That chart would probably be more useful if expressed as the shortfall between assets and deposits. It's not really a huge issue if a bank with $1T in assets has a $1M shortfall but the regulators will sure a shit still close it down.
Almost all failed banks (including SVB) in recent history held more assets than deposits. Liquidity is the issue.
Imagine you take your $10 million fortune and convert it all into gold bars and hide it under you bed. Then you order a pizza. When the pizza guy shows up, even though you are "rich," you are also in that moment broke and can't pay for the pizza. Not only will the pizza guy not take gold, you can't find someone to convert your gold into cash before the pizza guy gives up and leaves.
Except instead of just leaving, the pizza guy sues you and the state takes your gold bars under your bed and sells it to pay the pizza guy. Not saying this is a bad or good thing.
... and sells it ASAP for any price, as long as it's more than the cost of the pizza. No need to wait until tomorrow to get market value when you can recover your losses today.
That analogy only works when your gold is obviously worth a lot more than your pizza bill.
For SVB, the knock on the door is more like a loan shark coming by to call in for their return. You have gold under the mattress that is sometimes worth plenty, but it’s value isn’t determined until it sells and it isn’t looking to square up with what’s due.
Isn't the thing they got caught out on mainly TBills though? So the metaphor falls apart again because they have a practically guaranteed value just with a long time horizon.
The value at maturity doesn’t matter. It’s not like they were going to sit on them for the whole term anyway. They’re just an asset that’s usually fairly stable and that usually stays that way over a certain window, and so they’re actively traded and have a market value based on those characteristics.
In their case, the market value of the TBills that they purchased slipped too much. Because that’s just paper value and could have recovered or been been balanced for eventually, it might not have been an issue without a run of withdrawls. But buzz hit that they were in an unexpectedly and unisually fragile position, and that made people start the run that broke them.
> It’s not like they were going to sit on them for the whole term anyway
Really? Most of the reporting has described them as having a crisis in part because lots of treasuries that they had classified as "held to maturity" needed to be reclassified as "available to sell" which required marking them to market.
The shortfall only occurred because they had to sell their assets before maturity, and the value of those assets have decreased. If they were able to hold them to maturity there wouldn't have been a problem - they still pay out the same amount of money at the end - but right now people are willing to pay less for future money than they used to. So if they spend 90 bucks on a bond that matures in 5 years and pays 100 bucks, if they were able to hold for 5 years, they'd still have gotten their hundred. But, both the accidental run (no new vc money while companies keep spending their deposits) and the actual run on thursday meant they had to get that cash back now, and today people might only be willing to pay 80 bucks for that bond that still pays 100 bucks 4 years from now, so they lose 10 bucks. This is why if there was no run, there was no shortfall, but because there was a run, there was shortfall.
This seems like a rather exaggerated framing to absolve SVB of any responsibility for what happened, and is not accurate.
SVB overleveraged into long-term bonds in 2021 when interest rates were at an all time low. A financial institution/bank normally would hold a mix of maturities in their fixed-income holdings - 1 year, 3 year, 10 year - to maintain liquidity and reduce insolvency risk.
"If they were able to hold them to maturity there wouldn't have been a problem" does not make any sense - it's as if your company told you just wait an extra month for your paycheck, there won't be a problem. And then you told the mortgage lender to forget about this month's payment - if they just wait until next month, there won't be a problem.
Not to mention they had well over a year's advance notice to do _something_ because they knew exactly by how much their assets would decline in value. In March 2022 the Fed announced the decision to raise rates and continuing to do into 2023. By Sept they had announced the terminal rates would be over 4%, and have continued to openly increase that target since then.
Bond prices moving inversely to interest rates is Econ 101; anyone (at SVB) could've quite literally calculated their ~$25B 10-year 1.8% notes would drop by _at least_ $5B in 2023 before the terminal rate is even reached.
The run was the result of a clearly impending liquidity issue due to lack of near-maturation assets, not the other way around.
Why would my explanation read as absolving them of responsibility? The folks running the bank are professional bankers. They took a position that massively exposed them to interest rate risk and market cycle risk (when all of their clients are concentrated in a single industry!). As I said, they'd have been fine if they didn't need to cash in on those bonds or if interest rates stayed low. Making that assumption that they wouldn't need to sell (i.e. deposits would keep coming in) was obviously very stupid and failing to hedge interest rate risk (when high interest rates might directly lead to lower deposits because of the vc/startup client base!) is an even higher level of stupid that led to the whole thing collapsing in 48 hours. That doesn't invalidate that the bonds are still good/they have assets greater than deposits (though obvioust rhere could be fraud/devaluation when they try to sell) and that the FDIC has a pretty good chance of getting most people's money back (eventually, hopefully).
The main cause of the issue was that deposits increased so much over the pandemic and then decreased a lot simultaneously with a huge spike in interest rates. The Fed and the government have (unintentionally) engineered a banking crisis. A lot of banks are having liquidity issues now.
Yes they don't have a shortfall as long as there wasn't a bank run and they'd have time to unwind their long term bonds.
But they don't have time and did have a bank run, and therefore they do have a shortfall.
I think you might be able to argue that the bank itself had enough intrinsic value beyond it's ledger which could make up the shortfall, but that's all in the eye of the beholder who might want to buy them. We'll really see whether this is the case or not based on whether they have a new owner on Monday or they don't.
um, i'm sorry, but if i'm the pizza dude and i show up at your house where you offer to pay for the pizza in 1 bar of gold (sorry, we don't make change), then i'll gladly take that deal and pay for the damn pizza myself.
of course, we've already done all of the tests to prove it is gold and not lead dressed up in sheep's clothing
No bank with $1T in assets will ever have a shortfall of only $1m - it’s too easy to shuffle things around to move the problem forward another day or whatever.
A bank the size of SVB has a whole team that does that - it’s just a necessary part of operating at that scale.
Blowups like SVB happen when an entire team of financial experts have tried everything - and have nothing left they can do.
Then it blows up big, because all their other moves ‘come due’ at once.
I'd also like to see "Years of Banking Institutions Lost"... SVB is supposedly 40 years old... how old were banks that had failed in the past? That'd be an interesting other way to tally/view the magnitude of what happens, a kind of indicator of volatility.
My thought is... if a whole bunch of banks open then shut down 3 years latter, it doesn't seem as notable as a bunch of more established banks going under.
Why does that sort of “infant mortality” matter in finance if they play by the same rules?
I’m not being argumentative, just trying to understand. In physical systems, that view would be used to apply additional stress testing early to reduce the overall risk exposure (e.g., test a pump for a certain run time to be assured it’s made it out of the early failure age and is more likely to last a lot longer). I’m not quite sure how this applies to contrived (non-physical) systems.
I can imagine two effects why a younger bank might experience higher risk:
1) a young bank is more likely to experience a high-growth phase, which produces operational challenges
2) a young bank might be founded to serve a new business niche, and experience with the challenges of that niche might be less prevalent in the banking sector. Like airplane regulations, rules are written in blood.
Yeah, I don't know anyone saying "it's just SVB since 2000". They're saying SVB is the first major bank in a long time (and hopefully not a harbinger of things to come).
I'm actually curious if SVB failed because it had so many highly connected "big" customers.
A panic moves a lot faster if each person is pulling 8+ figures from the bank, and you have a lot more incentive to panic if you have more than the 6 figures of FDIC insured balance in the bank. There's also a measurable difference in hearing crazy Jim down at the pub pulled his $400 out of the local credit union because he heard the fed was raising rates and hearing from the VC on your startup's board that three guys -- guys you know and think are cooler than you -- have pulled their next year of runway from SVB because they're worried for vague handwaving macroeconomics reasons that sound plausibly impressive to you.
It sure is, and I hope congress and the Fed learns their lesson this time, seeing as some of the same people who worked in previous economic failures are still around, I doubt it.
Not the poster you asked. But, a lesson we continue to ignore is that there are other options to tame inflation besides raising interest rates. The problem is the option isn’t politically expedient so Congress just raises its hands in mock exasperation and says well, it’s the Fed’s mandate to manage inflation.
Congress are cowards and won’t do what should be done - raise taxes. That is likely the fastest least painful long term solution to quickly climbing inflation
I say likely solution because at this point economies are so complex I’m not certain there are solutions without any butterfly effect consequences
Unfortunately, the current tax structure disproportionately affects not-as-wealthy people/companies. So raising taxes would probably be a very unfair move to most people.
My fantasy would be for the government to abolish taxes altogether and just print the money they need, then use whatever mechanisms they have to take enough money out of the market to keep inflation in check.
That way we wouldn't have to pay taxes and the government could just get whatever money they need when they need it. I mean, they already do, so why make people jump through hoops and threaten them with jail for not paying taxes properly, if they could just do without taxes in the first place?
It kinda feels like the whole system is a scam to keep control over the population.
> then use whatever mechanisms they have to take enough money out of the market to keep inflation in check.
What mechanisms would these be, if not taxes?
The other main contemporary mechanism is raising interest rates, which only works on money that has been previously loaned out at a lower rate, and thus isn't a long term sustainable mechanism for recapture.
That doesn't address inflation. The point is that money needs to be taken out of the system. That used to be done by high tax rates on high incomes, and the estate tax. Both have basically been neutered.
But all things considered, 5% is not really a high interest rate. People are just acting as if it's unreasonable because they'd become accustomed to ZIRP. Personally I hope rates stay above several percent for the foreseeable future, for climate/resource reasons.
I know nothing about economics. Can you help me understand how raising taxes helps deal with inflation? Is the idea that the federal government "deletes" some of the money it receives through taxes, like the opposite of printing more money which cheapens the existing supply?
Yes, on the face of it. The issue with what appears to be the same old game is that those who absconded with the wealth pillaged through funny money, are not going to be the ones getting punished to “fix things”. This opens up a whole different set of cascading consequences because now on top of the moral hazard we had, we’ve gone well beyond that because the perpetrators have learned there are not only no consequences, but that you will be rewarded for your evils.
Combined with other factors too numerous to really go into here, we are seeing the emergence of essentially an aristocracy in the USA and Europe, consisting of, as the earlier aristocracy, of the pillagers of their own people and the people of the rest of the world.
You have stated Modern Monetary Theory precisely. Yes that is the new modern argument - government prints money, spends it on hospitals etc thus putting it in circulation and deletes it by taxation.
One HN comment == ten years of economic debate. :-)
In my opinion the Fed should be more decisive and data-dependent. In 2021 the Fed stubbornly stuck to an "inflation is transitory" narrative that meant they did not start raising rates all of 2021 when most people could see the excess and the mania of a bubble. Rates should have started to be raised since the summer of 2021, they could've done a slow and steady pace.
Instead, once things got super hot inflation-wise, then they flip flop and start a very rapid pace of rate hikes, unsurprisingly something broke and here we are once more talking about bailouts, about more QE. We're frenetically going from rapid tightening of financial conditions, to potentially, rapid loosening of said conditions. The Fed is supposed to raise rates in two weeks, I'm not sure if they will change their mind given what just transpired this last week.
I agree inflation must be tamed, I criticize the Fed's inability, or unwillingness, to start addressing it at least a year earlier. From my cynical perspective, keeping rates super low is a fucking party to the stock market and lots of powerful people want to keep the party going and they closed their ears to the inflation alarms. Now we're facing the possibility of another crisis (we'll see how things play out next week) and we know that the proposed solution will be to lower rates and accommodative policy that actually contributes to inflation. It's a shit show I'm tired of seeing repeat.
Those are simply common correlate effects. Inflation is really rather simple, it is inflation of the money supply, i.e., printing more Monopoly money for oneself, knockoff purses, using chemicals to create fake honey, it’s what counterfeiters do … whether it’s some North Koreans or the federal government … its fraud, criminal, illegal, immoral, evil, and a clear indicator of illegitimacy of this or any government that does what this fake government has done.
> It sure is, and I hope congress and the Fed learns their lesson this time, seeing as some of the same people who worked in previous economic failures are still around, I doubt it.
Don't bet on it. One of the big changes after the 2008 crisis was the passage of Dodd-Frank, which was then repealed in large part in 2018.
Some of the repealed provisions in Dodd-Frank would likely have mitigated or even prevented this bank run, due to the capital and liquidity testing requirements.
There are other banks that didn't make the official list, but effectively should have.
National City Bank was the US' 7th largest banks. It didn't "fail", but the US Treasury gave another bank, PNC, $5.7b in a capital injection to buy it in late 2008.
My very weak understanding is that in 2008 a ton of assets turned out to be valueless junk mortgages that were all going to default. Is that true for SVB or are their assets just too locked in for now?
What that graph doesn’t show is the percentage of the blue bars that are recoverable assets.
I'm not sure if we know how much of the blue bar is recoverable. SVB is holding a lot of fixed-income vehicles that currently yield less than:
* Depositing money in a fed account (available to banks)
* Depositing money in a money market savings account
* Every treasury instrument you can buy today
When they go to sell those assets, they may take a much bigger haircut than the pricing models suggest given the supply and demand. The assets definitely won't be worthless, but they may not be worth very much.
Treasuries don't even need to pay more than a savings account to be the rational choice as they aren't subject to local/state income taxes. That's a bigger than average advantage in California.
It turns out that there was very little defaulting in 2008, the problem was the fear of default which resulted in changing valuations that were not broadly expected.
In this case, there is no doubt about the value of SVB’s assets: they’re lower than they were a year ago simply because they were heavily long duration and rates went up a lot. That’s bond pricing 101.
That, in combination with a low diversity of depositors that starting withdrawing at once, set up the bank run that VCs created by emailing all their portfolio companies to run.
Not valueless, exactly. The mortgage backed securities were rated more highly than they should have been as the default rate was assumed to be much lower. When that became obvious the securities lost a lot of value and the banks found out they were over-leveraged.
I'm not in finance (clearly), but it seems to me there are a lot of similarities with interest rates rising and forcing banks to re-value their investments in bonds and mortgage backed securities. The clear difference this time IMHO is that valuing bonds based on interest rate movements is much less opaque (even fully transparent) compared to valuing mortgage backed securities based on default rate predictions that are outright lies.
We know, or should know, how many of these investments are held by large banks and what the rates and maturation dates are. The big question I have is the more traditional financial contagion. If companies that had millions in SVB lose that money there will be impacts for other banks as the companies and bank investors become more conservative or paranoid. If many of those companies go out of business that means fewer deposits and fewer investment opportunities.
Also note that the prior large spikes were due in large part to multiple banks failing as well [1]. It's also notable in that this is the second largest bank to fail in the data I've been able to track since 2008 [2].
I'll ask the obvious question, because I have no clue about this stuff. The early failures in 2008 seem to have been followed by a cascade of smaller failures. Is that going to happen again?
We don't know yet, we're slowly finding out who had exposure to what and how things are interconnected. It's a complicated machine and we'll probably know only after the fact. There's a lot of damage control messaging going on right now, and that actually makes me feel more bearish: All rumors are false until officially denied.
Right now we're dealing with the psychology of markets, if a large enough group of people get scared and want their money out, there's no amount of assurance that can stop that. They will only be appeased once they know their money is safe with them.
Even officially denied rumors can be true. See FTX ensuring panicking users that they were very much liquid, days (hours?) before they announced bankruptcy
I have no clue about this stuff either, but in my mind, every competent CEO has already asked their staff what uninsured deposits they have, what the financial condition of the institutions they have those uninsured deposits in is, they've asked their staff what they can do to mitigate risk from those uninsured deposits, and they want that answered over the weekend so they can go over it in an 8AM meeting on Monday and decide on what actions to take.
> The day before SVB fell, everybody said everything was fine.
Well, no, people were saying “Get your money out of SVB if its above the insurance limit”, because the run was already happening and that SVB couldn’t handle the run was a pretty widespread opinion.
But, while there are systemic/institutional/regulatory reasons why SVB’s conduct which created the vulnerability was possible, it doesn’t seem that the vulnerability itself is systemic in a way which makes other similar failures likely to be imminent.
Wouldn't we expect a lot of orgs to suddenly start caring if they have more than $250k in their accounts and start spreading it out over the next week, or removing it from banks entirely and putting into treasuries or other assets?
Or withdrawing entirely from niche/smaller banks and into bigger/more diversified ones?
(diversified banks are great because payday becomes mostly book entries instead of massive inflows/outflows on payday)
> Wouldn’t we expect a lot of orgs to suddenly start caring if they have more than $250k in their accounts and start spreading it out over the next week, or removing it from banks entirely and putting into treasuries or other assets?
I’d expect big orgs to mostly have money in banks specifically for reasonable cash needs (or temporary inbound flowthrough), and to have it in treasuries or other assets otherwise, but I wouldn’t expect to see much change. There’s no news here impacting accounts in other banks: the $250K insurance limit isn’t news, and there’s no reason to think that SVBs particular concentration of assets in long-maturity illiquid assets that have lost value is systemic rather than sui generis.
The ripple effects that will occur, I would think, will be more through companies that were dependent on SVB than companies with money in other banks.
I'm very curious about the bailout criterion. They can't set the rules individually for each "problematic" bank. Whatever formulation they come up with, will be immediately abused by creative financial engineering, so the problem will soon re-emerge in a different, totally unexpected shape.
> They can’t set the rules individually for each “problematic” bank.
Most past bailouts have been sui generis actions with rules adopted for individual or small numbers of institutions currently in trouble, not forward-reaching “rights” that future actors could exploit. So I don’t see why you characterize this as impossible here; if there is any bailout beyond regular FDIC process, the most likely case would be a unique specific plan for this institution that creates no general rule that anyone else could force the government to use in the future.
This "future" will arrive the very next day wrt another bank under the same type of stress, and then the next... Ad-hoc action for SVB might aggravate the situation.
In principle, they can do whatever they want, but they already know SVB is not the only problematic bank - there's a whole pipeline of them; inventing individual bailout protocol for each would look ridiculous. My bet is that Fed's PhDs are desperately looking for a formula as we speak. That won't be easy. :-)
Yes and No. Depends how you track "failure" and from which Point of View:
> Silvergate Capital Corp.'s voluntary liquidation process is being supervised by the state of California, and the company has not entered the Federal Deposit Insurance Corp.'s receivership program at this point, a spokesperson for the California Department of Financial Protection and Innovation confirmed.
Other banks in the past have "failed", but not from FDIC point-of-view, instead merged into others through a shotgun marriage facilitated by the feds, e.g. Bear Stearns and National City Bank[0] (formerly a top10 US bank until late 2008)