a chart that showed budgetary shortfalls. It sounds like SVB is only short about 10% of total assets if I am remembering what I read earlier this morning.
paulddraper · 3 years ago
No one really knows.
And banks usually aren't crazy amounts short. But they're short enough to got under.
Zetice · 3 years ago
lol so the fact that we didn’t have $250k of runway ends up being a good thing?
ElfinTrousers · 3 years ago
I mean, you could argue that relatively speaking you're better off, since you're probably not suddenly trying to satisfy champagne tastes on a malt liquor budget.
benjaminwootton · 3 years ago
Does this mean that depositors have lost access to their funds until the bankruptcy process, with the exception of $250k which will be available on Monday?
NordSteve · 3 years ago
That is correct.
FireBeyond · 3 years ago
Technically yes, but the FDIC is also working to release as much uninsured funds as possible as an "advance dividend".
Octokiddie · 3 years ago
> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined.
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.
ncallaway · 3 years ago
Yep, $250k.
boeingUH60 · 3 years ago
In my whole life, I have never seen a bank run from start to finish, but here we are. Interesting times!
rozap · 3 years ago
A bank run powered by memes.
We truly live in a world.
OldManAndTheCpp · 3 years ago
Bank runs are always caused by memes -- the change is bank runs powered by image macros, but memetic spread of the idea "this bank may fail" is always what causes a run.
katmannthree · 3 years ago
Yikes. Does anyone have an idea of which orgs have significant exposure (like Molly White's FTX contagion graph[0])?
TechBro8615 · 3 years ago
40% of startups just had their bank accounts cut down to $250k, so... a lot.
tedivm · 3 years ago
I'm not sure how true this is. 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.
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.
e1g · 3 years ago
The FDIC covers $250k per depositor, not per account, and specifically does not cover bond investments. Either your startup created 200+ entities to pull this off (good luck with the rest of compliance) and didn't do bonds at all, or the founder is misled.
tedivm · 3 years ago
> Either they created 200+ entities to pull this off
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.
costco · 3 years ago
Why didn’t they just use https://en.m.wikipedia.org/wiki/Certificate_of_Deposit_Accou...? I haven’t used it I just read about it in a Taleb book but it seems like it would be much easier than creating all the accounts yourself and you can interact with just one bank account instead.
tedivm · 3 years ago
I'll be honest, there's a chance that this is exactly what they did but that they didn't understand it or describe it properly. My main point was that there are ways to get protection beyond the FDIC limit, and your link shows a pretty reasonable way to do that.
e1g · 3 years ago
Assuming legitimate operations, this strategy is highly atypical in corporate finance. There is no scenario where this setup has less cumulative risk than keeping cash reserves spread evenly across the top 2-3 banks. For a startup, this is a red flag about the founders' priorities, risk management, and ability to find professional advice.
As an intuitive measure, extrapolate this idea to Apple or Microsoft, which keep ~$10B in cash on hand and also need to protect it.
tome · 3 years ago
> extrapolate this idea to Apple or Microsoft, which keep ~$10B in cash on hand
Literally cash, as in deposits? Or highly liquid assets such as T-Bills?
tedivm · 3 years ago
To be fair the founder was really incompetent, and the money was pretty much wasted. When the company finally sold it was well worth what my strike price was.
postexitus · 3 years ago
They either made the story up based on what they read on reddit or you are making it up now based on what you have read on reddit. There is a third possibility that that person being incredibly dumb and they actually believed what they read - but I give that a slim chance.
from · 3 years ago
Why would someone lie about that? Having 30 bank accounts does not confer any prestige upon you. There are companies that do this for people (https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...) and if you Google "FDIC sweep" or "insured cash sweep" there are a bunch of banks talking about how they support automatically moving money out when an account gets more than $250000 in it.
zamnos · 3 years ago
What's more likely being lost in translation is that they have an insured cash sweep account and explained how that works, and who exactly is creating the 30 bank accounts is what's being misunderstood in this game of telephone.
bombcar · 3 years ago
At the $100m amount people may confuse FDIC with SIPC - https://www.sipc.org
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".
a-r-t · 3 years ago
Just a clarification: it's per depositor per bank.
notyourday · 3 years ago
This is literally the primary job of the CFO:
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
squeaky-clean · 3 years ago
Per bank. You can use something like IntraFi to distribute your deposits across multiple banks automatically.
flutas · 3 years ago
Potential contagion: https://imgur.com/a/Xh6Kudp
These are companies, sorted by PPP loan size who had SVB as their servicer.
mydriasis · 3 years ago
Holy cow, O'Reilly in the top ten. That doth not bode well.
flutas · 3 years ago
Something to note: This list is not exhaustive. There was about 3.8k companies with svb as their servicer. That also doesn't mean all of their money was in SVB.
majani · 3 years ago
Chipper Cash raised $150m from FTX and $100m from SVB. Ouch
chollida1 · 3 years ago
some note i've been taking
> 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,
ejstronge · 3 years ago
>Keep in mind 93% of SVB's assest were not FDIC insured.
>> 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.
briandear · 3 years ago
When someone opens a bank account and makes a cash deposit, he/she surrenders the legal title to the cash, and it becomes an asset of the bank.
ejstronge · 3 years ago
> When someone opens a bank account and makes a cash deposit, he/she surrenders the legal title to the cash, and it becomes an asset of 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:
mytailorisrich · 3 years ago
Not sure about banking rules but in general accounting terms: The deposited amount is an asset (the bank has got the cash) and a liability (the bank owes that amount to the person who made the deposit) and neutral on the balance sheet.
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."
ejstronge · 3 years ago
Yes, but the OP comment conflated assets (cash and securities as you mention) with FDIC insurance which only concerns liabilities due to depositors who qualify for FDIC insurance.
nordsieck · 3 years ago
> I think this is Google's first hit when one searches this, but I do not believe this is correct.
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.
briandear · 3 years ago
The another, more reputable source says exactly what I said.
"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.
mhuffman · 3 years ago
For a bank deposits are liabilities and loans are assets.
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.
bob1029 · 3 years ago
The semantics of this are very cumbersome.
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.
mhuffman · 3 years ago
I agree with everything you say, but at a high level they "owe" you the money that you deposited. Which is a liability. They (generally) are not allowed to just go spend your money on anything they like (in the same way you could if you got a business loan, which is an asset and a liability), but it is prescribed how they can create assets with the deposits.
bell-cot · 3 years ago
It's an Accounting 101 situation ( https://en.wikipedia.org/wiki/Accounting_equation ) -
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.
bell-cot · 3 years ago
Clearer to read it in the article:
> 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.
dragontamer · 3 years ago
When Alice deposits $100 into a bank, the bank gains a $100 liability (owes Alice $100), and then a $100 asset (the cash). The asset is likely traded for a bond of some kind, in this case a US 10Y treasury.
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.
roflyear · 3 years ago
It's somewhat confusing to me, because a $100 treasury note is only worth less than $100 if you try to sell it today. You still will get your $100 back if it matures.
ellisv · 3 years ago
Yes but many people want their money today, not in 10 years.
roflyear · 3 years ago
That's a bank run tho not "normal operating" status.
Jensson · 3 years ago
Bank runs happens when you create conditions that can't handle bank runs. Nobody would worry about keeping assets at a Bank that wouldn't get destroyed if people started asking for their money.
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.
dragontamer · 3 years ago
Damn near the entire customer base of Silicon Valley Bank withdrew their money yesterday (Thursday), forcing SIVB to sell those 10-year notes.
twoodfin · 3 years ago
Right, but Alice and all of her friends want their money back now, and it’s your job as a solvent bank to give them their money when they ask for it.
Octokiddie · 3 years ago
This is the crux of the problem. SVB may have intended to hold to maturity, but the market forced it to sell to raise cash.
You may hold 100K in treasuries today, but if your employer can't make payroll, you're gonna sell to pay rent.
danaris · 3 years ago
> but the market forced it to sell to raise cash.
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.
dragontamer · 3 years ago
> 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.
jojosbuddy · 3 years ago
Aside from all those tech founders (today's LP VCs) from 2008-2020 likely held equity/deposits at SVB, and the sheer call out by them to make a run on the bank yesterday just broke the bank. The speed of fintech makes it feel coordinated.
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.
slymon99 · 3 years ago
@danaris - if you are a bank and people want to withdraw money, you need cash to pay them. By "the market" we mean the banks depositors who withdrew their case (partially due to these very concerns, hence why bank runs are called bank runs)
toast0 · 3 years ago
$100 today and $100 in a year are not the same thing.
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.
UnpossibleJim · 3 years ago
So, first off, I am not very literate when it comes to the comings and goings of banking procedures, so forgive me if this is a dumb question.
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?
tinco · 3 years ago
Well a defense might be to increase their liquidity by selling those treasury bills, which would drive their price even lower, making other banks also be illiquid on paper.
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.
adrr · 3 years ago
Fed could buy it and set a price floor on it.
e-clinton · 3 years ago
Both would be my guess. I’m expecting more smaller banks to fall.
opportune · 3 years ago
Yes, this may trigger many banks to sell off long term underwater assets which would further reduce their prices, incentivizing further sales. It can also trigger more bank runs that put time pressure on banks to do this. Bad situation overall
SkyMarshal · 3 years ago
> Svb Is First FDIC-Insured Institution to Fail This Year
Was Silvergate bank not FDIC-Insured?
bombcar · 3 years ago
Silvergate is apparently doing a controlled liquidation of itself, this is an FDIC-forced liquidation.
idlewords · 3 years ago
Now we just need an "incredible journey" blog post from SVB spinning this acquisition as a great win for both customers and investors.
colpabar · 3 years ago
Bonus points if they mention effective altruism, and how great it is, but how also it can be bad sometimes.
hef19898 · 3 years ago
A pitty FTX went under before, just imagine SBF announcing he is bailing out SVB!
jollyllama · 3 years ago
If you bail him out of jail, he'll bail out your bank, and then he'll bail out of the country.
huslage · 3 years ago
That's not really possible. SVB as an entity no longer exists once the FDIC steps in.
NordSteve · 3 years ago
Not entirely correct. There is still a "bad bank" which is the SVB entity (and will be wound up in bankruptcy), and the "new bank" which has all of the insured deposits.
khazhoux · 3 years ago
Or a cute 404 page when you login to your account:
"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."
adrianmonk · 3 years ago
Kinda seems like it should be a 503 Money Unavailable.
oefrha · 3 years ago
410 Gone is more accurate.
dpkirchner · 3 years ago
402 Payment Required
rtp4me · 3 years ago
420 - up in smoke
capableweb · 3 years ago
Or 301 Moved Permanently. Or 406 Not Acceptable. Or 410 Gone. Or 417 Expectation Failed. Or 429 Too Many Requests.
So many fitting status codes to chose between I don't know what to do!
hef19898 · 3 years ago
Using all of them, and switch between them? Maybe doing some AB testing to figure out which ones work best with users?
mayormcmatt · 3 years ago
Damn, this guy HTTPs.
hnburnsy · 3 years ago
Username checks out.
jojosbuddy · 3 years ago
Nah, it'll go to a GoDaddy page: "buy this URL for $3.99/yr now!"
samstave · 3 years ago
this guy HTTPs
moffkalast · 3 years ago
They've made an oopsie woopsie.
reducesuffering · 3 years ago
South Park nailed this https://www.youtube.com/watch?v=-DT7bX-B1Mg
lukewrites · 3 years ago
"This was a learning experience that will provide velocity in our continued disruption of the finance space for startups. We look forward to continuing to maintain a growth mindset as we ~cash your checks~ earn your trust."
Exuma · 3 years ago
Here's why a bank collapse is a good thing.
tibbon · 3 years ago
They’ll have chatGPT write it
jdoliner · 3 years ago
ChatGPT is happy to oblige:
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.
boeingUH60 · 3 years ago
> Bill Biggerstaff.
He lived truly to his name! Founded a bank that processed bills with a big number of staff.
Imnimo · 3 years ago
Don't forget the cutesy nickname for its employees and users.
"Dear Sveebles and Sveeblettes..."
testfoobar · 3 years ago
What a debacle.
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...
banku_brougham · 3 years ago
Its so funny until you realize your seed-round investment in a friends company used SVB.
Gonna be quite a show, this.
idlewords · 3 years ago
That makes it even funnier, though. At least to the rest of us.
loeg · 3 years ago
Not now, Maciej.
idlewords · 3 years ago
Literally no better time than now.
loeg · 3 years ago
If it's all downhill from here, then I guess it will never be funny. You don't speak for "the rest of us."
uoaei · 3 years ago
Sounds like someone needs a little "kill your heroes"-ing.
pwinnski · 3 years ago
Counterpoint: Now and always, as many times as it takes.
nvr219 · 3 years ago
lol
baggy_trough · 3 years ago
You really have to be a tremendous shit to say this out loud, even if it's how you feel.
eggsmediumrare · 3 years ago
Rich techies losing money and having to sell one of their houses is pretty funny. Regular people missing mortgage payments is not funny.
sophacles · 3 years ago
Isn't the investor justification for taking a huge chunk of profits "we take risk"? I fail to see how this is unfunny just because the risk you took played out in the bad way.
dannyw · 3 years ago
More people will lose jobs.
serial_dev · 3 years ago
I believe they didn't think that the biggest risk to their investment would be the bank the co-founders chose.
recursive · 3 years ago
Perhaps it wasn't the biggest risk at the time. Still a risk though.
FormerBandmate · 3 years ago
Tons of VCs had their assets there too. It could lead to serious ramifications, anyone with substantially more than $250k in that bank is out a lot and only time will tell how much they’ll be able to recoup. It’s not an FTX situation, the assets are somewhat there, but the losses in securities look extreme and unwinding them at a fair price may take months, if not years
shawabawa3 · 3 years ago
It is actually exactly an FTX situation
Not as extreme maybe, and less fraud got us here, but $assets < $deposits
cowmoo728 · 3 years ago
There is a very large difference between FTX and SVB. The people behind FTX will probably go to jail because they committed crimes and effectively stole money. SVB mismanaged interest rate risk and ended up on the wrong side of interest rate hikes. They had similar results of people quickly trying to pull all their money out, but it's not "exactly an FTX situation".
blibble · 3 years ago
no bank on earth can survive every depositor turning up at once and demanding their money
whereas an exchange shouldn't have a position at all
and a hedge fund normally doesn't allow withdrawals at all (without vast notice)
freejazz · 3 years ago
Well, people didn't show up to demand their money for no reason.
hef19898 · 3 years ago
My reading is that the long term book value of those assets is bigger than the deposits. And now that the deposits are withdrawn, SVB ahs to liquidate thise assets at current market value, which is (maybe?) lower than deposits. So, at the least, it looks like a strange risk management approach on behalf of SVB. And those clients that kept most of their money at this one, single bank.
ethbr0 · 3 years ago
From TFA:
>> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.
ptero · 3 years ago
I see it as very different from FTX. In SVB there was no fraud and no criminal wrongdoing; there may be no moral wrongdoing either. SVB was a chartered bank, subject to all regulation and reserve balance rules that other banks follow. As far as we know they followed all regulation to a letter.
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.
Mistletoe · 3 years ago
There may be no moral wrongdoing but it seems quite dumb to be so heavily in securities that massively lose value when rates go up and rates are at historic lows, no?
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.
freejazz · 3 years ago
To be fair, it sounds like some shockingly negligent management on SVB's part. Obviously thats orders of magnitude off from the complete lack of management w/ SBF.
eshack94 · 3 years ago
This is a bad take. It isn't the same situation.
ivalm · 3 years ago
Presumably VCs have only a tiny fraction of their fund as available as cash, so I guess it won’t be too brutal.
zamnos · 3 years ago
The VC fund only has a tiny fraction of their fund as cash because most of it is loaned to to their portfolio companies, which have it in cash at the bank their VC partners told them to (because you can't pay payroll with Tbills), which, to a large degree (judging from the comments on the thread from last night) was SVB. It's going to be brutal for every company who didn't get their funds out before this morning's announcement, not to mention the possible contagion risks.
ivalm · 3 years ago
Yes, the companies will be screwed but that’s not what I meant.
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.
gcek9 · 3 years ago
That's right. Although there is an interesting thing to consider: if you look at page 13 of the deck they shared on Wednesday[1], it says 56% of SVB's total loans are in the form of lines of credit issued to PE/VC funds, secured by their LP commitments. I imagine many if not most of those are fairly small in size, but it's possible some funds took out much larger lines of credit, secured by their future LP commitments, and were holding that cash at SVB. So we could definitely see some funds affected to varying extents.
[1] https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03...
testfoobar · 3 years ago
What is this? Does this mean that if PensionFundFoo invests in VCFundX as a LP, that PensionFundFoo never actually has to fork over cash to VCFundX to give to StartupZ? Does this mean SVB accepted PensionFundFoo's commitment to VCFundX as collateral and gave a loan to VCFundX to invest in StartupZ?
gcek9 · 3 years ago
Yeah, more the latter. VCFundX goes out and raises capital for a new fund, which includes PensionFundFoo as one of the LPs, and once closed, goes to SVB and says, 'hey look we have $100M in signed LP commitments for this fund we just closed' and SVB says 'great - we'll set up a line of credit for you at [x]% of that $100M that you can draw down now (or later) to do with what you want' (obviously to invest in startups, but that would also include their management fees which GPs can pull forward and use to fund their lifestyles and/or invest). And then the future capital calls from LPs, including PensionFundFoo, go to SVB to pay down any amount of that loan outstanding.
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.
testfoobar · 3 years ago
Thank you I understand. Credit Lines against commitments seems like a unique product that only a bank with domain expertise can offer.
zamnos · 3 years ago
Ah, thanks for explaining.
> 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?
ivalm · 3 years ago
Oh for sure. LPs would wire money to SVB and that money may be frozen/will be returned at less than par. Loss of relationship will also hurt. But for the biggest funds LPs are like pension funds, and that money will be available. One thing to consider is that VCs may need to call on their LPs to recapitalize their existing portcos which may leave less space for new investment.
anonymouse008 · 3 years ago
9 times out of 10 bankruptcy is a cashflow mismatch - this is going to be quite painful for a lot of things.
berkle4455 · 3 years ago
They’ll most likely be made whole or close to whole. It’ll just take time, so as long as that startup doesn’t have a huge burn already, should be fine. Anyway you bought % in their company which you still own, the cash was gone when you wired it.
sroussey · 3 years ago
Large burn? You mean any burn at all…
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.
berkle4455 · 3 years ago
[deleted]
lmeyerov · 3 years ago
Yep traditional advice is don't burn > 100k / mo when early stage, and most lower. So 2mo+ payroll fine for a normal seed, early A. Later stage are normally more sensitive. It's also a real issue with profitable companies whose outflows are at that level and are considering bigger purchases -- I'd be bailing if we were there just bc that.
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 :(
berkle4455 · 3 years ago
For sure. The post I was replying to was for a seed stage company though. They’ve got $250k secured by Monday. My point was small firms can meet payroll and bills just fine with only $250k
sroussey · 3 years ago
Sure, pre-seed. Seed is usually $2m-5m these days, and received all at once (mostly) as compared to VCs which do capital calls.
zamnos · 3 years ago
A company with 26 people, each making $120k (pre-tax), or a company with 51 people, each making $60k/yr pre-tax is enough to miss payroll this week if there's only $250k to draw from, and that's not accounting for any other expenses (like, say an AWS/GCP bill, though hopefully you're net-60 with them). CEO/CFO's also now got two weeks to come up with another $250+k in a complex environment.
twelve40 · 3 years ago
but do you automatically get access to the insured part, or do you have to sit around and wait for a few months until FDIC hashes it out with whoever? it could be really a matter of life and death for some startups.
Update: yes, seems like the insurance part is pretty quick
https://twitter.com/MMikeMMa/status/1634245929481175040/phot...
bombcar · 3 years ago
The IOUs that FDIC hands out can be borrowed against, or sold. There will be a lot of people active this week trying to buy them at favorable rates
davidw · 3 years ago
> likely be made whole or close to whole
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.
newaccount2023 · 3 years ago
its HN fantasy-land talk
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
dllthomas · 3 years ago
The parent didn't say everyone would get their money back. It said the friend who took a seed-stage investment will likely get most of their money back. I don't know the odds of that (most uncertain about the amount of money involved) but it's definitely much higher than "everyone gets all of their money back".
renewiltord · 3 years ago
It's how the FDIC does things. They pay what are called "dividends" on your previous deposits from the successor bank as they sell off assets.
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.
everybodyknows · 3 years ago
> All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. ...
tiffanyh · 3 years ago
Imagine having a life changing amount of personal wealth deposited at a Crypto exchange, and before you can spend it - the exchange sets it on fire.
idlewords · 3 years ago
It's still life-changing after!
themitigating · 3 years ago
That sounds terrible and I feel bad for them.
stephenhuey · 3 years ago
Disrupt disrupt disrupt! Those old stodgy banks just slow us down with their old-fashioned risk-averse ways! The cool kids can do it better!
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... :)
capableweb · 3 years ago
Thing is, it's probably true for 1% of the cases, that things are slow for no good reason. Trick is how to identify that 1% of times when you can truly make something better. But 99% of the times, it's all shit and ends up like this, or similarly.
ethbr0 · 3 years ago
The irony is that, as near as I can tell, they cratered their balance sheet because they were heavily into long maturity bonds (i.e. super conservative).
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?
travisjungroth · 3 years ago
The problem isn’t what they bought it’s what they sold. It was all correlated. Loans to startups were going bad while startups were pulling deposits since they weren’t getting funded. So you’re taking losses while losing capital. Doesn’t really matter what else you’re holding at that point if it doesn’t happen to be skyrocketing right now. Long term bonds will never be that thing, but at any point in time almost nothing else would be, either.
kgwgk · 3 years ago
> long maturity bonds (i.e. super conservative)
Do you think that long maturity bonds are more conservative than short maturity bonds?
JumpCrisscross · 3 years ago
> Do you think that long maturity bonds are more conservative than short maturity bonds
No. Nobody does. That’s why they typically yield more.
kgwgk · 3 years ago
Maybe ethbr0 does - considering the quote about super-conservative long maturity bonds.
Why do you say that he doesn't?
JumpCrisscross · 3 years ago
> considering the quote about super-conservative long maturity bonds
Within the set of long-maturity bonds, Treasuries are conservative. That doesn’t make them conservative per se.
kgwgk · 3 years ago
Full quote: "The irony is that, as near as I can tell, they cratered their balance sheet because they were heavily into long maturity bonds (i.e. super conservative)."
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.
ethbr0 · 3 years ago
Treasuries.
onlyrealcuzzo · 3 years ago
But SVB wasn't even doing anything sketchy or disruptive, right?
borski · 3 years ago
Correct. They were doing the same thing every other bank was doing, and an unnecessary panic run did them in. Depositors will get their money back because my bet is SVB gets acquired, as their balance sheet was actually fairly healthy (relative to other banks) pre-panic, but it's gonna have ripple effects for sure.
We shall see.
yeahsure22 · 3 years ago
They won’t get acquired, they no longer exist. The dream is done.
jldugger · 3 years ago
They've been acquired by a newly formed bank from the FDIC. I'm not sure that bank will be around much longer than it takes to mark their assets to market, since the press release said they didn't know:
> 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.
yeahsure22 · 3 years ago
Assets - 100b Liabilities - 130b
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.
makestuff · 3 years ago
Probably the good old federal government. Something something too big to fail.
toomuchtodo · 3 years ago
I love the optics of remnants of Silicon Valley bank being owned by the gov alongside Fannie and Freddie. Behold the graveyard of poor risk management.
strbean · 3 years ago
> my bet is SVB gets acquired
By a Thiel-backed company, after he initiated the bank run?
borski · 3 years ago
You may not be wrong, lol
eurasiantiger · 3 years ago
Gotta get those black budgets somehow.
recursive · 3 years ago
The market has demonstrated a demand for run initiators. Who are we to doubt?
makestuff · 3 years ago
Does he back Brex? I saw they had billions of inflows yesterday.
koolba · 3 years ago
They had massive asset / liability duration mismatch. That’s gambling on low rates for an extended period of time.
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.
onlyrealcuzzo · 3 years ago
Why can't a bank borrow for liquidity so it doesn't need to sell at a discount?
lisper · 3 years ago
It can, and when rates are low, many do. But interest rates are rising, so borrowing is getting expensive.
borski · 3 years ago
Every bank had this, especially during the last two years. They were not the only one. The difference was bad PR and a panic run.
hd95489 · 3 years ago
If that’s your theory then buy some puts because anyone that did this will absolutely get ripped a new one
nostrebored · 3 years ago
They won’t in the short term. Even the GFC had a multi year slow roll. Markets can remain irrational longer than you can stay solvent and all that
dahdum · 3 years ago
DFPI specifically called them insolvent and illiquid, took them over and handed them to the FDIC. I don't think they were all that healthy after all.
https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
borski · 3 years ago
No bank is healthy once all its depositors pull their cash out. What their balance sheet looked like before the panic is what I'm talking about. Every bank dies from a bank run, period.
kgwgk · 3 years ago
And how many banks are acquired after that happens because of how healthy their balance sheet used to look?
charrondev · 3 years ago
You can see a list of failed banks and who acquired them here. https://www.fdic.gov/bank/historical/bank/
Every one in the past few years looks like it was acquired.
nostrebored · 3 years ago
The cost of money is very different now though.
kgwgk · 3 years ago
This one is largest than the 100 previous ones combined.
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.
slowmovintarget · 3 years ago
Unless they get bailed out by taxpayers because "they're too big."
dahdum · 3 years ago
Wasn't their balance sheet before the panic what caused the panic? It wasn't some WSB meme that drove the bank run, they couldn't cover their normal day to day operations and started a bond fire sale and desperate equity raise.
shadowgovt · 3 years ago
IIUC: they could definitely cover their normal day-to-day. The thing that broke down is they had to announce true things that made investors conclude that their money wouldn't grow as fast as investors expected, and investors (understandably / justifiably) wanted to pull it out to somewhere it would grow faster.
(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.
SilasX · 3 years ago
No bank keeps 100% liquidity, but my understanding is that most banks are capable of getting liquidity -- at least from the lender of last resort (LoLR) -- for massive withdrawals based on the value of their loan portfolio, and SVB's portfolio had tanked too low to do this based on interest rates the LoLR would lend to them at.
twoodfin · 3 years ago
Won't lots of investors (aka depositors) start making this same analysis? Whether you have $10K or $10M, right now you don't want your cash anywhere it's not earning 3%+. So it's back to whether they're unique in finding themselves uncompetitive as a place to park cash at a market rate.
dahdum · 3 years ago
> The thing that broke down is they had to announce true things that made investors conclude that their money wouldn't grow as fast as investors expected, and investors (understandably / justifiably) wanted to pull it out to somewhere it would grow faster.
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.
borski · 3 years ago
High duration, yes, but actually extremely low risk.
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.
dahdum · 3 years ago
Didn’t SVB directly cause the bank run that killed them though? It wasn’t some externally driven event outside the scope of risk management. The assets were fine but the high duration was the risk. They took it purposely and lost billions when their risky bets turned against them. The emergency equity raise and sale attempts were desperation, and seen as such.
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.
borski · 3 years ago
Plenty of banks sell equity. General Atlantic had already agreed to purchase 500M of it, and it was the largest investor in First Republic as well.
gr1zzlybe4r · 3 years ago
How is the panic "unnecessary"? Are you saying that if your personal bank told you that you could get your money back, but just not right now, that you'd be ok with that?
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.
anamexis · 3 years ago
Does that means panics are necessary at every other bank, seeing as how their liquidity is similar (or worse)?
JumpCrisscross · 3 years ago
> every other bank, seeing as how their liquidity is similar
Source?
SVB had an unusual amount of long-duration assets. Most banks maintain a buffer of low-yielding, highly-liquid on-the-run Treasuries.
nostrebored · 3 years ago
I would not find it surprising if bank liquidity was actually historically low, especially considering that many banks do maintain buffers _of the same covaried assets_ and that banks _induce covariance when they choose to use an asset class for liquidity_.
Maybe ZFRB was just a really, really bad idea.
borski · 3 years ago
Not anymore. Very few maintain this, JPM being the notable exception.
The only difference is that panic set in and there was a bank run, largely led by VCs telling startups to pull their money.
ghshephard · 3 years ago
"unnecessary panic run".
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.
marioestrada · 3 years ago
It was a 40 year old bank too
bombcar · 3 years ago
Just about time for a midlife banking crisis!
FormerBandmate · 3 years ago
They bought bonds, which tanked when the Fed raised interest rates by 5% in a year. It seemed sane, until now
johngladtj · 3 years ago
The bonds they were legally required to purchase?
yeahsure22 · 3 years ago
But they didn’t have to buy THOSE bonds. They bought the wrong bonds.
themitigating · 3 years ago
Did they know they were buying the wrong bonds?
nairboon · 3 years ago
Of course, they are bankers, bonds are their daily business.
MrMan · 3 years ago
I think maybe they are not very good at running a bank.
PKop · 3 years ago
if they bought short term bills they wouldn't have lost value like the 10 yrs did. So, they made a duration mistake.
dahdum · 3 years ago
They chose to buy the much riskier bonds to support their very high 4.5% savings yield.
MrMan · 3 years ago
they were offering 4.5%? that explains a lot in terms of their reaching for yield in low quality assets
lokar · 3 years ago
No, they were not legally required to buy 10 year treasuries
nairboon · 3 years ago
Wouldn't say not sketchy, they traded interest rate risk and didn't hedge properly.
cal5k · 3 years ago
In fairness, it wasn't the risk-taking that did them in... it was the fact that they went all-in on 10-yr bonds at low interest rates and didn't adequately account for duration risk.
williamtrask · 3 years ago
Forgive me but I think this may be a contradiction. “didn’t adequately account for duration risk” == “risk taking that did them in”
cal5k · 3 years ago
There's a big difference between accounting for KNOWN risks wrt managing your treasury - something that every bank does as a matter of course - and trying new things.
CrazyStat · 3 years ago
Surely having your reserves locked up in assets that you can't sell without taking large losses is a known risk?
nairboon · 3 years ago
What kind of bank doesn't know about interest rate risk? That's their whole business.
cal5k · 3 years ago
That's what I'm saying. That's not the bank doing anything fancy and failing because of it, it's them not doing the basic things every bank should be doing.
SteveNuts · 3 years ago
Especially when the fed is telegraphing every move.
hef19898 · 3 years ago
One of the reasons each and every central bank does telegraph heavily is exactly to prevent situations like this one.
adam_arthur · 3 years ago
Duration risk is risk. Bonds are not risk free. Buying treasuries at ~0% rates was frankly stupid. The narrative going around that there was adequate risk management here and at Silvergate is not correct.
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.
shadowgovt · 3 years ago
The weird thing about all this to me is that the bank got sunk because they... Invested in very solid, predictable assets with guaranteed-except-for-apocalypse ROI.
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.
adam_arthur · 3 years ago
If you buy bonds you can lose money. To say they're risk free is wrong. Treasuries carry no credit risk, but they do carry duration risk. If you buy treasury bonds above par, you can also lose money even if you hold to maturity (though it would be illogical to buy them with negative yield. However we have seen this being done in Europe anyway)
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
shadowgovt · 3 years ago
In this context, "lose" money means "You won't get as much money out as you would have if you had invested the money in something else?" Because if I buy a t-bond at $5, I'm expecting to get at least $5 back when it matures unless Uncle Sam has died.
adam_arthur · 3 years ago
If you buy a T-Bond at 110 the treasury will pay you back 100 at maturity, thus you lost money in nominal terms (depending on coupon rate). This has been happening in Europe with their previously negative yielding debt
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
umanwizard · 3 years ago
Yes, but you would get more than that if you bought an (equally safe) treasury bond today. So it doesn’t make sense to claim that your bond is “still worth $5”.
Also, $5 today is not the same currency as $5 in ten years.
kortilla · 3 years ago
No, you’re fundamentally misunderstanding that a bank needs to be able to pay people when they withdraw their money. You can’t sell a bond that will be worth $5 in 30 years to get $5 in cash now when people can buy them from the fed for $3.
This has nothing to do with America, this is you not understanding duration risk.
shadowgovt · 3 years ago
Right, but the bank didn't invest 100% of its funds in MBS and t-bills; IIUC they had plenty to manage their projected operations cost and regular withdrawal / deposit activity. What changed is the panic / bank run. The panic sank them, but it'd sink basically any bank because no bank keeps enough liquid assets to clear all its deposit obligations.
... 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.
nairboon · 3 years ago
MBS are neither solid, nor predictable nor do they have a guaranteed return. Have a look at the GFC, where many thought MBS are how you describe them.
shadowgovt · 3 years ago
I thought it was over-investment in 10-year T-Bills that did them in.
mrguyorama · 3 years ago
>they're being punished for not having the money put somewhere it could grow faster.
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.
shadowgovt · 3 years ago
In that sense, no bank maintains 100% liquidity to handle withdrawals from every account holder.
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.
SilasX · 3 years ago
>Duration risk is risk.
Correct, but the GP’s point was that it was not “startup creditworthiness risk”, the thing SVB was most ridiculed for taking on.
makomk · 3 years ago
Yeah, arguably duration risk is pretty much the stogiest, most old-fashioned banking kind of risk that could possibly have tripped them up. Long-term loans and short-term deposits is basically what banks traditionally do.
p_j_w · 3 years ago
>it wasn't the risk-taking that did them in [...] didn't adequately account for duration risk.
This sounds like risk taking to me.
renewiltord · 3 years ago
HN really is like a ChatGPT version of itself. SVB is a 40 year old bank, bro. They are the old stodgy bank. The Meows and Mercurys are all still around.
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.
wbl · 3 years ago
40 years ago is 1983. https://fred.stlouisfed.org/series/FEDFUNDS
Their risk management might have overeindexed on the post recession era but the bank itself lasted through some pretty wild rate shocks.
renewiltord · 3 years ago
True. It looks like they mostly just made poor decisions in their most recent allocations. Unfortunate.
Mostly, though, all this talk about them like they're a neobank is because everyone appears to think they are one.
stephenhuey · 3 years ago
Your comment is delightfully insightful! I waited too long and cannot edit my comment to say I learned a lot from you and others here today. :P
victor106 · 3 years ago
Yeah, the cool kids also say/used to say only if they used blockchain this wouldn’t have happened…lol
sailingparrot · 3 years ago
> Those old stodgy banks just slow us down with their old-fashioned risk-averse ways! The cool kids can do it better!
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.
sylvainkalache · 3 years ago
Speaking of Mercury, they recently announced increasing customers FDIC insurance maximum to $1M for customer accepting to enroll in their sweep program. Not sure SVB offers this but I hope they do.
xxpor · 3 years ago
How can they do that? They don't choose FDIC limits.
dismalpedigree · 3 years ago
Mercury is not a bank. It keeps your funds spread across many banks where they open accounts on your behalf. Then they spread the deposits around to stay below the $250k threshold at each bank. Same as Fidelity and many others. I would be shocked if SVB was sweeping deposit funds into other banks.
iozero · 3 years ago
I've heard from a few people today who have Cash Sweep Accounts at SVB: https://www.svb.com/liquidity-management/deposits-and-invest...
Some claim that these accounts are insured/protected up to $125m, but I can't find any info online to corroborate that.
dismalpedigree · 3 years ago
This surprises me. I wonder what the mechanism and incentives are for a bank to sweep deposits to another bank.
spaceman_2020 · 3 years ago
In all fairness, those stodgy old banks have been bailed out multiple times in the past.
andrepd · 3 years ago
If only banks were risk-averse x) Unfortunately they are risk-happy when they know bankruptcy means a taxpayer rescue.
Octokiddie · 3 years ago
Maybe it's time to resurrect Fucked Company.
dheera · 3 years ago
Maybe it's time to get rid of fractional reserve banking and change it to full reserve banking.
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.
kibwen · 3 years ago
Full-reserve banking doesn't eliminate risk, it pushes it elsewhere. The nice thing about fractional reserve (yes, there are nice things about it!) is that it allows people to have a savings without completely paralyzing the money supply. Money that is "saved" can still be used for productive purposes. Yes, this introduces risk (of the sort that the FDIC is intended to ameliorate), but the alternative is to either discourage savings entirely in favor of active investments (which are themselves mostly subject to the same sort of risks as savings accounts of today), or otherwise encourage savings but let the economy be strangled by a lack of funds (which becomes a vicious cycle).
Certainly we can argue about the precise percentage of the fractional reserve, but keep in mind that "100%" is not a panacea.
dheera · 3 years ago
> Money that is "saved" can still be used for productive purposes.
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.
jen20 · 3 years ago
A savings account is not cash…
CASH is cash. Keep it in a vault. The cost of holding it is not nothing.
themitigating · 3 years ago
Why does it seem the perception of the tech industry is that products are just useless devices (like what you mentioned) or scams, that its employees are lazy and entitled, and basically it's all just a giant bubble of alof elites.
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
andrewmcwatters · 3 years ago
Unrelated to their finances, but they have an exceptional engineering team over there that I had the privilege of speaking with.
I’m sorry to see this happen.
woeirua · 3 years ago
LMAO. Can't even believe how many people were confidently asserting that nothing was wrong yesterday. If you had more than $250k in SVB yesterday you probably just took a huge haircut.
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.
briandear · 3 years ago
I bet a lot of VCs had significant money in that bank as well. Even if companies could raise money, there wouldn't be as money available.
JumpCrisscross · 3 years ago
> a lot of VCs had significant money in that bank
Everyone I know pulled yesterday.
eddsh1994 · 3 years ago
In a fractional reserve people can't all win
eddsh1994 · 3 years ago
Don't know why this is being downvoted - if a bank takes $100 and keeps $20 liquid while investing $80, and then everyone comes for their money, the first $20 is available but the rest will be slower if not completely lost. If everyone tried to take their money yesterday some people will win but a large number will lose... If there wasn't a run on the bank chances are it could have (slightly?) weathered the storm.
pclmulqdq · 3 years ago
Everyone who can read a balance sheet could figure out there was a lot of trouble after the announcement of the sold securities for a significant loss. The VCs telling portfolio companies to ride it out may have been looking for bagholders to ensure that they can get their own money out.
dougmwne · 3 years ago
The trouble in a bank run is that it’s impossible for everyone to have gotten their money out yesterday. Those first in line caused the collapse, the rest are out of luck. Nice to hear you have lucky friends.
gsibble · 3 years ago
I know a lot of individuals and startups, most over the $250k limit, who did not get out in time. SVB disabled wires and transfers for many yesterday.
gumby · 3 years ago
VC firms don't generally have tons of cash sitting around compared to their fund size. When you raise a fund, an LP does't just hand you $20 mil, then simply promise to send you up to $20 mil when you ask for it.
johnbellone · 3 years ago
The same people that were saying that yesterday were removing their deposits. They just wanted to be there first.
hef19898 · 3 years ago
There are three ways to succeed in this business: Be first, be smarter or cheat. And I don't cheat.
Margin Call is such a timeless, great movie!
johnbellone · 3 years ago
Indeed!
skywal_l · 3 years ago
And even though I like to think myself as smart, it's a hell of a lot easier to be first!
hef19898 · 3 years ago
Didn't he say sometjing like "while believe we have a hell lotta smart people under this roof, it is a lot easier to be first"? After all, it wasn't brains that got him in his chair, earning the big bucks, he can assure you!
highwaylights · 3 years ago
Do you care to know why I earn the big bucks?
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.
FireBeyond · 3 years ago
And to spin the quote further:
"And there are a lot of smart people in Silicon Valley. It's a hell of a lot easier to be first."
xapata · 3 years ago
But to be first, you must be smarter. Or cheat.
mangosteenjuice · 3 years ago
A good lesson for everyone who forgot the last cycle.
Slowly, then all at once.
plonk · 3 years ago
SVB isn't Lehman Brothers.
dehrmann · 3 years ago
It won't take out the broader economy, but it could really damage a lot of small companies in the tech sector.
uoaei · 3 years ago
It will take a significant amount of work to prove that those companies were providing net-positive outcomes for our civilization.
Me1000 · 3 years ago
Well, they were paying the salaries for hundreds of thousands of people (if not more) and making sure they and their families had health insurance.
rvnx · 3 years ago
Which in turn may not be able to pay for their mortgage. Which could cause getting Silicon Valley more affordable.
themitigating · 3 years ago
Do you think it's strange people are excited for the economy to fail?
gretch · 3 years ago
I think people are excited that we can get back to money tracking with actual value generation and not financial hacking.
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?
chasd00 · 3 years ago
I was taught disruption is good.
yr1337 · 3 years ago
When you see how much of a massive everything-bubble we were (are?) in, I can see where people are coming from on this one. Time to get some sanity back into this economy, and the people who will hurt the most are those who also benefited the most in the past 3 years (crypto-bros, useless startups with dumb valuations, etc.)
themitigating · 3 years ago
And they deserve it?
ashwagary · 3 years ago
>Do you think it's strange people are excited for the economy to fail?
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.
vineyardmike · 3 years ago
> If you had more than $250k in SVB yesterday you probably just took a huge haircut.
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.
prasadjoglekar · 3 years ago
You most definitely will. SVB already fire-sold 21Bn in MBS and took a 1.8Bn loss on that. Someone is eating that loss....
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.
hef19898 · 3 years ago
MBS, as in Mortgage Backed Securities??? Those MBSs? Oh dear, I am having very serious flash backs now...
hnthrowaway0315 · 3 years ago
IMHO MBS is not as evil as it sounds. After all stocks are backed by even more fragile things.
fallingknife · 3 years ago
Stocks aren't usually levered at more than 10:1, though. MBS are.
jcadam · 3 years ago
Time to re-watch The Big Short again.
kevinpet · 3 years ago
All men are mortal. My cat is mortal. Therefore my cat is a man.
Not all mortgage backed securities are subprime CDO squareds.
makestuff · 3 years ago
Don't worry everyone pays their mortgage...right?
timr · 3 years ago
No, this isn't true. SVB has some unknown amount of cash and other assets on hand. We have no idea what that is right now, or what percentage this is of the shortfall.
Someone will buy SVB, and they will put capital in as part of the purchase.
hnthrowaway0315 · 3 years ago
I wonder if anyone has Bloomberg terminal access can take a look and check whether there are disruptions in MBS and its hedging tools.
vitorsr · 3 years ago
I have access to Refinitiv. I think it looks fine?
hnthrowaway0315 · 3 years ago
Thanks. Do not have an account but I get it.
civicsquid · 3 years ago
Past losses aside, the press release says that there are about $180B in deposits with the bank holding about $210B in assets. Assuming the FDIC liquidates and restructures the bank, I don’t see why deposits could not be made whole.
If there were fewer assets then deposits, then yes the 250k+ accounts are probably out of luck.
bentlegen · 3 years ago
Will those assets still be worth $210B as the days tick by? I'm not a macro financial analyst, but I have to imagine trying to liquidate $210B of bonds, stocks, etc. will cause at least some of that value to fall – that's a big number.
nemothekid · 3 years ago
If someone well capitalized buys the bank, then they don't need to liquidate. The bonds aren't worthless, they just trade much lower now that interest rates have risen, however if you can wait until they mature you will get your money + interest.
vineyardmike · 3 years ago
Once the FDIC kicks in they can sell off to a different bank which can absorb them without touching the open market. Alternatively the FDIC can guarantee the bank for the duration necessary to sell assets slowly. They could likely sell the bank as a whole to another bank if assets>liabilities without too much disruption.
oceanplexian · 3 years ago
The "assets" are actually held-to-maturity securities (bonds) that are yielding less than the risk free rate. Who would want to buy a bond that yields 2% when you can buy treasures that yield 4%. So while they might have $210B in paper assets but there's no chance they will be unable to unload them without taking a loss, putting the bank upside down.
ok_dad · 3 years ago
> Who would want to buy a bond that yields 2% when you can buy treasures that yield 4%.
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?
petesergeant · 3 years ago
> Who would want to buy a bond that yields 2% when you can buy treasures that yield 4%
The government, to protect the economy
Me1000 · 3 years ago
The federal government doesn't need liquidity in the same way that a bank does, why would they even need to sell at all?
vineyardmike · 3 years ago
And restructuring tends not be stay “gov owned” - the government assumes ownership to stabilize the market then tries to sell off the business to another business. Often there’s some incentive to assume a massive amount of customers and assets. The gov may even take on the intermediate loss (the FCID is an insurance agency after all).
Me1000 · 3 years ago
Yeah, I can see why in general the government wouldn't want to hold on to assets, but bonds are kind of a special class of asset in that they do eventually mature and will naturally just be something they don't need to manage (within a relatively short time period too). If you expect that the sell off could take years to complete, some of those bonds will be halfway to maturity by the time they're sold.
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)
kragen · 3 years ago
US$1.8B is 1% of SVB's deposits; a 1% haircut wouldn't be that bad
i suspect the real number will be closer to 40% than 1%
sambull · 3 years ago
It's possible they'll socialize the losses on that for profit risk taking
Me1000 · 3 years ago
Is there any reason the FDIC itself cant just hold onto the bonds until they mature? The federal government doesnt need liquidity the same way a bank does, they wouldn't need to sell them for less than face value.
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.
hef19898 · 3 years ago
Well, and until everything is sorted all your deposits above 250k are illiquid now. So, I guess one way to not go under is to find a bank that gives you a generous credit line against whatever deposits there are at SVB. At huge risk margin, and quite a discount on the deposits. If there are such banks willing to do so, that is.
samstave · 3 years ago
all Thos banks usually start with 'swiss' passports in their name.
woeirua · 3 years ago
No one knows for sure. We don't know what the value of their HTM MBS actually is on the open market.
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.
matheusmoreira · 3 years ago
If people have to be reassured to begin with, it's already over. Money only exists because people keep believing it does. As soon as they stop believing it's gone.
banku_brougham · 3 years ago
That gummint fiat money looking better all the time.
omgomgomgomg · 3 years ago
But why would the startups become illiquid?
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?
NordSteve · 3 years ago
For business banking, you want a bank that understands your business. SVB was in the first rank of banks that understood startups.
Many startups aren't particularly sophisticated financially and just kept their capital in cash in the bank.
hef19898 · 3 years ago
What did James Ray say again about FTX? Something along the lines of "a group of highly unsophiscated people"? Man, the CFOs of the affected start-ups should all look for a new job. By the way, preventing things like that is something a good MBA does.
tome · 3 years ago
> James Ray
John Ray?
hef19898 · 3 years ago
Yes, that's the one! I knew it was something with "J"!
CyanLite2 · 3 years ago
They become illiquid because they don't have access to their money that was in SVB. They can't make payroll, can't pay vendors and landlords. The employees will leave first. Vendors next.
omgomgomgomg · 3 years ago
But normally, they will be bought by another bank coming Monday and resume business. The fdic assigns a buyer and pays the buyer, from what I understand.
Edit. I just realized, in the us, if there is no bidder, the fdic can close down the bank or run it itself.
jojosbuddy · 3 years ago
Bridge loans, DES, convertible notes, etc..., I'm sure their were loan "products" for startups similar to helocs (likely what put them in the hole). The appetite for crypto/fintech startups was huge during the pandemic and likely pressured them to get creative on products and overleveraged. It's all unwinding now.
Unfortunately, harder now for startups, mind that all those startup dreams from laid off FANG staff just got their rug pulled.
dehrmann · 3 years ago
> likely what put them in the hole
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.
morpheuskafka · 3 years ago
> Hundreds of startups will become illiquid as a result of SVB's collapse,
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?
borski · 3 years ago
They 'understand' startups. That is, they were willing to work with founders of new ventures, didn't require insane proof of provenance of funds (because suddenly millions of dollars would appear overnight), and would support founders with mortgages, for example, that were running companies that weren't yet necessarily profitable but were well-funded nevertheless.
LightFog · 3 years ago
They were proactive in incubators and allowed new companies to open accounts and make large deposits right away, when many mainstream banks wouldn’t or were too slow. I’m guessing plenty of startups stuck with them through inertia at least.
cragfar · 3 years ago
I can't say specifically for tech startups, but a lot of times lenders will require you to use their banking services as a funding requirement.
0x457 · 3 years ago
Try to walk to BofA as an entity that didn't exist yesterday and see how that goes.
yieldcrv · 3 years ago
Its not that bad.
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.
dboreham · 3 years ago
Not BofA, but I've done this several times at Wells Fargo and never had a problem.
0x457 · 3 years ago
Did you also deposit 100M the same day? Try opening line of credit the same day: startup banks will open it without any issues as long as you have cash.
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.
chasd00 · 3 years ago
High interest rate and naive customers who think they’re the smartest guys in the room.
andrewcamel · 3 years ago
Yep... I bet this is about to pull forward a lot of startup death. Gun now to VC heads to save things. Forcing decisions they were hoping they wouldn't have to make for at least another 6-12 months.
resters · 3 years ago
The knowledge that this would happen is why it happened in the first place. SVB execs won't take a pay cut.
itg · 3 years ago
So any startup which had more than $250k in SVB only has $250k left now I'm assuming? Hopefully this doesn't have a bad domino effect.
NordSteve · 3 years ago
The "bad bank" (SVB) will be liquidated and the proceeds distributed to the creditors. How much that will be for depositors won't be clear until that process occurs.
discodave · 3 years ago
Probably just a haircut. How much nobody knows yet, but according to the FDIC release, 3 months ago they actually had $209B of assets, so it's not a FTX-like 'oops we accidentally your money' scenario.
HDThoreaun · 3 years ago
250k on march 13th. The rest of the account will be released as the FDIC sells the banks assets, which will probably take months.
tedivm · 3 years ago
I'm copy/pasting a commend I made elsewhere, but I'm not sure this is the case.
> 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.
delfinom · 3 years ago
$250k is guaranteed by FDIC insurance.
The rest is limbo until the bank is liquidated and the remaining money is distributed.
hi · 3 years ago
Heads up founders who banked with SVB - Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-866-799-0959
senttoschool · 3 years ago
What happens to the deposits above $250k in this case?
Ouch for startups that didn't pull.
hijinks · 3 years ago
they turn into creditors of the bank to try to get the money back from asset sales. That could take years though it isn't quick
senttoschool · 3 years ago
Isn't that a death sentence for a startup? Even if you get your money back years later, you're company is already dead because it can't make payroll. At that point, the money will just go back to the VCs?
hijinks · 3 years ago
basically but the FDIC usually comes in real quick if they think a collapse might happen. Rumor is there's enough assets to cover the loses but it just couldn't handle the run happening.
I believe SVB will be open for business on Monday
ncallaway · 3 years ago
From the FDIC release there will be an advance payment on uninsured assets within the next week.
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.
azinman2 · 3 years ago
> Silicon Valley Bank is the first FDIC-insured institution to fail this year.
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!
kasey_junk · 3 years ago
The FDIC calls them failed banks by definition. If they step in, you failed. They have a failed bank list and Sivb is going on it.
Havoc · 3 years ago
That's pretty normal for confidence based stuff like this. There isn't really a point in regulators/insurers releasing a "well we're about half confident" message. So it flips from full confidence to zero confidence. Bit jarring but the sharp transition is not unexpected.
purpleblue · 3 years ago
This is how quickly a bank run can happen. They announced they were seeking funding, people started withdrawing all their money, and the investors all pulled out, leaving SVB high and dry. Now it's dead.
NovaDudely · 3 years ago
It is fun (in a morbid kind of way) just seeing how quickly the confidence on these things turn.
"Company is 200 years old and we will go for another 200 years more!"
2 Days later
"Whoops, all the moneys gone. Bye!"
whalesalad · 3 years ago
Well that escalated quickly. Glad I am banking w/ Mercury and hope they are not impacted by this.
wonderingyogi · 3 years ago
Mercury isn't a bank, it uses Evolve Bank & Trust and Choice Financial Group.
whalesalad · 3 years ago
True, I am just glad it isn't SVB.
davidw · 3 years ago
What's the best brief summary of what has happened so far?
NordSteve · 3 years ago
During the last couple years, SVB got a ton of deposits, and they didn't have matching loan demand. So they invested the money in bonds. Unfortunately they make a bet that interest rates would stay low, and bought longer duration (~10 year) bonds.
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.
rafaelero · 3 years ago
That's some terrible risk management. I can't believe they thought Fed' action during the covid crisis wouldn't cause inflation and prompt them to increase interest rates.
beefield · 3 years ago
I'm a bit confused. (Haven't followed in detail) Did they not mark to market the bonds they bought and ended up insolvent in reality but not in their books? Shouldn't the regulators have pulled the trigger earlier, then? Or is this just a liquidity issue and the bank is solvent, but the assets need to be sold?
EVa5I7bHFq9mnYK · 3 years ago
So they did exactly the same thing that FTX did - gambled with clients' money and lost.
foreigner · 3 years ago
That is what all banks do.
davidw · 3 years ago
Interesting, thanks. What with the bad bet being some fairly boring bonds... that should mean their investment didn't, say, lose 90% of its value or something. Just that the 10% (or whatever it was) it dropped was enough to put them over the edge. But if they sell off those bonds that's still a fair amount of money that can be recovered... right?
dragonwriter · 3 years ago
Its worth pointing out that bonds are just debt instruments and that their recoverable value responds to changes in the economic environment in pretty much the same way as direct loans with similar term would.
colinmorelli · 3 years ago
I think an important backdrop here is the initial catalyst for this (to my understanding) was a decline in VC funding and elevated cash burn in their clients, leading to a net outflow of deposits, which is ultimately what necessitated selling securities in the first place.
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.
loeg · 3 years ago
They made some bad-in-hindsight bets on low-interest, medium-duration debt, rates went up 4%+, and also startups have less cash in this environment, so they were obligated to realize losses on the debt to pay withdrawals. The end result being they were undercapitalized or at least not well-capitalized. They attempted to raise funds by selling equity but this incited a run on the bank.
berkle4455 · 3 years ago
That’s a whole lot of startups not making payroll or their SaaS payments
mynameishere · 3 years ago
Anyone know what the fire drill is on this? I imagine SV CFOs on the phone with Goldman Sachs trying to get a 5 million dollar credit line by COB today. Or shutting down operations.
Eumenes · 3 years ago
Why did startups use SVB over larger commercial banks? Every place I've worked has used them for some reason. I don't get it.
xt00 · 3 years ago
common wisdom held that it made it easier for investors to get you money -- especially from the usual sand hill road folks..
Eumenes · 3 years ago
I could understand like, getting the funds deposited to SVB, then managing your corporate funds in a larger more regulated bank
nemothekid · 3 years ago
Before the rise of mercury/column/stripe they were also way more amicable to get access to certain banking products. I remember at one point a company I worked for wanted to start doing ACH payments out of their account. Wells Fargo had some incredibly hoops we had to go through whereas SVB was just like "we would give you access, but you need to make us your primary bank".
wonderingyogi · 3 years ago
I wonder how many startups its going to affect.
bagels · 3 years ago
All of them that need to fundraise.
tlb · 3 years ago
The regulations that allow a bank to hold long-term fixed-rate bonds backing variable-rate liabilities (since deposit rates float) seems broken.
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.
mynameisjonny_ · 3 years ago
There's nothing wrong with your first sentence really. Banks can (and should) hedge these risks using swaps and other products. Someone really messed up here.
bombcar · 3 years ago
All banks run on exchanging short term liabilities for long-term assets. No bank is big enough that it can survive a large enough run.
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.
sneak · 3 years ago
It is absolutely ridiculous for someone with more than a few million sitting in checking to, well, have it sitting in checking.
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.
anon291 · 3 years ago
> It is absolutely ridiculous for someone with more than a few million sitting in checking to, well, have it sitting in checking.
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.
sneak · 3 years ago
In the US, it takes 24 business hours to transfer money, sometimes less. Payroll is easy as you know the exact amount and it's on a precise schedule set months in advance.
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.)
jen20 · 3 years ago
> In the US, it takes 24 business hours to transfer money, sometimes less.
What? The third-world banking system of the US often takes MUCH longer than that.
sneak · 3 years ago
No. Checks clear in 24 business hours, and fedwire wire transfers work same day if they are submitted early enough, and in no case more than 24 business hours (for domestic wires). Oftentimes domestic fedwire transfers are nearly real-time, and there is a plan for further modernization to speed things up in more cases.
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...
engineeringwoke · 3 years ago
A swap has two sides. Someone still holds the bag, so what you're saying here doesn't make sense. What SVB was doing is typical; regular banks don't hedge anything. You can see everything in a Bloomberg terminal
bagacrap · 3 years ago
they don't lose anything if they're not forced to liquidate those bonds but can hold them to maturity. It seems like the real problem here is a lack of diversity in liabilities (all tech/biotech startups).
tlb · 3 years ago
That's not true. When interest rates go up, they have to pay the higher rates on customer deposits, but they're not getting any more from their bonds. Perhaps they can spread the losses over 10 years, but the losses are the same.
xhrpost · 3 years ago
I don't think they "have" to pay the higher interest. Wouldn't they ultimately get that interest from parking money at the Fed over night? A bank isn't going to pay interest on money that results in a net loss, either they get it from the Fed or they are making private loans at a higher rate. Otherwise there would be no incentive to increase deposits as each would result in lost profits.
tlb · 3 years ago
A bank either pays competitive deposit interest rates, or people move their deposits elsewhere. That can happen quite quickly, and they'd have the same liquidity problem.
lvl102 · 3 years ago
Right because interest rates only go up, right?
tlb · 3 years ago
Obviously they go down too, but for a bank to be doomed if they go either of the two possible directions is bad.
bagacrap · 3 years ago
They don't have to and have not been paying higher interest rates on deposits.
One concern is that depositors will realize they can get better returns on money market funds and withdraw from banks en masse.
eclipsetheworld · 3 years ago
I'm wondering the same thing. The current rise in interest rates must have been a scenario that the bank considered. How can we still have a system that allows situations like this to happen? Other than negligence or malpractice, I cannot fathom a reasonable explanation as to how this happened / was allowed to happen (again).
kragen · 3 years ago
this is the system working as designed
zero risk is not a thing
Randalthorro · 3 years ago
What’s crazy to me is the fed hasn’t been raising rates out of the blue. What the fuck was this bank doing the last two years during every raise? They should have been rebalancing.
opportune · 3 years ago
I think what probably happened is that, for whatever reason (hubris, incompetence, some bull thesis) they didn’t sell their HTM assets during interest rate increases until it got to a point that taking a loss on them would have forced them to recalculate their reserves such that they were lower than deposits (ie insolvent). Technically they were allowed to do this because they get to count the maturity price as reserves rather than the market price. Selling at a loss at any point would have fixed the problem but force them to lower their reserve calculations and realize a loss.
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
runeks · 3 years ago
> They should have been rebalancing.
How would that have helped?
shawabawa3 · 3 years ago
Say they have 90B deposits and 100B in long term treasuries
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
namtab00 · 3 years ago
They would sell 95B of 10-year MBSs, but ho would buy them?
runeks · 3 years ago
Other banks will buy them at the right price (ie. less than what SVB paid initially).
runeks · 3 years ago
How is that different from just buying short term treasuries, instead of long term, in the first place?
shawabawa3 · 3 years ago
If rates don't go up then you get better yield with long term treasuries
hintymad · 3 years ago
Will startups have problems paying salaries now?
fullshark · 3 years ago
Good question and to me it seems the answer can only be yes.
severingties · 3 years ago
If the company's payroll is under the $250K FDIC insured amount, they can make payroll on Monday. If the company's payroll is like $1 million a month, maybe not.
jossclimb · 3 years ago
I can't see many startups having that sort of salary bill, unless they are a small seed with just a few founders working on a small wage as a sacrifice for their own investment. A lot of these startups would have hired during the frothy 2021 early 2022 phase when $250k might just cover a single employee.
manquer · 3 years ago
250k for a single employee’s mid month payroll ! That is $7.5m / year in only cash compensation!! that would be unheard of for startups who only bank at SVB, even only few blue chip CEOs will draw that much cash .
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.
jossclimb · 3 years ago
ok, this is my Euro brain's fault, we have a monthly payroll.
preinheimer · 3 years ago
I know SVB was an early partner for Stripe Atlas[1], I hope they've got other options now, and not too many companies get really hurt here.
[1] https://www.svb.com/news/company-news/silicon-valley-bank-pa...
bagels · 3 years ago
They had three choices. Mercury and one other.
reducesuffering · 3 years ago
Does this mean $SIVB stock holders who had $265 shares two days ago now have worthless shares? JFC no wonder bank stocks are priced so low compared to earnings... You're just hoping the dividends pay out enough before the inevitable implosion.
abofh · 3 years ago
Well, they were 38$ this morning, but yeah, probably going to approach zero
boringg · 3 years ago
They will be getting something but probably close to pennies on the dollar. Depends on how it gets repackaged and sold.
muzz · 3 years ago
The depositors, creditors, employees etc. all have to be paid first. I would be surprised if they can even do that, much less have anything left over for stockholders
ejb999 · 3 years ago
pretty much.
rootusrootus · 3 years ago
In the FDIC priority list, stockholders are dead last, depositors first. If the depositors take any kind of haircut, I'd guess stockholders will end up with exactly zero.
preinheimer · 3 years ago
Adam Conover did an interesting episode on the mechanics of a bank failing in the US, and how the FDIC practices for this moment.
It's in The G Word, their episode on Money. https://www.netflix.com/ca/title/81037116
omgomgomgomg · 3 years ago
Hold on, what happens if someone raised money from them for an incorporation?
They have to pay backbas usual, right?
Macha · 3 years ago
Yes, if you owe money to a bankrupt organisation, the creditors of that organisation now have your liability as their asset and will still expect payment.
boringg · 3 years ago
"Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-866-799-0959."
At least its toll free...
tpmx · 3 years ago
A Swedish white collar pension fund (Alecta) was the 4th largest owner of SVB. It's been big news over here today. I think I have some pension savings there.
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...
DLarsen · 3 years ago
I think I'm going to start asking potential employers where they do their banking.
capableweb · 3 years ago
I don't think it should be like this, but most surely your profile will be flagged as "suspicious" if you ask such questions.
kube-system · 3 years ago
There are some founders who are aware that their early employees are invested in the financial security of the company, and not only aren't scared of these questions, but openly discuss company finances.
ShamelessC · 3 years ago
I'm fairly certain that would be A-okay with the person you responded to.
zamnos · 3 years ago
Asking them to name the bank is a bit of a weird one, only because the answer can't be SVB anymore, and I'm not sure what OP would do with that information. (So it's FRB, then what? Unless you have inside info that they're about to fail, and you're interviewing this week, I don't see how their banking partner's material) But if a startup you're interviewing at won't answer what their runway is, or the rest of the reverse interview business questions, then that's a red flag and you should run far, far away from them.
* 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?
banku_brougham · 3 years ago
Aw shucks I wonder if any of my clients kept their working capital at SVB.
hw · 3 years ago
Are there any public companies that bank with SVB? Startups that went public in recent times?
nostromo · 3 years ago
For comparison, Bear Stearns had $350b in assets in 2006 (and much less when they crashed in 2008).
SVB had $210b in assets yesterday.
roflyear · 3 years ago
So let's say you work at a startup that has all their cash at SVB. Are you basically without a job now?
capableweb · 3 years ago
Depends on how big the startup is, how high the burn rate is and how on top of things the founder is and if they managed to pull the money before everything broke down. If the startup is small, you should be fine, $250K should be accessible relatively quickly, beyond that will be a process that can take long time and there is no guarantees.
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.
johng · 3 years ago
https://open.spotify.com/track/6j1D7df1BqtulVza3iIL6c?si=EuQ...
dangerboysteve · 3 years ago
SVB is one of the banks Stripe uses for its Atlas program.
ulrashida · 3 years ago
The biggest joke has to be all the "analysts" who chimed in with neutral or buy ratings as recently as yesterday.
I wonder what, if any, consequences fall their way other than the obvious professional embarrassment of a missed call.
gumby · 3 years ago
I suspect all depositors will be made whole. The bank had a liquidity crisis; it had reserves in excess of its 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.
bombcar · 3 years ago
The thing that's strange is FDIC took control and setup a receiving bank for liquidation.
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.
NordSteve · 3 years ago
Most FDIC bank takeovers are slow moving crashes, allowing for a longer negotiation where buyers can evaluate the loan portfolio they are buying. This is a reaction to a classic run, so no time for that.
czbond · 3 years ago
Chase has wanted this bank for years. Either they are taking advantage (takeover) or <conspiracy theory unfounded> helped accelerate it.
gumby · 3 years ago
Most of the good staff were poached by First Republic over the past few years. That caused me to bank my current startup at FR after more than 25 years of SVB.
So I don’t think there was much for Chase to buy. SVB has been in decline for a while
ashwagary · 3 years ago
Just saw a First Republic stock chart in crash territory, contagion?
everybodyknows · 3 years ago
Today's price range: 45-95
gumby · 3 years ago
S&P bank sector is down across the board, but presume it will regress to the mean fairly soon. Aren't many other banks with exposure similar to SVB's.
alfalfasprout · 3 years ago
First republic is in the same region and has a ton of tech clients. Collateral damage. So far it looks like they don't have the same exposure as SVB did though.
VirusNewbie · 3 years ago
Interesting you say this, their stock is up despite rest of my portfolio being red
czbond · 3 years ago
Flight to safety? Like when there was the Southwest Airlines December debacle - AAL skyrocketed for a bit.
mikeyouse · 3 years ago
So what I think is happening here is that if you take over a bank the traditional way, you need to mark-to-market all of the bank's assets -- so all of the losses from the long-dated MBS that would be perfectly fine if held to maturity would have to be recognized immediately, just crushing the balance sheet of anyone who bought it. Probably trying to line someone up who can either absorb that loss, figure out a way to recapitalize without recognizing the loss, or get access to some other lending facility.
t0mas88 · 3 years ago
But from what I read it's common for FDIC to "sell" to the acquiring bank at a price that wouldn't make a loss.
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?
mixdup · 3 years ago
Exactly. The fact they didn't have a bank lined up points very heavily to the fact that they are not going to be made completely whole. In the past, the FDIC has found a buyer and as part of that process guarantees some amount of the losses. IE: Savior Bank buys Failed Bank for pennies on the dollar, or even for a negative amount. They get all deposits, insured or not, and all assets--meaning loans. Then, the FDIC guarantees they'll make Savior Bank whole some percentage of losses on assets that go bad. Sometimes 80% or more
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
bombcar · 3 years ago
That's a really good point, FDIC usually swoops in Friday night; and this was closed on a Friday during business hours, that's actually insane; they couldn't hold on 8-10 more hours, the run must have been really bad.
Even WAMU (a huge FDIC action) was done after banking hours closed on the west coast. https://en.wikipedia.org/wiki/Washington_Mutual
ashwagary · 3 years ago
I just saw recent footage of 40-50 people standing in line outside an SVB branch waiting for service (withdrawals most likely).
I would surmise that the news spread fast among the tech demographic the bank services and the run is really bad.
toufka · 3 years ago
And in this case, tech savy individuals are willing to send $XXM in 6 clicks, 3min after getting a slack message. That's a pretty quick kind of run relative to old-school 'stand in line for your personal life savings' kind of run.
timr · 3 years ago
It doesn't really work this way. It takes time to set up acquisitions, even by the FDIC, and the "FDIC stormtroopers sell bank overnight" is apocryphal. They do weeks of legwork leading up to the actual handover of the bank.
We don't know the timeline here, but speculating that "it must be bad" because things didn't happen overnight isn't really responsible.
mixdup · 3 years ago
During 2008 crisis it worked exactly as described. Most failures resulted in the failing bank’s acquisition being decided before the seizure happened. The way this happened is very rare
ajb · 3 years ago
I think those actions worked out of hours because the bank's bosses let the FDIC know they were insolvent before a run happened, though? This time the bosses thought they could hold on.
If so, then the difference doesn't imply much about the banks asset level, just the idiocy of its bosses.
timr · 3 years ago
I mean...I think we're describing the same thing? So sure, it worked "exactly as described", but I think most folks on HN have no idea what "as described" means, in this context.
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.
elliekelly · 3 years ago
It seems like there’s a lot of uncertainty around the dollar amount of the deposits in excess of FDIC limits which would make it difficult to figure out a deal.
ecopoesis · 3 years ago
When was the last US bank failure where depositors lost money?
silisili · 3 years ago
Appears to be 2020, from a cursory Google search.
https://money.stackexchange.com/questions/129772/has-anyone-...
The oft quoted 'nobody has lost money' is from the FDIC, and specifically says 'insured deposits.'
everybodyknows · 3 years ago
What is "SVP"?
dredmorbius · 3 years ago
I suspect a typo for SVB, "Silicon Valley Bank".
kgwgk · 3 years ago
The size of this failed bank is quite abnormal. The business of this failed bank is quite abnormal. The surprising thing may be that the find anyone willing to take it out of their hands - let alone by Monday.
tinco · 3 years ago
But by the time the depositors get their money all of their employees will have left, and some other company will have an N year lead on cornering the AI dog washing market.
fairity · 3 years ago
> I suspect all depositors will be made whole.
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?
anonuser123456 · 3 years ago
The assets may not be valued anywhere near market prices given the recent run up in interest rates. They don’t have to reprice the asset if they intend to hold it to maturity in the face of fluctuating rates.
engineeringwoke · 3 years ago
There's a $40 billion hole in their balance sheet...
gumby · 3 years ago
As fairity pointed out in a comment to this thread, "The FDIC report shows $209b in assets and $175b in deposits."
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).
tchalla · 3 years ago
93% of deposits are uninsured according to a recent regulatory filing. So, I doubt it will be “all depositors” that would be made whole.
https://twitter.com/business/status/1634211584657571843?s=20
tialaramex · 3 years ago
FDIC means you get paid immediately regardless, but the bank will almost invariably turn out to be good for the rest, just not quickly.
mixdup · 3 years ago
No, FDIC means you get paid up to $250,000 per insured account immediately Any amount over that you are not guaranteed to be able to withdraw. These people are a long way from regardless
rcme · 3 years ago
> No, FDIC means you get paid up to $250,000 per insured account immediately Any amount over that you are not guaranteed to be able to withdraw.
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.
aioprisan · 3 years ago
> but typically all depositors are made mostly whole again
Typically, but no guarantee. And on what time frame, nobody knows.
mixdup · 3 years ago
Typically the FDIC finds another institution to buy the distressed bank, and backstops losses on bad assets. They were not able to do that in this case
I suspect many depositors will be taking losses in this failure
pirate787 · 3 years ago
IndyMac depositors got 50 cents on the dollar above the insured amount in the 2008 collapse.
https://www.ocregister.com/2009/03/20/depositor-losses-final...
notafraudster · 3 years ago
It looks like since 1/1/2014 (convenient stopping point for my scrape), FDIC takeovers resulted in an average of 76% of what's owed paid out (range 0%-98%). My guess is the <50% payouts were mostly fraud rather than a situation like this where it's a more traditional liquidity event, so I'd suspect it'll be above average, probably in the 80-90% range.
tialaramex · 3 years ago
That's disappointingly low. 0% is what you'd expect from an entirely unregulated "bank" which failed, so regulators were completely ineffective. Does the US just not bother actually having and enforcing capital requirements on banks?
SgtBastard · 3 years ago
That’s a bit of a grim take. There’s been multiple instances of otherwise well regulated banks being blind sided by deliberate concealed fraud by its employees.
tialaramex · 3 years ago
Leeson is an example of a bank completely failing to use controls whose purpose is to prevent exactly what happened. The bank should have another employee who is in effect marking Leeson's homework, and instead he was allowed to mark his own, so when he was down a million dollars he could say he was up a million dollars, and keep his job. And of course it's quickly not just one million. This isn't hindsight, these were normal controls, but Barings just didn't bother.
jen20 · 3 years ago
The tragic part of this story is that none of those who should have been responsible for implementing such controls faced any kind of legal action.
tialaramex · 3 years ago
Sure, the amount above $250k wasn't insured, so, you don't get that immediately - my core point was that the rest isn't gone and in many cases you'll get all or almost all of it back, that just won't happen soon.
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.
bityard · 3 years ago
Agreed. Lots of people here in the comments are making assumptions about a system they don't understand. Depositors with > $250k aren't necessarily going to "take a haircut," for the reason you mentioned, plus a few others. Additionally:
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.
jabart · 3 years ago
I don't think the signers count towards the limit like a personal joint account does and would keep a business account at $250k.
https://www.usbank.com/bank-accounts/fdic-deposit-insurance-...
kgwgk · 3 years ago
> 2. Any regular account with two or more signers (very typical for a business account) is insured up to 500k.
Is it typical for business accounts to be owned by someone other than the business?
panarky · 3 years ago
SVB is not a typical regional bank taking deposits from middle-class workers, where most accounts are under the 250k insurance limit.
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.
fairity · 3 years ago
> The cold, hard fact is that the bank doesn't have sufficient assets to pay back 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.
panarky · 3 years ago
That $209 billion number was not marked to market. Their assets weren't worth that much then, and they're worth less now.
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.
fairity · 3 years ago
Once again, my point is that your following statement is untrue: The cold, hard fact is that the bank doesn't have sufficient assets to pay back depositors.
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.
panarky · 3 years ago
Of course you're correct, nobody knows the future.
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.
SilasX · 3 years ago
Not unless interest rates plummet, no. The bulk of portfolio losses is from long term bonds losing value with the increase in interest rates. Allowing more time to sell doesn’t help you there, especially if you have to pay prevailing interest rates on any delay.
015a · 3 years ago
> The cold, hard fact is that the bank doesn't have sufficient assets to pay back depositors
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.
panarky · 3 years ago
> ... absolutely, undeniably ...
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.
roguecoder · 3 years ago
Being able to trust in the stability of banks is subsidizing the economy, not just wealthy individuals. It isn't CEOs who got tossed out of work in 2008, it was't wealthy individuals who had a 27% unemployment rate.
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.
kelnos · 3 years ago
I think the problem is when those games don't hurt the individuals playing them. After 2008, most of those banking executives who screwed things up saw few consequences.
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.
kiratp · 3 years ago
You’re basically saying the employees at a non-tribal number of startups should not be paid payroll because “fat cat VCs”.
panarky · 3 years ago
No, I'm saying let the fat cat VCs fund the payroll, not a quasi-governmental fund backed by taxpayers that explicitly said uninsured deposits are not insured.
roflyear · 3 years ago
> 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.
Contractual obligations often prevent this, btw. Many SVB customers had loans with SVB, which prevented them from using other banks.
drewbeck · 3 years ago
Wow, is this common? From a systems perspective it seems like pure folly, increasing systemic risk and reducing resilience. (from SVB’s perspective I’m sure it seemed great …) it feels like it should be illegal !
roflyear · 3 years ago
I asked a handful of people with experience in those things and they all said it is very common. I was very surprised as well.
VagueMag · 3 years ago
For Pete's sake, 1 month Treasury bills are yielding more than almost every bank account. Just set up a TreasuryDirect account and be done with it.
roguecoder · 3 years ago
It seems like SVB was exploiting the lack of sophistication among early startups, and now it is going to bite all those startups in the ass.
Wealthfront offers me as an individual better tools for managing risk that it sounds like people who banked with SVB were getting.
duped · 3 years ago
How does that work with payroll? 500k is not enough for a moderately sized startup to make payroll.
cormacrelf · 3 years ago
To be clear, if you have 10 million cash, and you need >250k to make payroll a couple of times while your banks assets are sold off and you get the rest of your cash back (or 95%, or whatever), there is no need to spread that 10 mil over 40 different banks. That would be very inconvenient. Just to set it up so you have enough insurance to help you survive a short while. You can put 9.75M in one account and 250k in another bank.
jjav · 3 years ago
> Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired.
Looks like not just startups, e.g. Roku had ~500M in SVB
https://edition.cnn.com/2023/03/10/business/roku-svb-cash/in...
dahdum · 3 years ago
DFPI specifically called them insolvent in their release today, does that change your opinion on depositors being made whole?
https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
dragonwriter · 3 years ago
> DFPI specifically called them insolvent in their release today, does that change your opinion on depositors being made whole?
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.
kgwgk · 3 years ago
Being made whole several years down the line may not be better than getting liquidated as soon as possible.
In a extreme example, getting $100 in 10 years is not as good as getting $70 next month.
gumby · 3 years ago
See my reply to kmod for further explanation on my statement.
kmod · 3 years ago
These statements seem pretty contradictory:
- "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?
ummonk · 3 years ago
They're just saying that many of the assets are insufficiently liquid to be instantly sold off to cover all the withdrawals during a bank run.
kmod · 3 years ago
I don't think anyone is saying this? The decrease in value is due to wrong-way interest rate exposure, not due to a fire sale
bagels · 3 years ago
Well, it's going to be both. Dumping 200b of bonds isn't going to yield premium prices.
ummonk · 3 years ago
The decrease in value was due to exposure to long duration securities yes.
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.
gumby · 3 years ago
That's a good question. The key is where I wrote that it was a liquidity crisis.
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.
purpleblue · 3 years ago
No, I think you're wrong.
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.
gumby · 3 years ago
See my reply to kmod in regards to this. It's the FDIC's current balance sheet we're talking about, not SVB's. In a liquidity crisis you don't have access to your capital. So FDIC spends theirs, and takes control of SVB's balance sheet. Also SVB is a small bank.
purpleblue · 3 years ago
The only way things are okay is if FDIC makes SVB whole on all its assets, which doesn't make sense. They are only on the hook for the 250k, everything above and beyond will get paid out by selling assets, much of which might be considerably impaired, because of accounting differences. You're telling me that if SVC had $1 billion in 0.1% 10 year bonds, they would pay them face value for that now? That's not how it works at all.
SVB was the 15th largest bank in the US. That's not a small bank.
gumby · 3 years ago
That's not how FDIC works. Its job is to protect account holders, not banks. SVB is dead; its shareholders and bondholders will be wiped out, includng the money they raised from General Atlantic this week.
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.
martythemaniak · 3 years ago
Yeah, it seems companies should be mostly fine. Like you had 10 million in cash yesterday, but now you get 10m in 10y TBills, which you have to sell for $9m to get your cash back. It sucks but it shouldn't change the trajectory of your startup.
opportune · 3 years ago
The conundrum with underwater bonds/mbs is that you can make depositors whole, or give depositors money back now, but not necessarily both.
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.
nr378 · 3 years ago
SVB held $21bn of 'available for sale' bonds and $91bn of 'held to maturity' bonds on its balance sheet, that were actually only worth $19bn an $76bn respectively on a mark-to-market basis, which means a total unrecognised hole its in balance sheet of $17bn. SVB's total equity was only $16bn[1][2]
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...
RC_ITR · 3 years ago
People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis.
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).
SftwrSvior81 · 3 years ago
> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis.
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.
kryogen1c · 3 years ago
> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities'
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.
tshaddox · 3 years ago
> to pay isn't related to liquidity today or tomorrow, it's related to their asset's value
How do you calculate that precisely? That seems like a fuzzy distinction, considering that the value of things change over time.
kryogen1c · 3 years ago
> seems like a fuzzy distinction
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.
FollowingTheDao · 3 years ago
Insolvency is a state of financial distress in which a business or person is unable to pay their bills.
If you think it is anything else you are just being an apologist.
kryogen1c · 3 years ago
> Insolvency is a state of financial distress in which a business or person is unable to pay their bills.
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.
joncrane · 3 years ago
However, if SVB had EVEN longer, say, 10-15 years, they would have been fine, right?
silisili · 3 years ago
Over what time scale delineates the two? If they were say, 1000 year bonds, would you feel the same?
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.
weixiyen · 3 years ago
yep, it's a solvency issue. The minute they tried to offload the bonds at a price lower than they paid for them (which seemed like the right thing to do to fix the liquidity issue), they were effectively in a hole and even if they waited 10 years later, would not have been able to cover the deposits.
They NEEDED to raise capital.
Their liabilities > assets.
They were 100% insolvent.
trifurcate · 3 years ago
You need to realize that essentially bond pricing reflects the present value of all cash flows you expect from the bond. For long term bonds especially, this makes it a particularly risky book, because you are very sensitive to interest rate changes.
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.
whimsicalism · 3 years ago
sounds like you are describing a liquidity crisis to me
hackernewds · 3 years ago
precisely, the maturation for the bonds were long-term. they would have been fine over time, if not for the bank run
paulddraper · 3 years ago
If your "liquidity crisis" is measured in terms of years and years, you have a solvency crisis.
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.
ves · 3 years ago
The liabilities are the same currency and the same amount in 2023 and 2033. They’re solvent.
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.
oldgradstudent · 3 years ago
Interest rates have risen since those long-duration assets were purchased.
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.
ves · 3 years ago
right, which is why this is a liquidity problem and not a solvency one. The assets cover the liabilities--you just have to wait ten years or whatever.
jahewson · 3 years ago
No their bounds are worth fundamentally less than they paid for them.
whimsicalism · 3 years ago
There is a continuum in how quickly you need to sell and the price you willmget for something.
oldgradstudent · 3 years ago
No.
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.
FollowingTheDao · 3 years ago
So it's the customer's fault?
strbean · 3 years ago
No, it's Peter Thiel's fault for intentionally initiating a bank run?
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.
csomar · 3 years ago
A liquidity crisis is a solvency crisis if depositors are asking for their deposits. SVB made a miscalculation on their outflows and the price for that apparently is their whole market cap.
csomar · 3 years ago
> 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.
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.
CydeWeys · 3 years ago
The assets they were holding do regularly trade and could easily be valued. They knew that the value was down. The problem was they didn't actually have to do anything about it.
tyre · 3 years ago
Because they planned to hold them to maturity, which meant that marking to market didn’t make much sense.
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.
tikkun · 3 years ago
> SVB's total equity was only $16bn
Which table in the 10-K would I look at to see this?
bjornsing · 3 years ago
> It's not like those government bonds won't pay out...eventually.
Does that really matter though? Anyone can buy and hold to maturity. The market price indicates that that's not good business.
FollowingTheDao · 3 years ago
> It's not like those government bonds won't pay out...eventually.
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.
zenmacro · 3 years ago
Wow, the government acted incredibly swiftly and decisively to crush the possibility of a general bank panic. The current US banking system is very different from the 2008 system.
delfinom · 3 years ago
Because SVB was an actual bank with deposits that is FDIC insured. This is their job and they always acted timely in any situation, even before 2008.
Bear Stearns in 2008 was an investment bank, they were not hawking FDIC insured accounts.
bigbillheck · 3 years ago
There were a whole lot more banks that failed in 2008 beyond Bear Stearns.
chasd00 · 3 years ago
well they got a finger in the dam leak at least. The question is, is it the only leak or are other cracks going to appear with more leaks?
rrmm · 3 years ago
From what I recall of the last set of bank failures this is pretty much the FDIC's SOP. They swoop in on Friday with little notice, close the bank, work through the weekend and open up for business on Monday. It apparently made for some interesting work environments.
yieldcrv · 3 years ago
!remindme 2 months
MrMan · 3 years ago
your last sentence is demonstrably false!
calgarymicro · 3 years ago
What? No it's not. Love it or hate it (and I lean towards the former), Dodd-Frank has greatly changed American banking.
perihelions · 3 years ago
HN has "ample capacity" to serve its readers "with one exception: If everybody tries to refresh this comment thread at the same time, that will be a challenge."
(I think it helps to log out? If you're in read-only mode)
nnx · 3 years ago
But I thought only crypto was risky? And that over-regulated bank sector was totally safe?
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.
ehhthing · 3 years ago
Except in this case, when SVB fails their customers will get the vast majority of their money back as the FDIC liquidates all of SVB's assets. When FTX fell, nobody got squat.
jitl · 3 years ago
When a bank fails, it gets put into receivership and you get (some of) your money back. There's enormous protection working in your favor provided by the FDIC. When a crypto token enters free-fall, there's no one to stop the market, and no one to help you get your money back. It's gone.
cp9 · 3 years ago
... my guy what are you talking about. the regulations _saved_ the depositors. if the FDIC wasn't around the little guy would be getting screwed right now, as it is, the big guys are the ones taking the brunt of the damage. if this had been crypto it would *all* be gone and the little guy would be the one holding the bag
UncleOxidant · 3 years ago
> regulations do not work
That's quite a lot of extrapolation from one bank failure.
unity1001 · 3 years ago
> And that over-regulated bank sector was totally safe?
SVB got an exemption from those regulations.
saos · 3 years ago
How bad is this for wide economy? I’m scared.
temp2022account · 3 years ago
Unless you had your money there the only change in your life will be the headlines you glaze over.
NordSteve · 3 years ago
It should not take too long to find out roughly what the uninsured depositors will receive. The investment portfolio is straightforward to liquidate. The loan portfolio will take a bit longer to sell, but it's a well-worn process. If you haven't read about Resolution Trust Corporation, it's worth a couple minutes -- this is how the assets of failed savings and loan companies were liquidated 40 years ago.
Ancalagon · 3 years ago
Yikes what a sucker punch to tech in a downed market. This sucks
xnx · 3 years ago
A lot of talk about the $250K FDIC insurance limit in this thread. It took me a long time to learn that you can have up to $1.25 million insured at an institution if you designate multiple beneficiaries: https://www.fdic.gov/resources/deposit-insurance/brochures/d...
zamnos · 3 years ago
If that's of interest to you, you might also want to look up "FDIC sweep" or "insured cash sweep". Basically your bank makes accounts at other banks, and each sub-account only has up to $250k in it, so you're totally covered.
https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...
m00dy · 3 years ago
Sorry to say but the depression is on our way.
jossclimb · 3 years ago
For tech workers who were part of the overtired 2021 cohort, sure, however most other industries remain isolated to this.
kmlx · 3 years ago
Silicon Valley Bank UK confirms it’s a standalone independent UK regulated bank.
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_...
prennert · 3 years ago
For posterity: https://web.archive.org/web/20230310175421/https://www.svb.c...
rvnx · 3 years ago
The announcement is somewhat funny in a way that "independent Silicon Valley Bank"'s announcement actually happens on the website of the US website they are not supposed to have links with.
Randalthorro · 3 years ago
Their regulatory framework and finances are independent not the company itself
rvnx · 3 years ago
Yeah, and now, the "independent and safe" UK branch is preventing people to take their money.
"SVB Online Banking (US, UK, Canada Branch Accounts) will be unavailable throughout the weekend."
0x00000000 · 3 years ago
Don’t worry guys, FTX.us is completely separate and independent from FTX.com
ignoramous · 3 years ago
We bought two domain names to prove it!
eclipticplane · 3 years ago
This press release didn't age well.
https://www.bloomberg.com/news/articles/2023-03-10/svb-s-uk-...
mirthflat83 · 3 years ago
Lmao, just like FTX
morpheuskafka · 3 years ago
If the assets are separate, it is still a very relevant point for depositors because the outcome of the UK receivership will be based on those separate assets. The amount that depositors in the UK bank recover may be completely different, higher or lower, than the depositors in the main bank.
deepsun · 3 years ago
What are insured maximums in the UK's equivalent of FDIC?
alarmingfox · 3 years ago
I believe the Financial Services Compensation Scheme (FSCS) in the UK insures deposits upto £85,000.
purpleblue · 3 years ago
The fact that no other bank stepped in to buy the assets makes it seem like this is going to be dire for depositors. There's something wrong in the books, or the liabilities are higher than the assets, both of which means that depositors are going to lose some money.
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?
hintymad · 3 years ago
Just heard that the payroll company Ripping is down, as they use SVB as their partner. What a rippling effect...
imhoguy · 3 years ago
fudged71 · 3 years ago
Which other popular companies have SVB as their main partner for providing products/services?
mosfets · 3 years ago
What does the "takeover" mean? Will people's deposit still stay intact?
avelis · 3 years ago
If a company has a loan out to SVB does that get sold off to basically another lender?
Edmond · 3 years ago
Please reboot Silly-con Valley...I mean the show. With everything that has happened with crypto and the current mayhem I think two solid additional seasons can be made.
dylan604 · 3 years ago
It would have to be with new players, as they pretty solidly tied a bow around that cast.
Zealotux · 3 years ago
I loved that show, such fun to watch! They definitely could make a lot with the crypto-nonsense indeed.
calgarymicro · 3 years ago
Silicon Valley actually already had an ill-fated crypto scheme arc - remember PiedPiperCoin?
adrr · 3 years ago
It didn't have NFTs or failed exchanges.
tpmx · 3 years ago
Bring back the whole cast including TJ Miller (sober or not, he brings it) ... but not Middleditch.
https://www.usatoday.com/story/entertainment/celebrities/202...
primitivesuave · 3 years ago
Thomas Middleditch shouldn't earn a living ever again because he made a woman at a nightclub feel uncomfortable?
esalman · 3 years ago
We need a reboot featuring crypto+AI.
cloudking · 3 years ago
I can see Pied Piper AI replacing Richard as CEO
heavyset_go · 3 years ago
Why make another documentary when you can just watch the news?
melvinmelih · 3 years ago
It’s not as funny when the real world is crazier than the parody show. See also what happened to Veep.
ozten · 3 years ago
I was wondering how us tax payers would end up paying into the crypto ponzi scheme.
NordSteve · 3 years ago
For those who want to geek out, here's a great memo that describes the liquidation process in great detail: https://corpgov.law.harvard.edu/wp-content/uploads/2008/10/0...
Someone holding a receivership certificate likely can sell it or borrow against it.
dahdum · 3 years ago
> it has taken possession of Silicon Valley Bank, citing inadequate liquidity and insolvency.
Does this settle the question of insolvency then? I didn't see that term in the other announcement.
tiffanyh · 3 years ago
Stripe?
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)
brunoTbear · 3 years ago
Stripe's money is not there
tiffanyh · 3 years ago
Question being: if a meaningful portion of Stripes customers were to bank with SVB, and if SVB were to seize operating - would this effect Stripe?
It’d be a Jedi move for Stripe to straight up acquire SVB. Imagine how strong of an offering they could create then.
ummonk · 3 years ago
Stripe doesn't have the assets to acquire SVB. As it is they're looking for funding to pay employees' stock tax bills.
xeeeeeeeeeeenu · 3 years ago
In the previous thread, someone posted a video showing the process of the FDIC seizing the Heritage Community Bank in Chicago:
https://www.youtube.com/watch?v=KIh6NEBL8BU
It's pretty interesting.
bmon · 3 years ago
Thank you for that link, it was really fascinating. The Australian government guarantees deposits in the same way, but I never realised this was also true in the US. I had assumed during the mortgage crisis that people lost their deposited money when their banks failed.
college_physics · 3 years ago
For some context, it seems that this is the first bank failure since some time (Oct 2020) [0]
[0] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
armatav · 3 years ago
Those mortgage backed securities will get you every time
nodesocket · 3 years ago
I worry about all the valley based companies that held their payroll and operating expenses with SVB. It's going to take awhile (potentially years) to deal with FDIC an clawing back what's left of funds. I.E. what about huge infrastructure related companies like Gusto, Brex, Xero? This is very concerning.
zackmorris · 3 years ago
Looks like the FDIC coverage limit was raised to $250,000 in 2008 and made permanent in 2010, before that it was $100,000 since 1980.
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.
dylan604 · 3 years ago
>how deregulation and defunding government programs often backfires on the people calling for it
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.
cjbgkagh · 3 years ago
'Bracket creep' almost never works in your favor and that is by design. The government knows perfectly well how to peg things to inflation.
bgc · 3 years ago
An interesting tidbit from the Bloomberg live thread[0]:
>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...
christkv · 3 years ago
How many of companies will loose access to liquidity and face bankruptcy next?
cissou · 3 years ago
That's wild. I wonder if it's good news for neobanks like Mercury and Brex who will see an influx of new customers, or on the contrary, startups will seek old, boring, safe banks instead of niche boutiques with lots of exposure to industry risk.
dopeboy · 3 years ago
In my circle of founders, it appears JPMC is winning out. We are currently on Brex via lending club and monitoring the situation closely.
AndreLock · 3 years ago
I think it's the latter. If anything, this will negatively impact Mercury and Brex in the long run as companies will favor safety above all else.
anonuser123456 · 3 years ago
This made Nouriel Roubini’s morning.
neom · 3 years ago
If you're struggling, email is in the bio, happy to chat. I've heard a few folk are really in trouble right now and we don't need anyone doing anything permanent, this too shall pass. Happy to talk! There is a way forward! :) :)
If you need to talk to someone immediately: 800-273-8255
650REDHAIR · 3 years ago
You’re a good egg.
serf · 3 years ago
>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]
marban · 3 years ago
Unbank the banked.
dcow · 3 years ago
It seems like anybody can find any way to light standing cash on fire. Not just crypto poster children. So...
danielmarkbruce · 3 years ago
Most un-insured depositors are going to get most of their money back. They'll get a good chunk (guestimate 20-50%) of it back within a week. The claims on SVB which will be held by depositors will likely be able to be sold to investors who specialize in this stuff for something reasonably close to par. Those who just hold onto the claim will be paid out most of what is owed (maybe literally 100%, more likely 90%+), but it will take longer.
It will be annoying and stressful, but basically ok.
knodi123 · 3 years ago
> Silicon Valley Bank is the first FDIC-insured institution to fail this year. The last FDIC-insured institution to close was Almena State Bank, Almena, Kansas, on October 23, 2020.
How humiliating. At least this isn't an epidemic.
kuczmama · 3 years ago
What I don't understand is why do banks work this way?
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.
noncoml · 3 years ago
If you have a large sum of money that you don’t expect to need them soon, do you put the in the bank or do you invest them?
Probably invest then. Why would the bank put its money in the bank if you are not?
420official · 3 years ago
The bank can happily choose to invest *its* money, it shouldn't be investing *my* money.
bombcar · 3 years ago
There are banks that do offer the 1:1 ratio you want; they charge you a quite hefty fee to do this.
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.
ncallaway · 3 years ago
> Then the bank could make money by providing services to their customers.
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.
kuczmama · 3 years ago
That's a very good point. I think services could include things like financial management, checking, sending/receiving fees, etc.
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.
Ekaros · 3 years ago
CBDC maybe? Let everyone have an account at central bank, then allow transactions to and from that account. No need to involve bank, have whole system paid by government as public service.
Then you could have banks handle the process of matching lenders to depositors. With varying systems...
PragmaticPulp · 3 years ago
> 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.
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.
AvAurora · 3 years ago
Not if you make inducing bank runs by means of marketing legal.
adrr · 3 years ago
Also where would the capital come from to give out loans?
stuxnet79 · 3 years ago
I see the point you are trying to make here but your argument isn't very convincing. You are completely ignoring the impact regulatory oversight would have. If fractional reserve banking was banned outright due to the risks it poses, then the situation you just described would never emerge.
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.
chii · 3 years ago
> then we need to come up with better reasons
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).
suresk · 3 years ago
1:1 banking essentially guarantees long-term loss of principal for depositors, albeit slowly. The main "service" a bank would provide in that scenario is holding onto your money for you and instead of paying interest on it, charging you a few percent per year to hold onto it for you.
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?
zerbinxx · 3 years ago
Ironically, returns on bank savings accounts have been so low for so long that my present APR of like 1% is functionally the same as if they just held onto the money for me. That would probably do a great deal to explain why no one uses savings accounts anymore
themitigating · 3 years ago
Then how would a bank provide loans for cars and houses? They might also have to charge a very high fee to hold your money and not provide interest
adgjlsfhk1 · 3 years ago
The problem with this take is fractional reserve is really good for the economy because it expands the money supply. The problem with a bank that holds 100% of the money is that it has to charge it's customers to use it, so they won't get customers.
UniverseHacker · 3 years ago
The ability to 'borrow' someone else's money to do something valuable with it opens huge opportunities. This model is what fueled the massive economic growth of the last few hundred years, made the industrial revolution possible, and made home ownership possible for non-aristocracy.
kayamon · 3 years ago
The people whose money you're 'borrowing' may have had other ideas about what they'd have liked to see it invested into.
nine_zeros · 3 years ago
> What I don't understand is why do banks work this way?
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.
mempko · 3 years ago
Banks don't lend out deposits. They don't take deposits and lend out 90% or so. Fractional reserve banking is a model of how banking works but it's a wrong model. In reality banks make loans (which create deposits). They try to attract deposits from other banks because they need enough bank reserves to cover liquidity issues (like customers transferring money to other banks). When a bank transfers deposits to another bank, they must transfer reserves too. There is really a 2 tiered money system in the US. There are bank reserves (which you and I can't have) and deposits (which you and I do have).
How banks actually work was described well by the Bank of England. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
kgwgk · 3 years ago
> Fractional reserve banking is a model of how banking works but it's a wrong model. [...] They try to attract deposits from other banks because they need enough bank reserves
Not completely wrong, after all.
mempko · 3 years ago
It's a useful model the same way a toy hotwheel is a model of a car. Yes they both have four wheels.
Notice the issue that SVB had was a huge influx of deposits and not enough loans.
mempko · 3 years ago
Ultimately it's the capital that the banks have that limit how much they can lend, not reserves. Their capital requirements are the limit. Once capital falls below a certain percentage, the bank is in trouble.
chernevik · 3 years ago
The whole point of a bank is maturity conversion, the transformation of short-term deposits into long-term 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.
stoicking · 3 years ago
I think what you described is a vault. A bank is where I go when I need money for a car or a house. A vault is where I put my money to be 100% safe.
thetrb · 3 years ago
People expect interest when they park a large amount of money in a bank. Where should that interest come from when the money just sits there? The bank will have to invest is somewhere (ideally somewhere very safe like in Government bonds) where they can then collect interest.
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.
rafaelero · 3 years ago
> What I don't understand is why do banks work this way?
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.
hot_gril · 3 years ago
Except the bank interest still doesn't beat inflation, let alone the rate of M2 increase. Chase offers 0.1% on savings accounts right now, which would be pointless to me.
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.
rafaelero · 3 years ago
I agree. That's why we need a currency with guaranteed limited cap that can act as a device both for saving and for spending.
nemo44x · 3 years ago
> Then the bank could make money by providing services to their customers.
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.
yibg · 3 years ago
If all banks worked like this, how would people get mortgages? Can’t loan out the money with interest.
killerstorm · 3 years ago
> What I don't understand is why do banks work this way?
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.
globular-toast · 3 years ago
Because you're a greedy human and you will find a way to take a larger slice of the pie. It happens every single time. You'd think this would be obvious by now.
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.
nsxwolf · 3 years ago
I had never even heard of the Silicon Valley Bank. It sounds fake. Is this really a contagion risk?
somenameforme · 3 years ago
An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate):
"- 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
BlandDuck · 3 years ago
"This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually."
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.
danpalmer · 3 years ago
It's never a liquidity issue as long as no one tests the liquidity!
lkbm · 3 years ago
He meant solvency issue. Someone else called this out downthread and he confirmed. Definitely felt like it should've been corrected more prominently, though.
zzleeper · 3 years ago
And yet he is wrong!
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
jamiequint · 3 years ago
Yes, I mis-spoke. If only there was some way to edit tweets or to pin your replies to the top of a thread :P
lkbm · 3 years ago
If you reply directly to your initial tweet with your correction (perhaps QTing the person who asked), I think it will appear at the top, or at least get higher ranking. I often see replies "boosted" via the original author QTing them as a reply this way.
benlivengood · 3 years ago
So they didn't require the deposits earning 2% to be in term CDs like sane banks and credit unions do?
blantonl · 3 years ago
“Eventually”
The markets can stay irrational longer than you can remain solvent.
pishpash · 3 years ago
All liquidity issues are solvency issues when marked to market.
actionablefiber · 3 years ago
That's true in a tautological way, but there really is a difference between liquidity and solvency.
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.
kgwgk · 3 years ago
But it's important that they are eventually worth more. Enough to provide the rescuer with a substantial gain that compensates them for their troubles. Solvency in a "breakeven" sense is not enough.
pishpash · 3 years ago
We've just seen there is no difference with SVB, because they tried to get a private rescuer to bail them out. Didn't work. Because why would a private rescuer lose liquidity to a lower paying assets (SVB's book) when they could lose liquidity to a higher paying one on the market (e.g. Treasury bonds)?
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.
actionablefiber · 3 years ago
I think that is a difficult call to make this early on. The FDIC's job here is to recover value for depositors and find buyers for its assets. It is hard to organize bank takeovers on short notice, and even in a private rescue there is a lot of regulatory involvement. The story isn't even close to over yet.
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.
blackoil · 3 years ago
It think this stretches eventually. I think it as, If the current value of assets is less than current value of liabilities, we have solvency issue. If the current value is higher but will need some time to offload those assets, it is a liquidity issue.
actionablefiber · 3 years ago
Classically, it’s a liquidity issue if the market value of your bonds goes down because rates went up, causing the discounted present value of the future maturity payout to decrease. It’s a solvency issue if the market value of your bonds went down because your borrowers turned into smoldering craters and they will not ever pay you back 100 cents on the dollar.
Really it is not so obvious to discern between them at the moment that the crisis is at its worst.
HDThoreaun · 3 years ago
Except SVBs assets would eventually mature for more than liabilities but no one would bail them out because the opportunity cost meant the book was worth less than just buying 10 year treasury bonds.
davidw · 3 years ago
> 10+ year duration, with a weighted average yield of 1.56%.
> 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?
Someone1234 · 3 years ago
That has to be an inflation adjusted yield, right? Why would anyone do anything remotely risky for such terrible returns? You can almost find government bonds with similar average yields.
Macha · 3 years ago
Weren't the rates on government bonds negative if you were a large investor like a bank?
zzleeper · 3 years ago
Nope! I got a 2.0% mortgage in 2021 (no points or anything) and the bank then turned around and sold it to Freddie who paid them 1.7% (so the bank made a nice 0.3% just for originating the loan).
Then Freddie packed my loan and sold it to others for something likely to be below 1.7%...
dahfizz · 3 years ago
>You can almost find government bonds with similar average yields.
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/...
kgwgk · 3 years ago
And 10-year bonds were well below 1%.
mikeyouse · 3 years ago
They're very safe assets, they just have a long duration which makes them really risky if you could need them to cover deposits.
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.
davidw · 3 years ago
I get how it'd put them in bankruptcy or whatever the precise term is for a bank. I'm just curious what it means in terms of people getting their money back. If their assets lost 10% of their value, I could see that being enough, combined with the bank run, to put them under. But if everything else gets sold off at 90 cents to the dollar, that's not awesome but it's not like "poof it's gone entirely" either.
BobbyJo · 3 years ago
> But if everything else gets sold off at 90 cents to the dollar, that's not awesome but it's not like "poof it's gone entirely" either
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.
mitthrowaway2 · 3 years ago
A bond with a 10-year yield of 1.56% has a price of $0.85 on the dollar. A bond with a 10-year yield of 4% has a price of $0.676 on the dollar. So if yields increase from 1.56% to 4%, the bond price falls by 21%.
kgwgk · 3 years ago
The risky part is (or more precisely has happened to be) the 10+ year duration, more than the ~1% yield over treasuries (which may be too low to compensate for the additional risk but is not what has brought the bank down).
dahfizz · 3 years ago
You can't use your intuition about stock prices for bonds/fixed income. In FI, its all a numbers game. As rates go up, prices go down.
JumpinJack_Cash · 3 years ago
> > 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.
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
jwozn · 3 years ago
Yeah, but banks don't profit by holding money for months.
gerad · 3 years ago
If they could have forecasted the future at that point, they could have made even more money than that!
BobbyJo · 3 years ago
If you could forecast even 6 hours into the future, you'd be the richest man alive in weeks. Nevermind months.
zenlikethat · 3 years ago
Because people can’t see the future and you’re talking do we forgo $1b a year or not in that spread. It wasn’t the MBS that got them into trouble, they were supposed to hold those to maturity. It was something else they did that led to that forced liquidation
duxup · 3 years ago
I have some family who (with some other partners) founded a small community bank that has grown over the years.
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.
kccqzy · 3 years ago
Actually if you think about the balance sheet for banks "too much money" is a problem for them because deposits are liabilities not assets. The money belongs to customers not the bank. The bank must pay back the customers on demand.
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.
duxup · 3 years ago
Agreed. Also too much money is hardly an automatic existential crisis. They can do what I described, get bought, merge, etc.
Of course if you dump it all into unwise investments, that’s a problem.
joosters · 3 years ago
At first glance, bank balance sheets are unintuitive and feel 'the wrong way round'. When someone deposits $1m at a bank, the bank doesn't have $1m more assets, it has $1m more liabilities.
(Yes, this is a gross over-simplification)
missedthecue · 3 years ago
And to make matters more confusing, deposits are called assets on the balance sheet!
kgwgk · 3 years ago
You may feel relieved - and less confused - if I tell you that deposits are liabilities in the balance sheet.
nulbyte · 3 years ago
That's not confusing, it's just wrong.
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.
patmorgan23 · 3 years ago
Your deposit creates an equal asset and liability on the bank's balance sheet remember assets = liability + equity must balance.
nulbyte · 3 years ago
Deposits are liabilities to the bank's customers. The cash the bank has, regardless of how it got it, is an asset. The cash may result from a customer making a deposit, but its still just cash. Deposits and cash are separate items on the balance sheet. Here is an example from the Fed:
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.
occamrazor · 3 years ago
They have both 1m of assets more than before, _and_ 1m of liabilities.
pishpash · 3 years ago
Too much money is only a problem if you are greedy for returns, like all the investors who lost money when yields were unsustainably low the last few years. They could have deposited it with the Fed and have been totally fine.
Individual investors don't even have that option and also have inflation to deal with. Banks don't.
duxup · 3 years ago
I think there is a limit. The bank costs money to run, customers expect interest (even if little).
That money isn’t doing anything to cover those expenses if some of it isn’t “working” to produce returns.
pishpash · 3 years ago
Banks don't pay the Fed rate on deposits so they already have that to pay expenses. In fact more deposits = more money on the interest differential but expenses don't scale with money.
coredog64 · 3 years ago
6 month T-bills were yielding 0.7% last year at this time. Inflation for 2022 was over 6%.
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.
pishpash · 3 years ago
No, they were greedy. They were going to lose it one way or another, either through inflation or through asset depreciation. There was no way around it. Going to a riskier asset doesn't help because all assets have the same interest-rate risk embedded. They just took on more risk in addition to that.
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.
duxup · 3 years ago
I think coredog64 is speaking more generally. The bank in the article was foolish. Other banks can still encounter real problems with too much cash on hand... granted they don't have to go hog wild on MBS or anything like that.
pishpash · 3 years ago
Yes, why did they invest in MBS, with negative convexity, at historically low rates!
disgruntledphd2 · 3 years ago
> 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.
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.
HDThoreaun · 3 years ago
It's not theirs, it's the depositors. And it's the depositors choice to leave it in the bank.
acchow · 3 years ago
A $1M deposit adds to both assets and liabilities.
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).
jfengel · 3 years ago
I think programmers find double-entry bookkeeping counterintuitive. It feels error-prone. In programming, you keep a single source of truth. Any time you copy the same data to two different places, one of them is always wrong.
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.
ghaff · 3 years ago
The other thing you get into as scenarios get complex is that there's a tendency to ask questions like "Why are you recording it this way rather than that way? The second way seems more logical to me."
The answer usually being some variation of "Because that's the way the Financial Accounting Standards Board says to do it."
btilly · 3 years ago
Double entry bookkeeping IS error prone - you have 2 opportunities to make each mistake.
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.
crdrost · 3 years ago
Yes, and once you get the programmer to realize this, it all makes sense.
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.
sScTE9qEMCxEk34 · 3 years ago
The zero sum property also makes it really easy to just add up along (any subset of) each column and find most errors. Not so important now when everything's stored in a computerized database anyway, but a lot more relevant to actual books with actual writing in them.
rkhacker · 3 years ago
So, in essence, the single entry bookkeeping will be sound if the change is not allowed?
moate · 3 years ago
This sounds like "0 code". No code is the best code because it never breaks, has 0 serve space requirements, will never need to be reformatted, etc.
jjeaff · 3 years ago
Single entry bookkeeping isn't really a thing and isn't really keeping books. It's just an account register or account statement with no totals or anything to check against.
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.
OJFord · 3 years ago
In my mind it would be more like only a total - 'single entry' is how most people manage their wallets: '£5 change, put that in there, oh I have £15 now'. No record of where anything came from or where anything's gone.
osculum · 3 years ago
That’s an oversimplification. Saying that it’s error prone because you have to write in two places is akin to saying that using a checksum is error prone: you have to write now the vale AND the checksum! More opportunities to make an error!
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.
thaumasiotes · 3 years ago
> 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.
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.
sScTE9qEMCxEk34 · 3 years ago
> 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).
thaumasiotes · 3 years ago
I guess I'm confused. If you're willing to consider governments (makes sense to me!), we are informed that the Achaemenid Empire (roughly 2 million square miles, mid-6th-century to mid-4th-century BC) was divided into 20 "tribute" districts: https://en.wikipedia.org/wiki/Taxation_districts_of_the_Acha...
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.
btilly · 3 years ago
Governments operated differently than businesses.
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.
thaumasiotes · 3 years ago
The claim above is that empires are below the threshold where everything runs on personal trust, not that governmental administration is fundamentally different from other kinds of administration.
> 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.
spicybright · 3 years ago
I have a friend that's an accountant that tried to explain how it worked. I thought it was more or less being responsible for counting money, but I think my eyes glazed over a bit trying to understand it.
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.
lamontcg · 3 years ago
I'm trying to understand how to read older 10-Ks and apply the capitalization of operating leases to those reports (converting property that is leased into capital to get an accurate estimate of the capital employed at the business) and with my background in IT and physics it is still a bit hard to follow (what I'm slow at is language, and really this is just learning a foreign language).
hathawsh · 3 years ago
You'd think that the solution to that confusion would be database transactions (commit everything or nothing), but there are exceptions. In ACH, sometimes you have to send out a lone credit or debit with no matching entry. It feels very wrong, but it's necessary because it balances out some other entry in another file (that you might not have access to.)
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.
matteotom · 3 years ago
I've been running my own finances with double entry bookkeeping (via beancount) for about 4 years now, and it's ended up being super useful. As long as I'm 90% sure I got all the income, expenses, investment buys and sells, and transfers between accounts, I can add "balance" statements for a date and easily work backwards to find if I missed anything.
dragonwriter · 3 years ago
> I think programmers find double-entry bookkeeping counterintuitive. It feels error-prone. In programming, you keep a single source of truth. Any time you copy the same data to two different places, one of them is always wrong.
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).
jfengel · 3 years ago
I think if a programmer were designing accounting, they'd put the flows in the database, and build views out of that. They might materialize the views for performance reasons, but they'd treat those views as suspect and the first response to any bug would be "blow away the accounts and recreate them".
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.
CPLX · 3 years ago
I mean, this is kind of how accounting does work. To a basic approximation a reconciliation is a line by line review of each of the flows, and an audit is "blow away the accounts and recreate them" and both happen all the time.
melenaboija · 3 years ago
> I think if a programmer were designing accounting, they'd put the flows in the database, and build views out of that. They might materialize the views for performance reasons, but they'd treat those views as suspect and the first response to any bug would be "blow away the accounts and recreate them".
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.
jkhdigital · 3 years ago
Right. The only actual raw data is transactions. Account balances are just filtered rollups. Double entry bookkeeping is just how you manually accumulate a set of account balances from transaction data, and a set of conventions for consistently labeling and grouping the transaction sources and destinations.
mytailorisrich · 3 years ago
If by 'error' you mean the amount of a transaction then yes you enter it twice but that should not really increase errors.
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.
WalterBright · 3 years ago
The reason for the invention of double entry bookkeeping was to detect arithmetic errors in summing the ledgers.
zestyping · 3 years ago
The name "double-entry" is a little bit misleading. The "double" part makes it sound like you are duplicating work, but that's not really what's happening.
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."
sapling-ginger · 3 years ago
> This maintains the invariant that money cannot be created or destroyed.
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.
youainti · 3 years ago
Not really. Money is created but it is created by the fractional reserve baking model where banks borrow from people who are willing to lend for short periods of time (depositors) and lend to those who are looking to borrow in the long term. The fact that you tend to deposit in checking accounts is what creates the money.
sapling-ginger · 3 years ago
The private banking system can only multiply off of the monetary base up to a certain multiplier, it cannot expand that base. Only the government treasury can expand that monetary base.
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.
cyberax · 3 years ago
> 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?
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.
sapling-ginger · 3 years ago
Most of the Federal Reserve's balance sheet is Treasury securities. If the Treasury stops issuing those securities, then the Federal Reserve don't have anything to buy.
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.
cyberax · 3 years ago
> Most of the Federal Reserve's balance sheet is Treasury 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...
jkhdigital · 3 years ago
Yeah I agree. I aced my MBA accounting class but it makes a hell of a lot more sense to conceptualize everything as “stocks and flows”.
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.
sScTE9qEMCxEk34 · 3 years ago
Yeah, I just treat credit and debit as opaque blobs. They're words, I don't really know what they mean, but I know one means "side A" and one means "side B" ;)
mcsoft · 3 years ago
Double-entry bookkeeping is essentially the law of conservation of energy applied to balance sheets. It's much more deep as it was invented some 5 centuries earlier than programming.
Aeolun · 3 years ago
Conservation of money in that case. Money doesn’t just disappear. What goes away somewhere has to appear somewhere else.
mcsoft · 3 years ago
exactly
tylerhou · 3 years ago
Programmers like a single source of truth — until duplicating data is necessary for reliability (redundancy) or performance (replication).
There is a reason why planes use 3+ CPUs running the same code, or why Google runs more than just one cluster of search.
danbruc · 3 years ago
I think programmers find double-entry bookkeeping counterintuitive. It feels error-prone. In programming, you keep a single source of truth. Any time you copy the same data to two different places, one of them is always wrong.
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?
nulbyte · 3 years ago
> 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.
sScTE9qEMCxEk34 · 3 years ago
> 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).
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!)
im3w1l · 3 years ago
I think it should be both: The $1m that was deposited is an asset, the customer's ability to withdraw $1m is a liability.
wdb · 3 years ago
One way to control it is by lowering interests on accounts to make it less attractive deposit money
StillBored · 3 years ago
Which is why there is a ~4% spread on savings/CD interest rates at banks right now.
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.
kgwgk · 3 years ago
Not exactly. The banks do not want less deposits (ask SVB how bad that can be!) but they try to get away with paying as little as possible and keep the spread. (You wouldn't say that the main objective of companies when they raise prices is to have less customers, would you?)
nickff · 3 years ago
If they wanted more deposits, why would they pay as little as possible to 'keep the spread'? No bank is anywhere near monopoly; there are tons more deposits to get (if you want them, and can make money safely on a spread).
kgwgk · 3 years ago
For the same reason that many businesses do not want "more customers" above anything else - to the point of selling at cost or at a loss - and if they increase prices is not necessarily because they want "less customers".
acjohnson55 · 3 years ago
Some banks actually do want less deposits. They do things like increasing fees to chase them away. But it takes some real discipline and investor management to pull it off.
snuxoll · 3 years ago
Synchrony offers such high yields on savings because their big product is consumer credit cards, and even at 4% APY on savings accounts the spread to a 25% APR credit product, even factoring in risk, makes it extremely profitable to do so.
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.
rlucas · 3 years ago
It's not nearly that simple, though. You are ignoring capital requirements. For things like Treasuries, you don't need any capital % against it. ($100 in deposit -> $100 in Treasuries, if you borrow at 1 and lend at 4 you made a 3% spread on $100). But for risky things that might yield much more, you might need to reserve far more, meaning you need to fund part of it with equity. ($100 in deposit but with a 50% capital requirement means you can -> buy $100 of high-yield stuff, but you need to use $50 of your equity to do so)
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.
snuxoll · 3 years ago
Yeah, I oversimplified it to a large degree because getting to deep into the nightmare that lies beneath the banking system can make ones head explode. It's accurate enough for a layperson, if nothing else.
mytailorisrich · 3 years ago
They have both $1m more assets and $1m liabilities.
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.
disgruntledphd2 · 3 years ago
yeah, like SBF's "balance sheet". https://www.ft.com/content/0c2a55b6-d34c-4685-8a8d-3c9628f1f...
Theoretically they had assets, but most of them were just internal magic beans.
avidphantasm · 3 years ago
Running a bank sounds like a huge PITA.
WJW · 3 years ago
This is correct. The only reason people still do it is because it makes them boatloads of money, not because it is fun in any way.
lottin · 3 years ago
I work in a bank and it's kind of fun.
somehnguy · 3 years ago
Working in a bank and running a bank are slightly different I would assume
zamnos · 3 years ago
Totally. Working in a bank exposes you to the fun parts of running a bank, without the stress of it being your bank.
webXL · 3 years ago
Let's hope (for all our sake) your work continues for a loooong time, fun and not-so-fun.
Until we all can self-bank!
joyfylbanana · 3 years ago
That's why it pays.
nabla9 · 3 years ago
So true.
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).
NovemberWhiskey · 3 years ago
To my mind, although it's in-principle equivalent, the clearer way to think about this is that banks borrow money from depositors and lend that money via loans or investments.
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.
andrepd · 3 years ago
> banks borrow money from depositors and lend that money via loans or investments.
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.
blackoil · 3 years ago
Can you elaborate this. Is it possible for a regular bank to lend money it does not have?
whatshisface · 3 years ago
They're allowed to borrow from the federal reserve which is allowed to lend an infinite amount.
acjohnson55 · 3 years ago
Banks aren't allowed to borrow infinite amounts of money from the Fed. If they could SVB would still be ticking.
runlaszlorun · 3 years ago
They can borrow easily but it’s still a liability, right? I think people here the borrowing part and don’t know the liability part.
SideQuark · 3 years ago
They borrow and repay with interest, so the don't borrow unless they have some use for the money that will return value to the borrower, and some profit to the bank, in order to repay the loan the bank got.
throw0101c · 3 years ago
> Is it possible for a regular bank to lend money it does not have?
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.
trifurcate · 3 years ago
That's not what GP is saying. When reserve requirements are low, banks are essentially no longer forbidden from lending out other customers' deposits.
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.
stephen_g · 3 years ago
The posts above are incorrect about how banks work, but your question is spot on. Actually, banks always lend out money they don’t have - they can’t actually “lend deposits”. The risk of what banks do is why banking licenses are hard to get and it’s so regulated.
This primer from the Bank of England is very clear: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
acjohnson55 · 3 years ago
Sure, but they don't have unlimited ability to make loans. They are subject to complex balance sheet constraints. And it's cheaper to borrow money from depositors than the Fed.
SideQuark · 3 years ago
> Reserve requirements are almost non-existent.
This says otherwise.
https://fred.stlouisfed.org/series/TOTRESNS
Lots more real evidence here https://fred.stlouisfed.org/categories/123
throw0101c · 3 years ago
> This says otherwise.
And in Canada, Australia, etc, they are zero:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
Nursie · 3 years ago
Indeed, in these countries the banks have capital requirements, which they also do in the US, instead.
throwaway742 · 3 years ago
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
gilbetron · 3 years ago
Those are reserves, not reserve requirements (which are noted as "discontinued" in the first link). To quote this: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
"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."
SideQuark · 3 years ago
Read more - the reason is the "ample reserves" regime, where, as I showed, reserves are vastly higher than usual. This is because the Fed has transitioned to a better method to handle what used to be called the reserve requirement. The new (and as the above data demonstrated) is higher actual reserves. This is done via changes in mechanisms, described in the FAQ.
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...
NovemberWhiskey · 3 years ago
People read “reserve requirements have gone to zero” (which is true) and assume it is so that banks can keep lower reserves.
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.
hgomersall · 3 years ago
And they can get reserves whenever they need to, because that's how the interest rate policy is effected.
ric2b · 3 years ago
I don't understand this, could you clarify? If they have so much more money than the requirements demand, what is the point of lowering the requirements? Who does it help?
NovemberWhiskey · 3 years ago
The point wasn’t that reserve requirements were “lowered”; they were removed - because the Fed moved to a different mechanism to set short-term interest rates.
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.
seanhunter · 3 years ago
I hear this a lot and it's in a lot of "explainer" videos on youtube and so on. The idea that banks have a special state-sponsored privilege to create credit is completely and very obviously untrue.
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.
swottler · 3 years ago
You are talking about credit, not money. Banks create actual state-backed money, which can be physically (or more likely electronically) paid to a third party after they've loaned it to you.
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!
seanhunter · 3 years ago
Banks don't create state-backed money either. The central bank creates money and gets it into the financial system by performing open market activities (eg buying treasuries with it) or depositing it into the accounts it holds with various banks.
Kiro · 3 years ago
No, the banks create money. If you've watched all these explainer videos surely you must understand basic FRB.
seanhunter · 3 years ago
Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. 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.
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...
tome · 3 years ago
> Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money.
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.
NovemberWhiskey · 3 years ago
I feel like there are quite a lot of people here that do not understand that the relationship between theories of money and the actual day-to-day operations of banks is about as close as that between weather forecasting and umbrella manufacturing.
joelhaus · 3 years ago
This is the way. It's too bad this can't be pinned to the top. Thanks for laying this out so clearly.
kgwgk · 3 years ago
It may be clear but it's not correct.
kgwgk · 3 years ago
> Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. 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.
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.
NovemberWhiskey · 3 years ago
You assert that the act of individual act of lending creates the money - this is known as the credit creation theory of money; the GP asserts that the central bank creates the money and banks are just moving it around - this is known as the financial intermediation theory of money. That also happens to be the theory that underlies most banking regulation, like the various Basel Accords.
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.
kgwgk · 3 years ago
As far as I can understand seanhunter asserts that bank lending doesn't create money - pointing to the definition of M1/M2 money - and claims that bank lending is not different from me lending you $100 and that the amount of M1 or M2 money in supply doesn't changed in either case.
> 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.
NovemberWhiskey · 3 years ago
>As far as I can understand seanhunter asserts that bank lending doesn't create money - pointing to the definition of M1/M2 money - and claims that bank lending is not different from me lending you $100 and that the amount of M1 or M2 money in supply doesn't changed in either case.
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.
kgwgk · 3 years ago
I don't know if the financial intermediation theory of money has its own definition of M1 and M2 but the one given by seanhunter is the standard one. If we're using the same definition [are we?] then it either changes or it doesn't.
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.]")
NovemberWhiskey · 3 years ago
A loan only increases the money supply if it's made without replacing the deposits that were loaned out. The financial intermediation theory is that that doesn't happen: a bank is just a place where money flows come together to find allocations to investments, and that the benefit is that the size mismatches between those in surplus and those who need to borrow can be reconciled, so banks that do this skillfully are economically valuable and make profits.
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.
kgwgk · 3 years ago
Sure one thing can be offset by another.
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.
NovemberWhiskey · 3 years ago
>Still, 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.
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.
kgwgk · 3 years ago
I don't debate any of that!
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.
NovemberWhiskey · 3 years ago
No; M2 has been defined to measure the money stock. You're a believer in the credit theory of money creation, so you obviously think increase in the money stock happens due to lending. If you're a believer in the financial intermediation theory, you don't think that - you think the central bank adds to or removes from the money stock (by controlling short-term interest rates, and therefore the amount of loanable funds), and the banks just move it around.
These are macro theories; they don't tell you anything at all about an individual loan - only aggregate behavior of the entire system.
kgwgk · 3 years ago
I'm not a believer in anything.
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.
NovemberWhiskey · 3 years ago
In the first case, the friend has given you $100 and won't see it back for a year, and then will get $5 interest.
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.
kgwgk · 3 years ago
> 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!)
SantalBlush · 3 years ago
I'm confused. Under link [3] you posted, the section entitled "Fractional Reserve Banking Process" states the following:
>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?
m101 · 3 years ago
Not how it works. How it works is that there are a number of constraints and metrics placed on banks that they need to satisfy and prevent them taking risk. At any time it could be any one of these that is the limiting factor on risk. It may not be a measure of "reserves" that is the constraint.
markmaglana · 3 years ago
I wonder if it’s correct to also think about it in this way: idle cash devalues over time. Coupled with interest (no matter how small) that they pay out to their depositors, this exposes banks to future liability. To counter that, they have to give “jobs” to as much of this cash as possible so that they can make those payments while also pocketing a profit for themselves.
q7xvh97o2pDhNrh · 3 years ago
This is indeed a reasonable way to think about it. A dollar tomorrow is worth less than a dollar today.
You might enjoy this light reading: https://www.investopedia.com/terms/n/npv.asp
startupsfail · 3 years ago
There are plenty of instruments though with different maturity dates, from a single day to decades.
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.
a1445c8b · 3 years ago
Too much idle cash is a wasted asset.
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.
howeyc · 3 years ago
> As for money markets, don’t those get invested in treasury bills/notes anyway
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.
stephen_g · 3 years ago
That’s not how it works. This is a good primer by the Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
unyttigfjelltol · 3 years ago
Maybe, but in the case of SVB, deposit amounts were suspiciously similar to assets....
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.
NovemberWhiskey · 3 years ago
OK, sure. It’s a distinction without a difference though. If you read pg. 5 of that document, it explains how the effect of market forces results in essentially the same net effect for an individual bank as if they did “lend deposits”.
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.
HDThoreaun · 3 years ago
Of course banks are lending deposits. They're throwing in some investor money too but vast majority of loans they write is using deposits. You can try to make some sort of "number on screen go up" argument, btu the underlying value comes from somewhere. When someone takes a loan and withdraws dollars they're usually getting money that was deposited by a customer.
wonnage · 3 years ago
That's a misunderstanding - when a bank originates a loan:
- 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
beowulfey · 3 years ago
But is it real? It’s more like an IOU, right? They don’t reduce the amount of money in the depositor’s account, but if the loan defaults would they be able to return the money to the depositor? My guess is no, not really (assuming no other outside cash sources).
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.
elcomet · 3 years ago
Money is not "real" so you can consider this IOU is actually money. And if everyone agrees then it is.
alangibson · 3 years ago
Your misunderstanding is around what money really is: it's just an accounting unit. It's literally a number in a database somewhere.
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.
beowulfey · 3 years ago
Am I wrong though that if the loan were to default and the depositor tried to withdraw all 1000, the bank wouldn’t be able to return it?
Perhaps because of the insurance from central banks this problem is avoided.
alangibson · 3 years ago
That's wrong. The loan amount was never anything but a number that someone at the bank punched into a database. It doesn't have anything directly to do with someone else withdrawing their own money.
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.
HDThoreaun · 3 years ago
You’re wrong. If someone took out a loan and withdrew all the money before defaulting the bank would not be able to pay deposits. Insured deposits would be paid by the government and uninsured deposits would go poof.
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.
alangibson · 3 years ago
Your understanding of banks taking in deposits then lending them out hasn't been true for decades. A bank with no deposits can make loans just fine. They can just borrow at a lower rate than they loan if they actually need to hand out cash.
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.
beowulfey · 3 years ago
This was basically what I was asking. Okay so, because the bank has access to an external supply of “money”, they can loan out more than they have in reserve. Thanks!
alangibson · 3 years ago
Yes, BUT they do not need to get 1000 USD from anywhere to put 1000 USD in your account. They literally just say you have 1000 USD. You can then electronically transfer that to anyone else's bank. The banks then borrow government money overnight to settle accounts. That's the only place government money comes into it.
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.
kgwgk · 3 years ago
> The banks then borrow government money overnight to settle accounts.
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.
HDThoreaun · 3 years ago
This is expensive. Banks can do this, but it's more of a last resort than the main plan.
alangibson · 3 years ago
> But is it real?
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.
HDThoreaun · 3 years ago
except people withdraw money and the bank needs to give those people actual cash. That's deposits. Of course they could take overnight loans or whatnot but deposits are cheaper.
nosianu · 3 years ago
The vast majority of money is not withdrawn. It's all transfers. And that is a major point and difference.
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.
HDThoreaun · 3 years ago
I am responding to a post that said
> 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.
dools · 3 years ago
Well, even reserve balances are created out of thin air… it’s all just accounting
nosianu · 3 years ago
> The cash in banks
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-...
HDThoreaun · 3 years ago
I’m not reading that, but I’m using “cash” because that’s what I’m talking about. Yes most of the loan money isn’t cash, but the cash has to be available for withdrawal so “it’s just numbers on a screen” doesn’t actually work all the way down.
wonnage · 3 years ago
Refusing to read about the thing you don't understand is pretty silly
fps · 3 years ago
Banks don't hold substantial cash. They send whatever cash they collect to the local federal reserve to be recycled and get fresh cash to hand out to people every morning from the same federal reserve. I don't think I've gotten a "used" bill from a bank in over a decade.
fauigerzigerk · 3 years ago
So let's assume a bank has collected deposits worth £1000 from all of its customers. Now the bank makes a loan of £100 to one of its customers and puts the money into the customer's current account at the bank.
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.
HDThoreaun · 3 years ago
They give your money to that guy. And he puts it in his account at the bank and they give it back to you. The money is still real though. Without the deposits they could not make any loans to begin with.
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
dools · 3 years ago
“ Without the deposits they could not make any loans to begin with.”
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”.
NovemberWhiskey · 3 years ago
If you actually believe this describes the process then follow me on this thought experiment.
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?
zajio1am · 3 years ago
By issuing deposits, each bank creates essentially its own money which is valid as long as it is inside the bank (used in transactions with other clients that use the same bank), but when clients send money to other banks, the bank has to use 'central bank money'.
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').
jacquesm · 3 years ago
In your worldview, where does the money a bank needs to operate from?
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)?
nordsieck · 3 years ago
> In your worldview, where does the money a bank needs to operate from?
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.
NovemberWhiskey · 3 years ago
>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.
Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?
nordsieck · 3 years ago
> how does that work exactly?
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.
alangibson · 3 years ago
The money that gets borrowed from the Fed is used to settle balances between banks. When a bank originates a loan, they just add a number to an account. The money doesn't come from anywhere. This works mainly because most money transfers are electronic.
tl;dr yes, banks create money out of thin air. It's been this way for decades.
reese_john · 3 years ago
> A bank can make an infinite amount of loans. They are not constrained by anything.
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...
jacquesm · 3 years ago
> A bank can make an infinite amount of loans. They are not constrained by anything.
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...
HDThoreaun · 3 years ago
Banks don’t have far more loans than deposits. When they make a loan most of the money is just redeposited, so effectively each oringal deposit gets 10x’d by people just leaving the money in the bank. That’s how fractional reserve banking and “creating money out of thin air” works.
If none of the loan money was redeposited than the bank couldn’t create new money.
jacquesm · 3 years ago
You are thinking of a nation - and even a single bank - as a closed system. But this is an oversimplification that makes it impossible for you to make steps in your understanding of how this all works.
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.
kgwgk · 3 years ago
> 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)?
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?
tekknik · 3 years ago
In a fractional reserve system the amount they can loan out is a multiple of their deposits, with the excess money coming from the central bank.
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.
nly · 3 years ago
Cash is fungible so the difference is not important. A bank has to balance its books eventually.
dragonwriter · 3 years ago
A deposit of $x adds both $x in assets (cash) and $x in liabilities (account balances).
treis · 3 years ago
This isn't an over simplification it's just wrong. The bank does have more assets (the 1 million in cash) that balances the liability (the 1 million they owe to their customer).
eftychis · 3 years ago
Yes, but the problem is the 1 million is unlikely to be in cash. Here, it is in MBS issued at low interest rates and thus practically ~$500k if the security is sold right now.
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.
KirillPanov · 3 years ago
What?
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.
lxgr · 3 years ago
And you think that the bank just keeps sitting on that cash until you withdraw it again, paying you interest in the meantime?
tylerhou · 3 years ago
If they are sitting on excess cash, they can lower interest rates on deposits.
The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.
lxgr · 3 years ago
Sure, but you don't get a useful model of a bank by only looking at the short term like this.
> 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.
incompatible · 3 years ago
Correct, although if they don't do something to make money with the cash they take in as deposits, they won't have sufficient income to cover their expenses, let alone make a profit.
dragonwriter · 3 years ago
The effecf of the deposit is separate from the effects of decisions the bank makes after the deposit.
The deposit creates a cash asset and an equal liability for the increases account balance.
Other transactions have other effects.
mbreese · 3 years ago
It’s cash, until the bank converts it to something else. For example a loan.
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.
rkagerer · 3 years ago
One way to generate interest is to simply park it at the Fed. Check out The Narrow Bank for the story of an upstart that wanted to make that their whole business model.
https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...
prottog · 3 years ago
Thank you for this! Very interesting.
kenjackson · 3 years ago
You're right, the full million isn't a liability. But anyone depositing 1M isn't putting it in a non-interest bearing account. So now you are generating liability every second you sit on the cash. Which means you need to "invest" it.
louloulou · 3 years ago
No one is showing up at a bank and depositing $1M of physical cash (except maybe Mexican drug cartels).
That $1M you're depositing is presumably the liability of another bank.
panarky · 3 years ago
Doesn't matter if it's physical cash or an electronic ledger since both the electronic ledger and the physical green pieces of paper are liabilities of the banking system, specifically for US dollars they're both liabilities of the Federal Reserve.
wins32767 · 3 years ago
> specifically for US dollars they're both liabilities of the Federal Reserve.
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?
refurb · 3 years ago
Dollars are bank notes “promises to repay”. It used to be many different bank issues notes payable in gold, now it’s one bank - the Fed, and it’s no longer gold.
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.
wins32767 · 3 years ago
> 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.
nulbyte · 3 years ago
> I don't see how those are liabilities of the Federal Reserve, but maybe I'm missing something?
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...
eecc · 3 years ago
Yup, that’s quite the insight. (Although I don’t understand why you write banks are forced by law to buy.)
dragonwriter · 3 years ago
The $1 million deposit creates a $1 million cash asset and a $1 million account liability.
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.
elgertam · 3 years ago
This is right, though I think we should be clear that the MBSs lost value because they are normally like bonds, and bond prices decrease when yields increase.
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.
Bluecobra · 3 years ago
> 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%.
skybrian · 3 years ago
Yes, bank deposits are a liability for the bank, which is why a bank won’t increase the amount you have in your account if you ask nicely. You have to pay them. If someone’s bank account went up by $1 million, the bank better have gotten $1 million more in assets from them somehow, or something weird is going on.
(Often, the asset comes from the bank making a loan. You can pay later.)
javajosh · 3 years ago
Not an expert, but was having some thoughts.
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.
1attice · 3 years ago
This is actually a nascent PhD-level thesis. Follow this thread.
nightmarish · 3 years ago
What makes you say that? It seems to be a restructuring of a supply/demand curve along a lattice. (Ironic, given your name lol?) https://en.m.wikipedia.org/wiki/Total_order
fecaldog · 3 years ago
2. The people running the graph do not want the graph to die but want the edges to decay.
Thanks for this, I am now also having some thoughts.
zomglings · 3 years ago
I also feel like having caught a hazy glimpse of something monumental. Thank you.
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?
webnrrd2k · 3 years ago
I like the graph idea, but I might be missing some of what your saying... Although I think that it should be more than just people as nodes. Anything that can participate in the economy via signing contracts woukd be my first approximation. So, businesses, cities/states/nations, etc...
Also, I think it's reasonable for individuals to inherit edge weights from their governments, as a way to model taxes, national debt, etc.
javajosh · 3 years ago
Thanks for that, but after thinking about it a bit I don't think I have much to offer. Perhaps if we were in a pub and I could understand where you're coming from. The thing about models is that they can be used in a lot of different ways, and can be pushed in many more ways. The model seems so trivial that it must be part of a 1000 other models if it is correct, or it must be well-known why this model fails. I imagine the quants rolled their eyes and didn't even bother responding, like how physics people do when laymen riff on quantum mechanics. (My ego would love it if this is novel, but my brain knows better.)
tazjin · 3 years ago
I think what makes this sound so profound is that the second point sounds like a shadowy, centralised cabal. In reality it's a lot of the participants in the graph, for various reasons.
d4nt · 3 years ago
Convert “$x” into “something Alice wants”. Alice doesn’t really want $x, she wants a new car, a house, a vacation, a new machine for her factory.
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”.
fmstack · 3 years ago
hold up hold up. there's a key distinction between the two categories of things you list in your examples. The first three are items that are consumed to meet Alice's specific desires, with features that match these desires-- a specific car, a specific house, a specific vacation. Alice buys them because she wants to use them.
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.
jcranmer · 3 years ago
> 2. The people running the graph do not want the graph to die, ever.
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).
ethbr0 · 3 years ago
If we're modeling the flow of value (in the more abstract), then holders of most currencies on the planet have real value constantly flowing away from them... by virtue of inflation.
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.
nightmarish · 3 years ago
Proposition 2 is flawed: some people DO want the graph to die.
javajosh · 3 years ago
Yes, it strikes me as perverse that if your business is debt, then a debt-free world is a very bad world. It's perverse in the same way it is perverse for a doctor to be sad when fewer people get sick. So, I empathize. Be that as it may, I don't see fewer people getting sick or wanting debt, so I think the point is somewhat moot.
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.
hgomersall · 3 years ago
To a large extent it reflects liquidity demands. When governments are falling over themselves to profess "fiscal responsibility" the liquidity demands are met through private banking.
inawarminister · 3 years ago
There's a concept in Anthropology/Primitive Economics called "Gift Economy" where participants in a community gifted each other help, goods, food, and rely on being gifted back similar things in higher/lower proportions sometimes in the near future.
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?
acjohnson55 · 3 years ago
Your model feels trueish to me, but I think the analogy is actually overcomplicating it.
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.
syntheweave · 3 years ago
Yep, this is indeed what is going on, and relates to concepts like "capitalism motivating nationalism, imperialism and colonialism" - it's the large scale expansion of the debt graph. It's something you can pull off profitably temporarily by coordinating your nation towards a stronger state bureaucracy, aggressive trade policies, industrialization, and destabilization or dehumanization of rivals. When we speak of "this is good for the nation", what's really at stake, materially speaking, is this kind of Machiavellian machination of debt, tempered only by whether it can be justified in terms of national myth, dominant ideology, party politics, etc.
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.
seanhunter · 3 years ago
1. This doesn't actually mean anything. It's true by your definition.
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.
kayamon · 3 years ago
This system will settle on a solution if there is no net total creation of money in the world. As long as new money is allowed to enter this system, edges will keep appearing to protect it.
diogenescynic · 3 years ago
No, the $1M deposit is an asset and liability (which offset each other). SVB then invested those assets in bonds/securities/T-bills but then had to sell them at a 20% loss because they needed funds for liquidity—-so now they don’t have as many assets as they do liabilities and hence are taken over by FDIC.
markmaglana · 3 years ago
I think the additional liability from that event would be much less because it would be computed from the interest payments that the bank eventually owes the depositors.
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.
tomhallett · 3 years ago
If a bank is noticing they are getting more deposits then they can safely make returns for (like SVB in 2020), can banks "simply" return deposits to customers and/or decline new customers/deposits? Is there a precedent to doing this? Or does everyone decide it's better to take risky bets to grow with the increasing deposits and we'll keep seeing runs when those bets go south?
arbuge · 3 years ago
> When someone deposits $1m at a bank, the bank doesn't have $1m more assets, it has $1m more liabilities.
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.
stephen_g · 3 years ago
The transfers are settled in central bank reserves, so the net change of assets and liabilities should actually be zero for deposits coming in.
elgertam · 3 years ago
> (Yes, this is a gross over-simplification)
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.
hgomersall · 3 years ago
Just to add to this excellent answer, because I don't think it's clear to most people: if the deposit is not created by that bank, the assets the bank takes on are the balancing side of the original deposit (so a loan at another correspondent bank or, if the spending was from the government, an asset at the central bank). Clearing might simplify the net situation, but fundamentally the asset the bank takes on matches the original asset that created the money.
m101 · 3 years ago
It has +1mm cash (asset) and +1mm liability to depositor
navane · 3 years ago
with interest being zero as it was the past couple of years, can the bank not just sit on that money and literally do nothing? What operational expenses do they have?
ronjobber · 3 years ago
Sure, if depositors said "ok we'll let the bank ride this out." But that's not what happened.
disgruntledphd2 · 3 years ago
Yeah, and remember that this particular bank has a very, very well-connected set of customers (in the graph theory sense). So once the run starts, everyone tries to get in, causing the actual run.
ptaffs · 3 years ago
rent and maintenance if they have branch property, salaries and benefits for staff at least. Banks have a lot of regulation and audit requirements which take work.
tropicaljacket · 3 years ago
but that doesn't increase with more deposits, right?
acomar · 3 years ago
if profits don't go up, shareholders get mad and the stock price tumbles. this is just capitalism.
goodoldneon · 3 years ago
Why is "too much money" a thing? If a bank only wants $100 million in deposits, but customers deposit $150 million, why can't the bank set the extra $50 million to the side and pretend like it doesn't exist until customers want to withdraw it?
nbar1 · 3 years ago
I believe it's because depositors want a return on their "investment"
thecyborganizer · 3 years ago
The customers who deposited $150 million expect some rate of return on their deposits - in fact, you promised it to them. In a year that $150 million needs to turn into $155 million or whatever.
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.
thepasswordis · 3 years ago
Is this not what bonds are for? Savings accounts earn less than just buying bonds, and the bank pockets the delta.
They got greedy.
rvnx · 3 years ago
The bank has short-term liabilities to their customers, and decided to lend out the customers funds to someone else for the long term.
Total non-sense and greediness.
drdec · 3 years ago
That's exactly what the bank did - they bought bonds. The type of bond they bought doesn't matter, what matters is that in a rising interest rate environment, the face value of the bonds fall and they are no longer producing higher yields than the saving account rates.
They didn't get greedy, they failed to anticipate the speed and amount that interest rates would rise.
treis · 3 years ago
Yeah, but they bought bonds to make their numbers work. They had a choice of getting like 0.08% in overnight funds or 0.36% in short term T-bills or locking it up and getting ~3% in MBS. They chose the latter to make more money. If they had chosen the former things would have been far less critical.
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.
disgruntledphd2 · 3 years ago
They too, thought that the world had fundamentally changed as a result of the pandemic.
snuxoll · 3 years ago
3% MBS, that's a good one. Try more like 1.25% coupon rate with the crazy low mortgage rates were at when SVB got the inrush of deposits (the banks and the GSEs gotta make their money too, with mortgage rates near 7% UMBS coupons are only at 5.5%).
dllthomas · 3 years ago
The type of bond would matter if default risk was a meaningful piece of the puzzle here, but in this case it isn't (IIUC).
gregruss · 3 years ago
They did not get greedy. They bought bonds, and those bonds turned into a liability. Because the bonds were bought when interest rates were extremely low, they are worth less than bonds at current rates and had to be sold at a loss in order to shore up liquidity. That spooked investors and prompted a run on the bank.
chii · 3 years ago
> They did not get greedy. They bought bonds
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.
HDThoreaun · 3 years ago
You said they didn't get greedy but the next sentence is the description of an extremely greedy act. They did not need to buy 10 year bonds. They could've bought 1 year bonds, or any other length shorter than 10 years. Or just less 10 year bonds.
kccqzy · 3 years ago
Bonds have a duration until maturity. Savings accounts can be withdrawn at any time. The bank normally pockets the delta by taking up the risk of this mismatch. In this case the risk became too much.
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?
thepasswordis · 3 years ago
I can't edit this anymore, but: there are multiple articles explaining that SVB owned mortgage-backed-securities, which is what I meant by "getting greedy".
jaycroft · 3 years ago
Because now the bank has to pay interest to depositors of $150M instead of $100M, which means that they'll pay a lower, less competitive rate. So, in order to keep customers, banks are incentivized to lend out any and all spare cash for whatever yield that they can get, in order to give attractive rates to depositors. Losing customers though shouldn't really be a problem for the bank, after all, those customers did deposit "too much" money - once enough have left to seek higher yields elsewhere, there will be less cash on the sidelines, and so higher yields for the remaining customers. I suppose if your whole philosophy is "growth at any cost", and you're measuring growth not just by AUM but also by number of customers, you get excess risk taking and yield chasing.
rcme · 3 years ago
At the SVB bought the securities in question, interest rates were 0 across nearly all savings products. SVB was trying to maximize profits for itself and shareholders. This isn't about attracting customers with high-yield accounts.
rlucas · 3 years ago
... though it may well be relevant that they might have felt great pressure to /retain/ customer deposits in a world of competitive yields.
skellington · 3 years ago
How bad can it be when most banks are paying 0.2% on savings accounts and nearly 0% on checking?
actionablefiber · 3 years ago
I feel most banks are coasting off the inertia from longtime and/or unsophisticated customers.
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.
CydeWeys · 3 years ago
Apparently your average person is much more likely to move homes than move banks. Bank accounts are incredibly sticky, and even though it's not really that hard to open up a new account (and maybe switch over some recurring transactions), people nevertheless don't do it.
actionablefiber · 3 years ago
So the conversation goes:
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.
abigail95 · 3 years ago
paying a lower rate literally solves the problem of having too much deposits.
they wanted a higher return so they increased their risk and blew up.
jellicle · 3 years ago
Well, yes, if your bank is receiving too many deposits and you didn't want to be vulnerable to a SVB-style failure, then you could:
- 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.
aj7 · 3 years ago
Because the customers expected interest and the bank’s investment portfolio can’t provide the necessary return to pay the interest rate they used to attract the customers.
rmk · 3 years ago
Yes, it's nonintuitive at first glance. A (good) loan is an asset, and a deposit is a liability as far as banks are concerned.
DeathArrow · 3 years ago
>Until I heard about those banks I hadn’t considered “too much money” was a problem.
You can always buy crypto if you think you have too much money. Or find a nice Ponzi scheme and invest in that.
lr4444lr · 3 years ago
Can you ELI5 this for me? Why is it terrible for the banks to simply sit on deposits if there aren't sound lending opportunities? I understand that the owners might prefer to sell rather than wait, but a small bank doesn't seem any inherently different than any other small business who's owner simply enjoys the work of running something. What is the inherent downside to idle deposits?
semi_cityplan · 3 years ago
Deposits aren’t free. We will use round numbers. If I take $100B in deposits and pay .5% interest, that’s an expense of $500M per year and including overhead even when rates were 0, deposits at a bank cost more than 0.5%.
So I need to lend it out so I can make the spread and I’m not just bleeding it money
kayamon · 3 years ago
Deposits don't need to have interest paid. It's entirely possible for the money to simply sit there and not be invested in anything.
semi_cityplan · 3 years ago
Four questions - where does a bank store cash? What is the IORB and what are its underlying assumptions? What is the overhead cost in banking? What is the cost of ACH and a wire? I don’t contend you can just have money sit there. I also don’t contend that it was stupid in hindsight to be this levered to duration. But there is an overhead cost in banking.
tomrod · 3 years ago
> “too much money”
Its not so much this as deposits are bank liabilities.
andromeduck · 3 years ago
Why even chase 1.5%.
pirate787 · 3 years ago
On $80B that's $120 million a year
snewman · 3 years ago
1.5% of $80B is actually $1.2B
postalrat · 3 years ago
If you could make 1.5% off other people's money how much would you "invest"?
berkeleyjunk · 3 years ago
They got too much in deposits very quickly and could not originate loans at the same speed. If they kept the money uninvested their operating costs would have eaten up their principal (even if they had to pay 0% in interest to their customers)
chii · 3 years ago
but operating costs don't rise linearly with deposits (i imagine it rises sub-linearly, at most), esp. if they can choose to pay 0% interest for deposits.
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.
HDThoreaun · 3 years ago
1% of 100 billion dollars is a billion dollars. They would rather have 1.5 billion than .5 billion.
itissid · 3 years ago
Noob Questions: How do banks typically diversify their investments so that this kind of thing does not happen? Also don't they have to have some kind of liquidity cushion? Can't they just cover their short term costs by borrowing(I thought there is an overnight facility for lending between banks to borrow at low rates)
LanceH · 3 years ago
With only a look at the summary numbers above, it looks like they tied up 40% or so to 10+ years. I don't know what the right percentage should be, if that much is going to be tied up in hold-to-maturity, you would expect it on a rolling basis which reflects the long term liquidity of your deposits.
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.
EMM_386 · 3 years ago
I don't understand why you would lock up that much money for 10 years at 1.5% interest.
Did they expect interest rates to stay at 0 for 10 years? That is illogical.
rvnx · 3 years ago
Especially illogical, considering it's not their own money that they locked, but customers funds (that they owe to the customer in the short-term).
abm53 · 3 years ago
If that was the market clearing price, then to the extent that rate expectations set the bond price (which of course is debatable) this would have been the consensus view at the time.
Dylan16807 · 3 years ago
You can't really capture consensus with a single number.
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.
BoiledCabbage · 3 years ago
They wanted to chase high-yields in low yield environment. The only way to do so was to take on more risk, specifically interest rate risk. They ignored the fact that it was risky because it was a "safe bond" and got nailed by it.
rsync · 3 years ago
"97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%."
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 ?
boosting6889 · 3 years ago
There’s a misconception that bonds are safe investments. They are not. You’re just trading one kind of risk for another. You can do the math, compare 4% and 1.5% compounding for 10 years and that’s why no one wants the bonds yielding 1.5%. Dumping 90%+ of your liquid funds into a single thing other than cash is completely insane especially when it’s not yours.
snuxoll · 3 years ago
Treasury bonds are "safe" in the sense that you will (because the US Government will not default on her debt) get your money back. The caveat is you will get your money back at maturity; if you need it before then, well, market value adjusts based on current yields.
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 :/
imtringued · 3 years ago
Bond ladders are the CPU pipelines of finance ;)
SmartJerry · 3 years ago
Bonds are perfectly safe investments when the normal consideration of safety is that you cannot lose money and you know your exact return through maturity. Can you miss out on better investments, ofcourse. The only issue is investing someone else's money into bonds - because they are the ones to decide when the cash is needed, not you. But I'd be shocked if at any given time at least 90% of cash is not invested in someway. You only want to keep what you need immediately out of investments.
bialpio · 3 years ago
Safe investment means you're not risking losing the money, not that there will never be a better opportunity (that may be just as safe). Alternative cost is not really coming into play here IMO.
nilsbunger · 3 years ago
It's pretty straightforward -- if you have asset yielding 1.5% forever, you can make it an asset yielding 3% by cutting its price in half.
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.
hervature · 3 years ago
I will first try to explain with simplified numbers and then do the equivalent calculation somewhere else.
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.
actionablefiber · 3 years ago
> You would get $100/1.05^10 = $61.39.
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.
panarky · 3 years ago
The rule of thumb is that for each 1% increase in interest rates, a bond loses its years to maturity as a percentage.
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.
ikiris · 3 years ago
Go watch Margin Call.
fspeech · 3 years ago
Interest rate rise will cause the same loss for bonds of the same duration. However MBS don’t have fixed durations. As interest rates go up, borrowers are expected to hold onto their mortgage longer. So the expected duration goes up for an MBS as well and loss is expected to be higher than bonds with similar duration to begin with. However there is a mitigating factor for MBS in a rising rate environment, that is they are amortizing instruments. So the duration doesn’t go up as dramatically as callable bonds/CDs.
jshaqaw · 3 years ago
MBS have a double whammy when rates rise. Not only are the mortgages yielding less relative to current rates but prepays decline so the duration extends. A lower relative rate for a longer time means a lower market price.
walrus01 · 3 years ago
> As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS)
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?
SilasX · 3 years ago
The error wasn’t that the mortgages defaulted too much (like in the ‘08 crisis) but that interest rates went up, which is a distinct problem, and, from the comments in these discussions, not something that the capital requirements adequately capture.
alexlesuper · 3 years ago
The problem is with MBS but not for the same reason.
mason55 · 3 years ago
> Did nobody learn the lessons on this?
I'm not sure you learned the lessons. Other than MBS being coincidentally involved, this has literally nothing to do with 2008.
dahfizz · 3 years ago
Do you think MBS are always and forever a bad investment because of a bubble 15 years ago?
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.
walrus01 · 3 years ago
To be clear, I think MBS are morally wrong in how they're implemented in the market, yes.
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.
dragonwriter · 3 years ago
> Do you think MBS are always and forever a bad investment because of a bubble 15 years ago?
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...
twblalock · 3 years ago
Any investments whose value was sensitive to the Fed's rates would have had the exact same problem.
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?
patmorgan23 · 3 years ago
The underlying problem in the 08 collapse was poor/non-existent underwriting of the mortgages and those loans being rated AAA when packaged in an MBS. When the economy slowed just a bit people started defaulting because originators were writing NINJ (No Income, No Job) loans, something that is illegal today.
This situation today has nothing to do with the failure of the MBS'S to payout like 08.
voisin · 3 years ago
> - 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.
This is a pretty insane bet. Why didn’t they ladder the maturities to have a lower average duration and less risk?
makestuff · 3 years ago
My pessimistic view is that bonuses were paid out on invested cash not on cash just sitting there. So they had to buy something to get a fat bonus.
voisin · 3 years ago
Shocking portfolio design isn’t regulated given how much of banking is regulated.
rvnx · 3 years ago
As a bank, parking the money into long maturity bonds, especially when it's not your money, and your customer can take the money back anytime, and the current rates are 0% (so can go upward only...).
Sounds like an insane investment decision.
ummonk · 3 years ago
They were probably chasing higher yields in a low yield environment.
DiscourseFan · 3 years ago
I don't get it. I'm no expert in finance but even I knew the fed wasn't going to stop raising interest rates because I had the common sense to know the fed would fail to trigger a recession by doing so.
riazrizvi · 3 years ago
When I set my ‘Hindsight Goggles’ to 100, I too saw that the Fed would keep raising interest after the initial rounds, because unemployment would stay low despite massive layoffs, somehow, and that prices would keep rising. And I am an expert in finance.
synu · 3 years ago
I, too, am a genius in hindsight. It's great to be in such rare company.
hangsi · 3 years ago
Surely in retrospect, it must have been obvious you would find such people despite their rarity?
synu · 3 years ago
You got me there.
DiscourseFan · 3 years ago
There still a war on, inflation wouldn'tve gone down until that ended. And you have to take the temperature of things in your daily life, its like Keynes said, people are driven by the "animal spirit", the market doesn't always (or ever) make sense, you have to get a feel for it and use specific data to support that feeling, not the other way around. Jesus am I the only one taking out more lines of credit with the expectation of an extended period of inflation? If everyone else is doing that (which they should be), the money supply will continue ballooning, the economy will stay strong and unemployment low.
riazrizvi · 3 years ago
If people keep borrowing everything will be alright? Society, the economy, doesn’t work that way.
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.
dkn775 · 3 years ago
Based on what you’re saying here, is it a good time to buy a first home? The interest rate and prices have been scaring me but maybe I’m looking at it wrong.
abigail95 · 3 years ago
I thought layoffs were way below trend? What layoffs?
323 · 3 years ago
I had the vague impression that after the 2007 crisis, banks holding retail deposit accounts were not allowed to invest in stuff like MBS, only investment banks (without retail accounts) were.
dragonwriter · 3 years ago
> I had the vague impression that after the 2007 crisis, banks holding retail deposit accounts were not allowed to invest in stuff like MBS, only investment banks (without retail accounts) were.
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.
incompatible · 3 years ago
The Glass–Steagall rules?
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...
ohgodplsno · 3 years ago
Investing in the exact same kind of unsafe assets that brought the 2007 crisis, as well as assets that cause house prices to stay unaffordably high.
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.
berkeleyjunk · 3 years ago
Actually not. The kind of asset they invested in does not really matter. If they invested in super safe government bonds at <1% at the same time, they would have had the exact same issue. It is the rapidly rising interest rates that did them in. If they were smarter they could have done a rolling ladder of short maturities but probably someone there was lazy.
dahdum · 3 years ago
They could have stopped offering the very high savings yields that attracted that capital, but profits and exec comp would have dipped. So...this instead.
darkerside · 3 years ago
That would have resulted in just as much of a flight, to higher yield instead of safety.
CydeWeys · 3 years ago
No it wouldn't have. The company would still be solvent and have a large number of total deposits, just less in total than they could've had otherwise. What they did literally destroyed the entire company; not doing so would not have had that result. The outcomes are not comparable.
darkerside · 3 years ago
What? Anybody with financial sense has noticed that rates have skyrocketed, and if you're still earning less than 1%, you're throwing money away. The more money you have, the bigger a deal that is.
CydeWeys · 3 years ago
Bank accounts are very sticky and most people don't move them in search of better rates. In particular, people are not thinking of cash sitting in a checking account as anything other than short term cash they don't expect to earn a return on anyway, so you wouldn't change your entire commercial bank (that everyone else in your industry also uses and expects) just to chase some small returns.
darkerside · 3 years ago
SVB was holding so many uninsured deposits because they were the operating cash for businesses. If you have $100M, the difference in interest would be $3M a year between 1% and 4%. What kind of business wouldn't be paying attention to that?
HDThoreaun · 3 years ago
Banks were not offering any interest on deposits at this time. Maybe you could find .2% if you looked hard
dahfizz · 3 years ago
Gotta love the monday morning quarterbacking. "Get rid of the thing that attracts all your customers, surely then there will never be a bank run."
dahdum · 3 years ago
I suppose you’re right, there’s nothing they could have done differently. They were forced to offer just about the highest, unsustainable, yield rates and otherwise attract and hold unmanageable amounts of capital. No other choice! Inflation was unforeseeable. Despite 40 years of startup banking experience and $3-10M yearly exec comps, how could they be expected to consider high inflation and a tech downturn happening at the same time? We are asking just too much of those poor execs, risk management must have been someone else’s responsibility. Biden must be to blame.
dahdum · 3 years ago
The execs have been pulling $3-10M/yr compensation and will walk away wealthy, legally in the clear, and probably into similar roles and comp elsewhere (or simply retired). They aren't bumbling idiots, though if they were, they'd be hella crafty ones.
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.
dang · 3 years ago
(We detached this subthread from https://news.ycombinator.com/item?id=35097120, which contains "that tweet".)
mcenedella · 3 years ago
Great moderating dang! Appreciate your tireless work to make hackernews great.
tempsy · 3 years ago
honestly disgusted by the blatant PR moves by YC and Founders Fund yesterday in leaking their “advice” to their founders to get out of SVB
Very blatant weaponization of FUD to drum up deposits for their investments in Brex, Ramp, and Mercury.
zdbrandon · 3 years ago
As someone who was considering using one of those "banks" in the coming months, this whole ordeal makes me want to stick with Chase, Wells Fargo, etc. Stripe integrations be damned.
hef19898 · 3 years ago
If you are outside of B2B, you do not need Stripe. You need a solid business bank, ideally multiple ones.
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.
hef19898 · 3 years ago
Or just some, as it turned out, valid business advice. That being said, I would never let my investors choose my banks (as in more than one bank) holding my company's cash. And I definetly wouldn't use some not-to-big-to-fail, not international bank to hold my multi-millions in VC money, which is the only yhing keeping my company a float.
tempsy · 3 years ago
Giving the advice is not what I’m referring to. I’m referring to intentionally leaking the advice to the press so they run the story about how Peter Thiel is warning everyone which accelerated the outflow.
hef19898 · 3 years ago
Ah, I wasn't aware of that. I am not the least surprised so that Thiel is, however, involved in this.
misssocrates · 3 years ago
Would it be better to keep good advice private?
weego · 3 years ago
When the fuck are retail banks going to be ring-fenced away from being able to trade in MBS. They're consistently cancerous to our banking systems.
zomglings · 3 years ago
I do not think this is a problem of mortgage-backed securities.
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.
snuxoll · 3 years ago
Aye, the mistake was the duration, not the instrument. I hope nobody would take 60% of their brokerage account and invest it in a 10 year bond either, ladders exist not just to manage liquidity but also to limit the duration you have to suffer low yields with.
mannerheim · 3 years ago
Yep. Let's not forget this same thing pretty much happened last year in the UK - pension funds got margin called because they borrowed money to buy gilts (UK gov bonds). Low interest bonds, money tied up, messed them up when interest rates rose.
tertius · 3 years ago
This isn't an MBS problem. It's just a poorly performing asset problem.
walrus01 · 3 years ago
This is a symptom of the problem of middle class single family home residential real estate being treated as an unreasonably-price-increasing bubble inflated investment and not a place for people to live in.
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.
s1artibartfast · 3 years ago
It's logical or sane if you think capital investment options in New areas is going to dry up and existing assets are the best opportunity for preserving or growing your money.
How much would you spend on the house if you're only alternative is to watch your capital disappear
Dylan16807 · 3 years ago
> 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.
s1artibartfast · 3 years ago
What if it is 10% per year until it is all gone?
Dylan16807 · 3 years ago
How many people think inflation is going to go to 10% and stay there for a decade or longer? Are they enough to drive up real estate this much?
s1artibartfast · 3 years ago
Maybe not 10%, but I don't think we will see deflation anytime soon so cash will always lose value. Sometimes faster sometimes slower.
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
dahfizz · 3 years ago
This has nothing to do with MBS in particular, it is a fundamental aspect of the fixed income market.
xwolfi · 3 years ago
Come on, where else would they put your money ? When are retail going to understand handling and parking and securing and regulating money has a cost and interest rate have to be chased somewhere.
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.
lapcat · 3 years ago
> An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate):
[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).
rvnx · 3 years ago
He is correct, but he is blaming the FED raising interest rates. The responsible is not the FED, but the negligent management of SVB that purchased such products because of greediness.
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.
baremetal · 3 years ago
If you inspect the values of SVB here: https://www.svb.com/about-us/living-our-values
You can see that managing money responsibly is not one of their values.
generj · 3 years ago
So because they have one webpage giving lip service to diversity and the environment, they automatically don’t value their core competency?
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.
baremetal · 3 years ago
>So because they have one webpage giving lip service to diversity and the environment, they automatically don’t value their core competency?
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.
jamiequint · 3 years ago
My tweet was posted before that article.
lapcat · 3 years ago
What are you saying?
1) You wrote the Mint article.
2) Mint took the text from your tweet unattributed.
3) ???
jamiequint · 3 years ago
Looks like #2
lapcat · 3 years ago
> Looks like #2
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!
lapcat · 3 years ago
Some people are downvoting my reply to jamiequint https://news.ycombinator.com/item?id=35100305 but if that comment becomes dead then you won't be able to see his reply to me or the surprising conclusion of the story.
jamiequint · 3 years ago
I hope it's accurate. What I should have said though is "This is not a *solvency* issue as long as SVB maintains their deposits", it's obviously a liquidity issue.
kypro · 3 years ago
> - 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.
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.
highwaylights · 3 years ago
Nah, the bank is responsible for their decisions.
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.
abfan1127 · 3 years ago
that doesn't excuse the Fed's behaviors.
nerdponx · 3 years ago
Two wrongs don't make a right!
danielmarkbruce · 3 years ago
It's easy to criticize the fed, but they did a pretty good job during COVID and they did a pretty good job during 2008.
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.
yterdy · 3 years ago
Not to let the banks off the hook, but
>They did a pretty good job during COVID
One word: "transitory".
danielmarkbruce · 3 years ago
It was surprisingly accurate.... mom inflation has been reasonable for several months now
nervlord · 3 years ago
That's.. Delusional. It's barely budged.
danielmarkbruce · 3 years ago
https://www.bls.gov/news.release/pdf/cpi.pdf
Note all the months since July 2022. It's good to read the source material rather than hyperventilating news articles.
anon20230311 · 3 years ago
Mean MoM % change in CPI-U from January to preceding July, 2016-2023:
* 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.
yterdy · 3 years ago
By that metric, and it took quite a bit longer to get there than ideal. It's also still elevated historically and compared to FFR, all of which is a roundabout way of saying that inflation has and continues to destabilize the outlook. Stability historically comes after an n-month lag of the FFR and core inflation meeting, right? Well, banks are failing now, and 4Q24 is a ways off.
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.
danielmarkbruce · 3 years ago
They are always caught off guard. Try predicting anything macro and see how well it goes to plan. Then try not moving too fast or too slow.
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.
yterdy · 3 years ago
The difficulty is somewhat artificial. Their statements give away the game, namely their obsession with a "soft landing." Translation: an undue focus on securities markets and saving entities who'd made bad investments, i.e., picking winners. They were late because they were trying to balance a factor that isn't part of their quasi-mandate (but that is important to politicians, and to the institutions that Fed officers revolving doored from). Without that factor, you see radical hikes in 2021 and QT not being undermined by waves hands vaguely. It hurts, but less than what's coming now.
danielmarkbruce · 3 years ago
The only entities they seem to worry about is banks. And banks going under is bad news for everyone, always has been. Being a lender of last resort to banks is explicitly part of their mandate.
pishpash · 3 years ago
They worry about banks because they are a bank. If it weren't for government oversight they'd be a private bank.
yterdy · 3 years ago
>The only entities they seem to worry about is banks.
You'll have to support thay with something. Again, the language of their correspondence over the past few years says otherwise.
chii · 3 years ago
And it was. The prediction was that covid supply/demand constraints would resolve when covid problems clear themselves.
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.
throw0101c · 3 years ago
> One word: "transitory".
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.
yterdy · 3 years ago
The magnitude matters, too. Stimulus did not constitute an annualized increase in average consumer purchasing power equivalent to the inflation we've seen. I imagine that wage inflation fills the difference, but of course, the stimulus is over and wage growth is not enough. So "transitory" is not an accurate characterization for most people looking at their finances; it has come to eat their purchasing ability, and stayed.
pishpash · 3 years ago
They did a terrible job after the Euro sovereign debt crisis passed, so let's say after 2014, and they did a terrible job starting mid-2021, after vaccines and opening up. Always too slow to raise rates and stop financial froth that was obvious to everyone.
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.
adam_arthur · 3 years ago
To say they did a good job during covid can only be determined through history… many would disagree.
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
freejazz · 3 years ago
What's the fed's obligation to that bank that you are making this point?
eschaton · 3 years ago
Dollars to donuts they’re a “sound money” kook who wants the Federal Reserve not to be able to manipulate the money supply to achieve societal objectives like “low unemployment” and “inflation that closely tracks growth in economic activity and population” and “preventing a deflationary spiral because economic activity shut down due to a global pandemic” because all of that is interference with the Holy Free Market.
Because after all the purpose of society is to serve the market, not the other way around, right?
reso · 3 years ago
The fed wasn't buying bonds for lulz, they were doing it to carry out their primary function.
SantalBlush · 3 years ago
Whether or not the Fed's behaviors are excused is not the topic of conversation.
danielmarkbruce · 3 years ago
And the $80 bill was about 40% of their assets. And their depositors are all businesses who will move the money out fast because it's not insured over 250k.
disgruntledphd2 · 3 years ago
Yeah, this is all very odd. What the hell happened there?
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...
danielmarkbruce · 3 years ago
That's a good find...
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.
james_barton · 3 years ago
Not completely sure about that:
"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?
kortilla · 3 years ago
“Operational” at a bank includes financial risks.
james_barton · 3 years ago
I know of at least one large European bank where it explicitly doesn't.
NovemberWhiskey · 3 years ago
>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.
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.
mattwad · 3 years ago
Actually, they are sacrificing employment to stabilize prices: https://time.com/6253699/federal-reserve-inflation-interest-.... The interest rate hikes are designed to cause unemployment, and it's not even working.
pkulak · 3 years ago
Well, yeah, their "dual mandate" is contradictory. You're not the first to notice, trust me. And that means that sometimes they have to sacrifice one for the other. When one is doing historically well, and the other not so great, it's probably not a hard choice.
goodluckchuck · 3 years ago
You’re inferring good faith, which - when dealing with humans - is an unsupported assumption. You don’t have to be an economist to draw the connection between printing money and a rise in nominal prices (irrespective of the interest rates and lending).
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.”
oarabbus_ · 3 years ago
>The Fed knows that there is no real ongoing inflation.
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.
SecretDreams · 3 years ago
They have a dual mandate. Pricing stability and employment. They're trying to trade one for another to achieve a better balance. Employment is far too hot right now.
HDThoreaun · 3 years ago
It's a dual mandate because it's impossible to accomplish both. They have to decide which to focus on.
maskil · 3 years ago
Don't see how anyone could view the feds actions in the last few years and conclude that they had this as their mandate
notJim · 3 years ago
> maximum employment and stable prices
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.
acomar · 3 years ago
the economists at the fed think the only possible cause for inflation is demand pressure, forgetting the historical supply crunches that have led to inflation. wages are up and unemployment is down because production is still reeling from covid, especially as the largest generation in history retires. so amusingly, in their failed ploy to crush labor power, the feds have fucked the banks.
(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.)
actionablefiber · 3 years ago
It is more like, demand is the only thing the Fed can control.
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.
throw0101c · 3 years ago
> the economists at the fed think the only possible cause for inflation is demand pressure, forgetting the historical supply crunches that have led to inflation.
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...
kazen44 · 3 years ago
mind you the alternave is far worse.
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.
grey-area · 3 years ago
Sure it is their job to set interest rates. It is far less clear that it is their job to buy government and corporate debt, and allow the government to issue unprecedented amounts if debt. Or to attempt to completely erase the business cycle.
NovemberWhiskey · 3 years ago
That would be the Fed pursuing the "maintain the stability of financial markets and contain their systemic risks" part of its statutory purpose.
grey-area · 3 years ago
From current evidence, their efforts seem to have had the opposite effect.
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.
oblio · 3 years ago
Covid would have forced a much harder reset, probably in 2021.
grey-area · 3 years ago
Covid came at the end of a decade of QE. They tried QT in 2019 before Covid hit and had to give up.
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.
darkerside · 3 years ago
Is there a reason they couldn't have just purchased shorter term bonds and securities instead?
muzz · 3 years ago
Greed. Those were yielding close to zero and they wanted the 1.x%
polygamous_bat · 3 years ago
It's an interesting reward mechanic for the bankers, "heads I walk home with big bonuses, tails I go home with a big severance and our customers get screwed".
muzz · 3 years ago
This is the essence of the moral hazard created by the bank bailouts in 2008
sam345 · 3 years ago
The yield has been inverted so short-term has been paying just as much or more than the long-term depending upon which securities you're looking at. 30 to 90 day treasuries have been yielding over 4%
muzz · 3 years ago
Yes-- if they kept that cash until now they would be sitting pretty
roguecoder · 3 years ago
... housing prices have continued to rise at wildly unsustainable rates, leading to record homelessness. Which is the exact opposite of what happened with the crypto market, where the Ponzi scheme collapsed.
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.
harambae · 3 years ago
There's always degrees of speculation that are going to vary - cryptocurrencies, tech stocks, consumer staple stocks, gold, commodities, real estate, etc.
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.
Aeolun · 3 years ago
> When central bankers make government bonds trade like meme stocks this is what happens
That’s what happens when people buy meme stock. I think the failure of the goverment and the bank are unrelated here.
rib3ye · 3 years ago
> SVB being a bank was basically forced by regulation to buy long-dated bonds for yield.
Is this true?
chii · 3 years ago
nope, there's no mandate to buy for yield - they do it to make money.
rqtwteye · 3 years ago
"to generate the yield they wanted to see on this capital."
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).
ahmedbaracat · 3 years ago
Exactly that. I am wondering why the “pressure” to generate more yield or any yield at all. It is counterintuitive to me to view the startups deposits as investments and not as saved money to be used later, hence no need for a risky or any yield (even if part of the savings will be washed by inflation year over year)
rqtwteye · 3 years ago
It's not clear under what conditions the startups gave money to SVB. It could be they just put into a checking account and SVB then invested it in a risky manner.
nemo44x · 3 years ago
Why would a bank take your money and go to the trouble of managing it if they didn’t plan on using it for something? The purpose of a bank is to lend money. They need deposits to do that.
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.
rqtwteye · 3 years ago
I think there is a little more to it. I don’t know about SVB but Deutsche Bank had a solid business doing pretty unexciting banking. Then the CEO got a big ego and pushed for larger returns which made them do more risky stuff and eventually fail. So it’s basically a big ego or just plain greed
Eumenes · 3 years ago
The team making these poor choices at SVB should be criminally charged ... The tax payer shouldn't have to bail out banks.
berkle4455 · 3 years ago
Another bank will acquire the company and make depositors whole. Government won't actually do the bailout, just facilitate/force it.
Eumenes · 3 years ago
So where does the lost money come from? Another bank just gives it up?
bryfb · 3 years ago
FDIC is funded by premiums from participating banks. Beyond the insured limit, there isn't really a guarantee that the "lost money will come back."
berkle4455 · 3 years ago
Another bank will commit to meeting 100% of investor deposits, take ownership of all SVB's assets, and provide liquidity to shore up any depositor concerns. Why would they do this? They get to acquire SVB insanely cheap (basically just the cost of covering the losses), get loads of new now-happy customers, and be hailed as a hero.
Asparagirl · 3 years ago
Unless, of course, this predicted white knight never appears because lots of other banks are secretly in similarly shaky positions where they are also holding lots of long-term Treasuries or MBS that are in some respects extremely safe but which also pay only 0-1% over 5-10 years, and those “assets” would need to be fire-sold at 65% of face value if the bank ever needed cash quickly…
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.
quesera · 3 years ago
> 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.
lp0_on_fire · 3 years ago
> Unless, of course, this predicted white knight never appears because lots of other banks are secretly in similarly shaky positions where they are also holding lots of long-term Treasuries or MBS that are in some respects extremely safe but which also pay only 0-1% over 5-10 years, and those “assets” would need to be fire-sold at 65% of face value if the bank ever needed cash quickly…
Just by coincidence Wells Fargo is having "technical glitches" affecting account balances the exact same day this happens.
nemothekid · 3 years ago
>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?
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".
incompatible · 3 years ago
Wouldn't the FDIC take an enormous loss if it facilitated selling SVB "insanely cheap"?
mrandish · 3 years ago
SVB's shareholders take the loss in the value of their shares (which were down >70% before the regulators stepped in).
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.)
paulddraper · 3 years ago
> should be criminally charged
For what crime?
If someone unintentionally but ineptly writes code that crashes Amazon on Black Friday, did they commit a crime?
chippiewill · 3 years ago
It's possible to be criminally negligent. If you took unnecessary risks then it can carry a criminal element.
zenlikethat · 3 years ago
MBS are literally one of the safest looking bets imaginable, most likely Silvergate blasted a huge hole in their books and set off a cascade of trouble
HDThoreaun · 3 years ago
Long term fixed income at near 0 percent interest when you might have to give the money you used to buy it back is very risky, as we see here.
paulddraper · 3 years ago
What's a safer investment?
zenlikethat · 3 years ago
They bought assets and loaned to customers … pretty standard stuff
bluetwo · 3 years ago
There are some big parts to this story we don't know.
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.
PhaedrusV · 3 years ago
I heard elsewhere they were extending loans to startups with pre-IPO shares as collateral, so yeah, that was their best option apparently.
HDThoreaun · 3 years ago
Something like 60% of their assets were these bonds in December. They very well may have seen the other 40% withdrawn already by startups that can't raise anymore leaving them with this pile of 10 year 1.5% bonds.
resource0x · 3 years ago
Ackman panics, appeals for a bailout
https://www.msn.com/en-us/money/other/billionaire-investor-b...
abhiminator · 3 years ago
Bailout? Sounds like an '08 déjà vu again.
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.
notShabu · 3 years ago
One of the differences between a central bank and regular bank is that the regular banks should do the riskier stuff and offer the higher interest rates.
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.
AviationAtom · 3 years ago
Relevant Bits About Money article on FDIC and bank failure:
https://www.bitsaboutmoney.com/archive/deposit-insurance/
I should add: apart from 2008, bank failure has historically been quite rare
bjornsing · 3 years ago
> - This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.
You mean it's not a solvency issue? It sounds like a textbook liquidity issue.
the88doctor · 3 years ago
Even if SVB maintains their deposits, that IS a liquidity issue, it just isn't a solvency issue.
dools · 3 years ago
What’s interesting is that this bank failure as well as the failure of a neo bank Xinja in Australia despite taking in deposits both illustrate that it is not the case that banks make money by “lending out deposits” but rather by issuing loans and then attracting enough deposits to make their lending operations profitable.
mooreds · 3 years ago
Affecting stripe payouts too: https://support.stripe.com/questions/important-information-a...
MattyMc · 3 years ago
Stripe stopped payouts to SVB bank accounts. Seems reasonable.
ahmedbaracat · 3 years ago
This logic is counterintuitive to me “As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital.”. Startups are not depositing the money in SVB to invest it, they are storing it for future use. Why the pressure to generate yield and grow the loan book “fast enough”?
https://twitter.com/AhmadBaracat/status/1634293096639787008?...
adam_arthur · 3 years ago
There was no explicit need or requirement for SVB to buy MBS at 1% yield, yes. Poor management handling too much money.
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
bryfb · 3 years ago
"The yield they wanted to see on this capital" I imagine is some combination of money needed to run operations of the bank, interest paid on the deposits and profit.
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.
brightstep · 3 years ago
Because the bank, like all capitalist entities, exists to make a profit. Why else?
ahmedbaracat · 3 years ago
Can they make profit by charging customers a monthly fee in return for their services instead of investing the money?
zenlikethat · 3 years ago
Because if you lose 7% of capital on $180 billion in real terms that’s an awkward conversation with your boss?
HDThoreaun · 3 years ago
Bank accounts were paying .1% interest at this time. SVB could've bought 1 year bonds and made .5-1% easily. That's a billion dollars...
zenlikethat · 3 years ago
They didn't think they were gonna sell the assets before maturity. In that case, buying those makes sense.
drawkbox · 3 years ago
> "- 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.
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.*
bdangubic · 3 years ago
all other details aside - if you purchase $80bn of “mortage-backed” anything you deserve everything that will eventually come your way
zenlikethat · 3 years ago
In general people pay their mortgages. Just because a financial crisis has happened around it once doesn’t mean the asset class is inherently bad. It’s more regulated than ever, the problem was rising interest rates and not being able to keep their head above water with the position.
bdangubic · 3 years ago
“in general” is not good enough when you are pouring in $80bn mate.
would you mortgage (no pun intended) your family’s entire financial health on something that works “in general”?
MichaelMoser123 · 3 years ago
fifteen years ago we had simpler explanations of why things are going to pieces. Nowadays everything is more complicated - but the results are the same...
(i think HN needs a black bar, we are all screwed)
lightbendover · 3 years ago
Pretty much the only outcome when reprehensible greed meets company structures indistinguishable from scams and charlatans masquerading as leadership.
anshumankmr · 3 years ago
Why would someone buy an MBS after 2008?
ripper1138 · 3 years ago
All banks still buy and sell MBS.
anshumankmr · 3 years ago
That sounds like a bad idea,but I am no investment banker.
donedeals · 3 years ago
MBS is a critical part of the american economy. You wouldn’t be able to buy a house without it.
caddemon · 3 years ago
The problem in 2008 wasn't really MBS it was the way they were packaged.
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.
notfromhere · 3 years ago
MBS is not the problem here. It’s not 2008.
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.
caddemon · 3 years ago
It is pretty predictable that they would experience a bank run given interest rates going up though. They locked the money up for way too long so it would've impacted the interest rates they could offer, meaning people would want to move their money outside of any panic instinct. Maybe if it were a bit more spread out over time they wouldn't have entirely collapsed, but they put 40% of their deposits in these things, it still definitely would've stung.
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.
kovacs · 3 years ago
It was stupid to not hedge that interest rate risk. I mean, the Fed telegraphed their moves well in advance. I don't work in finance but it doesn't take a genius to see how that dynamic would play out if that's your job. Not something I would've thought about till now but if banking is your business, you tend to think of ways it can break and this seems as elementary as anything if your job is to ensure solvency in all conditions. I just hope other banks weren't this stupid.
robertwt7 · 3 years ago
Please correct me if i'm wrong since i'm not a finance guy,
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.
jcmontx · 3 years ago
Not if they’re forced to sell at a low. I don’t know how big are the losses though.
gst · 3 years ago
> 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-...
zenlikethat · 3 years ago
I mean. If you’re a startup that just had $10 million locked out and can’t make payroll. It doesn’t matter that you’ll “get your money back”. You’re toast.
leoh · 3 years ago
Good grief. Simplifying this to “they took on tons of deposits and felt the need to make risky unchartered investments to retain their existing level of returns” is just so stupidly greedy. JFC, I think here of a ship with a heavy keel; only for the captain to order cargo many multiples the weight of the keel to sit above deck.
Why can’t so many folks who are doing well enough just act with basic common sense and integrity these days?
emkemp · 3 years ago
Nitpick: The Fed isn't selling bonds. Maybe they meant the Treasury?
zenlikethat · 3 years ago
Yea that bugged me too ha ha. The Fed doesn’t issue any bonds.
stephen_g · 3 years ago
It’s probably not material to the overall picture, but just for accuracy, the wording of this is inaccurate - “As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital”
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).
wankle · 3 years ago
If that's even mostly true, it sounds like the SVB was set up to fail. It almost sounds like like Biden is trying to crash the US economy.
sacnoradhq · 3 years ago
Lincoln Savings and Loan, LTCM, Bear Stearns, and now: SVB.
chewz · 3 years ago
> - This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.
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.
gigatexal · 3 years ago
Hedging maturity and interest rate risk is literally the only thing a bank needs to do. (Okay not literally but come on you have more or less one job: assure assets are secure and generate some yield safely).
tibbon · 3 years ago
Time to test if the regulation after Bear Sterns was sufficient. Surely it was enough to prevent issues as promised
standapart · 3 years ago
Probably safe to say: Stripe isn't going to be able to raise a couple bil to pay tax liabilities in this environment.
rvz · 3 years ago
I'm having a feeling that Stripe is totally fucked and tangled in this situation.
From Atlas, employee stock option taxes and it's IPO fundraising might be all on the line.
fairity · 3 years ago
The bigger story here will probably be the follow-on effects, assuming it takes a long time for uninsured deposits to be recouped.
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.
plandis · 3 years ago
My wife is a fan of these emotional baby toys called Slumberkins and she noticed that they appear to have this problem: https://www.instagram.com/p/CpopLR2OxRU
diimdeep · 3 years ago
It's 17 largest bank in US that is $0.25 trillion assets that is basically collapsed. It is a big sign of possible hyper inflation and much larger banking system problems for the entire world, that is still relying on USD.
nemo44x · 3 years ago
This will be a day long remembered in the tech world. The next few weeks will be will be the bad kind of interesting. I hope they have enough assets to cover everyone.
entwife · 3 years ago
Are there any other banks that might be affected by interest-rate risk?
eddsh1994 · 3 years ago
Mortgage-backed securities strike again
chernevik · 3 years ago
I don't understand why anyone would park any sum larger than, say, $5mm in a bank deposit for more than a minute.
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.
cglace · 3 years ago
If you take an SVB loan you have to keep your money in SVB.
fundad · 3 years ago
SVB is a closely held organization in these funding terms. All the more reason VCs should be on the hook for the losses because managing risk is their business, their venture if you will.
timdaub · 3 years ago
Would love to understand if this is actually good financial advice here. My bank plays broker for all the assets I own and tbills are part of that.
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.
kgwgk · 3 years ago
The bank's assets will be liquidated. If you have a securities account at a bank those are your assets, not the bank's.
timdaub · 3 years ago
so if I own $1M in Treasury bills I'll get them back while if I own $1M in cash then I'll get back $250k?
kgwgk · 3 years ago
Yes. (I mean, you may even get more. But the important point is that in the first case you do not have a deposit and the bank doesn't owe you anything.)
perfecthjrjth · 3 years ago
with some caveats: if you keep $250k in your personal checking, another $250k in your personal savings, another $250K in a joint checking account, another $250K in a joint savings account, all accounts being with SVB, you will get $1M back. FDIC states "The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category"
chernevik · 3 years ago
But accessing the securities in that account might be delayed if the bank were in receivership -- the FDIC might freeze everything while it sorted out what's what. I don't know how that works.
If the securities are in an account at another institution that certainly wouldn't be a problem.
notShabu · 3 years ago
From reading the comments it's interesting how the failure seems to have occurred.
Not crypto hype, not bad loans, but long term bonds... It's sounds very conservative and responsible.
cjbgkagh · 3 years ago
Does the US and SVB have bail-in laws? There is a huge difference between a preferred creditor and being at the back of the line. As SVB has a rather low percentage of FDIC insured coverage at ~5.69% compared to a more normal 40-60% they can't rely on FDIC to get the more typical 90c on the dollar. But then again SVB might have been healthier than other banks so maybe the dilution won't be so bad. Historically depositors were first in line but bail-in laws (depending on how they're written) has the depositors balances converted to equity which is last in line. Such laws are totally crazy but didn't have an impact because few people knew about them so depositors were taking big risks and not knowing about it there by not demanding the interest rates needed to cover such risk. In effect it decreased the risk to the prefered debtors, preference shares, bonds, etc lowering the interest cost to the bank. Basically by transferring risk to those who don't know better the bank makes free money. The idea is sold as a win-win for taxpayers and bank health but only works as long as depositors stay ignorant. If SVB is bailed-in with conversion to equity then knowledge about that risk will spread quickly and the follow on effects could be very substantial. I think that can't be allowed to happen, which is probably why even with such laws depositors tend to be a bit blase. But if that does happen then holy shit look out.
cjbgkagh · 3 years ago
Replying since I can't edit: FDIC is issuing a Receivership Certificate which I am assuming has first cut priority so it does not appear to be a bail-in. Debtors and equity will get hosed, as it should be, hopefully they can avoid a bail-out as well.
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.
Animats · 3 years ago
The FDIC hasn't taken over the SVB web site yet.[1]
"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.
RaSoJo · 3 years ago
So SVB's problem was that they had too much of money?
throwawayapples · 3 years ago
SVB's eventual consistency was a bit too eventual.
ChicagoBoy11 · 3 years ago
Ha - got a nice chuckle out of that one. Good levity for a time that is needed, and nice and extremely topical CS joke to boot!
Animats · 3 years ago
Rippling, the payroll company, reports that payouts "in flight" may fail.[1] They used Silicon Valley Bank. They're switching to J.P. Morgan Chase.
[1] https://twitter.com/parkerconrad/status/1634237386564730882
vagab0nd · 3 years ago
Why can't this bank borrow from the Fed overnight lending market to fulfill the withdraws?
havkom · 3 years ago
I have no idea but maybe they are not solvent anymore (negative equity, even if small)? (I guess Fed will not loan to insolvent banks, but I do not know if that is the case?)
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?
havkom · 3 years ago
I asked ChatGPT now about the federal reserve loans alternative:
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.
rhacker · 3 years ago
I read SVB and for some reason my mind kept thinking SBF.. is there some connection outside my mind?
hn_throwaway_99 · 3 years ago
Question regarding SIVB shares. So now that the bank is in receivership, are all of those shares worthless (I'm assuming they are)?
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.
manquer · 3 years ago
Shareholders are last in the line of creditors, shares will be worthless only if bank is insolvent not illiquid as it currently is.
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
jasmer · 3 years ago
The whole f*ing point of banks is to hold your money.
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.
dpweb · 3 years ago
May be nice for an acquirer. Roll those long term bonds into very short term treasuries - take that big loss now - and earn 4% going forward.
Rates will eventually top out - they just had made a very bad bet at 1.5%/10 yr.
zamnos · 3 years ago
Eventually, sure, but we don't really know where. And neither does the Fed, though I'm sure they have ideas on how far they want to go. They don't control the jobs report though.
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?
IndoorPatio · 3 years ago
https://arstechnica.com/tech-policy/2023/03/silicon-valley-b...
jojosbuddy · 3 years ago
Question now, with other regional banks getting some contagion from this... For all those that pulled yesterday, where are they parking their withdraws? National banks (e.g. BoA), other asset classes, mattress?
champagnepapi · 3 years ago
this is terrible. Many people will lose their jobs... due to liquidity issues at their companies :(
voytec · 3 years ago
Fresh email from Alpaca (YC W19) on the matter:
elzbardico · 3 years ago
So SVB suddenly had too much money and too few people to loan this money to, so they had to buy a dangerous asset that could have exactly this problem with a raise on interest rates, where every sane person in 2021 would know that all that stimulus money would lead to inflation down the road and consequently a tax hike from the FED.
"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*hnburnsy · 3 years ago
Wow, this guy called it in January...https://twitter.com/RagingVentures/status/161582608803847373...
MrMan · 3 years ago
wow very solid. you could have found SVB in screen just by the LTD ration and HTM percentages and zoomed in from there.
dang · 3 years ago
Related ongoing thread:
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)
fintechjock · 3 years ago
You’re doing some really great work through all of this
dang · 3 years ago
That's nice of you! but that list is hopelessly out of date now.
ignoramous · 3 years ago
Sell off in US bank stocks after SVB solvency scare https://news.ycombinator.com/item?id=35091505 - March 2023 (22 comments)
mupuff1234 · 3 years ago
Any recommendations for analysts/blogs/etc to understand how this might unravel?
seizethecheese · 3 years ago
So, I would expect a secondary market for deposit certificates to spring up. Has it? If so, what’s the value of $1 in deposit certificates at SVB?
If it hasn’t, this would be a helpful way to provide liquidity to startups with SVB deposits.
firstfewshells · 3 years ago
I wonder if this has any effect on the deposit sweeping programs run by firms like robinhood, betterment and wealthfront. They promise 4%+ yields with freedom to take out your cash any time. A quick look at their partner program banks suggests they more or less transfer the deposits to the same set of banks.
havkom · 3 years ago
If someone has both a loan from and an account with Silicon Valley Bank, can they skip paying the difference of the amount they are compensated and their account balance towards the loan?
kmod · 3 years ago
IANAL but I think yes and no? I think you're still obligated to pay your loan payments, but there's also a concept of "netting" where in certain circumstances you are entitled to what you describe.
Definitely don't take my word for it, just throwing this out there as maybe a starting point for more research.
eftychis · 3 years ago
Just because there is a whole lot of misuse of terms that makes it hard to understand certain comments and debate over if SIVB is insolvent or illiquid, here are some definitions:
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.
opportune · 3 years ago
The maturity value of a bond/mbs is not really the true value at a given time between it being issued and maturing. You can treat it that way as a person holding the bond if you pinky-promise to yourself to not sell until maturity, but since banks need to periodically sell these to let customers get their deposits, that fiction doesn’t work for them.
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.
eftychis · 3 years ago
The regulation to my knowledge does require marking to maturity. Yes as I have commented elsewhere in this post, all banks do this.
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.
opportune · 3 years ago
Sure that is the regulation, but just because it’s a regulation doesn’t mean it’s all you should do for risk management, it’s just the bare minimum.
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.
twelve40 · 3 years ago
So it seems like they mismanaged their assets and their liabilities, taking on a lot of expensive deposits while investing at low yield.
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...
opportune · 3 years ago
This, these bonds/mbs are liquid instruments, they just lost value at market prices. When I make a deposit in a bank I am not purchasing a CD - I expect full liquidity. If the bank invested my deposit in something that lost money but should be worth my deposit amount in X years that is purely the bank’s fault, not my fault.
alfalfasprout · 3 years ago
Here's the more mindblowing thing... not only are those MBS and treasuries completely liquid... they're correlated to interest rates! The fed has been forecasting interest rate hikes every single quarter. Every. Single. Quarter. They had plenty of time to roll over these investments at a slight loss. Heck, even reducing their exposure 50% would have been enough to not end up in this mess.
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.
Randalthorro · 3 years ago
Reserve requirements should be based on current market price or at least last quarter or last year, not purchase price.
They would have had to recapitalize way earlier if that was the case.
fooker · 3 years ago
> Reserve requirements should be based on current market price or at least last quarter or last year, not purchase price.
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.
albert_e · 3 years ago
Isn't the requirement already accounting for change in market value of "assets" in the quarterly balance sheet?
alfalfasprout · 3 years ago
Apparently the MBS can be valued at their maturity price for the purposes of reserve requirements.
kurthr · 3 years ago
I completely agree, but not discounting the duration risk (which the big guys do and buy insurance for) and/or adjusting for expected inflation (kind of is the yield curve), and allowing banks (other than the Reserve Bank) to mark them to maturity assuming no inflation is pretty bogus.
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.
q1w2 · 3 years ago
Exactly - they failed due to one of the most widely predicted trends. Literally everyone knew interest rates would go up.
They absolutely deserved to fail.
The government allowing them to fail is actually a sign of the system working.
alfalfasprout · 3 years ago
Not even predicted trends... even when the fed said specifically they would raise rates they still didn't start selling their securities. Every. Single. Time. Nothing.
nerdponx · 3 years ago
> Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this.
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.
mancerayder · 3 years ago
> by most accounts, the fed is going to do another 50bps hike nex
Is this one possibly one of the 'the Fed broke something' scenarios that might lead to quicker rate cuts ?
alfalfasprout · 3 years ago
Not really. It's like a child repeatedly telling you they're going to pour some cranberry juice in a container. Then pouring some. Then telling you exactly how much more they're going to pour next time. Then they pour that. Then again. And being surprised when it overflows and stains your carpet.
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.
opportune · 3 years ago
It depends on how much agency you ascribe to the SVB team, and things could very well have been more complicated than the commentariat gives them credit for, but this was all happening in slow motion over months/a year (with an extra year before then when the writing was more or less on the wall).
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
shjake · 3 years ago
> 50bps
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
dubcanada · 3 years ago
How? Powell has specifically said they are going to increase rates higher and faster that implies more than 25bps. Just because it was 25bps doesn't mean the next has to be 25bps, that's not how it works at all. There is nothing saying it has to go 75 -> 50 -> 25 and cannot go back up.
shjake · 3 years ago
It’s usually how it works, I mean it would indicate that they are unable to plan ahead by more than one month which doesn’t look great at all…
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.
worik · 3 years ago
> This, these bonds/mbs are liquid instruments
It is all relative, not all relevant
Anything is liquid if you will lower the price enough
kgwgk · 3 years ago
Liquidity is defined as being able to sell quickly at a fair price.
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.)
worik · 3 years ago
Liquidity is being able to sell, it is relative to price
There is no "fair price". Price is a scaler, it has no morals or ethics
kgwgk · 3 years ago
Fair price in the sense of "you get the same price if you want to sell and if you want to buy".
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.
gregruss · 3 years ago
If you don't understand the sentiment, I recommend that you read about what happens in a "run on the bank". Too many large withdrawals at the same time results in a liquidity crisis. No bank in the country has enough reserves to pay all of its customer accounts at the same time; it's part of our system of fractional reserve banking. A massive spike in withdrawals forces a bank to sell long term securities in a disadvantageous environment, often for a huge loss. That undermines customer confidence and exacerbates the issue, causing more people to withdraw. A single person could bring the most successful bank to its knees in that environment, as long as enough customers believe them; it's a self-fulfilling prophecy.
twelve40 · 3 years ago
So my personal takeaway: pick a bank that is too big to fail, because if it happened to a bigger, non-niche bank they probably would have used the taxpayers' money to bail it out.
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.
kelnos · 3 years ago
I was talking to some friends in finance about this, and unfortunately most of SVB's customers couldn't just pick another bank. Allowing a company to open a business account requires a bank to do a lot of know-your-customer stuff, as well as taking on a bunch of money-laundering and criminal-enterprise risk (that is, there are laws that punish banks if they hold funds that are used for criminal activities, especially terrorism-related activities).
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.)
Randalthorro · 3 years ago
The same thing happened to all these stupid crypto exchanges and banks and yield scams.
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
lolinder · 3 years ago
I think we all understand why VCs telling people to get their money out caused or accelerated the collapse. But what was any individual VC supposed to do, tell their startups to just go down with the ship?
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.
hn_throwaway_99 · 3 years ago
"When there is a run on the bank, it's important to be first in line."
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.
twelve40 · 3 years ago
Yeah, he was basically asking for the customers to keep fronting his risky shit. I'm almost certain SVB CEO already knew what was going to happen in the next 24 hours after his "stay calm" interview - FDIC doesn't get dispatched like that for no reason.
https://www.barrons.com/articles/svb-financial-stock-sale-ce...
kelnos · 3 years ago
Fronting risky shit or not, on the whole, SVB's depositors would have been better off if every one of them had calmed down and done nothing right now. I would certainly understand if depositors would then build a measured plan to diversify their deposits over the next year or so, but while SVB certainly caused lack of faith, the reaction to that was what caused SVB to fail.
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...
twelve40 · 3 years ago
If you hold deposits at 4% and invest at 2%, that's simply not sustainable. The more I read about this, the more it looks to me they were simply going down no matter what. If everyone kept calm for a bit longer, what would have fundamentally changed?
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.
lolinder · 3 years ago
You're talking as though the SVB depositors are some sort of hive mind capable of acting in concert. They're not.
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.
jen20 · 3 years ago
While I agree that removing money from SVB if you could was A Good Idea, this:
> 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.
lolinder · 3 years ago
> Acting in concert means knowing participation in a joint activity or parallel action towards a common goal
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.
jgwil2 · 3 years ago
Yep, it's the Prisoner's Dilemma. The rational decision for the collective is different from the rational decision for the individual.
bostik · 3 years ago
What a strange game. The only move to win is to cheat.
roguecoder · 3 years ago
That assumes a level of individualism that mostly doesn't exist. It doesn't matter if you are first in line if your customers are 1,000th in line: your business is going under either way.
lolinder · 3 years ago
If your business isn't B2B, then any customers that you have are almost certainly fully FDIC insured.
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.
hn_throwaway_99 · 3 years ago
I'm quite sure that businesses that got their cash out of SVB yesterday, and can thus make payroll today, are extremely glad they did so.
Not all bank runs are systemic in nature.
jen20 · 3 years ago
That wasn’t the point: they can be as happy as they like about making payroll today, but they’ll be screwed when their customers don’t make their invoices tomorrow.
hn_throwaway_99 · 3 years ago
My point is that not all of their customers were also SVB clients. It's faulty logic to assume that everyone's screwed because one bank failed.
100001_100011 · 3 years ago
SVB-like bank runs can be prevented with VBS-like locking.
bombcar · 3 years ago
The solution is one they couldn't or wouldn't do - when you have a panic run beginning, you need some trusted very large depositor to add a ton of money publicly.
The fact that the Feds did not maneuver this is another interesting datapoint.
ignoramous · 3 years ago
If the CEO was correct, wonder why they sold £3m of their stocks in the weeks leading up to this? https://archive.is/0WCkf
deepsun · 3 years ago
How can they do that right before the earning call? I thought all insiders, CEO/CFO especially, have trading windows that open after earnings call.
hn_throwaway_99 · 3 years ago
It was done as part of a 10b5-1 plan.
randall · 3 years ago
>But toward the end of March, TP sales plummeted because the supply just wasn’t there.
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)
lolinder · 3 years ago
That article doesn't say it was just the supply shift, it says it was a combination of factors including panic buying. And other, later sources put a larger share of the blame on panic buying [0]:
> 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...
mtlmtlmtlmtl · 3 years ago
Ah yes, the classic "there can only be one cause" fallacy. Which is almost always wrong, especially in chaotic systems like the economy.
It's just never that simple.
kmod · 3 years ago
It sounds like you're saying "if you don't sell you can't lose money"
danielmarkbruce · 3 years ago
Of course the VCs who told their portfolio companies to pull the money were doing the right thing, by the people they are obliged to do the right thing by. They want to protect their companies and their investors. They'd be mad not to, and they are legally obliged in many cases.
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.
FiberBundle · 3 years ago
No, it actually was incredibly stupid and short-sighted by VCs. Here's Matt Levine on that point [1]:
> 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...
ignoramous · 3 years ago
> SVB probably would not have collapsed
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...
FiberBundle · 3 years ago
That was still part of the Levine quote. He references [1] in the footnote as an argument for that claim.
danielmarkbruce · 3 years ago
This is weak argument. You take your money out of a bank who dusts all their equity on a dumb bet. You don't wait around hoping everyone will wait around.
FiberBundle · 3 years ago
"Dusts all their equity on a dumb bet"??? They bought mostly agency-backed mortgage based securities! Those are high quality assets. All major banks have the same problem of sitting on hundreds of billions of dollars of unrealized losses in total [1] caused by fallen fixed income security prices. Yet you didn't have other businesses panicking and pulling their deposits.
[1] https://adamtooze.substack.com/p/chartbook-200-something-bro...
danielmarkbruce · 3 years ago
This is another silly argument. Credit risk is only one of many risks in banking.
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.
roguecoder · 3 years ago
"Common sense" that just fucked over the industry & a whole lot of workers in it.
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.
ETHisso2017 · 3 years ago
Where can we find a list of startups that have large quantities of deposits at SVB?
blastonico · 3 years ago
Better call Gavin Belson.
weatherlight · 3 years ago
So.... how many companies won't be able to make payroll in 5 days?
garbagecoder · 3 years ago
Crypto is the 2008ish version of 2000.
antoniuschan99 · 3 years ago
SVB is a commercial bank for tech/biotech, venture & private equity firms.
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.
WalterBright · 3 years ago
The WSJ lays much blame on the way regulators regulate banks:
https://www.wsj.com/articles/washington-is-the-systemic-risk...
Apocryphon · 3 years ago
And NYT calls out the weakening of Dodd-Frank:
https://www.nytimes.com/2023/03/10/business/silicon-valley-b...
beebmam · 3 years ago
Maybe the federal reserve should slow down its rate increases before we cause a crisis.
nemo44x · 3 years ago
Agreed. It has become cargo cult like at this point. The Fed needs to pay attention to more than inflation and consider the time aspect of money and interest rates. Creating unpredictable chaos to optimize around a single (important) metric is not going to create a desirable effect.
nickrubin · 3 years ago
Garry Tan: "30% of YC companies exposed through SVB can’t make payroll in the next 30 days. If you or your company are affected, I recommend that you reach out to your local congressman to get this on their radar TODAY."
ecf · 3 years ago
So is this going to be a “privatized profits, socialized losses” type scenario? Are taxpayers going to be bailing out this bank and the companies that use them?
justin66 · 3 years ago
If the bank's failure doesn't represent a systemic risk to the economy, such that the executive branch would be justified in propping them up, we're talking about a popularity contest. Who does the American public like less, nerds or bankers? might not play in congress quite the way the OP is hoping.
It might not come to that, since the specifics of the bank's financials will determine whether everyone eventually gets their money back.
cybersol · 3 years ago
HN thread on this is here: https://news.ycombinator.com/item?id=35100743
mherdeg · 3 years ago
Does YC hire a lobbyist?
computing · 3 years ago
Libertarian, "small govt" VCs squealing for govt intervention... It would be funny if not for tens of thousands of people who might not receive their paycheck next week.
muzz · 3 years ago
There are many ways to avoid that.
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.
arnonejoe · 3 years ago
So that's it, all 6500 employees are out of work? Is there any severance in this situation?
bagels · 3 years ago
They may get to continue to work for the bank in the short term, under new management.
sam345 · 3 years ago
lots of comments about bank but what about business clients ? WSJ says lots of startups in danger of losing their funds over FDIC limit ? Anybody having experience with that ? https://archive.is/tetbD
Here's a good thread https://news.ycombinator.com/item?id=35094447. on affect to startups
formvoltron · 3 years ago
Sorry but why didn't the VCs get together and bail this bank out themselves???
egiops · 3 years ago
Umm our CEO just posted on the team channel that SVB is our bank and we don't know what happened yet
What does this mean for the company I work for, are they screwed?
positr0n · 3 years ago
Worse case, imho, is your company has trouble making the next payroll since most of it's funds are temporarily inaccessible. And after the dust settles they take a ~10% haircut on all the cash they had in the bank.
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.
egiops · 3 years ago
Thanks for your opinion, this makes me feel a little bit better apart from all the doom and gloom
havkom · 3 years ago
Is this a good guess as any?
* 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?
havkom · 3 years ago
I dont see why this was downvoted looking at some historical examples:
* 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.
artur_makly · 3 years ago
So what happens to all the startups that were created via Stripe/ATLAS with an SVB account currently less than 250k in cash balances? Should they move their $ to a new bank? if so which one is recommended? thanks!
mtoner23 · 3 years ago
All those accounts are 100% totally fine, the fdic will move their money to a new bank. YOu can google how this works but its 100% seamless
arthurofbabylon · 3 years ago
I am most curious about the decision to park so much capital in such a low-yielding and long-term investment. Why?
bluecalm · 3 years ago
Why do we have this system that to be able to use your money in convenient way you have to deposit it in a bank that can then lend it out? Lending and keeping deposits should be completely separated things. There is no reason whatsoever for me to have a stake in lending business just because I want a convenient way to keep and operate my money. Charge me for that and don't do business with my deposits.
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.
tbarbugli · 3 years ago
Dumb question perhaps: why only SVB crashed? I imagine all banks in US had an influx on money deposited in the same period as SVB
b0tch7 · 3 years ago
Good q, wondering the same..
DonsDiscountGas · 3 years ago
Presumably they did a better job managing liquidity risk. Or maybe the recent tech downturn has disproportionately affected startups, so a bank for startups would have issues.
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.
1970-01-01 · 3 years ago
I've seen double black diamond slopes with less of a drop:
ecf · 3 years ago
With so many banks dropping 20%+ I don’t see how this doesn’t result in an economic catastrophe.
jaxomlotus · 3 years ago
We bank with SVB and our funds are now frozen. This is going to be an incredibly painful weekend of waiting for news. For anyone else impacted, wishing you the best - stay strong.
theonething · 3 years ago
If you don't have more that 250k cash in there you should be good.
jetpks · 3 years ago
Unless they needed to pay their employees or vendors today.
morpheuskafka · 3 years ago
Supposedly checks drawn on the old bank will still clear (presumably only up to the insured amount, though it doesn't say that) according to the FDIC. And the non-insured amount will be available in branches tomorrow via the FDIC-operated DINB. So in theory you would be looking at at most one business day late for payments if you are only concerned with the $250k part.
anon291 · 3 years ago
> And the non-insured amount will be available in branches tomorrow via the FDIC-operated DINB.
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.
oldgradstudent · 3 years ago
The FDIC said a bit more
> 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.
morpheuskafka · 3 years ago
That was a typo, I mean to say that the insured amount was available.
sneak · 3 years ago
Two is one and one is none. I am an individual person with no payroll to run and I bank in three US retail banks because they fail closed so often (most frequently from card use while traveling, but also for myriad other reasons).
iguana_lawyer · 3 years ago
You should have deposited your money into a bank that wasn’t going to fail.
steponlego · 3 years ago
We basically only have petty cash now at my small startup. LOL luckily everybody is WFH and we can always switch to paying in stock again like in the early days.
consumer451 · 3 years ago
Wow:
> 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...
subarctic · 3 years ago
This was new information for me, but somehow I don't share your surprise that there's a NY Times article that mentions that Trump is to blame.
consumer451 · 3 years ago
My surprise was not partisan in nature.
But that information is not going to come from Fox News, so the system is working as intended then?
dragonwriter · 3 years ago
I mean, really Clinton is to blame for Glass-Steagall repeal, but Trump weakened the measures put into place that partially mitigated the risk from the Clinton policy. Just as Clinton threw out the risk mitigation measure put into place after the Great Depression, Trump undermined the partial replacement put into place after the Great Recession.
If Trump deserves more blame, its because the reason the idea was bad was much more fresh at the time of his action.
consumer451 · 3 years ago
They can both be wrong in my book.
goolz · 3 years ago
Yes, thank you, why can't both sides of the isle be to blame?
Animats · 3 years ago
"System Maintenance Notice"
"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.
hinkley · 3 years ago
If we’re going to treat the US government like an underwriter, maybe we should allow the FDIC to charge fees that look a bit more like insurance.
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.
mouse_ · 3 years ago
FDIC -is- insurance, and it's not supposed to make money, it's supposed to cost money. It's a safety net for when shit hits the fan. There should, in fact, be things you're not allowed to do as a traditional banking establishment. And I'm sure this event will be precedent for more.
hinkley · 3 years ago
It uses a pretty fixed set of rules though. So every fifteen years or so someone finds a new way to go bankrupt while following “the rules” and the FDIC and the public get to foot the bill because they technically did everything right.
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.
auntienomen · 3 years ago
FDIC is entirely supported by fees it charges banks. It doesn't get money from the US taxpayers.
ecshafer · 3 years ago
I am naive in this area. But what I don't really understand is.. why are all of these start ups using Silicon Valley Bank? It's a relatively small regional bank, that happens to have a ton of cash. Why aren't start ups using Bank of America, Wells Fargo, etc. It's odd to me that >90% of a sector uses this one regional bank.
sneak · 3 years ago
As I understand it, it was a matter of personal connection. Also, if most/all of your vendors and customers are there, payments settle faster (historically).
NegativeLatency · 3 years ago
Some startups do use those other banks
bumbledraven · 3 years ago
https://www.fastcompany.com/90864382/silicon-valley-bank-was... :
> 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.
hayd · 3 years ago
> doing so was listed as a covenant of their debt!
why??
im_down_w_otp · 3 years ago
We used to keep all our operating capital in a different bank, but then we did a venture debt deal to bring some AR cash forward, and the terms placed on us by the venture debt lender required us to move all our money to SVB, where they already had systems & experience in being able to monitor the accounts.
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.
paulddraper · 3 years ago
> relatively small regional bank
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.
woeirua · 3 years ago
For those saying that depositors will probably only take a small haircut, it’s all going to come down to the recoverable value of SVBs outstanding loans. 40% of their assets were loans made to startups, their founders, etc. The value of those loans is inextricably tied to those startups accessing their funds at SVB.
Even _if_ depositors are made whole those loans could still be called in and wreck a lot of startups.
bhawks · 3 years ago
I would be very surprised that SVB would be able to write terms into their loans that gave them the option to demand immediate loan repayment (these would be puts not calls). Those terms would have to come with much lower interest rates for borrowers and in a low interest environment I don't think it'd make sense.
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.
woeirua · 3 years ago
I agree that its unlikely that SVB can call in the loans at any moment.
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.
bhawks · 3 years ago
If the startup has no operating cash the equity collateral has a known value of 0.
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.
ccorxi · 3 years ago
Funny there're still people and companies trusting bank with everything they got. Hopefully lesson learned
borgchick · 3 years ago
So when every country in the world started printing money like it's going out of style in the prime of COVID years, to help stimulate the economy, they effectively wrote the first few chapters of this story?
vivegi · 3 years ago
From SVB Financial Group's latest 10-K filing (Source: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d..., p12, Jan 31, 2023):
> 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.
dhosek · 3 years ago
It seems to me that there is an upper limit to a bank where they just cannot do business efficiently. If a bank has more deposits than they can grow their loan book, they’ve crossed that line. This bumps up against the too-big-to-fail problem we had in 2008 as well. If the banks can’t manage their growth, perhaps they should be broken up and/or have limits placed on their size.
dhosek · 3 years ago
And if you think about it in terms of what deposits look like from the bank side, every deposit a bank takes in is effectively money they’re borrowing. SVB borrowed more money than they could afford to borrow.
afinlayson · 3 years ago
I’d love to see a list of startups who bank with svb. If I worked for them I’d be saving my money
sacnoradhq · 3 years ago
Friends of mine who were acquired by VMware used SVB 2010-2015 because their investors preferred it.
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.
bravo22 · 3 years ago
Comerica doesn't look so great these days either. I expect something to pop off there in the next little while. I would diversify away from them as well.
bluefqcebaby · 3 years ago
идиотизм
kbrkbr · 3 years ago
Weren’t the events that lead to this a massive multiplayer prisoner‘s dilemma, with a large defect wave?
djfobbz · 3 years ago
Prior to joining SVB, CEO Gentile was CFO for Lehman Brothers GIB - https://news.ycombinator.com/item?id=35110431
chris123 · 3 years ago
Fiat and fractional reserve ponzi. Watch them get bailed out, privatize the profits, socialize the losses. Same as ever. Let's see.
readonthegoapp · 3 years ago
If you knew your bank was going to fail in about six months, what would be your plan of action?
set up your stock sales.
hire a risk officer.
what else?
graderjs · 3 years ago
I was just thinking it would be cool if FDIC posted status reports like an incident update thing…when you have you know a technical issue or an outage this kind of like a running stream of commentary and updates posted by the company if they’re handling it well.
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.