How deep is the rot in America’s banking industry?(finance.yahoo.com) |
How deep is the rot in America’s banking industry?(finance.yahoo.com) |
Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there. Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves.
It is remarkable how badly SVB managed to fuck this whole situation up. But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.
I work at a different bank. The rates charged to banks for FDIC insurance have been based on the assumption that the FDIC would cover depositor losses up to the insured limit. By choosing to cover all losses even above the insured limit, we have chosen to put the burden for paying for those losses on all of the other banks (and indirectly on those banks depositors). I suspect this means that you will not see the interest rate on savings accounts go up as much as it might have otherwise.
I'm not saying this outcome is terrible, perhaps it was the best solution for the system as a whole. But using an insurance fund to cover a kind of loss, the insurance was not sized to address is not a choice that has no impact.
If I were in charge of everything (perish the thought!) I would probably have insisted that the uninsured portion of the deposits take some haircut. If depositors had gotten back 90% or 98% of their deposits instead of 100%, it might have increased the chance in the future that institutions with 100 million+ bank accounts would pay more attention to the risk profile of the banks they choose to invest with. Banks are rewarded mostly in proportion to the risks that they take; having a force other than government regulation that pushes in the opposite direction can be very useful.
Do you have some reliable source about it?
(NOT a "look at it logically" or "here's how my health insurance works, why would the FDIC be different", or "do your own research" or anything else that's some random internet comment - I'm looking for real meat about this claim).
But isn't it likely to cause more bank runs if depositors lost money? So in a real sense, many other banks were saved from going under, by assuring depositors that their money is safe, whichever bank they're at.
My understanding is that other banks have massive unrealized losses as well, due to the steep interest rate increases. So they're all kind of vulnerable.
I'd also add that covering uninsured depositors isn't new behavior for FDIC, at least as I understand it. The mechanics of how it was done here are different than in previous instances.
> "Insured cash sweep is a safe and convenient service that provides FDIC insurance on large balances while giving you access to your money, as well as the ability to earn interest. Choose between demand accounts, which offer unlimited withdrawals, and money market accounts that permit up to six withdrawals per month."
I've heard some claims that SVB was offering incentives to depositors who kept their funds in one lump account, is this true and if so what's the benefit to SVB from doing that?
(Note that I’m not trying to suggest that you were not harmed, I just want to make sure that I understand the source of the harm.)
1) Is this outcome better than (expected) panic on the banks and bank runs? There still seem to be runs going on e.g. First Republic. Are the markets “calm” now?
2) Because insurance fund is not designed for the task it is currently experiencing, how the gap will be plugged?
3) Could this cause depositors move money from smaller banks to larger ones, and then larger banks just lend this money back to small banks w/some nice profit?
How much extra are they taking from your bank to cover the delta between what the FDIC will recover and what they have to pay out?
How were you harmed specifically?
> you will not see the interest rate on savings accounts go up as much as it might have otherwise.
Bullshit. Interest rates for savings accounts are and have been an absolute joke. Are they going to become a more hilarious joke? Probably but seriously, who cares?
> I'm not saying this outcome is terrible, perhaps it was the best solution for the system as a whole.
Yes, it is the best solution, otherwise you'd have written a completely different statement if the bank run went viral and you would have been really harmed.
No sensical person is concerned with the interest rate on savings, it is nearly zero and effectively negative.
I dont believe anyone should have a single account with 100 million dollars nor should banks allow that, but they do. Perhaps part of the problem is that the $250k coverage is a value that should adjust annually and coverage should be relative to each account as opposed to each account holder
There are all kinds of legal and practical reasons that this isn't really a fair comparison, but again, it's not really about the specific policies, it's about a sense of where the government's priorities are and its flexibility seeming to only bend in one direction.
Bet on every number but 0 on a roulette wheel
Not 0: you and your investors make 3 billion this year
0: you and your investors lose your 20 billion you have invested, and the government bails out your depositors who kept 200 billion with you
This stylized bet is a good deal for the investors and management and bad for the government. Sometimes investors lose everything but it's still a very good bet in expectation. This stylized example is a case of "privatized gains, socialized losses".
Then the question is: was SVB reckless? They could have been less reckless by covering their interest rate exposure, but the fed has an equity to deposits ratio requirement, and getting any equity to invest requires a return. IMO they should have either diversified their business or stopped opening new accounts for tech companies because when depositors are uninsured and concentrated in the same industry, that is risky.
First SVB was bailed out by FDIC funds which all banks pay into.
Second, to say 'privatized gains, socialized losses', you are assuming that banking is like gambling, with no value being created through the banking process.
Even if banks were being very very safe, they would still make money by lending out deposits. (Whether that is good or bad for society, is another question, which I would argue the answer to would be bad).
Great point. To rephrase a bit, they lost money...and then kept doubling down by not cutting their losses (?hoping things would turn?) They finally tried to do something about it, but it was too late to matter.
So Management has to invest in something and it has to have some interest. I would love to hear an investment thesis that would have been able to deploy over $100 billion in new capital during the low interest rate 2018-2021 time period that wouldnt have been ill prepared when rates drastically increased in 2022-2023.
Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).
https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
It seemed self-evident to me, based on the explicitly stated limit on FDIC insurance, that if you had an amount of money over that limit, you really need to have a plan to deal with that risk, and people who failed to do so should suffer the consequences of their poor decisions. As things stand, the people who did spend the time and/or money to provision for that risk have suffered for it.
I think what many people are having a hard time with (myself as well, sort of...) is how the rules were changed out from under everyone in yet another example of how the rules don't apply to the politically connected.
If that were the case, they wouldn't have had to raise emergency funding last week. The assets were indeed impaired. Hiding the true values via AFS accounting treatment doesn't magically make the dire circumstances sustainable.
This misinformation needs to stop.
A distinction between held to maturity assets and market priced assets makes sense though, there should be some consideration in the calculation about term though for sure. The question of that though seems very complex to answer.
Further: the "market value" thing here is complicated. The reason there is separate available-for-sale and held-to-maturity accounting for bank assets is that, in the ordinary course, the assets are held --- the only reason you sell them is because of extrinsic distress. There isn't anything wrong with the agency MBS portfolio SVB had; they're worth less because if you have to sell them in Q1'2023, they compete with even more attractive bonds and are discounted accordingly. But if you just hold them, they pay back dollar for dollar, and that's what the bank normally does anyways.
The issue isn't that too big to fail happened, because its immaterial after the fact. Its that little punishment was actually done for bad management, and not only that, the situation is left worse because we have a banking concentration problem.
If you look at the number of banks chartered after 2008, its dropped to negligible amounts going into the business, and regulation has only been increasing. You have to lie to get a charter because no reasonable person would accept the personal liability without something in it for them. The requirements are that onerous.
Everything is now so big it will certainly fail, and that's what people are angry about. There is plenty of evidence over the past 100 years (and longer if you go further), that as sector concentration goes up, so does corruption, frauds, and other crimes that are largely based around deception at our loss. It becomes easier to increase the scope, and get away with it when setting up dominoes to fall (so you can profit on event's you manufacturered).
The fed aren't doing there jobs, and worse, it looks like they could never meet their original charter to begin with. They aren't government, they are private bankers.
So they try to justify bailouts as a way of saving the system, and really its just acting as a wealth transfer to the elite rich whose pockets they are lining via a money printer at the expense of the public taxed by inflation.
> Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead.
Part of the problem is that the system that enabled them to end up in this situation is the erosion of Dodd-Frank. The systemic risk to depositors isn't going away. If pissant SVB (relative to it's contemporaries) can lobby congress effectively imagine what other banks are up to. Speculation? Sure you can say I'm speculating. But the apple doesn't fall far from the tree.
> Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves.
The issue of course is that the total balances required the FDIC to dip into special capital reserves in order to make the bold faced lie the taxpayer won't front this.
Anyone who knows the surface level details of a bank know that these FDIC "loans" are effectively collateralized by the taxpayer. Banks pay an assessment. With what money? The depositor's money. A perfect example of a hidden tax.
> But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.
Credit Suisse is in big trouble and getting a bailout. Several other banks have collapsed in the wake of SVB. The only people not worried have their heads buried so deep in the sand only their feet are showing. Calling Chicken Little because you believe it was only SVB and not a massive market level problem suddenly beginning to show it's head is not a very effective argument.
I'd ask you to consider the economy that allowed these levels of capital to even exist. Years of ZIRP and near-ZIRP allowing effectively free money. As it stands, the mainstream media currently blames the fed for this and implores it to once again lower rates. The problem of course is that there has been no sign of stoppage in market speculation and we are only now starting to see VCs really tighten their belts. History doesn't repeat itself but it often rhymes and terrible, borderline predatory, VC funding practices begin to approximate NINJA loans in the limit. There's no reason to believe it's just SVB and there are plenty of reasons to believe we have very serious economic concerns ahead of us. Only difference this time is the criminals responsible will be wearing Patagonia.
That being said, I could be wrong and not aware of the specific Dodd-Frank policy that, if followed, would have made SVB safer.
The fed doesn't need to lower rates necessarily, it could simply allow all member banks to exchange low interest rate long term bonds for new higher yield bonds and pay the Fed for the spread with a loan. That would reduce the liquidity risk if the member bank needs to sell some or all of its bond portfolio on short notice to fund depositor withdrawals, it would allow the Fed to hold the low rate securities to maturity while being fairly compensated by member banks.
Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).
https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
My understanding is that SVB would have met the Tier 1 capital requirements even without the 2018 revisions to Dodd-Frank, for the reason digitaltrees said: The bonds it purchased are considered highly liquid and safe.
If you haven’t lived through a couple of these things then it’s perfectly understandable.
Back in ‘98 there was a huge monetary problem going on in SE Asia but pets.com could take a loss on every sale and make it up in volume. Everything was fine until it suddenly wasn’t.
In ‘08 cracks were starting to become obvious but housing prices never go down, keep selling $500k houses to someone making minimum wage. Everything was fine until it suddenly wasn’t.
Today you have massive layoffs in the tech sector but the CEOs are just trying to appease activists investors, nothing to worry about because tech companies never fail. That Dot Com Bust? Well, that was Web 1.0 and we have it all figured out this time, nothing to worry about. Everything is fine…
And depositors to their dismay are learning they are about as much loved as Wall street bankers, corporate execs and billionaires. More than any particular moral deficiency I think people are finding a general lack of self-awareness common among SV startup founders infuriating.
Exactly this. I even read a comment from such a founder saying essentially: "Why are people so angry, don't they know I oppose brogrammer culture?" As if brogrammer culture were the meat of of the reason why people are sick of the hypocrisy of the capital class, or even American startup culture specifically. Totally out of touch, completely clueless. Utterly tone deaf.
Particularly, the decision to change the rules in the middle of the game and make depositors over the FDIC limit completely whole again is clearly an unfair favor to the rich. Normal people don't get to have the rules changed mid-game in their favor. If all the depositors were merely semi-wealthy commoners with only $300k in their accounts, they would have only gotten $250k back. Nobody would expect the rules to be changed in that scenario. But if you're much richer than that, then the rules are apparently just guidelines. It isn't fair and that's why people are mad. Anybody confused by people being mad is completely out of touch, and voicing that confusion is only going to make people even madder.
That was amusing.
"S..See! A normal person!"
The only party that made out like bandits is the SVB management that piled on the risk in the first place -- but investors are ultimately responsible for letting them do that and investors have been punished.
While there wasn’t counterparty risk with those assets, there was duration risk. And their mistake seems to have been not selling those the instant the Fed publicly committed to killing inflation with higher interest rates. It should have been clear to them that their exposure to duration risk was rising, and they needed to restructure back in 2021 or early 2022 to mitigate that.
Disclaimer: was one of them, though not nearly as aggressive as I should have been.
This kind of assumes that the risk matrix of an executive is singularly indexed on the long term viability of their institution. But the short term gain of bad behavior is still in full effect. Bonuses for the years up to this crisis have already been paid and were probably inflated based on the banks over performance due to its riskier posture.
And the consequences have been softened. There's a very good chance that the people responsible here have had their guilt assuaged by the reduction in impact. They are probably less likely to become the kinds of pariah that they probably should because while we should always consider decisions in the context they are made, humans seem to always adjust their assessments to final consequences.
I'm in agreement that the decisions here on the part of the government are probably the wisest in this context. But this crisis does hint that perhaps we need to reconsider the structure of this system a bit.
1. Their reputation. How much less likely is it that a board of directors would think twice before hiring them to be a steward of shareholders' assets?
2. Their egos. How much less likely is it that people will be willing to invest time delivering projects whose value can be wiped out by poor risk management in the same way that SVBs has?
Most people are unaware they are loaning money to a bank when they open a bank account.
You've effectively said that bank deposits are now risk-free, meaning that the government is back-stopping 9.2 Trillion of deposits (40% of all deposits).
Can banks still provide a yield for these guaranteed deposits? Are they still able to loan out these deposits? What are the new capital requirements for these deposits, are depositors allow to take their money out when a bank run is happening?
We don't know
The upset seems centered around the perception that rules were changed ex post facto to protect political donors.
I get that impression from HN, from newspapers of all ilks and biases as well.
69% of SVB employees' donations were to Democrats over the past three years. <https://unusualwhales.com/news/svb-donations>
The bank donated $74 million to Black Lives Matter. <https://nypost.com/2023/03/15/svb-donated-73m-to-black-lives...>
But the bailout that people are complaining about is for all the other banks that aren't SVB. There are many insolvent banks out there that would otherwise have had to raise capital at punishment prices this year. Those banks are unambiguously better off with the Fed taking their underwater collateral at par, and this is a clear subsidy to (non-SVB) bank shareholders.
The surprising part is, if we were willing to do this, why not just revise the Fed's discount window rules? They discount from market value. Why not change that to face value for Treasuries?
Then add in some vocal VCs' hypocritical stance on bailouts coupled with Surveillance Valley's overarching hypocritical stance on freedom, and here we are.
It seems that in this day and age of instant communication and social media mobs, even three days is too long for the precise fate of deposits to remain unknown. IMO the right way to proceed is to calmly raise bank capital requirements, create a few new tiers of FDIC coverage (eg coverage on accounts between $250k and $10M is funded from assessment on accounts between $250k and $10M), and institute criminal penalties for executives of banks that go bust beyond their capital buffer (otherwise nothing reigns in TBTF accounts that have too much variance to be absorbed by higher FDIC tiers).
Does that have anything to do with this article at all? First few lines of this article: Banking is a confidence trick. Financial history is littered with runs, for the straightforward reason that no bank can survive if enough depositors want to be repaid at the same time. The trick, therefore, is to ensure that customers never have cause to whisk away their cash.
This article is about the possibility of the total loss of confidence in the banking industry leading to a run on a system that can't handle it. I understand the context you meant when you said things like "the system works, why is everyone upset", but I find those a pretty poor choice of words regardless with this much fear circulating.
This "somebody" is the government aka the central bank putting these bonds on their balance sheet. This is a new form of quantitative easing.
If the Fed did take them, it would be a drop in the ocean. The FED is already holding 2.7 trillion dollars of underwater mortgage-backed securities they bought.
They have six trillion dollars of other securities they are holding.
Nobody can do a bank run on the Fed and they control the interest rate, so despite their colossal unrealized losses, they can wait it out.
Meanwhile, all the benevolent VC techbros had to do was collectively agree to just not withdraw all of their deposits from SVB en masse, and they couldn't even muster that. How deep is the rot in SV?
First, it's not a Prisoner's Dilemma if the parties can communicate with each other:
https://en.wikipedia.org/wiki/Prisoner%27s_dilemma
> Two members of a criminal gang, A and B, are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communication with their partner.
Second, the traditional framing of the Prisoner's Dilemma disregards the aftermath, and the lasting reputational and trust consequences of betrayal, which would be substantial for any VC that failed to cooperate, or outright backstabbed the others.
https://www.microsoft.com/en-us/research/publication/byzanti...
1. What's going to happen to risk management at banks now that the government has shown themselves willing to backstop all deposits. Is there really any reason to spend money hedging risk?
2. What's going to happen to the bond market? Bonds are generally understood to change in price in a way that keeps yield equal to currently available fixed-income securities. However, with the Fed's new BTFP, the value of bonds is always par, apparently.
3. What are the banks going to do with their new liquidity? The Fed is essentially giving banks a fully collateralized $1 in exchange for $0.80. That's a lot of free money.
As to question 3, BTFP feels like a small dash of QE after pushing QT a little too hard and too fast. Banks will probably just put that extra cash into short term treasuries to shore up their balance sheet to protect against declining deposits. So I guess we should expect that extra cash to push short term yields down. Short term yields have already dropped a bit though, so maybe that is already priced in.
As for the QE/QT performed by the Fed. The Fed's balance sheet has already increased by 300 billion, which undoes like half a year of QT. JPMC estimates a total of 2T in liquidity. Not only will that undo all QT, it will bring the Fed balance sheet to new all time highs.
This is the closest the West can be to the East. We finally had the "rapprochement"!
https://www.proshares.com/browse-all-insights/insights/bond-...
But even then: Some professor was on Bloomberg today wondering about the hedge strategy. The hedge providers may be at risk if all of the sudden there are a huge amount of sales there. But this only happens during heavy withdrawals...
In turn, VCs/founders/executives promoted SVB. And now they don't want to be their own counterparties on a bet gone wrong.
https://twitter.com/one4thecashbag/status/163533710637676953...
Maybe I'm just naive when it comes to how these systems work, but couldn't SVB have just... done nothing? Nobody was compelling them to purchase any bonds at the time. Sure they have pressure from stockholders to make money, but if the deck was so stacked against them as everyone seems to think it was, it seems like a financially-literate management (which I would expect out of a bank) would have had the idea to merely wait a bit to see what the Fed was going to do.
(Everyone and their mother was predicting a crash from 2020 to 2022, so it seems reasonable that a bank of all institutions could have made the call to be patient and see which way the wind blows...)
Again, maybe this is me just being naive, but "They should have just been patient" seems like a mantra applicable to a lot of companies lately. Car companies cancelling all their chip orders at the start of the pandemic, only to scramble and re-place them as demand surged; tech companies hiring like crazy in the face of a supposed talent crunch, only to have massive layoffs a year later. It seems like companies keep making "impulsive" decisions to try and capitalize on short-term trends without any eye for the long term strategic view.
Yes, "being patient" might mean they don't make as much money as they could have if they jumped at the first sign of a change, but... Do they have to? SVB could have continued making money hand over fist in the long run, but now they no longer exist. Google and Microsoft and all these corps could have saved a lot of corporate face and internal morale, had they just waited out the supposed hiring crisis that never quite seemed to materialize: now they have a pile of irritated employees and everyone I know at a major brand seems to be holding their breath for the next round of layoffs.
There's a trend of hyper-efficiency in the name of maximum profit that I feel like I've been seeing kind of everywhere, and that seems fine until the moment the music stops. Maybe I'm just the kind of person who naturally hedges their bets, but I'm constantly blown away by how rickety entire companies appear to be sometimes. What am I missing? Are there just insufficient incentives to be conservative with resources and decision making?
The Greg Becker of the article (SVB CEO & president) was in SF Fed board of directors until Friday [1] and successfully lobbied for lax rules for banks like SVB. The current risk officer worked at NY Fed [2] and at Fitch Ratings (!) and Deutsche Bank [7]. Previous risk officer was director of Freddie Mac [3]. Yellen was the 11th President of the SF Fed [5] and the current president is her protégé [6].
They knew exactly what they were doing. The Fed looked the other way. They sold a lot of stock in the past month [8]. They are very well connected into the Fed and Treasury. I doubt anybody will get any kind of serious legal troubles.
[1] https://www.reuters.com/markets/us/ceo-failed-silicon-valley...
[2] https://www.svb.com/news/company-news/svb-hires-kim-olson-as...
[3] https://www.linkedin.com/in/laura-izurieta-1370144
[4] https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...
[5] https://en.wikipedia.org/wiki/Janet_Yellen
[6] https://en.wikipedia.org/wiki/Mary_C._Daly
[7] https://nypost.com/2023/03/13/silicon-valley-bank-execs-work...
[8] https://twitter.com/unusual_whales/status/163455502148748083
And this is just scratching the surface.
The rot is at the core, the Federal Reserve. My parents saved money in a savings account for their eventual retirement. It was a prudent and accepted way to do things. Over time, with Reagan and deregulation of everything that followed, their savings rate effectively dropped from 5-8% to zero. That income was expected to fund part of their retirement, and it was stolen from them in order to prop up wall-street.
Those zero and near-zero rates distorted fiscal reality in the US and elsewhere they've effectively broken the system. At some point, we'll be bailing out whole countries to keep kicking the can down the road, and that's when things will be too big to save and we get to The Great Simplification.
I only hope we've got alternatives to fossil fuels figured out at scale and somewhat in place, otherwise civilization could collapse in World Depression II.
> The prospect of unlimited deposit insurance, whether de facto or de jure, is leading to a large-scale reconsideration of views among even “moderate” banking scholars.
I imagine that's usually how real policy progress happens: interesting ideas are always getting thought up and proliferated, but it takes a big upheaval to move them over to being really possible.
[1]: https://www.crisesnotes.com/every-complex-banking-issue-all-...
Until we categorically prevent banks from attempting to "satisfy shareholders" with returns, these occurances will continue in one form or another.
Banks dont need to be sexy or shake up the industry. We need boring people in banking making okay-ish money.
Though DIF has only $500 million in assets and only services member banks in US state of Massachusetts.
I'm not an expert in this area, but in what way is this true? Interest rates are still quite low by historical standards. The 80s saw massive increases to a much higher level (approaching 20%) in a shorter amount of time. There were large jumps in the late 60s and early 70s as well.
They have all the data. If I was CEO of a bank I'd want to be able to get up in the morning and have some idea how much risk and what types of risk my bank was assuming. Especially in a dynamic environment of Fed interest rate changes. I would think they would be doing it all the time. Isn't that what computers do? Simulate scenarios like - What does our bank look like if the Fed raises rates to %2 etc. It makes me feel like they truly just don't want to know so they can do whatever they want.
They're super involved, requiring a full-time department to prepare for and run. That's a multi-million dollar recurring expense a bank with tens of millions of dollars of profit may not be able to afford.
Many of the takes further complicate by implying that they had no assets. Which just feels like lying at this point.
Sure, if everyone had just waited for the 10 year bonds to mature to access their funds their bank was in perfect shape.
—edit—
Assuming they could come up with enough money to pay the over market interest rates on deposits while also seeing their money flows reversing because of VC capital drying up.
Re effective system: Maybe dinosaurs had to swallow rocks to digest their food, but we don't have to maintain this practice just so dinosaurs can keep existing. The system needs to be deprecated in favor of better tech that takes it out of the hands of dinosaurs. Legacy banking and gov/political class need to be replaced by a better solution.
Which is...?
Hell, even with just layoffs the outrage on this site has been deafening. I can see shareholders and employees of SVB rightly being pissed off. It's not your place to tell them they should not be.
I mean... yes it is. I'm against zeroing depositors of failed banks, because (for better or worse) we've decided that banks should work like restaraunts and you shouldn't have to do a complicated risk assessment about how safe one is before deciding to do business there. But shareholders are a different story. If you invest in a company and they do dumb things and lose your money, that's at least somewhat on you - you're supposed to know what the company is doing before you invest, and potentially push for management changes if they're doing stupid things. Insulating shareholders from the bad decisions of their companies is an utterly unacceptable degree of moral hazard.
But they're not.
The next banks all get to keep their equity because the fed is putting out a lifeline (the new BTFP facility) so that they won't be zero'd out the way SVB was.
This is what I'm mad about. FDIC insures to $250k in normal cases. It should not have been used to insure depositors for their full deposit amounts here.
Had a good chuckle at that part in particular. I think it's the plan that a lot of people are having a hard time with.
I mean, this comment almost wrote itself.
Presumably they were onto something, as they jointly received the Nobel prize for economics last year for this contribution.
What I am confused about is - if everything went "according to plan", then what did happen? Is it really all peter thiel's fault? Surely someone as smart as him saw something that made him do what he did, given that it was a pretty massive thing to do.
Of course they don't! Look at some charts of newspaper advertising revenue over the past few decades. There's one word that best describes it: apocalyptic.
Where did all that advertising revenue go? Google and Facebook!
Shareholder money is still on the line?
Not saying that to justify SVB or anything, as they're in the business of securing people's money long-term, and they made bad decisions that they had plenty of time to course correct for (rates have been continuously rising for well over a year, with a clear goal of lowering inflation to around 2%, and you can see how slowly that was lowering and predict roughly how high that would get).
Car companies also had a big faceplant moment with cancelling chip orders, but we were in the midst of a novel global pandemic that no one really knew how people were going to react to, or how big or how long it would last. Health officials were predicting around 100k total deaths in the US, and we blew way past that.
But for tech hiring I can clearly see why they were like 'let's take all this zero interest cash, get a bunch of people, use them to get a competitive advantage, and then when everything starts to unwind we'll just lay people off'. It's a shitty thing to do to people, but I get the reasoning.
I know they all claim they didn't see this coming and 'take full responsibility' or whatever in their layoff announcement/apology letters, but behind closed doors I bet they knew exactly what they were doing, at least the vast majority of them.
I've had quite a few opportunities in my life that I didn't really leap on 100% like I should have, and as a result those opportunities slipped by, and I didn't end up making that hay at all as a result, the opportunities passed and I'll have to find some other way to make that hay.
If you ask me, the real problem is the fact that 30 year fixed rate mortgages with super low rates were being handed out like candy. Who in their right mind would seriously hand out a 30 year loan with a fixed 2.6% interest rate? It didn't cross their mind that just maybe sometime in the next 30 years interest rates would go higher?
It was completely obvious to me that whoever owned those loans was going to be sorry sooner or later. Turns out it was sooner. And in the meantime we got ridiculous house price inflation to boot. Why did those loans exist? Not because they make sense, but because of government policies intended to promote homeownership and pump up property values.
Clearly not safe. IMHO anyone buying 10 year treasuries in the last several years is an idiot. Those rates were guaranteed to rise, as they could not fall below zero.
Next up: anyone who bought a house in the last few years is gonna get hurt. We knew rates would be rising, and hence prices falling. So far it's mostly sales volume dropping near zero, but soon...
And then when people are broke, many will raid their retirement investments. The stock market has benefitted for decades from people blindly (via 401k funds) dumping money into the market. More buyers than sellers equals rising prices. Guess what a jump in sellers causes...
And then after the market drops, people with money elsewhere will want to buy, resulting in one more shift of money from here to there.
The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.
The bond market already is built to handle this, and we should stop treating demand deposits as this Schrödinger collateral. If you want to insure lending, insure the lending directly, not with consumer and business cash. I know there are no simple solutions to complex problems, but this all seems very unnecessary when you pull the system apart conceptually.
> codexb
Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself.
The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.
There are no completely safe investments.
SVB was killed by the boring part, not the startup banking risk.
Since 1971 everything (all relevant policies) were geared towards increasing the amount of debt in the system. It's no surprise that student debt, mortgage debt, credit card, auto loans and whatever else were ballooning.
Regular banks not making risky bets would go against it, so it will not be done.
It's hypothetical. The FDIC is likely to recover a vast majority of the uninsured deposits through asset sales, people just want to be outraged.
At smaller banks, 60-75% of uninsured deposits are usually recovered by FDIC and those banks went out of business for bad balance sheets, not bank runs due to duration mismatch.
We've gotten so used to assuming every statement is spin on 'you're getting screwed' that people assume it's always the case.
Of course the banks are only happy to have ANY justification to complain and not raise saving rates, and blame the Federal Government.
But there have been no indication yet that the FDIC will be drawing on the insurance fund to cover the depositors.
What’s unforgivable is why these large depositors that didn’t tend this cash for short term operational needs didn’t have the funds in govt securities in an insured brokerage account at a trust company…
Where many venture backed companies got hung up though is that the terms of venture debt provided by SVB required the borrowers to keep use SVB as their bank…
One member of the SVB c-suite was the CFO fr Lehman in the run up to that catastrophe. So, BOD don’t appear to care. They keep on hiring each other, making massive mistakes, but walking away with $$$$ in bonus money.
That's like asking how you were specifically harmed as a result of there being one more CO2-spewing pickup truck in the world. Bad things amortized over millions of people are still bad, even if the harm to any individual is too small to verbalize.
Honestly, it looks like in a year or two, the Government will make money off of this because as soon as interest rates come down the securities will go back to book value.
The real winner here is Goldman, since they bought the bond portfolio from SVB that triggered all of this at a discount and can hold to maturity and interest rates may need to come down or a broader asset exchange program implemented to stop any contagion, so those bonds will return to book value sooner than expected.
There are literal products to insure money in excess of 250000. But people who are getting bailout now were not using those products. They were not paying for insurance in excess of that.
The system did not worked purely as designed. The system socialized loses of well connected rich people.
Government will get back the number of dollars equal to the par value of those bonds. Inflation between now and then, however, will mean that in real terms there will have been losses.
And from where this money is coming from you think? From you and me and everyone else because costs of doing business are transferred to clients, so to the whole society because almost everyone have a bank account.
Note: AFS treatment reports the BOOK VALUE not MARKET VALUE
You can read this: https://corporatefinanceinstitute.com/resources/accounting/a... to understand AFS vs MTM treatment.
Losses are reported, definitely not clearly. Losses are hidden under "Other Comprehensive Income." If you want to be transparent about it, then it should show up in the Profit and Loss. You'd choose MTM accounting treatment. Not choosing MTM accounting treatment is literally hiding the losses into a vague bucket of income.
The idea that this was somehow hidden needs to die. People knew they were vulnerable to a run not due to some shady rumor Network, but because they reported exactly what they were doing plain as day.
They were making low but positive interest profit on those assets. They simply locked up too much money in a long-term investment to withstand a coordinated Bank Run. This was a real mistake, but it is not at all about secret accounting.
Anyone who can do simple arithmetic could determine that they were at risk in a bank run from their published documents. Most of the world simply did not care because they did not think the Run would happen
"Simply".
WaMu - acquired, depositors got 100 cents on the dollar
IndyMac - 50 cents on the dollar
Silver State - 11 cents on the dollar
Depositors have not always been made whole in the past. Calvinball has certainly been played in the past, for IndyMac the FDIC limit was retroactively raised from 100K to 250K.
That's what people are pissed about. The Calvinball rules.
And we know how that works out, if you're in the in group, you get paid, and if you're not in the in group, you get fucked.
As Black Flag once sang, "We're tired of being screwed. Revenge!"
They worked together to put out a joint press release, and Biden gave a down-to-earth, rough-and-tumble speech about protecting depositors and kicking the failed executives and bad-luck shareholders to the curb, because this is "how capitalism works". It was an unusually blunt attempt to preemptively push back at the perception that this guarantee of FDIC-uninsured deposits will be branded a 'bailout'. (I predict that this attempt will fail and this will widely be perceived as a 'bailout' in casual and political discourse, which is the exact forum at which they've aimed this message.)
After 2008, the public gained awareness of the consolidation -- both forced and emergent -- that occurs in response to these sorts of crises. Public opinion views these outcomes unfavorably, because they seem unfair and irreversible, albeit no palatable alternatives have emerged that are acceptable to both to the public and government and industry incumbents.
[1] https://apnews.com/article/silicon-valley-bank-failure-depos...
Buyers of banks in the last round got screwed. Dimon has been vocal about this. They inherit a string of liabilities that take a decade (or more) to resolve. Add to that, the number of private equity buyers for a $200bn bank is limited.
No, they would have gotten $250k + ~90% of the balance. Maybe even 100%. Annoying but I wouldn’t care enough to take to twitter about it.
To explain why: it’s an overall loss of a few percent. The same as the daily fluctuation if I had kept the money in the stock market or whatever.
Months of work undone by loaning to banks which made risky investments betting against high interest rates.
Any uptick on this graph is equal to printing money which causes inflation. They can wait it out while we collectively pay the cost of this increased money supply.
Does that resonate with you? Or do you still have no sympathy for all those people?
https://rooseveltinstitute.org/wp-content/uploads/2021/08/GD... (Central Banking for All: A Public Option for Bank Accounts By Morgan Ricks, John Crawford, and Lev Menand* | June 2018)
This might have been true for the past ten years or more, it's not true now. You can easily find savings accounts now which offer over 3%, and it's going up as the fed continues to raise rates.
This still might not be the best investment when you consider the high inflation, but it's great for emergency fund type accounts that need low risk, high liquidity.
I cant believe this got downvotes...
Relying on customers to check their bank, besides being fairly impractical for all but the largest and most sophisticated customers, is just going to trigger bank runs as soon as customers get any whiff of a problem.
I don't see the problem with unlimited FDIC provided the regulations are congruent with that. If you want to go the private route for better interest rates and take on the regulatory burden yourself, you can always go with an uninsured bank. If you just want a simple place to stash a few hundred million, why make you jump through hoops?
What I don't understand is why start-ups were apparently keeping millions of dollars of capital in a bank account rather than government bonds or other instruments, given that the FDIC limit was well known.
The assumption that an operating company should understand fixed income pricing dynamics, have a POV on future FED interest rate moves, and dive into each potential banking partners' asset duration is an interesting one, especially when most of SVB's deposits were made during a period of perpetually falling interest rates, where duration mismatch helped banks.
If banking is to be boring and minimally profitable, that leads us to the idea that it should be a utility, not a risk taking venture, no? And if the Fed interest is covering the costs of banking, aren't we already all paying that cost as taxes?
[1] https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
It doesn't matter that prices might recover in the future. I'd argue they might not -- and if anyone believed otherwise they would buy up the assets at inflated prices (why arent they?!) SVN rolled the dice, made bets, the value is way down and...they didnt have enough money to allow customers to withdraw money. That is a fail. They needed to raise a lot of cash, they didnt/couldnt raise enough. That is a fail.
Further, they underwrote tons of LoCs for startups which are underwater due to down-rounds. That isnt a temporary impairment, that is a permanent impairment.
Their customers are burning funds (as most VC-funded companies do) and VC funding is down, so declining balances via continued withdrawal is the natural state they need to support (even in the absence of a bank run.)
This is absolutely false -- there is no guarantee of this. Agency securities pay more than treasuries because there is a risk of default (never in aggregate, but pass-thru component cashflows i.e. individual homes.) Further, there is a risk that upon default, the home isn't of sufficient value to account for the lost principal. If anyone has doubts of the potential for default of agency securities, the mortgages underneath these bonds are all publicly displayed monthly: https://singlefamily.fanniemae.com/applications-technology/f... and you can see defaults also.
>> The only impairment they have is that they pay less interest in the interim than other available bonds, because their rates were locked in before the interest rate spike.
This is a third of the story.
Second third of the story: they may less interest than advertised due to defaults/delinquencies
Third third of the story -- and most important: their value has gone down, so in the immediate term, the bank depositor cannot withdraw money (because the bond cant be sold at book value.) It is absolutely not OK to tell bank depositors to wait 10yrs while a bond bays them back little by little. Bank depositors should be able to withdraw money at any point they want.
Granted, it's sometimes hard to establish market value. In the case of assets with genuinely low liquidity, the market value is somewhere above the bid and probably below the ask. Accounting in this case comes with error bars, but it's not really justifiable to approximate the value of an asset outside of this range.
Here's an example. Suppose a hypothetical bank receives 100 dollars in deposits at an interest rate of effectively 0. They use 85 dollars to buy a bond that matures in 1 year that pays 90 dollars, and keep 10 dollars in cash as reserve requirement. They pay themselves the extra 5 dollars as bonuses. They have met their fractional reserve requirements, and according to your scheme, their holdings should be valued at 100 dollars. Are they solvent?
All bonds get held to maturity by someone (unless they default, but that's not the problem here). The FMV of the bond is determined by the value of the bond's remaining cash flows to that person; so if the FMV went down, then that should be a clue that value was fundamentally lost, regardless of who's holding the bond.
Maybe we should admit Congress will never repay the national debt and simply have the Fed purchase new federal debt issuance. The current complicated charade just pays banker bonuses.
Duration risk is specifically tested for in larger banks. The stress tests SVB successfully lobbied out of would have saved them.
But I just can't wrap my head around the decision making process at SVB. I wouldn't expect to be paid high 6 figures to run risk at a $200B bank and I knew not to be in long bonds. hn_throwaway_99's comment about the legality of hedging their HTM book makes me wonder if they just reclassified it to reduce their costs in 2022. (Only credit and servicing risks can be hedged)
And that gets to the real issue. Current regulations actually encourage rate risk at banks <$250B, because you can either pay for insurance or just mark it HTM. The majors don't have this choice and have to eat the extra cost.
It is not that way in EU banking due to the Basel framework and IRRB. At least they have reporting standards and don't allow more than 15% to be at risk in the Supervisory Outlier Test (SOT).
Edit: I went looking and PWC has a nice overview...
6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge.
... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities.
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
In reality, they didn't hedge, and they used the HTM accounting treatment. So the accounting still said they were fine, since that permitted them to ignore the loss when interest rates increased; but accounting doesn't change reality, so they actually weren't fine and they blew up.
People who bought a house as an investment might be in trouble, but people who bought a home to live in are making out like bandits with their 30 year fixed mortgages.
It would of course be deeply unintuive to a regular person and likely very unpopular if rates went negative enough to require it to be reflected in consumer banking (eg negative rates on a checking/savings account). But I don’t think it’s impossible and we may see it in our lifetimes.
That is just a nitpick though because I think the US public as-is would throw a fit if it happened, making it unlikely. Fully agreed that purchasing a 10y bond at 1% was boneheaded given plenty of people predicted interest rates to need to increase to fight inflation (come on, just because the fed said it was transitory for a while, doesn’t give professionals an excuse to blindly take that at face value). The effective yields could have been so much higher just keeping the cash uninvested or in short term treasuries, then purchasing 10y bonds after the rate hikes started or stabilized.
Yeah that is much more obvious in hindsight but it’s not like it was a fringe position even in 2021
Earning a nice bonus last year is a reasonable consolation prize, but I'd wager most execs would rather have had a lower bonus and the ability to continue to manage an operational bank through 2023.
> Earning a nice bonus last year
Why do you think this was limited to last year? I suspect they made risky moves again and again and again and got paid out again and again and again.
You should learn that you the moment you put a deposit in the bank, the funds become the property of the depository bank. As a depositor, you are a creditor of the bank.
People are mad because the rules were changed in the middle of the game to serve the interests of a select few (mainly VCs and the startup crowd).
Those supporting this bailout seem to have some of the least knowledge on how banks work.
I'm fine with banks being not for profit institutions run by the government. Allowing people to safely store their money is baseline civilization. If banks are private, the government is going to have to back them up because you can't have the operational accounts of nearly every business in the country getting wiped out randomly.
Putting a ceiling on FDIC insurance is effectively an outdated idea that doesn't work.
Take the example of a company that keeps payroll in a cash account. Let's say that company has 100 employees. Should the FDIC treat the account as belonging to 1 person or 100? If you say 1, I say you are irrational.
Companies with treasury departments already know this. They can put money in money market funds, CDARs, cash sweeps, or any other vehicle to protect their cash. There are multiple ways to hold cash with very low duration risk that does not involve putting it in a bank.
FDIC is not an outdated idea. It is just the reality of the current financial system because it would require an excess of $20 trillion dollars to insure every deposit in the banks.
I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.
With that said, it's good they got punished for poor decisions given their depositor profile.
If it was a short period of time (a week?) this was going on, then sure. The emperor darting to the bathroom without his clothes on is unlikely to be a scandal after all.
But even if fed rates dropped tomorrow those bonds will not recover to par, because inflation on their principal amounts has already happened, and their interest rates are too low to ever recover back how much they have lost value barring truly exceptional deflation.
So unless they somehow come up with even more cash on hand to be able to avoid ever realizing those losses (good luck when everyone starts drawing down savings and boomers start retiring more and more), they’re boned inevitably.
Deflation wise, the fed will fight THAT even harder than the current inflation fight they are doing, and that’s relatively easy to combat - print more money. It’s why they’ve been printing money since ‘08.
Since the expectation is that inflation will continue for some time of course makes the math and present value even worse, but there is no plausible situation right now where the expected future dollar value of those bonds will be high enough to recoup a large percentage of their purchase value in today’s or a future dates currency.
That value is gone.
No, whether they are safe or not depends on what you are using them for.
If you have to mark them to market, they aren't safe investments. If you can hold them to maturity, they are safe investments.
If you're willing to lock the depositors up for 10 years and pay them back when those assets mature, sure. But that probably wouldn't be seen as an acceptable way of making those depositors whole.
Someone's got $100 of deposits with you today; you're holding a 10-year bond that will pay $102 over the 10 years but currently trades at $87. Yes you "can" "pay" "them" "back" eventually, but what if they want to pull their deposit today, perhaps to buy a bond like the one you were holding? If you do the accounting based on today, they're entitled to $100 and you only have $87; if you do the accounting based on 10 years' time, they're entitled to $115 and you only have $102; either way there's a shortfall.
Investing involves risk. Sometimes that means losing money, even if you are the bank.
Bonds have only ever been considered ‘safe’ from a repayment perspective (it’s the only thing they really get graded on risk wise), and even then junk bonds are a real thing. The value of the bond shrinking due to inflation is always a unquantifiable future risk that typically gets priced in price/interest wise by the buyer/underwriter - but with the fed suppressing rates? All bets are off.
Those who got those 2% mortgages though have a lot to be thankful for. As long as the zombie hordes don’t get them in the coming debt apocalypse anyway (/s).
The reason a $100 par bond paying 2% sells for (I don't know, say) $87 when interest rates are (I don't know, say) 5% isn't that the original bond is impaired. It's that the same $100 buys you a bond that pays 3% better, so nobody will buy the bond without a discount.
But the bank doesn't normally sell the bond to begin with. That's why people say banks "borrow short and lend long". What the bank is supposed to do is hold the bond until it matures and is paid back in full. The only reason SVB can't do that is that all its depositors simultaneously demanded their money bank, so it couldn't wait the bonds out. But other institutions can do that waiting.
It will be a loss for the bank, but that seems better than total collapse. Banks are ultimately companies that take calculated risk to make money, if you can't afford to take an occasional loss then you shouldn't be in a risk based business.
And if we are going to expect them to be guaranteed in the future insurance rates must go up, not just to cover more things but to cover the riskier behavior it creates.
If we aren’t going to cover them 100% in the future then apparently it’s true that there are not just different classes of banker but different classes of depositors.
About 50 cents on the dollar.
The typical depositor in post-2008 bank failures (all tiny, until SVB and Signature) got about 75 cents on the dollar.
1. which seemed pretty likely, I know people who over the weekend were planning to pull all of their money out of a regional bank and put it in one of the 4 super banks Monday morning)
As far as I know, regulatory requirements require/encourage holding good bonds but if the FDIC is going to start treating gov/muni bonds of any maturity length as good as cash, then there's less reason to hedge against interest rate risk.
Edit: after reading this article posted by lordfrito below I stand corrected. SVB executives knew the risk and took it anyway. But not for personal gain but to maximize firm value as it allowed higher profit which increased the valuation (so yes they benefited personally, but to a greater extent than just a few million in bonuses).
https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
As long as the holder does not intend to sell the bond, believes that is more likely than not going to be a position where it isn't forced to sell (to generate working capital etc), and there is no likelihood of a credit loss, then the bond is not OTTI.
The subjective assessment of whether you're "more likely than not" going to be forced to sell the bond is the pivot on which this whole thing tilts. It's probably a good question whether a simple balance of probabilities is really where that standard ought to be.
Why, I do not understand.
All bank risk assessment regimes measure both credit and interest rate risk. Measuring 1 in isolation is idiotic for now obvious reasons.
[0] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
The actions are borderline criminal. To avoid a $36M hit they literally bet the bank. This was a step beyond regular incompetent mismanagement.
From the article:
In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there.
Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings.
Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.
I love HN because many of us actually listen to each other and debate in good faith, helping each other sharpen our views.
Glad you found it helpful.
> that was one of the lowest risk assets they could invest in and still get enough
Was it? They had enormous deposit inflows and were struggling to scale, so their costs should have been undersized by default. They really ought to have been able to survive off the pennies that weren't in front of the steamroller.
So part of the problem is that SVB had a reasonable-looking balance sheet of HTM bonds, then had to sell some at market, which flipped their entire portfolio to MTM and destroyed their balance sheet.
E.g., a simple balance sheet:
Assets Qty. Par Market Total
-----
Mark To Market Bonds 10k $1k $0.8k $8Mn
Hold To Maturity Bonds 1M $1k $0.8k $1Bn
Total $1.08Bn
But, oh shit, now all my long-term bonds have to be marked to market, so now my balance sheet looks like this:
Assets Qty. Par Market Total
-----
Mark To Market Bonds 990k $1k $0.8k $792Mn
Total $792Mn
Otherwise you are totally right that it should have been no problem to cover the shortfall by selling off some of the treasuries, even though they would have had to take a haircut on them thanks to the Fed jacking the rates so fast.
Interest rates take a random walk from now until maturity.
Under fair-value accounting, the balance sheet value starts at fair-value (obviously), then gyrates, but tends towards face value, and reaches it at maturity, due to time decay of bond premium. As you said yourself, every bond eventually matures in the absence of credit risks and fair-value can't indefinitely diverge from face value.
Under amortized cost basis accounting, the balance sheet value starts at fair-value but then increases every year until maturity, at which point it is also face value.
Surely you acknowledge that these are the same? They both describe the exact same cash flows.
This is banking in general though. Any bank will struggle if a significant portion of deposits suddenly outflow. SVB was unique in that it had relatively large balances concentrated in relatively few depositors. This made it especially susceptible to a bank run. Of course they knew this and should have handled their risk appropriately.
Also, according to reports, they were very close to getting bridge financing. The run caused the financing to fall through, and we all saw what happened.
There is the run from ‘can’t liquidate fast enough’, and there is the run from ‘can liquidate fast enough, but don’t have enough value if they do’.
The first one any bank is susceptible to, the second one is a bad bank issue - and it means that any sustained rate of deposit outflow is going to eventually implode it, as they’ll run out of value at some point regardless of how slow the draw down is.
That’s because that second scenario is essentially forced ‘mark to market’, which unlike ‘stress tests’ and regulator driven accounting standards, can’t be gamed. That’s the real issue here.
SVB was in the last category, but everyone is pretending it was in the first category because this problem is systemic due to fed reductions in interest rates for so long. We’re trying really hard to not look behind the curtain because it’s too scary.
The really interesting thing is easy fed cash has caused this issue globally. Global interest rates have been suppressed everywhere the USD touches, even China. Now that they’re ending, the bill coming due is a global one.
That’s why the fed is willing to take all these bonds at par for cash - they recognize they created this mess and don’t want it to spread, as it will implode the system and break the orderly turnaround they are trying to accomplish.
Pain spread over years in ways the system can absorb without causing an out of control spiral is the goal. Retirees eating dogfood (or starving), and mobs of angry unemployed 20 something men burning cities are the thing they are trying to avoid.
The thread here asks: "who's paying to cover SVB's uninsured depositors?". Isn't that the answer?
Maybe enough depositors will leave money in the SVB at below-market interest rates that it will earn its way out of the hole. The FDIC has given depositors a special incentive to, since by guaranteeing all funds they've made the SVB the safest bank in the USA. If the depositors don't, then the FDIC will take the loss, and socialize it over all participating banks.
Per my other comment, the HTM accounting is a distraction. That accounting was compliant, but accounting doesn't define reality. The holders of long-term bonds take a real economic loss when interest rates increase, regardless of whether they sell. This may seem unintuitive since the cash flows don't change, but it couldn't be otherwise--if the bond is worth par, then why aren't any buyers willing to pay that?
Not really. They were sold 1 month after the 10-Qs were filed, which is shorter than the holding period most reputable banks require for their executives, and the 1O-Qs had only that one sale in them.
They may have "made out like bandits" in taking advantage of equity holders, and perhaps without duty of care to depositors... but all that is true regardless of the subsequent actions. They did not "make out like bandits" because of the Government's actions. And I think that's important, given the criticism levied against the "bailout".
That's the loss that took down the SVB, and it's a real economic loss. If the SVB's depositors behaved like the simplest textbook model, then as soon as short-term Treasury rates increased, they'd insist on correspondingly increased interest on their deposits. The cost of that extra interest would be the SVB's loss--the cash flows in from the bonds stay the same, but the cash flows out to the depositors would need to increase.
In reality, I understand that depositors are generally "stickier" than that, leaving their funds at their existing banks even when bank interest rates increase slower than Treasury rates. That gave the SVB some hope that they could earn their way out of the hole, passing the loss slowly to their depositors over time by paying below-market interest rates. That's the behavior that HTM accounting roughly models. The SVB's depositors had no economically rational incentive to accept that though, and they didn't.
... but SVB expected to have positive net-interest-income with increasing rates. Look here:
https://www.sec.gov/Archives/edgar/data/719739/0000719739230...
A 100bp increase in interest rates would've increased net-interest-income by 1.8%; a 200bp increase by 3.5%. This is typical for banks, because lending rates go up more than deposit rates as the base rate increases, increasing interest margin.
So the idea that this is about NPV of future cash flows is not right.
Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
In other words, if the FDIC's current funds can't cover the bill, an extra fee will be levied on banks to make up for it.
The problem, as it were, isn't some lurking or hidden loss, it's arguably that these answers aren't currently available and we don't have the slightest idea in the public what will happen if profits result from the bailout venture. This shouldn't be a "heads-I-win-tails-you-lose" redux.
The FDIC's current funds were $128.2 billion on December 31 2022
SVD had ~$200 billion of deposits December 31 2022 - but obviously had significant withdrawals prior to being taken over. Likely < 100 billion remained.
Beyond the special assessment, they almost certainly need to raise a new assessment to cover $250k+ deposits. Full insurance can't be on a discretionary basis.
Buy Banana futures while it's still cheap.
Since 1933.
It always has been.
I agree that it is important to argue I good faith and help each other sharpen our views. Thank you for providing an important resource in the discussion.
While I still feel the instinct for vengeance or rage at SVB is counterproductive given that you showed evidence that the leadership of SVB knowingly, willfully, and with reckless disregard for the consequences, decided to invest in more long term securities than they were advised by their own team does justify some of that instinct.
That being said I still feel the system worked as expected. I think, given human nature as on display with SVB, the regulatory environment should go back to the stronger standard but I also think getting bank failures to 0 isn’t a laudable goal. Some failures will happen and as long as we eliminate the motivation for a run on the bank the system should allow for a degree of risk and failure.
Of course most of the money left in a self-sustaining bank run, not directly for the reason above. There's a quite rational reason for someone to start that run, though. That reason wouldn't exist if the bank were well-capitalized on a MTM or NPV basis.
The SVB's expectation in that 10-K is a model of depositor behavior, predicting that depositors will leave their funds at a MTM-insolvent bank earning below-market interest for long enough for the SVB to earn its way out of the hole. That prediction obviously didn't come true. So doesn't that just mean their model was wrong, and shouldn't be relied upon elsewhere either?
The regulatory regime is one that makes depositors whole when doing otherwise seems likely to cause a major crisis in the banking system. Which we've had for a long time. It merely seems inconsistent because evidence of "likely to cause a major crisis" differs by current possible crisis.
As https://www.bitsaboutmoney.com/archive/banking-in-very-uncer... explains in painful detail, the reasons why they likely concluded that there is systemic risk. But long story short, rising interest rates caused the banking sector to have $620 billion in unrealized losses. Unsurprising since the interest rate rise was *INTENDED* to make people lose money, making money more valuable relative to goods and services, which reduces inflations.
But $620 billion is substantially more than the $130 billion in the FDIC insurance fund. It is substantially less than the $2 trillion in equity in the banking sector, but both losses and equity are unevenly spread. Therefore there are banks under water, and others that are fine. But nobody is sure which are which. And given cash outflows from worried people, we were about to find out the hard way. And once there is a bank panic, even fine banks become not fine.
Like Wile E. Coyote, running off this cliff works fine until you look down. But we've looked down. And now the whole sector needs saving. Thus these actions.
They will go back to normal behavior once the crisis is over.
What's the difference between the FDIC insuring all deposits at US banks directly and US banks doing it themselves by forming a complete graph? (Other than there being a clear upper limit in the latter case, which is currently greater than $1b per account.)
But financially I think it's the same. If 400 customers each use 1 bank each, then a single bank failure means the FDIC needs to make whole one customer.
But if every customer put 1/400th of their wealth into each of the 400 banks, then FDIC has to cover all customers for 1/400th each.
The cost to us as depositors/taxpayers is equal.
It seems like SVB was perhaps a little more exposed to interest rate risk than others, and had a pool of depositors that were more likely to withdraw significant funds in lockstep.
1. Illiquidity. For example, there might be few people anywhere in the world with the expertise to accurately value some weird loan to a startup. If those prospective buyers are busy or undercapitalized, then the market may become inefficient, with best bids well below FMV. If we wait for those expert buyers to research the startup's credit risk, to raise more money themselves, etc., then the bids will eventually come back up to FMV. This is the classic "It's a Wonderful Life" style bank run, and was an important dynamic in 2008.
2. Time value of money. Assuming positive interest rates, a dollar later is worth less than a dollar now. The NPV of a given cash flow will remain constant, which means that its current value will increase steadily with time. When interest rates increase, the NPV of a future cash flow decreases, and the FMV of the corresponding asset decreases. This isn't a market inefficiency. If you assume that money is lent at interest and no riskless arbitrage opportunities exist, then it's just how money works.
The SVB's problem was #2. There's a liquid and orderly market for their assets, trading at prices close to those predicted by a simple NPV calculation; that price is just lower than the SVB wished. Hold-to-maturity accounting allowed them to ignore that, but that didn't change the economic reality.
The only thing we can be certain of is shareholders are wiped out and general creditors will take a significant haircut.
I guess the FED could have bullied some banks into buying the securities at a higher rate, but the books themselves are transparent.
As long as the rates on the bond are > than the rates SVB is paying its depositors it will be fine.
For the Treasuries, this is known but not public. For the MBS, a theoretical value is known but not public. (The federal government has to sell these securities. It doesn't make sense to announce the holdings so they can be front run.)
They state clear as day that they had 91 billion of securities, currently worth 76 billion in their hold to maturity portfolio.
In their avalable for sale (AFS) portfolio, they had 28 billion, currently worth 26.
They break it all down by asset type, MBS, treasuries, foreign debt, ect. They break it down by the duration, eg <1yr, 5-10, 10+ yrs
There is no mystery. I dont know why people keep saying this.
Check out page 124 onward if you are curious: https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d...
Seems like having everyone use at least 400 different banks achieves one of the core goals of the FDIC guarantee - making small/midsize banks viable and preventing everyone from piling into the big four megabanks.
If customers are only utilizing a single bank, and the FDIC will insure all deposits regardless of amount, they would need 400 times as much than would be necessary if the balances were swept.
> Insurance only pays out . . . if a bank fails
That's a good point. So one difference is that while the money is equally insured in both cases, the payout dynamics would change. Very roughly, the amount of a payout might be expected to go down in the cross-bank case (smaller account values, but then also more accounts per bank, so it isn't quite so simple), and the likelihood of a payout might be expected to go up (higher chance of failure with more and smaller banks). But this all depends on how interlocked the banks become; in the extreme they could end up functionally a single bank.
The first thing that came to mind for me is somewhat related: Spreading deposits across banks is relatively better for small banks and worse for big ones, since the small banks gain deposits and the big banks lose them. So you can definitely argue there's some advantage to keeping a lower insurance limit, although it gets murkier when we bring behavioral considerations and "too big to fail" into the picture.
This is new with SVB. I get the whole "250K minimum" argumemt, but this is the first where we are seeing major 10M++ depositors getting 100% guarantees.
I don't see issue with spreading money across smaller banks - other than perhaps they may not be able to assess risk as well as larger banks. But again, SVB.
I think one thing to keep in mind is that most bank depositors hold far, far less than the 250K guaranteed by FDIC. By a large margin. Id be surprised if the average was above 10K. There are $17T in deposits across the country [1]. The FDIC at the beginning of the year had $128B in balance as insurance to depositors [2].
[1] https://fred.stlouisfed.org/series/DPSACBW027SBOG
[2] https://www.fdic.gov/analysis/quarterly-banking-profile/inde...
Yes, categorically. No, not specifically. 5 and 10 years produce different answers, particularly with current convexity. (It is fine if you're trying to get broad-grained answers.)
Potential buyers over the weekend got a list of CUSIPs. The public does not get that until ex post facto.
We still have a very good understanding of the "delta" and the magnitude of the loss, if not with crystal clarity.
Nearly all of the unrealized loss was in securities more than >10 years. They had 15.1 billion in unrealized HTM losses. 14.7 billion of this had a maturity >30
9 billion is agency MBS
2 billion in agency collateralized mortgage obligations
2.3 billion in commercial mortgage backed securities, and
1.2 in municipal bonds and notes.
They actually have relatively few treasuries, and none in their HTM portfolio. Unrealized losses on treasuries are ~1 billion, And mostly treasuries from treasuries less than 12 months ( contrary to what most people report).
I really recommend actually looking at their filing. It is extremely detailed.
https://d18rn0p25nwr6d.cloudfront.net/CIK-0000719739/f36fc4d...
That doesn’t matter, because they’re federally backed. But it’s a crucial difference to appreciate less than one week after a run.
The question is in what way(s) does it matter whether deposits are insured without limit in a single account, which is new, or with limits when spread across an arbitrary number of accounts, which isn't? If one costs 1x, why should the other cost > 1x?
It's a serious question. FDIC assessment rates aren't as simple as tax brackets and for example it's possible that the act of spreading deposits across more accounts in more banks would increase the fees paid into the existing system anyway.
It matters because only 1 (SVB) bank failed. If those depositors had their money swept across multiple banks this point would be moot.
Edit: If deposits are spread about multiple banks, the FDIC does not need to carry as large of a balance to cover the loses of any single bank, which results in less indirect fees to depositors of different banks.
If the deposit is 250k across 100 banks, and only 1 bank fails, FDIC is only on the hook for at most the 250k.
Now multiply that by number of depositors. It's RAID for banks. You're gaining fault tolerance by decreasing the impact of any particular failure.
Just wanted to say this is such a great analogy. Thanks.
I'm not willing to do it to win a hn debate, but there's enough public information to estimate the size of their hole within a billion or two.
Claims that they were evasive or hiding things in their financial reportings are off base. Claims that it would be impossible to get an idea of their Financial losses are also off base.
Nobody (in this thread) claimed this? And I disagree with the “within a billion or two,” though do think within a few tens of billions is accurate. The problem isn’t the specificity of the filing per se but the delay; that isn’t the balance sheet anymore.
It is clear from the statement that we are almost entirely talking about 30 year MBS purchased in 2021.
3% 30yr MBS were about $105 throughout 2021. These were about $89.2 at the end of 2022 (10-k filing), and about $89.4 today.
You might say, "but they may have put it 30yr MBS!". The thing is, you can validate this by the ammount they lost from 2021 to 2022. It also doesnt make much of a difference if they bought slightly different rate MBS at 2.5% or 3.5%, as they track pretty closely. Lastly, MBS value havent changed much since the time of the 10-k filing.
To get "a few tens of billions" difference, they would have had to tripple their losses on MBS in a time when MBS value has been stable.