What is there to learn? That's not an actionable statement.
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.
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.
The point is that a bank run is a liquidity event (i.e. we still own more than what we owe, it’s just hard to turn it into cash fast enough).
SVB has a fine balance sheet for now, they’re just running out of easy things to sell.
The quote is referencing liquidity events, where the problem is everyone wants their money because they’re nervous about the bank, but the only thing that can hurt the bank is them taking out their money (because then the bank is in fire sale mode).
A CEOs job in this time (something SVB CEO did not do) is to project confidence. That’s literally all they can do.
His statement didn't project confidence. My "we are adequately capitalized" shirt is raising questions answered by my shirt is the meme way of expressing it. The right move would be to find a recapitalization transaction and complete it, which they tried to do but issued the press release right after a crypto-focused bank went into receivership due to falling account levels. That did not help matters.
There’s no deeper point.
Do they?
If SVB is sitting on a pile of Treasury bonds that mature in 20 years, they can “hold to maturity” and get their principal plus some very low interest rate. But this is useless! In a fantasy world in which all their depositors leave and they keep those bonds for 20 years, they are indeed worth that amount in 20 years, which has a rather lower net present value today, and maybe their investors care and maybe they don’t.
But this is, of course, a fantasy. Those bonds are collateral for deposits, SVB pays 4.5% APY on savings, and that 4.5% doesn’t materialize from the ether. In 20 years, 4.5% multiplies money by 2.4, those T-bonds will not multiply by 2.4, and SVB will slowly but surely end up in the hole. Unless they convince a very large fraction of their depositors to forego interest.
It boggles my mind that banks are apparently permitted to do accounting on a hold-to-maturity basis. Holding a bond to maturity avoids paying a spread and maybe has some tax effects. And that’s it. Otherwise you might as well sell it and buy a new one with the same present value.
(I am not an expert, and I’m going off HN comments for how these rules work. But if the banks really do get to say they plan to hold a fixed-income instrument to maturity and they can value it as something like face value, then I think the system is broken.)
It's hilarious that banks serving crypto and startup ecosystems aren't failing because their crypto and startup loans went bad, they're failing because of the duration risk from holding long-term Treasurys on their balance sheet.
That is the number one reason why banks go bankrupt...
It's not hilarious, duration risk is the biggest risk a bank has to deal with and it gets worse the more and more people keep their money as demand deposits. This is why the Fed does QE, the duration of deposits has shrunk so low, that the banks can't buy treasuries as the duration of the treasuries has become too long in relation to instantaneous demand deposits that can switch from bank to bank. The only solution that the Fed came up with, is to do the duration transformation themselves by buying long duration treasuries and giving instantly transferrable central bank reserves with no duration risk. This works because the system as a whole cannot go bankrupt, but individual banks can. If you take your money out of the bank, the CB reserves just get turned into cash. If you transfer between banks, the recipient bank now holds the reserves.
Also, plenty of crypto specific banks did fail because their loans went bad.
If a bank has $100 of deposits and has lent out $90 on a 30-year adjustable rate basis, the bank is exposed to potentially liquidity issues, default risk, and second-order effects like changes in the yield curve. But if the bank lends that $90 as a fixed rate mortgage or buys a 30-year T bond, they are directly exposed to interest rate changes.
(Also, as I understand it, and this is far outside my expertise: banks usually try repackage their debt and sell it to investors. The banks presumably can’t carry those 30 year fixed mortgages on their books without accounting for interest rate risk. Why are T bonds special?)
No it isn't. Any other bank would be happy to write a loan backed by US treasury holdings, at no more than a moderate profit. If you're sitting on that, it has value. But it doesn't have value in literal dollars by tomorrow morning to pay out a withdrawal. That's what "liquidity" is all about.
This has nothing to do with liquidity. If I had a 0 interest, $100 T bond maturing in 30 years, I cannot sell it today for $100. But anyone who lent me $90, nonrecourse, using it as collateral and asking for only a moderate profit is nuts because this bond is not worth $90 — not even close. Maybe I can get a loan that is based on my own credit-worthiness, but that’s a different story entirely.
If I have this $100 T bond, and I’m a bank, and that T bond is collateral for a $100 savings account paying 4.5% APY, I am in the hole. If my depositor sticks around, I can gamble and hope I can make up my losses (e.g. by interest rates going way down), or I can try to be such an awesome bank going forward that my profits can make up for my losses, and maybe I’ll get away with it, but I don’t really deserve to get away with it.
Not to a retail investor looking at short term returns (and irrationally obsessed with Inflation! due to media consumption), but to a bank with regulatory deposit requirements and a longer term outlook? Seems not unreasonable.
Anyway it doesn't have to be worth the full face value. It just needs to be worth enough to back a short term loan big enough to honor current withdrawal demands.
I wonder if this is the problem.
> to a bank with regulatory deposit requirements and a longer term outlook?
Maybe with some generally accepted accounting principle, but not by any sensible business standard.
If that bond trades for $80, no one would buy it for $90. It’s worth $80. Similarly, if you already own it, it’s not magically worth more.
And if you are a bank with a long term outlook, you expect interest rates to hold near current levels, and you pay 4.5% APY to depositors, your long term outlook of paying 4.5% to deposits where that deposit money is locked up in a very safe bond earning 1.8% APY, you are losing a lot of money, very safely, in the long term. Almost exactly as much as you would lose by booking the loss right away and investing in something else.
Other than tax or regulatory arbitrage, complex accounting is no substitute for actual profits and losses :)
But they wouldn't continue to pay 4.5% interest for 20 years would they? This is just a brief moment of high interest rates, so I think that's the main detractor from this argument. In other words, it's not like 4.5% APY on savings is anywhere close to the norm.
You are welcome to make that bet for your personal finances or on behalf of your company. You should not make that bet with someone else’s money unless they have signed up for it.
For most banks, it is fine to assume a 20 year deposit window because deposits are fungible and for most of recent history deposit bases have gone up.
SVB was wrong for not assuming that the 2021 deposit spike was (in hindsight obviously) a short term blip, but you can look at their loan book on page 19 of [0].
It's not immediately clear to me that there's some sort of systemic risk in VCs/PE firms not paying back their loans, but given how circular the tech ecosystem is, maybe we get there.
[0]https://s201.q4cdn.com/589201576/files/doc_financials/2022/q...
Let me try again. You're still thinking about liquidity -- assuming a 20 year deposit window seems okay to me.
But the problem is solvency. It's not that the assets are illiquid -- it's that they insufficient. If you run a bank, assume a 20 year deposit window, and invest those deposits in safe assets that carry similar interest rate risk to the deposits themselves, then you are solvent. If depositors leave faster than expected, you may be forced to pay a spread or other haircut to sell your long term assets early, but that's a small effect and can be managed gradually as long as you stay on top of it.
This isn't SVB's problem AFAICT. SVB bought assets that were perfectly liquid (T bonds!) and (if I read the filings right) assets that are still fairly liquid (MBSes), but they had interest rate exposure that did not match the deposits. Savings account interest rates (at SVB!) were up to 4.5%, and those T bonds had much lower fixed interest rates. [0]
If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative.
[0] Whether you think about them as paying low interest for a long time or as being marked to market at a loss and then paying current interest rates at maturity is immaterial. You end up with the same number of actual dollars at the same times.
You are confusing price today with the actual characteristics of the instrument.
A T-bill pays back it's face value always, it just trades below face when interest rates are higher than when it was purchased.
That is the definition of a liquidity problem. You'll get the face value back eventually (it is sufficient), but not if you sell today.
A liquid market is not the only characteristic of liquidity. There's a liquid market for anything at a low enough price...
>If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative.
This is a true statement people are making that has nothing to do with what happened here. The point of a bank is interest rate arbitrage, so I agree SVB would have to do their job better over those 20 years, but this thing that happened over 3 months is a liquidity crisis. They weren't running out of money to pay interest on deposits, they were running out of money to give those deposits back and were veering into the problem discussed above - selling things below value to create liquidity.