[TooSmugToFail]

SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion.

Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable.

European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leveraged this loophole.

For those interested, FT Alphaville describes this in ample detail:

Silicon Valley Bank is a very American mess https://on.ft.com/3ywMURD

[JackFr]

Agree.

SVB was not small, but an order of magnitude smaller than the large money center banks (Citi, BofA, JPMChase).

That being said, nearly every other bank of that size submitted Dodd Frank Stress Test results to the Fed in 2022.

https://www.federalreserve.gov/publications/files/2022-dfast...

Somehow SVB avoided this. I don’t see this as systemic at all. The FDIC will make depositors whole and the owners and managers did a bad job and they lose. The worst possible response would be a bailout of any sort beyond ordinary FDIC receivership.

[boppo1]

97% of depositors exceeded the FDIC limit.

[phone[phone]]

That stinks, and I feel for them. Let's hope people will learn a lesson from this - never keep all your eggs in one basket.

[otikik]

What about this other lesson: bankers need to be punished harder.

[youngtaff]

Or perhaps the other lesson is VCs shouldn’t create a run on the bank they holds their funds and the companies they invest in funds

[phone[phone]]

We don't punish bankers in this country.

[fbdab103]

Aren't we talking about hundreds of millions/billions of dollars? At that scale, not a lot of baskets available.

[throwing_away]

Could a tech company have split their accounts into separate $250k accounts? I'm not sure if the bank would offer that.

[x3n0ph3n3]

No, FDIC insurance applies to account owners, not accounts.

Fun fact, if you're married, you can actually turn that into 3 * FDIC insurance limit.

- Account 1: You

- Account 2: Your spouse

- Account 3: Jointly you and your spouse

[quesera]

You'd need to split across multiple banks.

This can be done manually, with some logistical challenges.

This can also be done automatically, e.g. via CDARS.

[HyperSane]

Then they should have understood the risk they were taking.

[WeylandYutani]

And chosen a better bank.

Besides common strategy in my country: have more money than 250k spread it around at multiple banks.

[HyperSane]

There are services that do that automatically.

[ageek123]

I’m not sure you’re using the standard definition of “make whole”…

[talideon]

Your username is both very ironic and apt in this particular case. Also, your analysis is spot on.

[nayuki]

On Reddit they call this phenomenon beetlejuicing. (Subreddit, Know Your Meme, Urban Dictionary)

[toomuchtodo]

https://archive.is/Fx1is

[twelve40]

so it looks like the bank run was not the root cause but a consequence of this mess, and all these people moralizing about not panicking were essentially advising small companies to keep funding wild practices of one adventurous bank CEO out of their pocket - how could it have ended in anything else?

[cm2187]

Yes and no. LCR is basically requiring you to keep in cash and liquid assets the equivalent of a 30 day bank run. And it should work. A european bank had very large bank run last year and survived without even breaching its regulatory minimums. But that still leaves the bank in a weak position after the bank run, and you can't predict the exact magnitude of a run.

[aqme28]

What is a "30 day" bank run? How is a bank run measured in time?

[andreareina]

Seems to just mean 30 days of average outflows, i.e. a bank should be ok for that long without any money coming in via new deposits, loan repayments, etc. Of course the issue is when you have larger-than-average withdrawals...

https://www.investopedia.com/terms/l/liquidity-coverage-rati...

[Scoundreller]

Probably doesn’t help that this is very a niche bank. Lots of orgs running their payroll from this bank, but few retail account holders.

At a typical community/regional bank, payday is just a bunch of bill entries: debit the corp account and credit the employees accounts. Meanwhile a business-focussed bank will just have huge debits every Friday without corresponding credits: those are happening at other banks.

And with a small number of account holders, it doesn’t take many actors to cause an a bank run.

Payday sealed the fate here.

[cm2187]

All institutional investors take their money back as soon as they are legally allowed, no new financing available, and for other clients, assumptions are made, calibrated by the regulator on previous bank runs. And you net that with the bank getting its money back as soon as available (with a limit on the netting between inflows and outflows at 75% of outflows).

[Our_Benefactors]

Undoubtedly it is a dry bureaucratic definition like “A 30 day period where on each day capital outflows were greater than inflows by a factor of 10”, of course in the definition failing to capture what an _actual_ bank run is.

[npunt]

What other banks that startups use have an exemption to Basel III? Would love to understand broader risk to startup ecosystem.

[ta1243]

Why would a startup use a risky bank?

[Scoundreller]

Given how popular this bank was with startups/tech orgs, it suggests that they were otherwise unbankable by the usual players.

I’m unsure what special services a startup needs from their bank that any other bank serving businesses couldn’t offer.

[MrBuddyCasino]

This btw is Jay Ersapah, Head of Financial Risk at SVB. Apparently DEI & LGBTQ issues were more important than making sure their assets & obligations are balanced: https://twitter.com/the_real_fly/status/1634035956188688385

[1980phipsi]

Come back when you have the entire risk mgmt org chart and show she is at the top. Then I would be interested.

[fidgewidge]

At SVB UK, which is isolated apparently. Not that it reduces the impact of the image ...

[fidgewidge]

Isolated ... or not. Damn this situation moves fast.

[throwayyy479087]

SVB UK also failed this week.

[Longtermvalue1]

It’s reported that SVB paid executives bonuses to grab cash right before they were shit down. Each of these executives names should be published & exposed as the grifters they are.

[throwayyy479087]

SVB UK has now been sold to HSBC for 1 pound.

[djfobbz]

We are living in a REAL CLOWN WORLD!

[DeathArrow]

What are other banks that exploited that loophole? Maybe it's time to short them for some easy money.

[HyperSane]

Glass-Steagall needs to be brought back. It was incredibly effective at preventing situations like this.

[fshbbdssbbgdd]

Glass-Steagal separated commercial banks from investment banks. As far as I can tell, SVB was just a commercial bank and the way it went bust has nothing to do with conduct that would have been prohibited under Glass-Steagal.

[worik]

> SVB used an exemption from Basel III,

Really?

That is interesting. Why? How? Who else?

[rr808]

Are you sure that is the problem? I see lots of comment today they lost a lot of money on long dated treasuries. Which is "safest" asset.

[dragontamer]

No.

My money market fund (VMFXX) is composed of Fed Repo notes with 13 _DAYS_ of maturity average (https://investor.vanguard.com/investment-products/mutual-fun...)

A bank holding customer deposits in lol 30 _Year_ or 10 _YEAR_ treasuries is anything but safe. That's called duration risk, and congrats, they just got burned by duration risk.

[rr808]

Sure, what I meant was Basel rules mark treasuries as level 1 capital. So Basel doesn't have much to do with it, as the OP suggested.

[wpietri]

Are you sure? The article says, "short-term Treasury bills get 100-per-cent weightings", implying that longer term ones would get something else.

[Jensson]

> Downside: this also means bank is going to be less profitable.

What are the downsides to society if banks are less profitable? They invested in T-Bills, I don't see how that investment served society in any way.

[dragontamer]

> They invested in T-Bills

They invested in T-Bonds (10Y or longer) and MBS (mortgages) it seems like, not T-Bills (1Y or shorter)

The distinction is extremely important in this case. If they were trading T-Bills, they would have survived. Instead, they took on much riskier T-Bonds (probably hoping to make more money).

[JumpCrisscross]

> What are the downsides to society if banks are less profitable?

The minimum viable size of a bank increases. Small, community banks can't implement Basel III. That's why they were exempted. How SVB was in a bucket with the Bank of Jackson Hole, however, is another question.

[AnimalMuppet]

There is no downside to society if banks are less profitable. There is a definite downside to the banks, though. And given the chance, at least some banks will try to get out of that downside.

[chii]

if banking was less profitable, all else being equal, you'd expect that there'd be less banking activities including loans. Less loans means less economic activity from what those loans are funding (such as business loans, or construction loans etc).

[stephen_g]

Why would you expect that? It doesn’t seem to follow at all… If banking was less profitable, they’d more likely want to try and increase volume (issuing more loans) to try to make up for it and make more profit.

(Which is why bank regulation is incredibly important, because without strong regulation banks often do start to chase profit by lending to more and more risky customers, and when that unwinds you get what happened in 2008)

[PKop]

Literally funds the government lol

[Jensson]

But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly? I don't see how these corporate profits benefited society. They didn't fill some hard to do function, they just risked others money and planned to skim the gains for profit, why should society encourage that? And they didn't even risk the money in growth areas, they just gave it to the government, I could see their value if they actually took some valuable risks, I don't see the value of a private corporation that skims profits by investing into the government.

[tialaramex]

The UK government owns several banks, one of these banks is for exactly this purpose.

National Savings & Investment Bank (NS&I) does not offer loans, but money you save with this bank is in practice just part of the country's general fund, they're paying you interest on your savings because if they borrowed that money commercially they'd have to pay interest too.

This has one obvious big advantage for the saver - it's inherently safe, you aren't saving with a bank, who might gamble your money away and then go bankrupt, if the whole country fails then it doesn't mean anything to lose the Pounds in the savings account, Pounds are now worthless anyway. Also if you live there you have more immediate problems.

Since the government owns it, it's also allowed to do things which would otherwise be illegal, at least potentially e.g. NS&I Premium Bonds are basically savings except with gambling, or scratch-offs except you get your money back if you don't win. Your deposit is safe, but instead of say 1% interest on £10 000 you might have 0.1% chance to win another £90 000 for a total of £100 000.

This is technically worse than the 1% interest but it's exciting and people buy lottery tickets so who am I to argue?

Edited to add: Somehow the word not was missed in my second paragraph during editing. Fixed now.

[twic]

Three modest notes about premium bonds. Firstly, you can cash in bonds at any time, so it's effectively an instant access account. Secondly, the current rate is 3.30%. Thirdly, the payouts are tax-free.

3.30% on an instant access account is actually pretty great (best i see elsewhere is 2.51%; i see a six month fixed term deposit at 3.28%), and getting it tax-free without having to have it in an ISA makes it even better.

[zamnos]

I might be misunderstanding what you wrote, but in the US, Wealthfront Cash is offering 4% APY, which is a bit higher than 3.3.

[throwaway426079]

Just to note that interest percentage is a prize fund and most deposits get nothing.

[gruez]

>But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly

What you're describing is pretty close to a "narrow bank", minus the "owned by government" part. The Fed doesn't like it for several reasons:

>The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary policy, because if they succeed they will keep a lot of money at the Fed, increasing the size of its balance sheet. 4 They might also make other short-term interest rates (like fed funds) more volatile, because people who would otherwise participate in those markets might park their money at narrow banks instead, making it harder for the Fed to target interest rates. 5

>Second, it worries that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo), and maybe even making it harder to make loans:

>Third, the Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks.

https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

[flangola7]

I have a hard time seeing his 3 and especially 2 are even that bad

[dannyw]

The Fed has shareholders, pays dividends, and are partially owned by the biggest banks.

Interests are not perfectly aligned.

[rich_sasha]

They are actually a recipe for slaughtering a capitalist economy.

[PKop]

Well now you're questioning the necessity of banks in general. Additionally, the government regulates them into these securities.

>Why not just make the government do that directly?

If I understand, do you mean why not cut out the middle-man and have people buy the T-Bills/Bonds themselves? If so I completely agree, to some degree, that banks nowadays are nearly complete scams as far as warehousing your money, while providing near 0% interest, with the backdrop of 4 to 5+% risk free short term rates from the government as alternative.

I myself have taken out a bunch of cash and deposited into various tenors of treasuries at TreasuryDirect.gov

And many others have as well, which is why depending on which data you look at there has been a massive withdrawal of cash from commercial banks in recent months, with people either buying treasuries or putting the cash with their brokers (who are buying treasuries etc).

I don't know the answer to how this is resolved, or banks place in the economy... they are supposed to provide credit and money creation for business investment. Since the 2008 crisis, lending has been subdued... there are probably many causes for this. Banks have terrible apps, user interfaces, user experience moving money quickly (in the US) and terrible returns provided to you for lending them money (most people don't realize this is what you're doing when you deposit). So yea, they are a legacy, protected industry that scams their customers out of the spread between the treasury yields they are getting.

[delfinom]

:shrug:

The alternative to banks is a credit union where you are a shareholder and their rates aren't necessary exciting either. There's a cost to maintaining infrastructure both digital and physical. Not to mention providing various financial services to shareholders.

The moving money problem is a bigger issue with the American financial system as a whole and basically the business mentally of underinvestment and "don't break what works". FedNow will hopefully reduce alot of the time delay related friction in the coming year or two that comes with ACH.

[Godel_unicode]

T-Bonds tie up money for a long time, bank deposit are largely retrievable on demand. Banks take a fee for bundling lots of deposits together to invest and depositors trade upside for convenience.

If you know you have a 10-year horizon, by all means buy treasuries instead of depositing at a bank.

[Jensson]

But that doesn't work if the bank is allowed to put your money into T-Bonds, then your money is locked there just without the upsides.

And you can sell T-Bonds, they are as liquid as any other assets, the bank just lost money on it. If the T-bonds hadn't lost value they wouldn't have collapsed, they would have just sold the bonds.

[yuliyp]

It works usually. The bank can spread out the maturity dates of money such that they'd generally have enough cash on hand to be able to meet withdrawals. The higher yields mean they can still have some cash on hand and still pay some interest to their depositors.

[phkahler]

Taxes fund the government. Bonds are just a way to avoid managing a budget.

[anonporridge]

Na, taxes create demand for currency, which maintains the currency's value. Then you just print or borrow the currency into existence to fund the government.

People are forced to acquire the currency to pay their taxes or risk being assaulted by the violence of state and dispossessed of a lot of their stuff and/or freedom.

[taneq]

Is this MMT? There was a flurry of articles about it a couple of years ago, airily explaining that it’s fine for all the governments to print unlimited money now because they can just curb any inflation by raising taxes.

Ignoring the fact that elected governments do not, of course, do that.

[peyton]

This is complete bullshit. There’s no model with explanatory power.

[hackandthink]

"Fiscal Theory of Money" is a nice story. Economists often tell worse stories about money (Graeber).

Fiscal Theory of Price Level seems to be inspired by Fiscal Theory of Money.

"The literature on the fiscal theory of the price level (FTPL) integrates discussion of monetary and fiscal policy, recognizing that fiscal policy can be a determinant, or even the sole determinant, of the price level"

Christopher A Sims: Paper Money

https://scholar.google.com/citations?view_op=view_citation&h...

https://en.wikipedia.org/wiki/Christopher_A._Sims

[PKop]

Ok so you're saying it's bad that they fund the government. But given the large budget deficit we have, the statement is true.

[arez]

government doesn't need taxes to fund anything, it can just create money and sell bonds. Taxes are just for steering money flows

[phkahler]

>> government doesn't need taxes to fund anything, it can just create money and sell bonds.

This is a nice fiction a lot of people spout. The consequences of that are inflation or default. Inflation is very unpopular but defaulting ends the game because investors won't buy the bonds after that. There are consequences to ignoring debt.

[andrepd]

My country has an 8% budget surplus before interest payments, and 2% deficit after. What would be the consequences of ignoring/defaulting on that debt exactly? Seeing as how it's already doing fine with an 8% surplus.

I can think of other (political) consequences, but not economical per se, if you assume that a loan has a risk of default priced into its interest rate.

[nostromo]

Inflation would like a word.

[majewsky]

Speaking from my German perspective. Our (European) central bank printed central bank money like crazy the last 10 years, and apparently it was not a problem. Prices only shot up once there were supply shocks due to Covid and Putin. And sure enough, the supply shocks are slowly waning, and hence YoY inflation rates are also rapidly declining.

Yet everyone keeps talking about how the money supply is causing inflation, even though there is no plausible direct connection [1] between the amount of money in some bank account somewhere and consumer prices. The bakery down the street does not look at federal reserve rates when figuring out their bread prices.

[1] I'm guessing that someone will be able to explain this to me. But keep in mind that your explanation should cover how we could have over a decade of near-zero interest rates and the respective money supply inflation without seeing any significant consumer price inflation.

[gumby]

> What are the downsides to society if banks are less profitable?

Because they touch money they have all sorts of woo-woo respect. Really they are just service providers like lawyers, gardeners, and doctors.

The whole public perception of the finance sector (and its own sel-regard) is backwards.

[cm2187]

They charge more for credit.

[xwdv]

The exemption should still be allowed, as it led to great banking innovations for startups.

The exemptees just need to be fucking careful with this advanced mode of operation.

[talideon]

So, you're essentially proposing a weaker, informal version of Basel III. In which case, why have such an exemption in the first place? What innovations does it lead to? Restrictions on banking typically exist for a _really_ good reason. After all, we saw what happened when retail and investment banking were allowed to mingle because it 'lead to [...] innovations'. If you're going to advocate for something beyond saying 'but look, innovation!', you need to be more explicit about what those innovations are, because European banking is plenty innovative within the constraints of Basel III.

[worik]

Yes.

And the pace of innovation in US banking was very slow, essentially stalled, for a generation from the consumer's POV

Here in Aotearoa we have ATMs on every street corner since the 1980s. All but the tiniest traders have had pos electronic transactions for nearly thirty years

Other countries are even more advanced (our banks are all like yous now, consumers now viewed as pests)

I want innovation in customer services, but what we get is innovations in financial engineering.

May they all rot...

[Forgeties79]

“The exemption for dumping hazardous materials should still be allowed, as it led to great manufacturing innovations for startups.

The exemptees just need to be f**ing careful with this advanced mode of operation.”

This sounds tongue in cheek I know, but SVB’s situation has created real world consequences even for me, someone who has no money tied up with them. My go-to for bonded cellular networks (so i can run a livestream for my employer, a small tech start up) had to tell all of us who use them to pause payments immediately today as this unfolded and are not taking new rentals in the meantime. They’re literally not getting paid right now. This is not a holding pattern that can last long and is highly disruptive for them and, consequentially, me. A video content guy at a small start up on nearly the other side of the country.

[rco8786]

> The exemptees just need to be fucking careful with this advanced mode of operation.

How many times will we get burned until we learned that banks will not be careful if they are given an opportunity to not be.

[illiarian]

Or that any business will not be careful given the opportunity.

[layer8]

> The exemptees just need to be fucking careful

You mean “need to have sheer luck in their gambling”.

[bequanna]

Head, we get bonuses

Tails, taxpayers bail us out

[nordsieck]

> Head, we get bonuses

> Tails, taxpayers bail us out

You're doing to have to define "bail us out".

SVB's shareholders got wiped out.

[astrange]

Most bailouts are done to protect employees and union contracts, not management.

[bequanna]

Please name one “banking innovation” the banking industry has implemented in the last decade which has benefitted consumers.

[astrange]

Same-day ACH, aka why you now get paid two days earlier than you used to. Check deposits by smartphone camera. Most of the stuff on https://www.bitsaboutmoney.com.

[mullingitover]

Are these really innovations, or just convoluted workarounds for problems that other countries have actually solved? I don't think anyone under 40 in Europe has ever written a check, for example, because wires are far more convenient there.

[hyperman1]

Agree. This 40 year old european has seen/used exactly 1 cheque in his life, to buy the house. For some complicated legal reason, houses can not be bought with normal means of payment. We had to walk with the flimsy piece of paper from the bank to the notary, where a bank representative was actually sitting. We gave it to the notary, the notary gave it to the previous owner, and they had to walk it back to their bank. We both felt like stone age caveman, except the previous owners already did it once in the 1980's when they bought the house, so it was the 2nd cheque they saw in their lives.

We asked the banker what would happen if we were robbed. He said he'd just write a new one. The thief couldn't do anything with it, as it was all on name only, and the extremely low daily volume of cheques in use would mean cashing it would stand out like a sore thumb.

[Scoundreller]

System-wide Innovation is a lot easier when one’s country has a handful of banks. USA has ~4500 banks, 12x the #2 country, Russia.

https://www.helgilibrary.com/charts/what-country-has-the-mos...

[gdy]

In Russia money transfers are mostly instant. What stops american banks from using new software and new payment protocols?

[FireBeyond]

LOL. In Australia, an inter-bank ACH transfer was typically complete within the hour, worst case. Usually within minutes. Without fees. In 2002.

[astrange]

And how good was your internet?

[FireBeyond]

Back then you could get 10mbps cable, which was about the same as RoadRunner and stuff here...

... now the transoceanic cable, on the other hand, that was... anemic, we'll say.

[talideon]

OK, how about mentioning something that isn't typical in the EU while still adhering to Basel III. Plenty of time here...

Meanwhile, how close is the US to making Chip-and-PIN a thing?

And who still uses cheques these days?!

[astrange]

We have chip-and-nothing, or contactless, which is better than Chip-and-PIN. (Note Apple Pay and similar are basically chip-and-PIN because it's authenticated by the phone passcode.)

> And who still uses cheques these days?!

US uses them for business-to-customer payments, especially unsolicited ones, because we don't want to give random businesses we don't know our bank account numbers.

[monodeldiablo]

Those numbers at the bottom of a cheque? Yeah, they include your account number.

There's no inherent information risk to giving out an account number that justifies an outdated paper-based system. Especially when one considers the accompanying fraud risk thereof.

The instant I moved to Europe, I realized just how far behind consumer banking is in the US. It's pitiful.

[orwin]

You can't get your refund directly on your credit card? It's standard for at least clothes and tools/furniture in my country.

[Forgeties79]

We have had check deposits with smart phone cameras for over a decade. I’ve done it with Schwab since college, and while I won’t share my graduation year, it’s been well over a decade lol

[bequanna]

So, they restrict my access to money that is mine for less time? I’m not sure I would call this an innovation.

[morelisp]

VCs and founders must believe SVB offers at least one, or why not go with a normal bank?

[saurik]

And how did that work out for them? Are many of the people who were using SVB yesterday happy about their decision today? If they could go back in time and give up whatever that innovation was, and not be praying that they still have their money next week, are you saying most of them would be happy where they are? The problem here is that the system just isn't transparent enough: you put your money in a bank and I guess you just have to assume that they are really really smart or you lose your money... people make fun of crypto here constantly, but at least there everything is an open book. At the end of the day, the situation with SVB is actually worse than some scary DeFi protocol.

[nradov]

The system is sufficient transparent. SVB was a publicly traded company. Customers who cared about risk could just read the reports. In the end any bank can fail.

https://ir.svb.com/financials/sec-filings/default.aspx

The depositors will get their money back, with perhaps a small delay. Which is more than you can say for scams like cryptocurrency.

[monodeldiablo]

Depositors will get their insured money back. Is there a commitment from the FDIC to make all depositors whole? If so, that's not typical.

[nradov]

SVB was a normal bank. They specifically targeted tech industry startups through relationships with VCs and founders, but there was nothing special about the banking side.

[gesticulator]

This has to do with a web of relationships and risk tolerance, not some product set…

[morelisp]

Whatever you mean by "relationships" is in fact an "innovation" in the banking sense.

[MrMan]

nonsense - what banking innovations do startups need? is there really any such thing as a startup? or are we just talking about small businesses some of which grow into larger still unprofitable businesses? hopefully this mythologizing stops

[chasd00]

I was wondering the same. You put money in a bank so no one robs you and steals it. Money goes in and money comes out when you need it. What innovation is there?