I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk.
We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .”
Also consider the past 10 years have probably been the friendliest 10 years to startups ever.
I don’t think startups will have a harder time banking in the future.
This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. Buying 10 year low yield securities and not hedging them against rising rates.
Plenty of banks would love to have the deposits of startups and VCs.
I bet a bank like Mercury or some other ones will grow to take SVB’s place.
I think the attention is put on some, likely, bonds backfiring. Not going into questioning how a 20y old bank would buy very long bonds as historically lowest returns. There is even more likely some bad lending in there in the order of billions that either have or are going going to materialise as defaults. And that's plain'n simple having to wipe numbers from the books, and those books aren't going to look good.
Banks take deposits but also loan with a 10x or even more ratio. Not difficult to imagine a SV bank would have lended a lot of cash, with marginal interests that aren't covering the actual risk.
Only speculation on my part there but needs to see further unwinding to bring some clarity or where the hole mostly comes from.
Until then, the narrative sounds far better than pointing out a widespread bad credit issue that other banks are also going to face in the coming months.
> has nothing to do with the startups using the bank
The proximate cause is short-term funding from risky depositors, i.e. start-ups. The ultimate cause was insolvency. (Yes, not illiquidity, simple illiquidity is solved by the Fed’s discount window.)
> This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank.
And those startups should have diversified their millions of VC cash to reduce their exposure and over-centralization on a single bank. In fact, they should not have been over-relying on VC cash in the first place. Now they will be getting $250k out of the millions of VC cash they chose to place in SVB.
The FDIC system working as intended once a bank goes under. No bailouts and no exceptions.
> I bet a bank like Mercury or some other ones will grow to take SVB’s place.
Mercury is not a bank. [0] It just works with other FDIC banks like Evolve Bank & Trust and CFG (Choice Financial Group).
In other thread someone wrote that VC made a contractual requirement that "their" startups use a particular bank. Perhaps due to lower fees for companies with same owners.
no. the problem with long term AAA securities was only 100B of their 200B book. the dead loans to startups are a much bigger problem and why nobody would buy them.
Banks assume a lot of risk if they are overweight in any single sector. Having some startups is fine if it’s not a giant portion of your depositor base to the point that you have major sector risk.
I’m really glad ZeroTier used a boring old mainstream bank that didn’t specialize in any one sector. We looked at SVB. Bullet dodged.
Yes, reality eventually back fires. It's not like the fed figured they should turn around because "inflation". It may simply be that they can't keep printing since it has become much harder to dump it anymore on (global) producers. See the geopolitics, Finance101 isn't enough to grasp the magnitude and seriousness of what's been going on lately.
The problem is, this is not true. Look at the history of the stock market. There's a whole science about "Valuation". Like all sciences it has a long history and it evolves.
It has evolved, a lot over the years. And with it, the prevalent valuation of companies has changed, likewise by a LOT (generally going up, by a lot).
So you'll have to be more precise? There are many valuation philosophies, from Nprofit, to value of the physical assets of a company, Nrevenue, Discounted cash flow analysis, Growth stock ... which "reality", exactly, do you mean?
Some people even see the "in the end, we're all dead", as the "reality" at the end of the stock market. Eventually, they're probably right.
I'm sorry I didn't use the word "reality" as to define some alternative interpretation or a better philosophical approach to valuation, but trying to see what you mean. We can even consider WeWork and a few other valuations on the edge, or of some obsolete past.
By reality here I meant that SVB caught itself having to liquidate positions to get, what I suppose is, enough liquidity to operate. Realised a significant loss, and the cashflow got aggravated when investors and depositors reacted to that information.
Reality that some (chief?) executive, based on perhaps unrelared reasons, sold a big bag of shares, and that information spread and caused further market pressure, followed later on by more run on the bank.
Reality that entering 2023 the fed continued to raise the interest rate and the tech sector saw further negative prospects, at least from the point of view of investors, aggravating SVB's situation. In particular when Moody
was about to downgrade the bank rating.
I don't have a crystal ball, neither did SVB, and its CFO surely is many folds better at strategic/tactical financing than I, but this series of events is although summarised the way it unfolded for them and I refer to reality calling back because, it doesn't matter how the books looked like or what philosophy was used in 2021, in September last year, or at the latest financial disclosure. Wires couldn't be honored and.. reality call happens. Not my reality. The reality, which i would call accountinglessly obvious.
About "the end" I don't see it that way at all. We certainly aren't dead. Death though already owns most of life and keeps growing relatively to the living. It doesn't imply we will necessarily all end up dead.
Lastly, back to the market and the demise of some major bank, or all of them if needs be, it matters very little to life. Not all that serious if you want my take on it.
Let's see what Monday morning got to say, reality is what it is.
My point is that you imply current valuations are unrealistic and must fall back to reality, which presumably is realistic valuations, but you neglect to define both unrealistic valuations and realistic valuations. You know, in a way that allows me to take a company, look at say, balance sheets, and tells me which is which.
I guess I made you give some examples, which is already a big improvement.
> [...] SVB was actually assuming quite a bit of risk.
Honest question: compared to what?
Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan?
Or is the case that JP Morgan is as insolvent as SVB, but JPM's depositors are less likely to withdraw their funds (because it's a big bank and it has primarily retail customers)?
These are honest questions; I'm not suggesting JPM is in the same situation. However, I'd like to see some numbers.
I'm not sure I completely follow the linked PDF, but it seems to be suggesting exactly that:
So, the big question for investors and depositors is this: how much duration risk
did each bank take in its investment portfolio during the deposit surge, and how
much was invested at the lows in Treasury and Agency yields? As a proxy for these
questions now that rates have risen, we can examine the impact on capital ratios
from an assumed immediate realization of unrealized securities losses (see next page
for a full explanation of our methodology). That’s what is shown in the first chart:
again, SIVB was in investment duration world of its own as of the end of 2022, which
is remarkable given its funding profile shown earlier.
The argument seems to be exactly that SVB both had highly interest rate sensitive depositors and significant unhedged duration risk. Both led to correlated interest rate risk at SVB and both were unique in the US banking world.
Another key comment by Cembalest
As shown below, being flooded with deposits from fast-money VC firms and other
corporate accounts at a time of historically low interest rates might have been
more of a curse than a blessing.
The chart shows that SVB's balance sheet expanded by 250% from 2019 to 2022 (compare JPM at ~40%, one of the lower banks listed and the next closest, Western Alliance at ~180% and Truist at ~150%).
>For systemically important banks, no adjustment for AFS is needed because all AFS unrealized gains and losses are already reflected in their reported capital ratios. As a result, only gains and losses in the HTM portfolio need to be included in our adjustment. For these four banks ...
So, regulations turn a blind eye to HTM losses for any bank under $1T in assets:
What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's?
That was not my argument. I tried to explain for the purposes of banking many alternatives were available. If it's credit they were looking for, banks only lend what you can offer as collateral. Funds come from the VCs.
I feel like there is some disconnect. Maybe I don't understand your question
I was answering why startups need a bank, and it isn't just for loans.
The most basic needs for an account is so that you can 1) store the money you get from VCs, 2) pay your employees, 3) receive payments from customers.
Do you see why a company needs a bank account?
Without a bank you need to operate in cash and have a room somewhere full of physical cash with guards, ect.
> What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's?
I do not think I said a company does not need a bank? My comment was in response to the statements trying to imply SVB, was the only option for Startups or that other banks would not accept Startups as clients.
I see, my answer pertains to your 2nd and 3rd question, not the first.
Regarding the first, I am not expert. Many commenters in the various threads have highlighted problems they have had at other banks, such as banks rejecting VC wires or stupid profitability requirements for lines of credit. It mostly sounds like banking SOPs which are incompatible with startups.
It sounds stupid but I have run into similar problems working at large companies trying to partner or buy startups. We want some IP from some small startup and begin financial disclosures. Some idiot in finance runs the numbers and sees the startup is losing $X per year and puts up a red flag on the deal. Like, no shit it is unprofitable, it is a startup and we want their IP.
"The liabiity issue: extreme reliance on institutional/VC funding rather than traditional retail deposits While capital, wholesale funding and loan to deposit ratios improved for many US banks since 2008, there are exceptions. As shown in the first chart, SIVB was in a league of its own: a high level of loans plus securities as a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits. Bottom line: SIVB carved out a distinct and riskier niche than other banks, setting itself up for large potential capital shortfalls in case of rising interest rates, deposit outflows and forced asset sales..."
No, what they're saying is a far greater portion of their deposits are from depositors below $250K who have no rational motivation to participate in a bank run.
This is rather silly explanation of what happend, especially from JP Morgan...
Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. SVB didn't.
Since April 2022 till January 2023 SVB had vacant position of Credit Risk Officer.. And the explanation is simple - SVB's former head of risk, Laura Izurieta had left after 1Q2022 when looses from bond portfolio started to grow. She has probably already realized the final outcome as this is ABC of risk management (and in April 2022 the path of rate increases had been already set in motion by FED).
Now look at the timing of insiders selling shares of SVB...
Which part is silly though? The JPM report is indeed essentially saying that they didn't properly hedge interest rate risk.
It just adds that SVB's situation was exacerbated by the fact that the health and size of the deposit base they had cultivated was also inversely correlated with interest rates (ie VC and startup activity declines with rising rates), which made their situation even more precarious than at other banks.
> Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk.
Just a thought: the UK gilt crisis in December was related to pension funds holding long term gilts. And these pension funds all properly hedge the interest rate risk, they normally don't care how rates evolve.
However, the market value of the gilts was changing too fast for the hedging to work. My understanding is that money couldn't be moved around fast enough to meet margin calls. Which then caused a bad feedback loop of forced liquidations of gilts, and the Bank of England had to step in to handle the crisis.
So with this new story of duration risk at SVB, I'm wondering now whether other banks are in danger. They may have hedged their duration risk, but what if the hedging mechanism turns out to be broken?
> the UK gilt crisis in December was related to pension funds holding long term gilts
No, you got it wrong.. UK pension funds didn't have much gilts. UK pension funds had swaps on gilts and mostly assets equal to long term gilts (AAA rated). Like for example ownership of a parking lots in Germany, apartments in Norway - safe, steady cash flows. This is what chasing yields at zero interest rates does.
Penions funds needed a window of few days to make a fire sale of these assets to meet their margin calls. It takes about two weeks from some junior analyst from BlackRock visiting said parking lot in Germany, checking books to BlackRock depositing money at UK Pension fund bank account. So Bank of England opened unlimited discount window for UK Pension funds for about two weeks. And then it closed.
Thanks for the correction, I indeed misremembered where exactly the margin calls came from.
I guess the gist of the point I was trying to make still stands though. SVB was not the first fallout from rising yields on long duration assets. There is probably more improper hedging of duration risk out there.
it's even worse than that. the pension funds were selling swaps (paying variable rates). that's why the BoE needed to step in to buy gilts - to drive the yield down and stop the bleeding from both the variable payout and capital losses incurred when liquidating gilts at a loss.
zirp has caused some pretty astounding fuckups and i'm sure there are many more to come.
> how is the opposite end of this hedge hedging their position?
Plenty of financial functions create natural short interest rate exposure. Like SVB, they have no business speculating on rates, so they hedge it away. (The Fed is also involved in the repo market.)
Interest rate swaps maybe. Svb would be on the side that is getting a floating rate payment, while they pay a fixed one to the other side, so when the rates increase it would offset the loss in bond price. Thing is I’m not sure if they need to hedge if the bonds are for 1 year because they will get the money back anyways
Any regular bond holding would include a mix of maturities - 1, 2, 5, 10 year bonds. This provides constantly maturing bonds leading to liquid cash with yield on the longest term instruments.
That being said, I don't think it's possible for all banks to hedge interest rate risk. The risk, to the system as a whole, doesn't go away just because it's transferred to someone else.
Swaps do indeed transfer that risk to other parties, at a premium because those other parties are more able to absorb the risk. While, sure, there are systematic stresses across the whole financial system, it doesn't mean that there aren't counterparties more capable of managing interest rate risk and willing to do so for a fee. This can be done by just having a larger balance sheet, or blending durations.
Seems like SVB wasn't willing to pay the premium, though.
Who are these counterparties that can absorb trillions of dollars in interest rate risk?
My amateur understanding is that this counterparty would need to be short long bonds, ie. be a bond issuer. And they would need to be interested in exchanging their fixed interest rate for a variable one.
If the above is correctly understood I don't see how banks can find issuers of trillions of dollars worth of bonds that want a variable interest rate in a rising interest rate environment.
It’s very expensive to buy hedges when the event they’re protecting against is actively happening. The point would have been to find that counterparty ahead of the time and still pay a hefty premium.
If I’m taking the variable end of a swap and expecting interest rate hikes, I can use the spread I’m gaining to offset the damage to a portfolio I already have of shorter duration (thus: less interest rate sensitive) bonds.
Overall, the USG issuing trillions of dollars of low interest bonds and then raising rates is going to cause losses for bond holders throughout the system, but as long as those bonds are held, in aggregate, in portfolios and entities which won’t face liquidity crises until they mature, the loss can be borne.
There may also be more sophisticated ways of offsetting bond exposure, but I’m not familiar. I’m appealing more to the idea that this impact by the Fed is easy to predict, indeed exactly the point. Bond valuations drying up will reduce the multiplier and take money out of circulation. The system is supposed to remain capitalized (and/or hedged) to survive the stress and the Fed would be watching. Apparently some parts of the system weren’t. And there are calls for the Fed to slow down. And probably more evidence that banking regs need to remain strong.
The system risk can be reduced when someone who’s positively exposed to rising rates trades exposure with someone who’s negatively exposed to rising rates.
For example, pension funds often benefit from rising rates because they plan on paying out future liabilities with current assets and landlords are negatively exposed to rising rates because they own a stream of income in the future. The trade of interest rate exposure between these parties helps both achieve more stability.
A real world example would be taxi drivers trading weather risk with ice cream vans. One party benefits from wet weather that stops people walking outside and the other benefits, so they can trade exposure in a way that makes the system more stable.
The 10 year $100 bond is still going to pay out at a profit... in 10 years. But there's more valuable things that one can do with $100 in the shorter term so any sales of that before it pays out will be done at a loss.
In simple terms, a bond is a piece of paper that pays a dollar amount per year to the holder for N number of years, after which the initial price paid for the bond is returned to the holder.
For example, a 10-year bond that pays $2 per year costs $100 today. That is, a piece of paper that pays $2 to the holder every year for 10 years, after which the holder gets its $100 back.
Now, some time passes and the market thinks the above bond is too expensive. Instead, the market will only pay $50 for the above bond, ie. $50 to get $2 per year.
This means that the price of another bond: the bond that pays $4 per year will now cost $100. This is the case because holding two bonds that cost $50 each and pay $2 per year is exactly equivalent to holding a single bond that pays $4 per year and costs $100.
If the market price of a 10-year bond that pays $4 per year costs $100 then we say that the current rate of interest for the 10-year bond is 4%. If this rate of interest falls to 2%, it simply means that the market is now willing to pay $200 per year for a bond that pays $4 per year — or, equivalently, $100 for a bond that pays $2 per year.
This really sheds clarity on the situation. SVB was in bad shape long before the run, and there is no apparent next domino to fall. FDIC limits are very well understood and relatively easy to work with (despite the rampant FUD about “who’s going to use multiple bank accounts”, deposit sweep programs are highly available and convenient). This is a risk management failure by depositors (in addition to the bank of course), and should be treated as such.
what you have to ask is how much of the "deposits" were loans from SVB? that is the real issue. SVB "loaning" money to startups on the premise that they would park it in SVB accounts. nobody knows how big that number is, but it is the real problem.
This appears to be the case - the JPMorgan analyst is (paraphrasing) saying that if you did a fire sale on all of the assets of the banks in isolation the difference between their capital ratios (the amount that they have to have on hand to meet depositors) is minimal. Notice that of all of the banks in the fifth chart the blue line and the bronze line are nearly even - except for SIVB, which has no bronze line. That's not good. I can't speak to this person's methodology, but if what he is saying is true there's almost no risk of contagion in the broader banking sector. And if that's true then there's $152 billion dollars of VC capital that's going to evaporate Monday morning.
It should be noted that JPMorgan participated in the bailout in 2008, with the resulting headaches that that entailed, and Dimon has explicitly stated that he wouldn't participate in a current bailout. So JPMorgan may not be entirely objective. However, to my eyes, this appears rather clear.
This is not risk management failure by depositors.
Depositors can and should assume that regulations prevent banks from assuming outsize risk like this.
This is a policy failure of the regulators that oversee banks. Banks should not be allowed to have so little cash on hand, especially when we knew with high likelihood the fed would raise rates.
> Depositors can and should assume that regulations prevent banks from assuming outsize risk like this
Small depositors, yes. Institutional depositors, no.
Not all banks are equal. SVB was borderline investment grade before it collapsed. Treasury advice strikes me as low-hanging fruit VCs could have guided their companies on. Instead, most universally recommended SVB because the priority was reducing friction, not risk.
Exactly. 250k to me seems like a very logical threshold to expect at least some sophistication. Deposit sweeps get you to 3M many places after which it seems perfectly reasonable to expect people to manage treasuries. If Bogleheads can do it VCs can.
Then again, you have people like Mark Cuban who clearly don’t know about basic cash management (https://twitter.com/mcuban/status/1634413306948603905), so maybe American lack of financial literacy has truly trickled all the way up.
The alternative take would be that Cuban knows exactly how it works but sees a chance to push for what's essentially a federal startup subsidy because his fanboys don't know.
Yes, my reading is that he knows well, he just wants to socialise his insurance costs (including self-insurance, by splitting deposits across several institutions).
I am surprised they show JPM in all their comparison charts (typically research doesn't cover their own employer). By showing JPM as an outlier on the opposite of the spectrum to SVB, it feels a little bit like a marketing document.
I can't speak for literally all businesses, but more or less everything a business publishes is marketing/PR. They fully control what they allow to be published, why wouldn't they make sure it paints them in a positive light wherever possible?
You’re missing the point. This isn’t a marketing piece. JPM doesn’t need to compare themselves to SVB for any reason, that’s like comparing David and Goliath. What’s purpose would that accomplish?
This is a marketing piece the same way an engineering blog post is a marketing piece. It demonstrates expertise and helps influence others. I can think of two audience members:
* Those with cash in SVB, or another regional bank, and want to find a 'safer' bank.
* The relatively uniformed that are nervous about banking.
It's definitely marketing but it's also a collected and analysed aggregation of real data. I read part of the last page as well, and there was an absolutely delightful sentence. To paraphrase:
"This document is an analysis by person X, based on his opinion. That opinion may change at any time."
That's a lovely, if corporatey way of paraphrasing the well-known quip "When facts change, I change my mind. What do you do?"
There's no doubt the document was prepared in a huge rush. Like any large bank, JPM would have had to get it out well before end of business on Friday. Wouldn't be surprised if they had to get it out before lunch! But that rush also means there would have had been far less time to polish it up, and indeed, the author points out that at least some of the industry figures were lifted as-is from an earlier report they had produced.
the irony of this whole situation is VCs and startups pouncing on the chaos to encourage people to move their money into even more opaque neobanks eg Mercury/Brex/Ramp as if they don’t have the same issues with relying on VC funded startup deposits but even worse in that their balance sheets are hidden.
We use their Treasury account type for most of our cash. It's split between Morgan Stanley and Vanguard funds.
Now, if Mercury fails it's going to be a pain in the ass to get at the money in these backer accounts. So we keep what we need for 2 months of operations with another bank. We were using SVB for this, now we have to find a new emergency backup bank.
also use mercury for the same reason. they are a tech company that provides a good interface to baking services at a wholesale price, which is very different than trying to be a bank. for actual banking i see know reason to use anyone other than jpm chase.
they work with tiny regional banks that act as a white label service
if one or more of those tiny regional banks fail in the same way SVB did I don’t see why there wouldn’t be an issue as a customer of Mercury
it’s also unknown what percentage of these banks’ total deposits are Mercury deposits now. if it’s a lot then you have the same risk of a bank run on the Mercury side disproportionately impacting the solvency of the underlying bank
they can fail all they want as long as you have less than 250K deposited. if you are using mercury as a transaction agent then you have no risk. you keep your deposits at a tbtf bank, then automate your transactions to run through mercury, so you pay lower transaction fees.
no, it was very different at SVB. SVB was loaning money to startups on the basis of exclusivity contracts where those startups were required to hold the money in SVB accounts, so they were basically paying SVB to create the illusion of having liquidity. that is a whole different game.
that is true for some customers not all and not the primary reason why it failed.
and the problem is you know nothing about the financial health of the small banks that are white label providers so how can you say you’re confident in the management of these individual banks that Mercury is contracting with? you don’t know anything about them.
they are guaranteed by the FDIC up to 250K, and mercury has set up their systems to spread deposits across multiple banks, to increase the amount guaranteed.
so, if mercury has a 1M FDIC guaranteed, then you can move 1M per day through their systems with 100% guarantee, but the risk that a bank fails on one particular day is very small, so maybe you can move 10M a day through them, with effectively no risk.
10M a day is 3.5B a year. very few companies are doing transactions on that level, so mercury scales up very well.
Agreed that these neobanks aren't a wise choice, but I still think the VCs made the right call in advising their portfolio companies - they had a literal vested interest in their success, they had to do something, this eventually was going to happen.
Maybe a stupid question: if banks can collapse from a bank run, shouldn’t the entire model be questioned? A bank run is simply when a threshold number of customers decide to withdraw their cash, with every right to do so. With social media + frictionless mobile banking, the entire notion of teetering your model on mitigating the risk of a “bank run” seems anti-customer, regressive, and unsustainable.
SVB didn’t collapse because of the bank run. There was a bank run because they collapsed. It is true that the bank run may have accelerated the collapse slightly but they were in really bad shape before it started.
A lot of people want to blame depositor panic, but I don’t think that is really fair. In a properly managed bank, the assets exceed the liabilities, which means that if people want their money out, the bank can liquidate their assets to pay them and still have money left over. SVB’s assets are worth far less than their liabilities (to the tune of nearly $100B dollars by some estimates). Panicking depositors didn’t cause that.
I’m not blaming depositors. In fact, I think depositors have a right to panic withdraw. They’re making a decision to take business elsewhere, as they should.
That that can cause or accelerate collapse makes me question the entire bank model.
What other model leads to instant death, damage to their entire customer base, and collateral damage to the broader system, when a certain number of customers decide to go elsewhere?
I wasn't talking about you when I was saying that some people are blaming depositors. Some other commenters are really angry at the VCs that participated in the run. Their anger is understandable, but misplaced in this case IMO.
> What other model leads to instant death, damage to their entire customer base, and collateral damage to the broader system, when a certain number of customers decide to go elsewhere?
None of these things happened because some customers decided to go elsewhere. They were going to happen anyway. SVB was in really terrible shape and was already in the process of collapsing.
Customers also want to earn easy, high interest, that's the main issue. You're taking a risk (albeit a small one) with your deposits; your money is being lent by the bank and they pay you interest in return.
If you only want your cash to be held safely, put it in a safety deposit box.
Don't want to move the goalposts, but I think it's more accurate to say that most people (and companies) park their money in banks with the following expectations:
* It's easily and quickly available
* The number only goes smaller when the account owner authorizes it for stuff the account owner wants to spend money on
* The account owner does not have to think about any of the actual logistics of making the above
Naturally, these are in tension - it costs money to make all of this happen. And since people want the number in the account to not go down (through fees or whatever), then 'naturally' the bank needs to make $$$ somehow.
The flip side of your original question about "business model" validity is that the business model is heavily subsidized by the state and overall society because this particular business model generates a lot of liquidity, which is generally believed to be net beneficial for governments, societies and countries.
In effect, this entire business model and all the regulation and laws and structures put in place are attempting to systemically will into being a high-trust environment. The possible downsides of this system more or less scale with the size of the gap between the actual underlying society, and the degree of trust implied by the system.
Give me a break, no one is getting high interest returns from their cash savings account. A pittance is given to savers so banks cause my money for lending. Yet, when I want to borrow money from the bank on their credit card the interest rate is in the double digit percentages.
Precisely:
“At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%.”
In the UK, you are only covered up to £80k though... I could understand people wanting to get at least money over £80k out, but also how long does it take to get access to your cash if you have to go through the government insurance procedure. Is it days, weeks, months ? I have no idea and wouldn't want to have to find out.
The chart titled “Impact of unrealized securities losses on capital ratios” really shows just how inadequate the tier 1 capital ratio is (what regulators use). Ignoring the impact of unrealized losses in assets marked as held to maturity is crazy. Seems like a regulator problem to me, no bank taking deposits should be able to make high duration and negatively convex (from high MBS holdings) without hedges.
An important stand out quote to me here: “ It’s fair to ask about the underwriting discipline of VC firms that put most of their liquidity in a single bank with this kind of risk profile“.
I really don’t understand why these firms didn’t use at least two banks for their deposits. Surely these tech firms have heard of single points of failure being problematic?
If you get any kind of loan from SVB, you're required to keep your cash with SVB.
I think it was entirely reasonable for Series B and earlier startups to keep all their money in SVB. It was wrong, in hindsight, but reasonable. Bank failure is not the thing that's going to kill most startups. SVB just failed spectacularly, and it sure seems like it's not going to put anyone out of business.
In other articles I've read where some of these VCs had "levers" into the bank where they could keep track of what their companies were doing. Not sure what exactly that means, or if it was legal, but it makes sense.
What I find most disingenuous in this whole saga is the conflating of small business payroll depositors with all depositors. Circle & USDC rely on the interest rate earned on the stablecoin deposits for their business and SVB was providing that with poor risk management. With a $3B deposit (or more since they likely moved money out and partially caused the collapse), Circle should have been doing additional risk management beyond SVB, not just collecting interest. Now taxpayers are supposed to cover that failure?
The other thread was wild and the conclusions in this memo disagree with many of the assertions that commenters have been throwing around–accusing depositors of recklessly banking at SVB to chase higher yields and accusing SVB of playing fast and loose with risky investments.
JPM says neither of these were the case:
> “At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%.”
> “The irony of SIVB is that most banks have historically failed due to credit risk issues. This is the first major one I recall where the primary issue was a duration mismatch between high quality assets and deposit liabilities.”
Good analysis. Everyone should be very worried about these charts. In short, a lot of banks are sitting on assets that have significant unrealized losses, which is very similar to the situation leading up to 2008. If there is some event down the road that forces the banks to dip into their HTM assets to cover withdrawals or losses, then we could be looking at yet another systemic crisis. The cause will be different. But the banks are in a precarious position. Perhaps more importantly, this puts a ceiling on what the Fed can do to fight inflation. If they keep jacking rates the magnitude of the unrealized losses will increase.
> The liabiity issue: extreme reliance on institutional/VC funding rather than traditional retail deposits
Unsurprising how the bank failed due to the VC driven mania and now that the pyramid scheme collapsed right in front of everyone; taking the majority of startups in the tech industry with it.
Now we will see how unprofitable these startups really are and have been fully dependent of constant VC cash. A very big lesson to learn about risk.
I don't see the same red flags in FRB's filings that were present in SVB's filings. SVB had almost half their assets in held-to-maturity securities. FRB has 12%. SVB had triple the short-term credit from FHLBs compared to FRB.
It doesn't have the HTM red flags around unrealized gains but it has similar red flags about a panic-prone undiversified and uninsured depositor base. Solvency is irrelevant when depositors panic and start a run on the bank anyway.
I was not able to find any filings indicating what fraction of FRB's depositors and deposits are or are not insured. Do you happen to know where to find those?
Not quite sure how much to look into but the operating of the UK side seems flawed. One Director left in Jan, and the particular Director has previously had 35 businesses all of which were lending companies and paid significant dividends. There seems to be a trend. I dont think this is poor risk management, I think this was very intentional.
Does any one knows if VCs have contracts with startups where they have to deposit X amount weekly or monthly? Now if they can't because of the SVB debacle, can the startups sue them? This would put these VCs in even worse situation - not only they could be out of their money deposited at the bank but now they owe even more money to the startups.
The VCs don't "owe" money to the startups: they "buy" equity with their money. The VCs aren't "out" the money deposited by the startup at SVB; that money was already exchanged for equity in the startup.
The VCs aren't happy because they and the startup both expected that the money-equity exchange meant that the startup would have working capital, so potentially the value of the equity that they got has fallen. This is a problem for both parties.
Yes they buy equity but do they always pay upfront? I would imagine that they have some contracts structured in a way that allows them to pay in rates based on performance etc. Also, what if some vc signed contract last week with payment due this week and they can't pay. I dont expect a lot of cases like that but i suspect few did.
A child-like regulatory question: Why aren’t HTM portfolios for retail banks frequently marked to market? Wouldn’t this force more accurate accounting in the event a bank needed to sell bonds in a capital crunch?
Not an HTM certified, not even a practitioner here. But it's also an accounting question.
The way it's done: asset is valued per maturation. It would mudd the water even further I think to have the quarterly reflect the "at current market" value. Things go up and down. What matters is how you close (realised gains or loss), and, at SVB's demise: your cashflow.
No cash? Then sell your assets. Creditors/depositors ain't gonna wait.
Realised loss? That's your balance going down in true accounting terms now.
Accountings get disclosed? Those quarterly release are mandatory for all publicly trading company: that could cause worry among investors, and in the case of a bank a panic a bank run.
What a market valuation made at each quarter could achieve is give a momentarily evaluation of what a fund's assets is made of if they were to liquidate right then, or that day. But it isn't how it works*
It does work for goods though, amortization is accounted for and a well oiled exercise. Futures, bonds, stocks? Good luck with that. If we could predict the future the game would be a whole lot different.
On reflection, one wonders why all bank deposits don't have insurance.
I'm guessing the answer is: something something make more profit...
E.g. my businesses are required to carry liability insurance. I have to do that because we have big company customers who made it a condition of doing business with them. So why do big companies hand $nB over to another company for safe keeping but not require insurance?
The only truly viable deposit insurance is from the government, because they can print money
What good is private insurance from an insurance company if they go insolvent because of massive numbers of bank failures
So, now the answer to your question is a political one: are we willing as a society and government to potentially put that much taxpayer money at risk. I think it's a perfectly valid discussion to have, but it's one we haven't had yet, and one we refuse to have until the shit has hit the fan
Isn't it up to the depositor in a way? Normal people are 100% protected up to $250k, and then large investors can choose between boring, low interest, extremely safe banks vs high interest risky banks. Although as the analysis pointed out, the higher interest was nominal in this situation so it was a poor choice.
It is important for banks to always have a balanced portfolio and regulations to force them to have it.
Otherwise, it’s weakness will soon be recognized by some billionaires, Thiel in this case, and they will take advantage of this weakness to become even richer.
We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .”
Also consider the past 10 years have probably been the friendliest 10 years to startups ever.