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:
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.
Even more: single, joint, retirement, revocable and irrevocable trust accounts all fall into different categories and are insured independently for each account owner in each bank (the joint account is 250k for all co-owners): https://www.fdic.gov/resources/deposit-insurance/financial-p...
Or you could hold short-term t-bills for any extra money over the FDIC insurance limit. Then you are good unless the US Gov goes bankrupt, which is a non-zero risk but much lower and different.
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?
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.
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...
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.
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).
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.
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.
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.
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.
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).
> 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.
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.
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).
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)
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.
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.
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.
>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.
> The Fed has shareholders, pays dividends, and are partially owned by the biggest banks.
Those statements might technically be true, but the implied conclusion (ie. that the fed is beholden to banks because of its ownership structure) is not. The federal government essentially controls the fed because the president appoints all the board members, and nearly all of its profits are paid to the treasury.
>The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits, after dividends on member banks' capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury,[22] and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion.[23]
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.
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.
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.
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.
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.
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.
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.
"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"
>> 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.
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.
The obvious consequence of defaulting in your debt is that it becomes difficult to go to the capital markets in the future if you need to.
Probably more politically disastrous is that if the debt is denominated in the domestic currency, it’s likely that a substantial portion of the bond holders are domestic and they will not be happy about having their wealth confiscated.
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.
It's not accurate to say the EU has been printing money like crazy for 10 years, when for most of that time, the money printing was minor compared to 2020-2022.
Europe, much like the US, was printing money, at a fairly steady rate from 2008 to 2020, at which point they doubled the money supply in a little over a year. That is, they printed more money in ~18 months then they had since the EU was formed.
At a very basic level, more monies in circulation means each individual money is worth less than before. If each individual money is worth less than before, you need more monies to buy something. This is fine if you have more monies on hand to compensate, but generally this isn't the case for individual persons.
Thus, you have inflation: The price of goods inflate(!) because the value of monies drops inversely to the monies in circulation.
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.
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.
“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.
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.
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.
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.
There are instant transfers (Zelle, wire transfers, debit cards). There aren't instant transfers with all the same properties as ACH, but later this year there will be.
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.
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.
Not in Europe it's not, which is
monodeldiablo's point: there's no inherent risk to giving out your account number. It's only the primitive US system which makes it a risk.
>> Those numbers at the bottom of a cheque? Yeah, they include your account number.
> Yes, as well as the routing number.
>> There's no inherent information risk to giving out an account number …
>Of _course_ there is. In the US, the account + routing number is sufficient to perform a ACH transfer, write checks against that account, etc.
The risk is enormous.
So… how does writing a check remove this risk then? That was the original point, that writing a check is safer than giving out your account number.
We can, but sometimes you get payments in the mail from businesses you only have an occasional relationship with.
You can pay people instantly by refunding their debit cards - that's how Uber drivers can get paid - but it's not free, which is why most transfers don't go that way.
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
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.
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.
The FDIC insurance won’t make the rest whole, the bankruptcy process will. The assets are not fundamentally toxic and someone will buy them, with a haircut.
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.
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
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?
This whole discussion around bonds makes me feel like I'm either too stupid or too smart, because it does not make sense to me that SVB would not have any sort of hedging around government bonds?
I don't know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It's common sense between investors you need to hold a mix of the 3 to hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it's likely the government will increase interest rates to compensate, and so on.
Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?
Every bank in existence fundamentally borrows short-term at a low, floating rate, and lends back out long term at a higher rate. The lending rate can be fixed or floating.
This kind of thing is bank risk management 101. For example, in Europe, banks tend not to lend out long term at all at a fixed rate, precisely for reasons like this.
Broadly this is called "duration marching" IIRC, duration being the name of sensitivity to interest rates. Ideally a bank would have no duration risk - they don't care if rates are going up or down. You can achieve it with a variety of tools: IR swaps, issuing long-term deposits/bonds, floating rate loans etc.
You're right, if SVB in 2021 just bet the farm that interest rates will stay so low for a decade, this is basically moronic.
No, it’s smart! If it works out, you cashout and go on the speaking circuit patting yourself on the back for your ygenius. If it doesn’t, you’ve limited your own liability and someone else comes in and cleans up your mess.
The US does have inflation-indexed bonds, but they're only available in small amounts ($10k/year). They're for consumers, not institutions.
You can, however, buy bonds with varying maturity times. That's generally OK, since there's a liquid market in those bonds. They appear to have been caught flat footed by a sudden run.
You only get paid to take on risk. If SVB hedged away the interest-rate risk that they take on by buying long-term bonds, they would no longer be taking on as much risk and thus no longer potentially earning as much profit.
AFAIK, variable rate bounds aren't common anywhere else. They are more of an inheritance of the hyperinflation times, and the government really hates them.
But people do love buying them, exactly because they never lose nominal value.
I'm not aware of any useful hedge for long term US government bonds. There are inflation protected bonds (TIPS), but they wouldn't have worked as a hedge in this case [1].
The author myopically tries to extrapolate this incident to "the economy" and "other industries". SVB's customers panicked. But who are SVB's customers. For the most part, VC, PE and non-profitable "tech" startups. Not surprising they would panic. They produce nothing themselves, conduct surveillance, sell advertising services, pay employees from funding rounds and call this a "business model".
This is not "the economy". This is a giant sucking leech attached to it. A parasitic fungus that has attacked the minds of an alarming number of susceptible people. But not everyone is a mindless zombie.
Among other things, the parasite needs "zero" interest rate borrowing to survive.
"The economy" is not synonymous with Silicon Valley nor the SV mind virus.
Hey can we save this kind of comment for Reddit? Literally the majority the tech you use today was born from companies that were unprofitable and leveraged VC funds at some point.
I don’t know about you, but I come to HN for discourse that I could not get on race-to-the-bottom social media sites.
Well, Intel, Apple and Microsoft, to name a few, have (nearly) always been profitable. But isn't VC supposed to invest in things that are likely to return a profit? There's some risk, which is offset against the ROI, but I don't see a good reason to invest in companies that run a loss.
I disagree. The poster has an interesting point and contrarian perspective. Is it a grandiose metaphor? Probably. Can we learn from the discourse? Definitely.
Even if the hyperbolic claim you made was true (it's not - see below if you want), why should we all be polite, pious disciples of Silicon Valley? It's ok to critique things, even when they provide some good.
N.B. I think it's more accurate to say the actual majority of tech we use is born from government funded research à la the entrepreneurial state. One should not confuse R&D with commercialization.
HN is much worse than many sub-reddits. Look at the belligerent ignorance on display not just here, but that which is demonstrated by the VCs who seem to collectively lack a sufficient knowledge of finance and other things. The decline in quality is evident here, and it doesn't stack up well compared to places where people mostly know what they are talking about.
In the short term, it is interesting to see if this problem grows[0]...if Fed keeps rates at high levels for longer, there is going to be a gravitational pull into treasuries which will cause more banks to fail.
It would be very prudent to not have more than the FDIC insured amount in especially smaller regional banks that may have made same errors as SIVB while avoiding Basel III regulations [1]
Boom and Bust is a feature, not a bug in western fractional reserve banking. In China, where they have a different system, the central bank would electronically print debt free money and recapitalize the bank and execute any bankers violating lending guidelines or otherwise giving "illegal loans" in order to prevent the moral hazard this would otherwise create. Being a banker and screwing around is an extremely serious crime in China.
The only reason the boom/bust cycle is implemented thus in the west is so the banks can periodically redistribute assets of their least successful borrowers to other people. In China, the reorganizations are more market priced since the ownership and control of distressed assets is written down by the central bank and they are resold for pennies, while in the west it tends to go through bankruptcy court, which is a slow complex bureaucratic process and tends to destroy what was left of the company.
Self inflicted wounds this time, though. There is nothing wrong with a bank purchasing 80bln of MBS with their depositors money. The issue becomes when the fed suddenly raises rates faster than any time in their history while still failing to fight inflation (which is a result of having a stronger economy).
No, please do not even try to imply that this was the Fed's fault.
They did not raise "suddenly". The move away from ZIRP was well telegraphed. Once they did the first hike the only question was how fast and how far. Most in the market initially expected an end rate around 3% (ie, 100bp over their target inflation rate of 2%). As it became increasingly clear that the inflation was not just about supply chain disruptions that end rate target went to 4% and higher.
Further - every bank has a team with one responsibility - asset and liability management. They are responsible for not just the product choices (ie, MBS vs Treasuries, etc) but also matching durations. The Treasurer of the bank is also responsible for oversight, including whether or not any of these positions should be hedged and to what extent.
This is entirely on the bank staff and management.
Not investing such a large percentage of their capital in long-duration fixed income vehicles all at once.
There's nothing wrong with going long on duration, it's a hedge against decreasing rates. The problem is when you go all-in on long duration investments and rates suddenly shoot up like they did, you now can't sell those assets without eating a massive loss.
An appropriate hedge would have been doing what every retail bond trader does, build a ladder. If they had simply bought a wider variety of say 1/2/5/10 year securities then they could have let the longer-dated ones sit and sell the shorter duration ones (and they wouldn't have suffered such a huge loss of market value that spooked depositors and started the run in the first place).
Yields on short-term fixed income securities were absolute shit, barely above 0%. If you've got a bunch of cash and nowhere to put it to work then even a horribly yielding MBS seems like a good idea, and the inflation monster hadn't yet come to roost making the Fed start jacking rates up far earlier than anybody would have expected.
Even at the time it should have been seen as a short-sighted move, however. It was obvious ZIRP wouldn't go on forever and rate risk would bite you in the backside, so I can't call it anything but careless yield chasing without proper risk management.
They took deposits from depositors who would blow up if interest rates went up, and then used those deposits to buy assets that would blow up if interest rates went up. Interest rates went up, so their assets crashed at the same time that deposits plummeted and withdrawals skyrocketed.
If you want to standardly hedge against interest rate risk, that's what swaps are for. If you want to take on a comparatively less rate-sensitive portfolio, then you buy shorter-dated bonds. They yield less, but surely that's better than "the FDIC seizes your bank and your equity goes to zero."
I think the chief risk officer at this bank left last year, they may have been the person who got the bank into these positions. it will be interesting to see if there is news coverage about that person's role in the crisis.
Let me get this straight. You're making the argument that raising interest rates from 0.01% to 0.17% in a year would have a similar effect as raising interest rates from 5.9% to 100% in a year?
You would say the Fed raised rates as quickly in the first scenario as the second?
Not the Fed's fault. SVB's fault for going all-in on 10year duration MBS. If they had mixed in a good amount of shorter duration tbonds/tbills they would've been fine.
If you have a healthy mix of business and retail clients, payday is a wash. If it’s a lot of business customers; every payday is like a predictable mini bank run.
If you have a small number of large, correlated and communicating players, you have a huge bank run risk.
Everyone says SVB had bad investment and they deserv it etc. However, I am worried about this being the first of many similar financial instutation failing. After all, bonds are supposed to be safe on paper. Increasintg interest rate fast can break many people who are not able to adjust.
These bonds were supposed to be "safe" in the sense that they would be repaid on schedule. And that's been fine, AFAIK there is no suggestion that they won't be repaid.
The problem is that SVB, knowingly, took on "interest rate risk" by buying long-term bonds (average 6.2 years, I read) that lock in an interest rate. The money to purchase those bonds came from deposits, which can be withdrawn at any time. When everyone started withdrawing their money SVB had to sell the bonds, and they took a loss because interest rates have increased and the bonds they were selling were not longer worth as much.
The problem wasn't really the bonds, it was the influx of 3-4 times the money from 2019 to 2021 that essentially made SVB make basic and bad decisions chasing profit. The influx was essentially a pump and then they leveraged themselves to current markets not future even with a safe vehicle. SVB's whole premise was that interest rates wouldn't go that high, a very bad bet in high inflation.
The dump trigger wasn't even an action/attack it was the lack of additional influx of VC/private equity/sovereign money, probably mostly from foreign markets that slowed or stopped, that tripped them up.
Then larger investment groups filled with startups like Founders Fund and Union Square Ventures doing a margin call across all their funds/investments caused a big enough dump that it was over. The run was started at this point and days later the bank is over.
Ultimately this is SVBs fault, but also regulators because concentration like this where they are responsible for so many companies and one type of money VC/private equity, is an attack vector just sitting there. It wasn't wise for investment groups to run the bank either because now this harms companies across the board, but may also be a consolidation move, shaking out companies they don't back.
HBS is even realizing too much optimization/efficiency is a bad thing. The slack/margin is squeezing out an ability to change vectors quickly. This is happening from supply chain to credit to food and more.
The High Price of Efficiency, Our Obsession with Efficiency Is Destroying Our Resilience [1]
> Superefficient businesses create the potential for social disorder.
> A superefficient dominant model elevates the risk of catastrophic failure.
> *If a system is highly efficient, odds are that efficient players will game it.*
It is CLEARLY time for some anti-trust busting at the funding level.
Bonds weren't the problem.
The financial strategy employed to use those bonds was the problem.
You can do the same thing to yourself.
Take your life savings and emergency fund and put it locked up into 10 year treasuries bought direct from the treasury.
Now go have an emergency. Good luck, have fun.
you can transfer your treasuries to a broker and then sell them. i do see your point though. if your emergency is you need your life savings TODAY then yeah you'd have a problem. but you could probably find a source of credit while you sell.
A casual look at the regional bank index ETF will show that starting about two weeks ago, the price started to steadily decline and then a sudden drop with SVB. I’m not sure if this decline is well correlated with the total market index over the same period, but if not, it suggests that some people “saw this coming” a couple of weeks ago and the other shoe may still need to drop. Was it just good analysis? Was there some whispering going on? If so, I hope the SEC is watching.
This kind of things usually have someone or some people pushing from behind. I'm sure there are some sharks around the corner. Of course you have to have blood to attract sharks but human sharks can easily buy social media and newspaper to exploit small wounds.
This might be just the beginning of a large hunting campaign, let's wait and see.
Every sophisticated bond investor knows about duration risk. We expect banks to be sophisticated in that way. This was a really boneheaded investment to make at a time when interest rates were at historic lows.
I disagree with the overall learning from SVB’s collapse. Bonds are safe. The learning, to me, is that keeping interest rates at zero for too long distorts expectations in an unsafe way. What did SVB do wrong, exactly? They took in a lot of money, i.e. they ran a successful business. And they bought safe assets with that money. Who at the time would have disagreed with their strategy? The issue is that the Fed created expectations that interest rates had a reasonable chance of staying 0 for the next decade. This blame falls squarely with Powell. He lowered rates in 2019, well before the pandemic. Who can blame someone for seeing near-0 rates in 2019 and believing they would stay that way well into the 2020s?
Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.
I think you're suggesting that somehow SVB a large and sophisticated bank could not contemplate that the fed would raise interest rates. Not to mention despite the size of their bet, they could have unwound this position for the last couple years since their initial bet.
>And they bought safe assets with that money.
The point is that you can't buy 100B of bonds and say "oh bonds are safe". When you buy low yield bonds with a 10 year maturation you're inherently betting that rates aren't going to rise since their valuation will go down if rates rise.
When you're a bank risk management does not involve hoping the fed doesn't raise interest rates. Sometimes you make the wrong bet but you recognize your mistake, take the loss and sell those T-Bonds earlier. Then you plan your communication to clearly explain why so that a bank run doesn't happen.
It seems the one of the pieces in the chain is that there was a big disconnect between the internal perception of the magnitude of the problem and what was communicated. Silicon Valley VCs and startups are twitchy right now and they tried to exit this position too late with too little explanation and got hit with a very old and very traditional bank run.
I think you’re simplifying things too much. The issue wasn’t that SVB couldn’t foresee higher interest rates. There were a number of other issues, almost all caused by the Fed and the federal government:
1. Covid stimulus vastly increased the amount of cash at the bank.
2. Artificially low interest rates plus the cash infusion caused inflation.
3. While inflation was beginning, the Fed somehow got it in its head that inflation was “transitory” and rate hikes weren’t needed.
4. The Fed waited too long to raise rates, so they needed to spike rates as quickly as possible once they changed their opinion on inflation.
Basically the government gave banks hundreds of billions of dollars to lend via stimulus spending, and then made those loans worthless by spiking interest rates less than a year later. Whose fault is that really?
The federal reserve has dual mandates for both full employment and to have stable inflation. These mandates are in many ways opposed to each other. Putting the blame on the fed in hindsight is always easy, but unlike an institution with such a mandate SVB failed at one of the most fundamental parts of being a bank.
So I would say it's safe in one way (if you hold it to the end, you'll get your money back plus interest), unsafe in another (its value on the market before then is not guaranteed).
I disagree that the Fed set an expectation for indeterminate 0% interest. I'm sure that's what sugar addicts in the market told themselves, but I think the Fed was clearly, if gingerly, trying to dig themselves out of a 0% hole, having started to raise rates again in 2015. As they should have been!
You get back your money plus a garbage interest rate relative to what you could've gotten if your money were available now though. That is why it is cheaper, it's not like it's an irrational market dip due to a panic, where the time-value will eventually recover. Unless interest rates go back down very soon the time-value on this thing is definitely a loss.
And yeah as a bank it's an extremely stupid move to put 40% of your money into an entirely unhedged bet that interest rates will not go up for 10 straight years. Maybe the Fed didn't handle things as well as they could, and similarly maybe VCs exacerbated the problem unnecessarily, but I don't see how the lion's share of the blame doesn't go to SVB here.
There are LOTS of financial players looking for low credit risk long-term assets who can tolerate the associated interest rate risk. Pension funds and life insurance companies have highly predictable long-term cash outflows and often happily buy long-term bonds to match up inflows. They do not care that the market value of their holdings has been hammered by interest rate increases because the assets were selected to fund a future liquidity need.
Just because the tech community is just now discovering interest rate risk and maturity matching problems doesn't mean any of this is new to the rest of us.
> In the 2008 crisis, a major lesson was that you can’t effectively reduce risk by bundling together lots of risky assets into one major asset.
That was the first domino to fall, but that was survivable. The real problem was that the banking system had a suicide pact in the form of credit default swaps on each other that they couldn't cover. The MBS stuff was bad, but that wasn't what caused 2008.
Now I'm just waiting to find out if some other bank is going to need to pay out credit default swaps for SVB in excess of their market cap...
Only indirectly. They released a statement after the FTX collapse saying effectively "don't worry, no problem here", which caused a bank run that they couldn't manage and forced the collapse.
Given the timing one wonders if Silvergate had more impact on SVB. SVB claimed to have minimal crypto exposure, but one wonders what might come out as the FDIC digs deep into their books.
But mostly this was because they bet the farm on long duration bonds just before a period of rising interest rates. It's not like nobody saw that rising rates were on the horizon.
I'd say they're unrelated. This situation could hit any US bank that placed the wrong bet. What's somewhat unusual, and might shelter other banks, is the bank run was viral among VC-backed firms. They also had a stronger incentive to withdraw a lot more because their funds weren't insured. A bank with lots of retail customers doesn't have this issue.
I thought Bear Stearns going under was exposing a crack. Same for New Century Financial Corp. declaring bancrupcy.
Is this going to end with similar results as 2018 by affecting the whole financial system? If yes I hope there will be no bailouts using public money and the financial system will start to be properly regulated and supervised.
> A 10Y T-Bill purchased on the first trading day of 2021 is now worth less than $0.80 on the dollar
Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.
Yes, another way to think about this is that if you bought an .80 t-bill today it would have the return on investment equivalent to a 1.00 bill bought last year. That’s because the new t-bill has a much higher interest rate.
So in effect, as the fed raises interest rates, they are destroying the principle of every existing bond on the market. That’s a big problem for anyone owning bonds, especially if they are using them as collateral for leverage.
> they are destroying the principle of every existing bond on the market
What principle are they destroying? Bonds are not, and never were, immune to economic changes. They're just less volatile and react differently than stocks and, if you hold them to maturity, will pay what what they promised.
It seems to me that the problem is that a whole bunch of people made investments assuming that there was effectively no risk in doing so. Like the good times would last forever or something.
Either way, they were treating them as if their value was guaranteed prior to maturity. That has never been a thing that these instruments guaranteed. They were gambling, because they failed to hedge that risk.
I noticed that he conflated the safety of a T-note* with the asset price. US Treasuries are AAA-rated super safe guaranteed returns because they're not expected to default or miss a coupon payment, and they'll be redeemed for the full value when they mature. That doesn't mean they don't have market prices that fluctuate.
Thanks for the note! I'll change the wording in my article WRT bills/notes. :)
With regards to safety, I noted that I think there are two types of safety to note here:
1. Default risk.
2. Asset price volatility.
Ultimately if someone is willing and able to hold to expiry, they aren't subject to #2, but this clearly wasn't the case with SVB and may also be the case with other institutions. I think it lacks nuance to not consider the middle states between the purchase of a bond and the full return of the bond upon expiry.
> Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.
100% back in, say, 9 years at 1.5%. Or take the 20% hit today, buy back bonds giving 4% yearly and end up with the same amount. I mean: it's literally how the price drop is calculated right?
They would have gotten their principal back but missing out on interest for 10 years is a huge cost, particularly if you have to pay out interest in the interim to your depositors.
Yeah but it's important to understand why it's down 20%. Some commenters are acting like this was 100% irrational panic and SVB didn't do anything wrong, it's just too bad they couldn't hold out for awhile.
What they actually did was put 40% of their deposits into a long term bond that would start paying a shit rate if interest rates went up. The invested money is borrowed from depositors so the only thing they really "own" is the interest. In order to keep depositors in a high interest environment it will require paying out some amount of interest too. But they have locked themselves in to gains at a now small interest rate.
This was a risky bet for the bank from the start and there's absolutely no way they would make the trade they did if they knew interest rates would go up, even if they also had a guarantee that there would not be a bank run. This isn't a simple liquidity crisis or even somebody trying to stay solvent until their GameStop puts pay off.
First off - it is not a 10Y T-bill. T-bills extend to 52 weeks. From that point through 10Y are "notes" and everything longer are bonds.
Second anyone involved professionally in the markets understands the duration (not maturity) of bonds and how coupon rate and market interest rate will effect the price of said bond. [those interested can google terms like 'modified duration']. So there is absolutely no shock that the price of 10yr paper with a 50bp coupon would be near 80 in the current rate environment.
> If they could have held the entire term they would get back 100%.
Yes. But those "100%" wouldn't be worth as much, due to inflation. There's also an opportunity cost to consider: if you sell now with 20% loss you get a chance to invest that money wiser.
Just so we are all fully aware: SVB bet in ~2020 that interest rates they offer could be well below 1% (given their operating costs and what not) for 10 years. Obviously, by 2023 already, depositors were expecting much more.
So, yeah, these MBS will probably pay out when held to maturity, but their customers didn't buy MBS, they deposited their money in a bank.
I mean objectively the bank bet that interest rates wouldn't go up, they took a massive unhedged position in exactly that.
I hope the bank thought it was betting, because if they didn't realize they were betting on interest rates staying low then that is a shocking level of incompetence. They probably thought it was a safe bet, but it was a bet nonetheless with obvious risk if they were wrong.
The subtext here is David Sacks and his friends are investors in Silicon Valley companies. Lots of Silicon Valley companies are depositors of SVB and could lose money if there is a haircut on assets over $250k, or at least will lose temporary access to their cash. David Sacks wants SVB to be bailed out by a major bank so those deposits are made good. He’s talking about a wider economic impact because that’s an argument that such a bailout is necessary for the country, not just local VCs.
I don’t understand the disgust I’m reading for VCs and startups. Bailing out the bank doesn’t mean we let the bank CEO get richer off this transaction (like we did in 2008). It means the startup companies making payroll are going to survive and continue building the future of technology and healthcare.
There’s disgust for a few reasons. One is that the wealthy (including VCs) have an undue influence on society and the economy just due to being wealthy. It’s always nice to see them take a hit sometimes.
Silicon Valley is “building the future”, but at the same time can be very disconnected from the lives of many people around the country. That leads to mistrust and lack of empathy when these kinds of things happen.
I'll add on an extra layer of disguist: cash management accounts exist. They've existed for a long time. They serve literally to hedge against the risks of bank failures by automatically sweeping funds in them between multiple FDIC member banks to:
1. Increase the amount of funds covered by FDIC insurance
2. Reduce the potential for loss of funds by a bank failure
I get that it's a pain in the ass to manage a bunch of accounts, but any business with >$1mm in cash reserves really should have everything but their operational float in a CMA or manually move it around themselves into multiple banks. When I see comments about a startup that had $x million in cash with SVB I have to wonder what the hell the founder and their investors were thinking keeping all of that in a single place.
I don’t think people are disgusted at “startups” in general, but David Sacks deserves any scorn that comes his way after his shameless and pathetic Musk sycophancy through the whole Twitter deal.
This guy who has spent years (decades?) constantly whining about how government regulations are excessive and federal agency should be curtailed and government should stop protecting various groups from harm etc. is now suddenly crying out for urgent government help once something is hurting him and his friend circle personally.
Funny that in threads about crypto companies failing everyone cries about "this is why we have regulations and safety valves in the financial industry!" but now when these are in force people cry about the safety valves and regulations existing, and how the companies should just be allowed to fail
I'm thinking of the Glass-Steagall Act that was put into place after the great depression. It prevented banks from engaging in both commercial and investment banking at the same time. You had to choose what sort of bank you wanted to be. The effect of this was to prevent banks from being able to take depositor's money and put it in risky investments.
It was effectively repealed in 1999 by the Gramm-Leach-Bliley Act. Its repeal is one of the things that allowed the 2008 crash to happen.
It's just that VCs and their portfolio companies are part of the same plutocracy as the banksters of 2008. Those without gazillions in stock options are furious that all of a sudden, they cry for bail-outs. Just like 2008.
Let them crash and burn, they shouldn't have all their assets in one bank.
its not just government bailout versus nothing. private equity could have come together and tried to shore of the bank in its capital raise, but nobody (not enough) wanted to be first. their own collective risk aversion is their demise. And on the greed front, people totally plan to buy the carcass and firesold assets.
Hacker News has not been pro-startup and VC for a long time, probably at least for 10 years. It's now mostly tech workers who are not the capital class or are startup founders.
The sentiment has just shifted among workers I think. People have understood that working for startups is a low estimated value gamble compared to non startups.
Dilution and share classes also are worse nowadays I believe.
The especially funny thing to me is that some VCs were telling their portfolio companies to get their money out of SVP first thing this morning. So Sacks is a VC asking for a bailout on a bank run triggered by VCs. Cry me a river.
It's nice that he took time from his busy schedule decimating Twitter to share his views. But in my opinion VCs can't simultaneously claim to be such financial geniuses that they deserve lower taxes (via the carried interest loophole) but such babes in the woods that they need Uncle Sam to bail them out for a bad financial decision. Pick a lane, buddy.
Ah yes, a classic for sure. That pairs well with the libertarians who demand freedom to do anything they want to others, with a state just large enough to keep their inferiors from doing anything in return.
My money at VMFXX is almost entirely composed of safe Fed Repos with average maturity of 2-weeks. VUSXX is mostly Treasury Bills, again of maturity averaging like 2-weeks. My money at SWVXX is composed of AAA-rated bank notes, of similar 2-weeks-ish maturity average.
The idea of a bank, like SIVB, being composed of largely 30-year mortgages and 10Y or 30Y Treasury Bonds is insane. The bank deserves to die after taking such high duration risks. There should be _NO_ bailout. I can barely believe a bank was so stupid to keep customer deposits backed by something so risky.
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We've been preparing our financial system for the last 15 years (since 2008) for the next financial storm. We've got "stress tests" to see that various banks have severed contamination between each other, at least in theory. Lets see how good our preparations have held up.
No point giving up and bailing things out before we've even tested our new financial system regulations. We can afford to let some banks go under. Only if the contagion has a chance of spreading everywhere should we consider the last-ditch effort of a bailout.
He is suggesting that the Fed/FDIC make depositors whole, not necessarily bail out the bank.
There is a good chance that depositors will be made whole regardless, but even if it does require some intervention it is probably worth it to prevent this from spreading to other banks. There are very valid reasons why certain organizations would need to keep more than $250k in an account, and if everyone of them started transferring their money to a handful of the safest institutions, then things could quickly get out of control.
They won't lose deposits except insofar as they decided it was OK to exceed the 250k limit for FDIC insurance. And in deciding to do that, they were deciding to take a risk and got burned by it -- but it was a risk they willingly took on.
Honest answer? I don't know. But when my business was in a similar position (not from VCs and only about 25% of that amount), my business partner, attorney, and accountant sure did, so I know it can be done. IIRC, it was a fairly complex mix of different things. There certainly wasn't a single place that held all of the money.
I know that this sort of problem isn't new, and I know that there are a variety of ways to mitigate the risk to acceptable levels. I don't think you can ever completely eliminate risk.
Dealing with large amounts of money is very complex and really requires experts to do right. I'm an engineer, not a money expert. Your question is better aimed at a subject matter expert.
But my underlying point isn't even that these companies did the wrong thing. Only that they took a risk -- and starting a business is itself taking a risk. That's not necessarily a bad thing.
But when you take a risk, you're (obviously) taking a risk that the money will be lost. That's truly an unfortunate thing, but everyone knows the rules of the game.
In jest, this comment reminds be of that article about "The Gods On Hacker News" [1]. A random user just typed "when I had about $25mn in my business account..." like that's nothing, lol.
I gotcha. But I never had anything like $25mil. The business did. It's a rather significant difference. Even there, that wasn't profit that could be spent freely. The majority of it was already spoken for to cover expenses.
These spread your deposits over (up to) thousands of banks, keeping each account below FDIC insurance limits. You can choose demand deposit accounts, or CDs or money market accounts if you want interest.
All accounts roll up into a single bank statement from your primary bank.
There's a couple of services that will split up your deposit into 20-different banks, so that you achieve $5 Million FDIC insurance rather than just $250,000.
Also, if any particular bank fails, you only risk 1/20th of your cash.
EDIT: I never managed $100M before however. Maybe that stops being a potential plan at these sizes.
It is not insane at all. Banks match expected duration of their assets and liabilities. This bank made a number of errors and was caught in a classic liquidity squeeze. Not the first and won't be the last.
Sorry, but the systemic risk here is vastly overstated. Yes, this will be painful to the tech sector but they made some truly awful decisions and have to pay the piper.
We should also consider the moral hazard at play here. How are future tech CEO's going to go into work every day and completely crush it 200% if they know that the government will bail them out if their monkey jpeg startup fails? A bailout will only breed lazy entrepreneurs, taking hard-earned tax dollars away from America's job-doers.
all I’m seeing is that the monkey jpeg startup just needs to never take VC capital from Andreesen Horowitz and then won’t be tied to using that one bank
just stick with selling directly to collectors and you already have enough money
As a rule let's not use Twitter comments as indicators of anything, but most I see seem to either be enjoying the chaos or confused as to how SVB's bad decisions leading it to fail will lead to other banks failing.
I don't use Twitter. The Tweets I see when I click this link are 80% political shitflinging from one side of US politics (even the replies to each one are 100% one-sided), and 20% non-political. Why?
Twitter attempts to manipulate your emotions by showing you controversial things to keep you looking at ads as long as possible, just like every other social media company.
Is that universally a bad thing? Are all US Banks so thinly capitalized that none of them could survive a run? If so, then doesn't that make one question why you'd ever keep money in a Bank in the first place?
I get that the FDIC insurance is supposed to make you whole as long as you have less than $250K in a bank. But then you have to ask if the FDIC can actually cover that for several banks at a time - particularly at a time when the debt ceiling has not been raised and so Treasury can probably ill afford additional unplanned spending.
Though I’ve never connected the dots the way you have, the last time major commercial banks (like WaMu) failed it was because of being caught swapping much riskier assets than this article is pinning the blame of SVB failing for. Also, when it was clear that there was a risk for cascade collapse of major commercial banks, fed leadership and potentially people from the fdic went to congress and told them to stop playing partisan football, and TARP was passed within a week.
If SVB really failed because it misstepped and believed it would make more money off of government bonds and didn’t, I don’t really see there being a risk of the major banks collapsing. If lots of smaller banks banked on (no pun intended) doing the same thing though…
What you are talking about here is the financial apocalypse. If a hundred million people all lose the money in their bank accounts, then we go back to the barter system overnight. The thing you will be bartering will likely be seeds and ammunition.
I don't think the statement is completely misplaced as other comments on this thread indicate. Everyone has to be wondering if their bank is next. Just an anecdote, but, I'm sitting here wondering if I should sell the bank bonds I bought because the counterparty risk just skyrocketed. It doesn't take much to get the snowball going.
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