Bank run on Silicon Valley Bank
techcrunch.com
techcrunch.com
Becker said the bank has “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”
Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.
It seems that CEOs of banks haven't learned anything since 1873 when this was observed.
However, not to defend the guy, but as a CEO of this bank he ... has to say something. And whatever he says it will be bad anyway.
A bank can follow a lower risk strategy and accept lower profits, but that's not necessarily what shareholders want. Some risk of failure is acceptable.
I Don't think you can make that call for all CEO's of Banks 1873.
Is that terribly worded or is it just me? I figure it’s supposed to be poetic but I find it tedious. I think it could be simplified like this:
“A banker who argues his creditworthiness has none.”
I realize it’s a quote but holy shit.
You are right that it definitely explains 99.99% of banks in history. But there are a handful of historical examples -- even after "modern banking" began in medieval Italy -- that don't fit. A recent example is The Narrow Bank which was shutdown by the Federal Reserve. But in the past you had things like the Bank of England in 1844 which went to 100% reserves for a period. Or banks under the Louisiana Banking Act of 1842 -- which was why banks in Louisiana were unaffected by the financial crisis of 1857.
That’s the kind of thing that only gets said when there’s some concern that there will be a run.
Also out most of the banks - you would expect that the clients of SVB are a little more sophisticated than your retail bank demographic being start-up companies and all (big assumption).
Assuming these people have any level of sophistication is what gets us into these messes. It’s good to remember they are betting billions of dollars based on nothing but fomo and don’t know anything special at all.
Is that worth it?
Sometimes you can be too smart for your own good: in this case the CEO might have assumed that everyone knows that all banks inherently carry a risk in case of a bank run, but all the market hears is the word “risk” and panics correspondingly.
True, but isn't it possible that if he omitted this clarification, his statement about "ample liquidity" could be on shaky ground, from a legal perspective?
You can lie, and say everything is great. If enough people believe you, your bank is safe and you live happily ever after. If they don't believe you and pull their money, then you committed fraud and will go to court.
Or you can tell the truth, and say everything will not be great if everyone pulls their money. Then people will definitely pull their money. You will be sad, because your employer has turned into a smoldering crater and your equity is worth zero, and everyone will blame the bank run on you, but you are probably legally safe.
I think the only real thing you can do is make sure no one with credibility ever asks you if you are solvent. That is hard to avoid though, if you are a bank and you have to raise money by selling equity.
SVB's customers are weighted significantly more towards businesses who will have more than $250k in the bank. So, they have to be ready to take action fast, so a bank run on SVB is much more likely.
I'm going to go out on a limb and say that that might not be common knowledge.
A run might be more likely for investment funds like Questrade and Fidelity if their customers liquidate their holdings en mmasse and move to cash deposits and CDs, which would be covered by depositor insurance.
I don't think this is damning in any capacity. It's well known that all banks in the world keep part of their reserves in other vehicles. If a bank run happens, they'll have liquidity issues.
What a guy.
[0] Thiel Fund, Venture Firms Advise Companies to Pull Money From SVB
[0] https://www.fastcompany.com/90864395/silicon-valley-bank-an-...
Every bank would be in trouble if everybody took their money out
Or just don't mess with money that belongs to customers. Be the world's first reliable bank.
But the Fed won't let TNB open an account. The basic reason seems to be that they worry that this model is destructive to the US economy, which relies on banks making loans so people can buy houses and cars, and businesses can operate. If everyone banked at a narrow bank, the economy would seize up from lack of capital.
Whether or not you agree with this take, the reality today is that you cannot run a bank like you've described in the US.
(This is all covered in more detail by Matt Levine: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...)
Investment/VC funds are doing the same (we’re talking many, many billions of deposits lost in a span of a few days).
There is a chance SVB will freeze assets while they deal w liquidity crunch which may impact startup ability to pay bills, pay salaries, etc.
If you use SVB, transfer your money out now (as in Friday morning at 8:30am), even if it’s to your personal account while you set up a business account elsewhere.
This is a serious issue and may result in wide ranging damage to the entire tech industry.
SVB is the most commonly used bank by startups and investors. This isn’t media trying to hype a story for clicks, this is a real an major issue.
“The requirement that the defendant act with the intent to deprive the owner of his property makes embezzlement a specific intent crime.”
Meaning your safe as long as your intent is not to steal the money.
But if your concerned definitely ask your lawyer. (Accountant won’t be able to provide that sort of legal advice)
If you move company funds in one blob from SVB to Personal account, and then move the same blob from Personal account to Bank XYZ, and document the process, you'll be fine.
Of course, you can use your personal account for a while until you setup another business account (which you should have at least a couple if you are well funded) but while it's technically not illegal, it can massively complicate your accounting later.
If you risk it and SVB goes into receivership: you might fail to make payroll. You might not have money for the taxman. You might default on liabilities.
These are not balanced risks. Any executive which does not pull their company's money to surefire safety is being negligent. Your duty is to your employees, your shareholders, and your suppliers. Not the owners of SVB, or to make the FDIC's job easier.
So, in cases where you think this is a risk, it's best to move swiftly.
These aren't the actions of a healthy bank. Of course, their problems are now much much worse as people got wind that the bank was in trouble.
Do you now if that "investor" is short Silicon Valley Bank's stock, took out long puts, or has other conflicts of interest?
Because if so, they just committed a felony.
That "investor" had better hope one of the recipients doesn't forward the email to the SEC.
Are you short Silicon Valley Bank, by chance?
As you know, we are limited in what we can share until the transaction formally closes next week but in the meantime I’m attaching concise information on the strength of our business, based on our recent mid-quarter update and financial announcements.
Our Moody’s Deposit Rating is Prime
Our credit ratings are also investment grade
SVB took action this week designed to:
Strengthen our financial position Enhance profitability Improve financial flexibility now and in the future
Our financial position enables us to take these strategic actions
SVB is well-capitalized Has a high-quality, liquid balance sheet Peer-leading capital ratios
Even before these actions:
We had ample liquidity and flexibility to manage our liquidity position SVB has one of the lowest loan-to-deposit ratios of any bank of our size
The improved cash liquidity, profitability and financial flexibility resulting from the actions we announced today will bolster our financial position and our ability to support clients through sustained market pressures.
If the subprime crisis taught us anything it was that ratings go for marginally usefull to utterly useless the second sht gets real and there is actual stress in the system
The problem in 2008 was that splitting an investment into a senior "low-risk" one and a higher-risk one led to higher ratings overall than the initial investment warranted. Do you have any evidence that something like this is happening here, or that this is a systemic problem?
SVB received all the capital it needed to cover the losses on its bond portfolio liquidations.
Cons:
The announcement of bond sale losses made everyone realize ever bank has a bunch of bonds at a loss if they don't hold to maturity, and SVB is going to need to sell any more of its bonds at a greater loss as more customers pull money out.
Pros:
The losses, percentage wise, aren't that great, so far. As long as perhaps greater than 90% of deposits don't leave then everyone can get paid out and its really business as usual.
Cons:
Large institutional investors are the biggest account holders and they're absolutely pulling out, alongside all of their portfolio companies.
Pros:
Other banks that are more liquid could step in and shore up the capital.
Cons:
- The fed [likely] won't be one of those banks (even if it just meant buying the bonds closer to par value) because that would mean a reversal of policy.
- This didn't help Silvergate bank and the new equity investors are at major losses too now, wiped out.
4 hours ago the fdic closed the bank
i'm curious whether your account was fully fdic insured or how much you stand to potentially lose if not
If a bank does get in trouble, it's usually because its balance sheet is not sound (i.e., assets are not really worth more than liabilities). In the case of SVB, a big portion of its assets are loans made to startups. Who knows how many of those loans are at risk of default in this environment? Simultaneously, many of SVB's depositors are also startups that at the moment can't raise more capital and thus have been withdrawing money from their bank accounts to fund their cash burn. I suspect SVB can't sell its doubtful loans, or use them as collateral, so it has been forced to sell high-quality long-duration assets purchased when rates were much lower, recognizing large losses.
Particularly when 'venturing' into areas more profitable because of more risk?
Here's their loan risk analysis as of EOY:
https://i.imgur.com/ZWG157R.jpg
Don't miss 14% to "innovation economy influencers"…
VCs: [immediately texting after hearing the above from the CEO] attention all portfolio companies, SVB seems to be in trouble, don’t keep your money with them
It’s also what makes having any sign of balance sheet weakness a death spiral, as anyone who knows runs for the exits, making things even worse.
Waiting to see how this shakes out for Peter Thiel.
That's some weird stuff!!
A bank that understands this, knows it's not fraudulent, and makes it easy to withdraw, deposit, get credit cards, give loans/venture debt, has a competitive advantage in this niche but highly lucrative sector—given they can operate with the right risk controls.
We stayed with SVB.
so a fraudster could easily exploit this bank then?
Example: After our startup went up in flames in 2017 my wife and I (co-founders) got "regular jobs" with nice salaries. Some time later, we tried to refinance our mortgage with Chase. The banker at Chase was very happy to serve us right up until the point where he asked if we had more than 20% ownership stake in any company. I said, well, yes, technically we own 80% of our defunct startup. He then said he had to look at the startup's tax returns for the last two years. I was like... ok, that's weird, but sure. He then informed us that we did not quality for a loan because he had to consider our company's income along with our own, and our company had lost half a million dollars in its last year of operation, therefore he considered us to have lost half a million dollars.
I was like... "Do you even know what a C corp is?"
We ended up switching to SVB, which had no problem refinancing our mortgage.
(Fortunately our balance in that account today is within FDIC-insured limits...)
They understand the startup ecosystem in a way that big banks don't. Now there's some competition from startup-focused banks like Brex and Mercury, but a five years ago SVB was one of the only games in town.
P.S. which makes me wonder how much of SVB friendliness was just smart marketing. If you look up and down this thread, most of the SVB "explanations" here are strictly circular: "they are good for startups because they are good for startups", with little to none useful info.
Mercury provides services and a frontend, but their banking services are provided by Choice Financial and Evolve.
Brex is also not bank. The Brex business account is an FDIC Sweep account, which constantly moves your balances across multiple banks to keep you within the FDIC limits.
and not unlike aws/stripe/etc they want to be the bank for small companies that grow into huge companies. startups are a good segment to target (eg like vc) because they might also turn into a large company with much more cash and more banking needs
The collapse of a solvent but illiquid bank is well worked out in the US. Here's a 60 Minutes episode where they got to cover the process.[1] It's not too bad for the customers, but it is really bad for bank management. The 60 minutes video shows the moment when the FDIC people show up and tell the CEO he's finished.
This is after a $1.25B common stock offering in an attempt to shore up its cash reserves.
Keep in mind they are raising cash by selling equity with their shares at $100 when they were at $500 a less than a year ago.
That's pawn shop levels of selling. To say they are in trouble is like saying it would be tough to sell a house that is currently on fire.
Rumour was that SIVB got alot of the old SI deposits when it became clear that they were going bankrupt.
It looks like both SI and SIVB will go bankrupt due to the same two causes.
The one two punch of:
- loan duration mismatches(short term deposits bet against long term loans). More specifically to get some interest income you tend to have to either go to riskier assets, not an option for bank, or longer duration. Unfortunately this locks you into rates for a long term.
As everyone knows, rates have really gone up quickly in a short duration. This makes your long duration assets drop alot in value so you can't easily liquidate them to move to new higher paying assets.
Normally this would be fine as you can ride out the duration of your long term bets without losing money, except for the second issue below.
- and a deluge of withdrawals meaning you can't just ride out your long term loans.
The difference here is that while SI will go away, someone will probably buy SIVB. It's just that with FDIC only protecting the first $250,000 in deposits you don't want your corporate money at the bank. And you certainly don't want to wait for FDIC to step in and make you whole.
There is a potential third issue with SIVB in that as the bank of alot of silicon valley startups they hold a lot of warrants for those companies on their balance sheet. And those have really been written down alot lately. Stripe, a great company by most measures had its valuation cut in half according to a post from yesterday so you can imagine what the average startup's valuation is worth if strip is being cut in half.
SIVB got hit by a lot of different issues all at once but they all had the same root cause, large interest rate hikes in a quick timeframe.
The other commonality between SIVB an SI is that both banks heavily concentrated on one sector only, for SI it was crypto and for SIVB it was silicon valley. For each bank they ran into interest rate hikes at the same time that the sectors they relied on took a huge dive in value.
Diversification is important.
"Motivated seller!" -- Lionel Hutz
Calling it a duration mismatch is a bit misleading. They took on duration risk and their loans lost value is more accurate. Otherwise they would just sell the loans (which they stated they did, but clearly it wasn’t enough thus the equity raise)
Remember my point was it was a 1-2 punch.
1) their duration mismatch their long term assets lost value, this isn't a problem if you can hold to maturity as you'll get all your money back.
2) people flocked to the bank to pull money out as tech went down, their deposits really fell as those companies needed the cash to fund operations and layoffs.
When the demand deposits were required back before the duration of their assets this required them to sell when the assets were already marked down.
Does this make my point clearer?
But if other banks don’t have such enormous amounts of money leveraged it seems possible this is a one off case. When rates get hiked as quickly as they have risks that were always there that nobody considered are made obvious.
That conjecture seems wrong. Sure, 2% 30-y treasuries dropped a lot in value, but you still can easily liquidate them.
In 2008 you could sell your MBS at any time, it was just for 10 cents on the dollar, that's not liquidity as we use the term.
They sold a chunk of long duration assets for a 1.2B loss because they had to sell them. That's a big loss for the quality of assets they were selling.
That is what is mean by hard to liquidate. Its true you can always sell anything. It's can you get a price that keeps you solvent that is the liquidity issue.
SIVB wasn't selling 2 and 30 year treasuries, they were selling MBS.
If you don't have to sell them and can keep them to maturity, they don't appear as a loss in your accounting.
It's the difference between mark-to-market versus held-to-maturity accounting. If you have to sell, you are forced to mark-to-market. If you don't have to sell, you don't have to account for losses due to bond prices falling in the market.
just fell another 44% in pre-market after that 60% fall:
SVB Financial Group
Pre-market 58.60 −47.44 (44.74%)
The bank re-opened for withdrawals the next day under FDIC control, and was later sold off to another bank.
Edit: the video was relatively optimistic given the subject matter, at least for bank customers, not the owner. Assuming there's a market for buyers in such a case.
I'm curious if and how the "secret online bidding process" the FDIC runs to find bidders doesn't leak out to the owners of banks. It's possible the banker in the photo heard about it via word of mouth when it was being shopped.
If anyone loses money in the SVB downfall, it is entirely the fault of the CEO/CFO for poor management.
Depending on your monthly cash flow and your balances, anything over $100k should be kept in CDARS. It is explicitly designed to keep your cash spread out across banks limiting risk of default at a single institution and keeping the balance at each bank below FDIC insurance maximums.
Banks even at their simplest "Main Street local level", need to keep, say, 15% or 20% of their deposited funds available, as determined centrally e.g. the Fed or the Bank of England.
The rest by design is to be lent out, that's how banks offer loans, mortgages etc.
So "we can't immediately return 40% or 60% or 80% of deposits" really isn't any kind of gotcha or big secret. No bank in the world can handle such a situation.
So: runs can and do happen, and are always a threat, and currently might be happening.
The question is: how to handle it in a grown up manner.
It isn't. That's a myth. It never has been how banks work and never will be.
Destructive runs can never happen in a modern banking system if the central bank does their job properly.
If everybody takes their money out of a bank in trouble, then the central bank ends up as the main depositor in that bank.
Which is as it should be - since they were regulating that bank.
The question here is whether the regulator has been asleep at the wheel and whether depositors over the FDIC limit are going to pay for that.
When banks lend out money, they don't lend out existing deposits, they create new (debt-based) money from nothing and this new money is fractionally backed by deposits.
With 10% fractional reserves, if they have $100 in deposits, they can lend out $1000, thereby creating $900 of new money from nothing.
edit: Here is a great explanation: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Quote: "Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality."
and if all of a sudden, the depositors decide to take out their $100 in deposits, the bank is in trouble, because they'd still have the $1000 in loans, which is now not backed by any reserves.
They, if this were to happen, would be required to obtain the reserves somehow - borrow from another bank, from central bank, or attract new depositors.
so in essence, the idea that the depositor's money is "lent out" is not technically correct, but the idea is not too different.
Loan to deposit ratio is orthogonal to reserve ratios, which is orthogonal to capital requirements.
It’s not that banks are loaning out more than their deposits that creates new money, it’s that they are loaning out money _at all_ that does.
Every VC is talking to their portfolio companies right now about this. Text/slacks/emails. Half of them screaming panic telling founders to pull money out, the other half holding the line to stay strong
Most founders i know arent taking the risk and moving money...
There are a lot of harmful clowns out there fearmongering. They should stop.
The failure of a bank like this, if it occurs, would be bad for a lot of people.
Not even once, they have done something for us.
As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time. If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Demand deposits should cost a low service fee, since the money can't be safely lent.
Yes, I'm a lot of fun at parties, why do you ask?
If we really want to prevent bank runs, shouldn't we just forbid lending?
Snark aside, transforming duration is a big part of the value that banks add. In general, there's a lot of demand for lending short and borrowing long. Banks add value (and risk) by taking the opposite side of those trades. I'd rather have banks that suffer occasional runs (which really aren't that common at this point) than banks that don't transform duration
Yes, it would solve one type of problem. But nobody wants your solution because it’s an unreasonable trade off for everyone to solve an extremely rare edge case.
Single-minded optimization for single edge cases is really easy in fantasy worlds, but in the real world people choose trade offs even if they come with rare edge case risks.
> Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
In other words, no liquid deposits allowed. Banks charge customers to hold their liquid cash because they can’t do anything reasonable with it.
So yes, you could make one type of extremely rare problem go away by removing a desirable feature used by hundreds of millions every day. I don’t think people would actually choose this, though.
> As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time
Either you don’t understand how banking works, or you’re trying to project a crude misunderstanding onto the general public.
The concepts of assets and liabilities are well understood in the business world. Banks aren’t “lying” and fractional reserve banking does not mean that banks are creating fake dollars. Liabilities have always been part of the equation.
Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all.
It feels to me like saying that evictions wouldn’t be a thing if we simply didn’t allow tenancies.
I roughly believe that if you gave people the choice between paying to store money in ‘cash but it’s a number in a database’ (ie the thing you describe) and investing it in some kind of ‘not a bank’ where they can earn interest and withdraw when they please but the big pot of money is loaned out, there might not be runs of the ‘bank’, but there would likely be runs of the ‘not a bank’.
Yes but this is a valuable service for the economy and so society has decided that it's worth the cost of insuring the risk of a bank run in exchange for the economic benefit of banks doing this.
I don't remember a bank ever telling me this. I was taught how banks work way back in grade school. Surely everyone knows that banks don't literally hold the money you deposit in a vault somewhere.
I honestly don't see where banks are lying about this.
Seems like for the vast majority of people it does not. Most banks make enough money to pay their FDIC premiums and some interest on demand accounts and profit for their shareholders, and the few that don't are covered by insurance. That seems way better than having to pay a monthly fee to keep my money safe and liquid.
>there wouldn't need to be a reserve ratio at all.
Wouldn't there? The bank could still end up with bad loans in excess of their models and require some capital to take the loss before depositors. Or are you suggesting that banks are simply a market maker between depositors and those with loans? That seems even less optimal, societally.
One deposit. One loan. One withdrawal request.
This is the main issue, and it's called a "reserve requirement", which is a percentage of the deposits that the bank must keep on hand to mitigate risk of issues like this.
https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta...
In March 2020 the US Federal Reserve lowered it from 8% to 0%, which is where it is today. Just to give you an idea of how the economy works then, let's say you put $100 into your account at Bank A. Company X takes a loan from the bank for $100. Where do they put their money from the loan? Well, they spend most of it but part of it ends up in, let's say, Bank B. Bank B then takes that money and loans it out 100% to Company Y, who spends some of it and also puts some reserve into their bank account in Bank A. Which lends it out 100%.
So this is an over-simplified example but just to give a visual that this is where inflation is coming from. The "government" isn't printing money -- the banks are. It's a deck of cards with no safety net.
Watch the movie "The Big Short" and tell me how this isn't the same situation.
source: I am also a lot of fun at parties
What is the business then? In order for it to be a business, a bank needs to earn a higher interest rate on what they lend than on what they borrow.
The bank has two choices to achieve this delta in interest rates. It can either 1. mismatch duration or 2. make loans that are riskier than their borrowings. By banning the first, you are implicitly claiming that the second is preferable. Is the second really preferable? Maybe. But not obviously.
I have no special sympathies for Silicon Valley Bank, but the reason its customers still have deposits today is that the bank leaned more toward the duration mismatch than the risk mismatch. What happens if you achieve your interest rate delta by making super risky loans and all those loans turn to goose eggs? Bye bye customer deposits.
Banks have some set of relatively fixed cost, in terms of systems and staff. In a low rate environment, there's virtually no margin to be made on short term lending. Stretching the duration for higher yield is the only way to get margin to cover expenses.
Even in a high rate environment, most of a bank's reserves tend to be short term - savings accounts, 1 year CDs, etc. The things people want to borrow for (e.g. houses, cars) tend to have a longer time horizon to pay off. So if you want banks to actually make those kinds of loans, duration matching doesn't work.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Until the borrower doesn't (or can't) pay back the loan...
"Safe" and "moral" seem like inherently relevant words here and I'm unconvinced that you're proposal would be overall beneficial compared to the increased circulation we enable today.
You are trying to solve a relatively non-existent problem.
Are fixed deposits not common in the US?
1. https://techcrunch.com/2023/03/09/silicon-valley-bank-firms-...
Why these companies didn’t issue shares at the outrageous/nosebleed valuations they were at a year ago? Truly a mystery
The market was made aware of how deep the losses are, as this is not usually reported in investor disclosures and the bonds are usually held to maturity thereby not being subject to losses in their notional value
ANY bank with volatility in customer deposits is vulnerable to these losses as they have to sell the bond at its current value at a big loss to cover the customer withdrawal
Today I learned that many startups park their money at one bank. I hope that isn’t true. If it is I’d be moving my funds regardless right now.
Two of the largest bank ETFs are down around ~8% today. SIVB is only 2% of the holdings of KBE and 3% of KBWB.
https://www.google.com/finance/quote/KBE:NYSEARCA
https://www.google.com/finance/quote/KBWB:NASDAQ
A former Bridgewater guy who I respect very much is saying that the panic is totally uncalled for: https://mobile.twitter.com/BobEUnlimited/status/163395659942...
Been using Mercury for a couple of years, as a customer I can recommend their excellent support & services. That said, I know aprox zero of their balance sheet or those of their backing banks Choice Financial Group and Evolve Bank & Trust.
But I'm not worried about Mercury, I'm worried about their partner bank.
Anyone know if Evolve is in a similar situation?
https://techcrunch.com/2023/03/09/silicon-valley-bank-shoots...
The king without clothes fairy tale of startup unicorns is starting to hit reality of financing capital at high interest rates.
Many startups have not had sound viable business models which yields black profit numbers but have instead run on red minus numbers year after year. Due to very low interest rates it has been too easy to start new companies. Thus many startups have been started without viable business ideas. The startups have been funded by venture capital, venture capital have calculated on future discounted cash flow when valuing the investments. Now that central banks are raising interest rates to fight inflation the higher interest rate will effect venture capital firms calculations. Venture capital uses future discounted cash flow. Now central banks artifically altered the interest rates by quantive easing which forced interest rates lower than the natural market yield.
“Application
To apply the method, all future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question;[[1]](https://en.wikipedia.org/wiki/Discounted_cash_flow#cite_note...) see below.”
source: https://en.wikipedia.org/wiki/Discounted_cash_flow
According to the investopedia article four values are among other used to value startups:
* Cost-to-Duplicate
* Market Multiple
* Discounted Cash Flow (DCF)
* Valuation by Stage.
source: https://www.investopedia.com/articles/financial-theory/11/va...
This being a bit different, the most likely scenario will be SVB getting bought on the cheap by a bigger bank. The merger will be pushed by the regulator.
Since SVB's root problem is lack of diversification in client basis, a larger bank beings the perfect solution. In such a scenario SVB will continue as a brand, and their website would start working again.
What would you name as its peers? I've heard First Republic. What about Bank of the West?
>perhaps solely because of its name
It is a killer name, after all. I bet the First Republics of the world wish that when they were started however many decades ago, their founders had the foresight to name them "High-Tech Bank" or "Sand Hill Bank" or somesuch.
It's baffling that banking regulators in the US allow such a racket to exist in the first place. It would be as of "Silicon Valley Insurance Co" were to insure every home in the Bay Area and no other homes anywhere else. The chances of large insurance claims all happening at the same time (the insurance company equivalent of a "bank run") would be unreasonably high if all of the risk were to be concentrated in a single town in an earthquake prone area. Now there are reasonable solutions to diversify that risk away in the insurance industry, such as the reinsurance market.
The US has a strange history of having large numbers of small, independent banks. In other countries (in Canada at least), banking is an oligopoly - the regulator effectively limits the number of banks that exist in the country to only a handful and only a few very large ones. This has the benefit of forcing banks to be large and diversified, thus avoiding the phenomenon of a small bank run or two happening every year like they have in the US. It would appear that the US system is also prone to occasional larger bank runs, like say Lehman Brothers or Silicon Valley Bank... The advantage of the US system is the lack of regulation promotes entrepreneurship and investment, which is something systematically lacking in a country like Canada.
It might also turn out that, in retrospect, it was a bad for the Silicon Valley venture capital industry to be so heavily reliant on a single, non-diversified, local bank. I can't help but wonder how much of a role the VC industry played in this, for example what ever happened to the billions of dollars that the VCs raised for crypto startups? Is Silicon Valley Bank liquidity crisis a domino effect of the cascading bankruptcies and market crashed in the crypto racket?
Both of these items have a duration. They have to match the duration between their assets and their liabilities or they end up insolvent. If enough of the depositors try to pull their money out of the bank, then that reduces the duration of the banks liabilities, and the bank won't be able to move quickly enough to sell their assets to stay solvent.
The tech companies that are complaining about FDIC intervention caused their own problems because they are panicked morons.
Even more ridiculous is any one of these mega tech firms could probably step in and solve this situation with a cash infusion. They would almost certainly come out ahead because they would be buying a claim on the bank's assets for less than they are worth. But they won't. Because they don't know what they're doing.
What happened here is no different than what has happened in every banking crisis pre-08. The economy will be fine, someone like Berkshire Hathaway will make a stupid amount of money and customers will blame a bank for a problem that they created by being stupid.
We later opened two accounts in two different banks as a backup/failover strategy. One handled incoming invoices and accounts payable, while the other handled payroll, so we'd always have money flowing through both banks at all times. If one of them failed, locked us out etc. we'd have the other to fall back on. It actually happened once: due to an admin error one of the accounts was locked for 10 days. We just routed payments and receivables to the other bank and went on with our day.
1. The Bank lends money to startup
2. They raise money from VC
3. They pay back the loan to the bank using the VC money
4. Valuation raise and the VC shows high returns
5. VCs raise more money to repeat the process
6. Small investors buy shares of high-tech company because bonds yields 0%
It works, until it doesn't anymore.
I'd say now is a good time to short SVB if you're into that sort of thing.
You’re a day late. Try again on the next bank failure.
SVB is probably not the last shoe to drop in this story.
This happened in 1930 a year after the crash started and again in 2009 a year after the events of 2008.
Fed policy will be interesting in the near term. I know they are fighting inflation but they may have to concede this is a battle that will be fought over the next several years and that deliberately destroying the economy through too aggressive rate increases is bad medicine.
Still though, it's too early to say. If there was a more widespread contagion and a panic, then I guess it could be bad.
To me though the real culprit is the super lower interest rates we had just a few years ago. Without that, we would not be seeing any of this.
I don't know what to make of it.
Reporting suggests SVB has a lot of reserves, but them trying to raise money suggests otherwise. Weird.
Although, why anyone managing billions of dollars thought it was a good idea to lock up tons of money for a long period when interest rates were nil is beyond me. I'll gladly take their job at merely HALF their salary!
SVB probably has a disproportionate number of its customers being mid to large businesses, for which FDIC protection isn’t as helpful. So they’re probably more vulnerable to runs than a bank that mostly holds retail customer funds.
I don’t think the FDIC intends to stop every possible bank run, but rather dramatically reduce the number of them and reduce the impact when they happen. I think on that front the FDIC has been enormously successful
Lots of startups hold a lot more money there and aren’t protected.
Why did 50% of VCs and their startups and their mom bank all bank at the same bank?
Decentralization seems to get a bad rap in the valley
https://www.reddit.com/r/Superstonk/comments/11n1xtw/all_ban...
They took the deposits and bough "safe" bonds (eg treasuries). Which they're allowed to carry on their books at cost, even though their market price drops as interest rates rise.
But in both SVB and silvergates cases the drop in the market value of their assets coincided with an increase in withdrawals. They were forced to sell some of these bonds to fund withdrawals, requiring them to realize the market price. The accounting distorted the value of their assets to an extent, and the withdrawals laid that distortion bare
Sometimes the headlines write themselves...
The bank’s leadership made some bad financial decisions but then scored a massive “own goal” in how they communicated all that to the market and their customers.
Will be hard to raise for startups without compelling profitability metrics, though
I wonder how many people's lives and livelihoods have been upended by this trash saying "it's just business"? Now he wants people to be nice to him? Better idea - go live on the street - it's just business.
Is it that bad?
Also, I'm constantly fascinated by how many smart people fundamentally don't understand the economics of banking and how these (often private) institutions create and destroy money.
Enjoy bankruptcy you frauds.