[kurthr]

Play bank run games, win bank run prizes.

Really, I don't love the regulatory arbitrage played by SVB and unhedged duration risk, nor the moral hazard created by the bailout, nor the somewhat bizarre attitude of companies holding huge $100Ms of uninsured deposits earning minimal interest (why have more than 1 months cash flow?), but really this was a bank run pure and simple. When you have to plan to lose >20% of your deposits in a single day you're not a bank anymore. That is a money market account or some other product, which doesn't lend long. It's a bit apropos that those who started the run will pay part of the price, although there's a LOT of collateral damage, and I don't doubt those who started it will ultimately turn that to their advantage since they have the deepest pockets.

https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.htm...

BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes (not raising short rates would increase inflation expectations and push 10y rates even higher!). And there is no hard line between solvency and liquidity, because it all has to do with time scale. If I say you have to give me $1000 in the next 3 seconds or I take your car, you can't do it because you can't reach your wallet fast enough.

[akira2501]

> you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes

I blame the bank management. They left the risk management position open and spent way too much time, money and effort on marketing during that period of time rather than shoring up their shaky position.

[danielmarkbruce]

It's also questionable that they could account for their bonds the way they did. A company isn't allowed to just decide to put something in the "held to maturity" bucket - they need to both intend to do it and actually be capable of doing it. Given the depositors in question, I don't think they ever met the bar.

[MilnerRoute]

And even then, this article is about the venture capital industry and private equity firms - which for the most part is entirely different than banks.

The problem is apparently that some VCs invested in banks - and banks are about to be more heavily regulated. That's a good thing -- it will get banks implementing the backstops they should've had all along. I really don't mind if some VCs make less money than they'd hoped on their investments in risky banks.

Also, this $500B number is spread across the entire VC industry. And even then, most VCs have heavily diversified portfolios. Just for example, one investor in SVB was Insight Partners -- but their web site lists 800 different investments. They're part of that $500B number, but it will have very little effect on their overall portfolio.

[phoehne]

Actually, I think what they're talking about is that VCs have a lot of investments they would not dump more money into. They use these investments as collateral for loans, based on some kind of valuation (which, given the lack of price discovery is arbitrary). Essentially, they're zero value investments. If these investments were repriced, the actual value of the VC fund would fall.

As the interviewee indicates, if the uninsured depositors had not been bailed out, the VC firms would have had to decide to put more of their "dry powder" (on a temporary basis) into these startups until their deposit claims were adjudicated. the VCs would not have done that, even if they knew they'd get all of it back when the dissolution was complete. That means that the 10 million investment in a 1 billion dollar unicorn currently on their books would suddenly be worthless.

Instead, they're going to continue to carry it at $10 million because there's no price discovery on these highly illiquid assets. Essentially, the last price discovery was when they made the investment which caused the value to be set.

[rlucas]

54% of SVB’s loan book was loans “to” VCs and PEs, but they weren’t loans based upon the funds’ portfolio holdings. They were Capital Call lines, based on the power of the VC to demand that its LPs make good on capital commitments.

(Yes, the fund portfolio holdings were pledged as additional collateral here but that’s secondary. The only thing that could make the CCLOC outstandings get marked down is if the well-heeled institutions and individuals who’ve committed to VC funds stop making their capital calls.)

Even SVB is not crazy enough to lever up against VC portfolio marks.

[LapsangGuzzler]

SVB also chose not to prioritize hiring a risk manager for months leading up to their collapse, which is just pure stupidity. Anyone worth their salt would've pointed out that they were at risk due to their investment strategy and homogeneous customer base.

We're seeing old lessons from the 80's being retaught in the banking world.

Never put all of your cash in one bank. Keep your debt and your liquidity held in separate banks because if you don't and your bank goes under, your bank debt is written off against your balance when the bank liquidates.

The hyper-connected world we've created prioritizes efficiency and optimization at the expense of operational redundancy, which leads to people getting caught doing stupid things like putting all of their money into one business bank that had no visibility into their own risk profile.

[htss2013]

Maybe they didn't "chose" to not hire one. Maybe every competent risk manager they wanted to hire wanted nothing to do with SVB because a competent risk manager would have been able to foresee what happened.

[rodgerd]

> SVB also chose not to prioritize hiring a risk manager for months leading up to their collapse

Closer to a year, I believe. On the back of lobbying for exemptions from Basel III adequacy requirements.

[arcticbull]

> nor the moral hazard created by the bailout

There was no moral hazard created because bank shareholder equity got zeroed out.

Bank management and shareholders were not protected against the 'find out' phase.

[xboxnolifes]

People keep saying this, but I don't understand why they don't see the issue. Yes, shareholders got zeroed out of their SVB shares. But since there was no risk to playing with depositors money besides losing the business, which can fail in any number of other ways as well, there is no deterrent to taking on the large risk.

The optimal strategy to beat the competition is to edge toward more risk. And since you can get an edge by playing more risky, other banks will have to do as well to compete.

A traditional business, when edging toward risk, fails when they cannot get their customers to buy from them. Banks fails when they can't get their customer's money back to them. That's the big issue with the risk dynamic.

[taeric]

This is probably less true than you think. If SVB's assets had been anything other than treasuries, I would agree. But liquidating their assets would almost certainly move all of those to a willing buyer. It is everything else that is problematic and likely nobody wants to buy.

[yibg]

What was stopping this behaving before or if there was no depositor guarantee? Either way there was no downsides to them.

[cwilkes]

The moral hazard is that there isn’t a a limit to the $250k FDIC insurance so people that put money into the bank don’t have to care what the bank does.

So there’s no incentive to work with a bank that took the time and money to pass a stress test — in fact the one that didn’t bother to do any testing can give better terms as they aren’t spending money to be safe.

[arcticbull]

I don't think it should ever be the depositors responsibility to figure out whether a bank is properly managing their risk backing your deposits. That's both intentionally meant to be opaque to depositors - you get dollars in an account, not share in an MMF for instance - and also, it is incredibly difficult for even professionals to evaluate. This is the responsibility of regulators plain and simple. And I'd argue by the FDIC taking this risk on now, moral hazard is still not a factor.

[tripletao]

I'd tend to agree that expecting depositors to police their banks is bad policy. It would be better to make that policy change explicitly though, by insuring all deposits, rather than by slouching into it with ad hoc rescues like here.

I agree there's no moral hazard as to the SVB shareholders, since they got zeroed. There is a moral hazard as to the shareholders of other banks, who will benefit from the new lending program in proportion to the amount of bad interest rate risk they took.

[8ytecoder]

That’s the point IMHO. We want depositors to keep money in the banking system. The inverse of it where depositors don’t trust the system would result in even more bank runs. However well run a bank is, there’ll always be a certain amount of assets in long term that lose value in the short term. We’ll be seeing perpetual bank runs and a new shadow banking system will emerge if this continues unchecked.

[tveita]

They're opaque to anyone with less than $250k in the bank, which is almost everyone.

If you are large enough player to be visible in the "systemic risks" picture you should be helping to stabilize the system, not just throwing your weight around like a drunk elephant to see where money falls out.

[phoehne]

It is and it isn't the depositor's responsibility. It's totally expected for a large company to take a long, hard look at their bank. When I was an undergrad in Econ and in Accounting, the issue of insured account limits was literally in the text books. In the accounting/finance/economics area it's already well understood that a CFO (or their office) is responsible for vetting the bank. Moreover, it's the CFO's job to make sure the bank has adequate controls because (unlike consumers) commercial deposits are not indemnified when fraud occurs. If a company's payroll is stolen through fraud, for example, it's likely not recoverable. (Unless the bank failed to follow their procedures or the procedures set forth by the depositor, and you may still sit in court for years.) If your personal Visa debit card gets compromised, you aren't liable for the fraudulent purchases and the processor eats the cost. The health of the bank is less opaque to mid to large businesses, which have access to tools like Lexis/Nexis, Bloombergs, detailed ratings, and let's not forget personal networks. Most large companies also have to run big choices, like what banks to use, by their boards.

. Pending litigation . Counter party risks (e.g. do they have exposure to a problem bank) . Financial statements (usually the first stop and contains a lot of information) . Credit Default Swap rates (what does it cost to insure the debt issued by the bank) . What rules does the bank operate under (domestic, foreign, state, federal, etc.) . General reputation in the industry (e.g. go to $CS to launder your cocaine money)

That being said, it's probably beyond a small business to really evaluate their bank risk. And while 250k may have been adequate for the 2010's, it may no longer be sufficient to cover many small businesses (and by small I mean the back office is a handful of people). Should it be 500k? 1 million? I don't know. What I suspect is that making it unlimited, it means that a bank that's hemorrhaging depositors could offer unsustainably higher rates. Less risk-sensitive CFOs might decide that parking 10 million in reserves might be a good deal since it's as safe as an officially insured deposit. It's much more liquid than holding a 90-day CD or 3 month T-bill to maturity. Suddenly, the bank is flush with deposits, but is still going under. This would be kind of like the 1980's S&L crisis. That's why I'm all for raising the cap, but with clear limits and adjustments to the fees charged to member banks for insurance. If we need to expand the FDIC insurance fund by 3x to raise the cap, that's fine. But raising the cap, for an extended period, without adjusting the rules or the price for the insurance could lead to unintended consequences.

Should a VC funded company of 10 people do what GM does when evaluating a supplier or customer? Probably not. What about when it gets to 100 people? At that point I would expect there to be a competent CFO. What about the VC? (I'm just going to ignore all the tweets from the All-In community that showed a profound lack of understanding of banking, confusing a modern bank Gringot's.) Should the VC, as part of their advisory role, maybe recommend a good part time CFO or cash manager? Did regulators screw up SVB? Possibly, there were a lot of issues found when they transitioned to a new regulatory team year or two ago (or so I read). But regulators are not bank managers. And if a bank can show their risk controls are adequate, and those risk controls are being followed, it does not mean they're making good investments. (It's arguable that both lack of controls and following controls were an issue for SVB - as far as I've read).

[bagacrap]

What's an individual supposed to do, pay for an audit of a bank's balance sheet?

The bank had poor risk management, regulators were asleep at the wheel, depositors are blameless. Although I will say that a startup with millions in the bank should probably have a CFO.

[kasey_junk]

Large deposit holders audit bank balance sheets as a matter of course. It’s a standard risk management function for corporate treasuries.

That it’s apparently news to a bunch of cash heavy depositors at SVB is one of the more revealing parts of the crisis to me.

[phoehne]

If you bank with publicly traded banks, they publish their financial statements and those statements are audited. They are freely available for you to read and contain a lot of good information. You could watch, for example, SVBs interest expense grow unsustainably, quarter after quarter. That's what the shorts picked up on and why some investors built up a short position on SVB.

That being said, two people running an Etsy store won't do that. Nor should they have to. Maybe the insurance should be bumped up, but for either a very limited time, until you write new, official rules. And yes, the CFO should do an appropriate level of due diligence for a large business with lots of money. It makes you wonder what some of the CFOs did all day.

[watwut]

You can insure larger deposits. It costs a bit more and that is about it.

[chimeracoder]

> So there’s no incentive to work with a bank that took the time and money to pass a stress test

This assumes that there future uninsured deposits are guaranteed (they may be, yes, but this is a bet, not a certainty).

Regardless, you're making the case that consumer choice is not sufficient pressure to enforce safety measures. Which is correct, but we already knew that! That's the purpose of regulations.

Expecting industries to self-regulate in response to market forces is a losing battle.

[dilyevsky]

Right lets all just play silly accounting games breaking up your 100M into 400 individual bank accounts instead of doing something productive and just raising fdic limit to something sensible for a small-medium business

[bagavi]

You have to play silly games and try to fix the system simultaneously.

You always keep your foot on the brakes in case someone is drunk driving on the road. At the same time, you'll try to fix those issues via legislation (DUI) and technology

[phoehne]

That's why managing those insured deposits is automated.

[HWR_14]

You mean spread you 100MM into 400 individual banks so we have diversification when a single bad bank CEO decides to take stupid high-risk positions?

[doktorhladnjak]

There is absolutely moral hazard for depositors. If uninsured SVB depositors had gotten something like 90¢ on the dollar for deposits, every company with uninsured deposits would start thinking about how reliable their bank might be. More due diligence would happen.

Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larger.

[Turskarama]

It shouldn't be up to depositors to do "due diligence" on their bank, making sure they're compliant is exactly the kind of thing government is _for_.

Imagine if you had to do several hours of research on every single thing you purchased and investment you made, you'd never have time for anything else and there's still a chance you miss something.

Compare that to experts doing it and spending a lot more time on it, then slapping anyone who is not up to standard. It's a way more efficient system.

[kshacker]

If you see a bank offering 4.75 percent on a certificate vs another offering 2.75, which one would you choose? If you always choose the highest, should you not have a stake if the bank was found to take a lot of risk to offer this higher rate?

[bagavi]

Break up your deposit into 250k$ accounts, each insured by FDIC. Let software handle the logistics of payments via multiple bank accounts.

Asking depositors to do the due deligence is a strawman.

[norgie]

> Asking depositors to do the due deligence is a strawman.

Except that there are many commenters in this exact thread making that argument.

As for splitting up your deposit into $250k chunks, I agree, companies should do this as much as possible. But it would be hard for some companies. An extreme case is Circle, who says they had $3.3 billion in SVB. To get all of this covered, would require 13,200 different banks. It looks like there are only 4,236 FDIC-insured banks in the US. Add in another 4,853 NCUA-insured credit unions, and we're still left with $873 million uninsured, despite using nearly 10,000 accounts.

[HWR_14]

Circle is an extreme case with over 100MM USD of revenue each year and whose primary product is memory management. I'm fine saying that they have to do due diligence.

Sure, I don't want depositors to have to do tons of due diligence to manage a small business payroll. But I am also fine saying that a company with over 2 billion in USD should be able to afford to find safe places to stash it.

[bagavi]

Can't you have multiple accounts in the same bank?

[dalyons]

Why? What is anyone gaining by forcing individuals and businesses to utilize middlemen to split their cash across dozens of bank accounts? Just guarantee deposits for all and skip the performative complicated BS.

Spread 250ks all comes out of the same fdic pool anyway, so why bother?

[xmcqdpt2]

Exactly. The 250k limit is clearly meant to ensure individuals don't have to fear bank runs. Saying companies should split accounts so that they all remain close to 250k is clearly a hack that goes against the intent of the law.

I think the government should reserve the right to haircut large depositors in cases where there is serious negligence or malfeasance, so it makes sense to have the limit. But it's also a good idea not to do that in cases of mere incompetence, like here.

The alternative is to do like Canada and basically keep around a handful of big banks and make it illegal for them to acquire each other (to avoid further concentration). We don't have to rescue them basically ever... but if we did it would be abysmally expensive. And customer service is garbage.

[bagavi]

The banks don't want you to split the money because they will have to pay higher insurance to FDIC. This will eat into their margins. The business and the customers interests are not aligned in this case.

Until the law changes, you have to look out for yourself and not beg for bailout. Also, this is not complex since software takes care of it behind the scenes. Our company did it from day 1.

Also more than half of deposits by volume are FDIC insured so the system can handle the whole volume if the customers choose to do so

[youngtaff]

Asking large depositors to split their deposit amongst multiple banks is unreasonable

Asking them to insure their own funds is a reasonable thing to do though

[bagavi]

It's thier choice to adopt either solutions.

My point was that the existing tools and infra was enough for svb customers to secure themselves. At a high level, they didn't bother getting an insurance and now they beg for bailout.

[throwawaylinux]

> It shouldn't be up to depositors to do "due diligence" on their bank, making

It certainly should be if they aren't paying for their accounts to be insured. The government does not exist to prevent private companies from going out of business.

> sure they're compliant is exactly the kind of thing government is _for_.

And if regulations magically remove all risk, then insurance should be very cheap so no reason not to get it.

[Turskarama]

Ridiculous, how can the average person _possibly_ know if their bank is doing everything properly or not?

Even if they are when you open the account, how often should you check to make sure they still are?

If insurance is necessary then the banks should pay for it, then if they want to have lower insurance premiums it's up to them to lower their risk profile. Yes, they will pass these costs on to the customer, but banks with lower risk profiles will then be cheaper making them more popular, and increasing stability of the entire system.

[JumpCrisscross]

> have to plan to lose >20% of your deposits in a single day you're not a bank anymore

When you sell your liquid portfolio to Goldman at a $2bn loss and then announce non-binding equity commitments, you’re going to lose 20% of your deposits. Now that banks can borrow against the face value of their Treasuries, the same duration problem shouldn’t recur. (That said, we’re stuffing an ungodly amount of crap into the FHL bank.)

[mitthrowaway2]

> BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes

Can't we sort of blame the Fed for that [yield curve inversion and long rates] too? It undertook massive quantitative easing during the pandemic, which depressed the yield of long-term bonds such as those bought by SVB. Perhaps if it hadn't done so much QE, the yield on SVB's long-term bonds would have gone from, say, 3% to 4% instead of 1.56% to 4%.

Edit to clarify: I'm not saying that the Fed deserves blame for SVB taking such a risky long-term position, I'm saying the Fed deserves some blame for long-term bonds being risky.

[LapsangGuzzler]

> Can't we sort of blame the Fed for that too?

No. SVB chose to pursue a risky investment strategy with no risk manager at the helm for months, the banking equivalent of stupidly storing all of your nitrous fertilizer in one place and then being surprised when the whole thing blows up.

SVB made numerous, critical mistakes in their management. If anything, one could argue the Fed enabled this stupidity by keeping rates low for so long. But ultimately, the failure falls on the bank.

[jjeaff]

I haven't seen a lot of evidence yet that SVB was necessarily pursuing a risky strategy. Certainly, proceeding at all without a risk manager is risky in and of itself. However, the "risky" investments that I have heard described thus far are mostly treasury securities. They simply had too many for a time horizon too far out. There is no bank right now that could withstand a withdrawal rate of nearly 50% of total assets in a single day.

[nafey]

> However, the "risky" investments that I have heard described thus far are mostly treasury securities

You assume that all risk is default risk. The risk that SVB took wasn't that the US govt will default on its bonds. It was that the treasuries will lose their value in case of interest rate changes.

SVB bought billions of dollars of US treasuries which lost their value in the last year due to rate hikes. This showed up as unrealized losses on their balance sheet which spooked their depositors and precipitated the collapse.

[jjeaff]

No, I understand the liquidity risk involved in having too much tied up in long term treasuries. But I am yet to see evidence that any bank could have withstood a run of that magnitude. Nor have I seen much evidence that most other banks have significantly less liquidity risk than svb did.

[tripletao]

It's solvency risk, not liquidity risk. When interest rates are 4%, having $1000 ten years from now means I have 1000/1.04^10 = $676 now. If my current liabilities exceed that, I'm insolvent, not illiquid.

Liquidity is about bid/ask spreads, disorderly markets in which the price becomes temporarily irrational. The SVB's problem was simply the time value of money, that the liquid and economically rational price of their long-term bond-like assets is lower than they wished it would be.

This paper estimates that 190/4800 ~ 4% of banks would have deposits at risk if half of uninsured deposits were withdrawn. That means 96% of banks wouldn't. The SVB's situation wasn't completely unique, but it's far from the norm.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676

[LapsangGuzzler]

> Nor have I seen much evidence that most other banks have significantly less liquidity risk than SVB did.

In traditional banking, rising interest rates are a good thing because it means that banks in turn get to underwrite loans at higher interest rates, which positively affects their bottom line. SVB's problems were twofold: A) they had a one-dimensional investment strategy that was adversely affected by rising rates, and B) outstanding loans made up a very small portion of their business relative to their size, which made it so that they weren't able to capture meaningful value from rising interest rates. The latter is actually pretty rare for a bank, which shows how uninterested they were in actually functioning like one.

[prottog]

> But I am yet to see evidence that any bank could have withstood a run of that magnitude.

I think you're right that no bank can withstand a run of that magnitude, and it has been pointed out elsewhere in the thread that entities that can do so aren't really a bank anymore. However, the bank run only occurred because it was public knowledge that SVB had terrible duration risk, so it's somewhat of a chicken-or-egg problem.

All the findings that came out since then points to minimal duration hedging on SVB's part, so all in all it sounds like a bank that was poorly managed, perhaps adapted too well to a ZIRP world, and was ripe for a run to happen.

[HWR_14]

SVB was warned by the Fed numerous times about their risky strategies. Certainly that implies they were pursuing a risk strategy. In 2021, the Fed issued citations and said SVB had "serious weaknesses in how it was handling key risks,"

Meanwhile, the bank run happened because people noticed the horrible risk management, not randomly. And those people talked.

[kevin_thibedeau]

The COVID money printer was guaranteed to cause inflation. Raising rates to combat that was an inevitability. If you don't understand such basic economics and lack the wherewithal to hedge against likely future outcomes you shouldn't be running a bank.

[mitthrowaway2]

Oh, I'm not looking to absolve SVB of their responsibility for their position. I think you misread my comment. I mean blaming the Fed for the yield curve inversion and the steep change in long-term rates, and thus value of long-term debt, as opposed to only low overnight interest rates. The Fed does not deserve blame for SVB's choice to load up on that long-term debt without hedging those risks. I'm answering the parent's context, which is discussing how the gun got loaded; we all agree it was SVB to blame for pointing it at their own head.

[reverend_gonzo]

I’d say it’s more like the Fed opened up a “Free ammo and cocaine store”. Most banks came by, got their free coke and went on their way. SVB came alone and said “well let’s have a fucking party: get rocked up and play some Russian roulette.” And every other bank that might’ve been eyeing that ammo realized “holy shit this is for reals.”

[wbl]

Please explain to me what you think rates would have needed to do given that there was a massive decrease in economic activity due to a pandemic followed by inflation.

[phoehne]

I think the real damage was done between 2008 and 2018, when we spent 10+ years under zero interest rates in the US and negative rates in parts of Europe. I think that conditioned people to forget about things like duration risk and interest rate risk. Had we been under a "normal" rate regime during that period, I don't think people would have thought 10 year t-bonds paying 1.5% were in any sense of the word a "good deal." I think peoples' expectations were so messed up that Austria (?) issued a 97 year zero coupon, zero interest rate bond. Like it was a good thing.

[mitthrowaway2]

IMO? Overnight term rates should have been zero from 2020 to about July of 2021, then allowed to rise by 0.25 per month to perhaps about 3.5%. Long-term rates should have been left to float with the market, pricing in the expected risk of inflation. Not that my opinion matters, since I wasn't in charge.

[wbl]

That still leads to losses on long term treasuries. That's what it means to raise rates.

[mitthrowaway2]

Yes, of course it does. But there are losses, and then there are losses. 10-year yields going from 1.56% in 2021 to 4% in 2023 is equivalent to a price drop of 17% (given maturity in 2031). If 10-year yields had only been, say, 3% in 2021 before rising to 4%, the bond price drop would have been closer to 7%.

[rcme]

The Fed’s owns projections have rates coming down in 2 years. Of course the 10Y yield curve is inverted.

[grozzle]

Last week's David Mcwilliams podcast [1] goes into a good explanation, generally matching your reaction. David is an economist who's regularly been around all the top conferences, worked for a couple of central banks, and he is good at explaining how you can tell when the emperor has no clothes.

1 https://podcastaddict.com/episode/154571052

[ouid]

There is a hard line between insolvency and illiquidity. Illiquidity can be solved by borrowing at the federal funds rate.

[kurthr]

I kinda agree here, it's a cash flow question. But that doesn't resolve what the haircut (if any) should be put on the securities in question nor what their future value will be.

The BTFP does it for one year without a haircut. Is it long enough? Depends on where long term rates go. If they fall a couple of points in the next year, it could, but if the Fed fails to beat inflation and they rise... then it wouldn't.

[cinquemb]

The other problem with BTFP is that it makes less HQLA collateral available in the swaps market for securities with similar tenors to those locked in BTFP. In one hand you increase liquidity for the most liquid assets on bank books, and on the other hand you decrease liquidity for least liquid assets on bank books (and private holders of said securities, private $ denom debt > us gov debt).

[joe_the_user]

...really this was a bank run pure and simple

I've been around and around on this question. Insolvent or illiquid, illiquid or Insolvent... etc. It was solvent on paper, by what it had to record on it's books. But it was insolvent by mark-to-market (which it didn't have to use but which the sophisticated but not-that-sophisticated investors, say venture capitalists, would assume is the reality). But hey, you could say it was solvent by the Fed supporting every bank it's size. Then again, the Fed didn't come through in time, so maybe the run was the reality [1].

And you could say "this was a run 'cause picking on SVB in particular was unfair since a significant portion of all bank capital in long term bonds that put them on an "overhang" of unrealized losses. [2] But maybe, the Fed needed to cool the economy so killing a few banks was needed and SVB and signature were the most logical.

[1] Matt Levine in Bloomberg https://archive.ph/uIYtY [2] https://finance.yahoo.com/news/u-banks-sitting-1-7-211212318...

[tripletao]

> which it didn't have to use but which the sophisticated but not-that-sophisticated investors, say venture capitalists, would assume is the reality

It seems like you're implying that a truly sophisticated investor would view this differently, but I don't see how. By all indications, the MTM price was economically correct--bid/ask spreads and trading volumes were normal, and the price was very close to what a simple NPV model would predict. There are cases where the market price is economically wrong (in a "liquidity crisis", "fire sale", etc.), but there's no evidence of that here.

Managers and shareholders of the SVB and other banks with similar losses have strong self-interest in arguing otherwise, and they're doing so quite successfully. It's particularly easy to confuse people about interest rate risk, since it's so abstract--you're still getting the same future cash flows, and it's hard to explain why they're less valuable without a concept of NPV or other bond math, which relatively few people understand. The economic loss is just as real as with any other risk though, regardless of what the accounting says.

[joe_the_user]

I suppose I shouldn't necessarily imply "truly sophisticated" but one group of depositors would just say "of course the Fed will support the depositors, there's no reason to worry" your argument about insolvency is correct.

[tripletao]

That's fair--to the extent truly sophisticated depositors believed "there's no need for a bank run, since the FDIC would take extraordinary measures to back the uninsured deposits even if the SVB collapses while economically insolvent", they were exactly right. The cost of moving money out is so small that you'd have to believe that very strongly not to though, or to get a big auxiliary benefit (access to future credit, etc.) from the continued existence of the SVB.

[joe_the_user]

Yeah, I only really wanted to say there were different levels to how might approach this stuff, not try to rank their smartness.

On the one hand, the news reports seemed to vaguely imply that some pretty wealthy people were standing in line for quite a while and I assume that was time they could use to make money other ways.

On the other hand, maybe everyone withdrawing money knew things were safe but also "knew the drill", knew the Fed needed their complaints to bolster it's actions.

[somedudetbh]

> unhedged duration risk, nor the moral hazard created by the bailout

Just making sure I understand your point here, are you just against "banking"? Unhedged duration risk w/ LOLR backup is essentially "the banking business".

What's the moral hazard? The equity is wiped out, most of the debtors are wiped out.

The only moral hazard I see is we've disincentivized individual depositors from assessing the financial strength of their banks. To me, this is a good thing. I hope we can bring similar moral hazards to choosing a plane to fly on, bridge to cross, building to enter, restaurant to eat in, hospital to go to, etc.

[bagacrap]

Other banks had less duration risk and some used hedges. No bank is going to profit from this particular environment but it's possible to manage assets such that the entire business doesn't implode.

[landemva]

While it is possible to manage for safety, regulators did not enforce that.

[jgilias]

You sound like you have a good grasp of this!

What’s your take on the observation that historically after the yield curve inversion ends, it’s 3-6 months until a recession?

[qwytw]

It's a correlation. Also a big part of the inversion is the fact the market expects the Fed to start cutting rates in 3-6 months. Of course historically this tends to happen at the beginning of recessions...

[kurthr]

I agree. I'm an amateur, but I'll give my personal answer:

There will be a recession.. but when? I think sooner than later, but next year NBER could declare it to have started today or maybe it starts in another 12 months. There are "large and variable lags to monetary policy", which usually means >12mo. Almost a bigger issue than the actual risk free treasury yields is the rate volatility that's forcing lending rates up, because bankers don't know what's going to happen, and that makes loans and hedging expensive. The speed of the rate rise, along with the size and duration of inversion is very large and relative to previous rates it's a huge move (doubling from the 1-2% previously). That's going to break something some time. It could be when the debt ceiling fight gets real or earlier, if the economy actually turns over. You'll know when the Fed starts cutting rates.

[alxmng]

Blame properly rests on the system that is designed to produce bank runs. The system is designed such that bank runs are possible and inevitable. It is not risk management or the Fed’s interest rates, it is the practice of investing deposits while simultaneously promising those deposits are available. Instead of changing this system, the Fed was created to solve a problem the system inherently produces.

If deposit accounts were held at the Fed, and investment and loans were kept separate, there would be no possibility of bank run.

[landemva]

> not raising short rates would increase inflation

Proxy war in eastern Europe, with USA dumping big $ there, is causing price rises.

[nostromo]

Inflation was surging well before the Ukraine invasion.

[landemva]

The virus lockdowns ended and manufacturing supply chains have been clearing. Please tell us why price increases are continuing, instead of dramatically dropping.

[nostromo]

Because we printed trillions of dollars and haven’t come close to removing all that excess stimulus yet - nor have any supply side constraints that existed prior to Covid been removed.

[landemva]

I thought the corona payments ended. Computer chips and PCs are largely back in stock.

Fertilizer and fuel prices went higher in past year. This drove up food production prices. Molecule flow in pipeline to Germany was sabotaged, preventing sale of molecules from east to west which drove up natural gas prices at export ports in USA. Not a virus issue but a war issue.

[lxgr]

> Computer chips and PCs are largely back in stock.

Not sure if car manufacturers, the Raspberry Pi foundation, and many others would agree with that assessment. Energy prices in Europe have started coming down again as well.

And Corona payments may have ended, but the money is still sloshing around in the system.

[HWR_14]

Why wouldn't you expect price increases to continue?

[bagacrap]

How does that domestic impact service sector wages

[landemva]

Large debt issuance to fund federal government deficit spending causes dollar to devalue. This affects price of labor paid in dollars.

[watwut]

Russian troll.

[mindslight]

"Proxy war" ? Asserting that Russia only invaded Ukraine at the behest of another country (China?) is a pretty strong claim.