FDIC Takes over Silicon Valley Bank

They expanded in some areas by buying other small community banks, specifically in areas where there was a big increase in income in the local area (from mineral rights, etc).

The smaller banks that they bought were in a situation where suddenly they had large amounts of cash incoming, and customers who were paying off / not taking out loans like they used to.

They didn’t have the reach (mostly confined to a small rural region) to use that cash to give out loans elsewhere so they looked to merge or be bought by someone who did.

Until I heard about those banks I hadn’t considered “too much money” was a problem.

Let's be clear, the issue wasn't that the Fed raised rates to a historically average level, it was that they were manipulating the bond market in 2021 with trillions of dollars of QE.

Over the last few years the Fed has basically done a pump and dump on the bond market, and SVB being a bank was basically forced by regulation to buy long-dated bonds for yield.

I've seen a lot of people speak critically of SVB and I get it, but I think people should take a minute to ask why the hell bonds were yielding such a low amount in 2021. I just wonder how much longer we're going to blame, banks, crypto investors, bond investors, equity investors, home buyers, etc for what's happening to the value of their assets. When central bankers make government bonds trade like meme stocks this is what happens. Perhaps if we didn't do that, SVB and many others wouldn't be in this position.

But that's exactly the problem. With higher interest rates, those deposits will be looking for a higher deposit rate. With their assets tied up in low-paying long-term bonds, SVB will not be able to pay that higher rate.

It would only work out "eventually", if the depositors would accept a below-market rate until the bonds matured.

EDIT: This is indeed a solvency issue, not a liquidity issue, as also pointed out below.

This in theory creates a diverse non-correlated system of capital deployment with the best projects winning over the bad ones.

However when the central bank offers interest rates that a private bank cannot match even when it's deploying into safe and endorsed assets like MBS then some weird stuff happens...

The Fed can promise risk-free returns at whatever rate they want but once it exceeds the private banks', then the banks no longer serve any purpose. If there were a way for individuals to hold accounts directly w/ the Fed, they'd all do that. Money will be sucked away from banks that deploy capital in the private sector and squeeze into ones that just passthrough to the Fed's like money market funds.

With high enough interest rates, the Fed can end up sucking up liquidity even from good and safe projects and cause widespread asset collapse b/c the entities that are supposed to be doing price discovery can't compete anymore.

I'd like to learn more about the dramatic drop in MBS - elsewhere, downthread, it is asserted that they have dropped 30-50% ?

I understand the inverse relationship between bond price and yield ...

... but I am surprised that an asset yielding ~1.5% drops 30% in value when treasuries of similar duration rise to 3-4%.

Are there other factors at play with MBS in early 2023 - such as increased delinquencies - that are putting downward pressure on their price ?

Sticking to unrealistic goals seems to to be the downfall of a lot of financial institutions (and probably a lot of other companies). Same happened with Deutsche Bank in the 2000s. The CEO declared that they wanted to achieve higher ROI and to achieve this they had to start doing ever riskier stuff until it blew up in their faces (and the taxpayer generously bailed them out so they could keep their big bonuses).

This is a pretty insane bet. Why didn’t they ladder the maturities to have a lower average duration and less risk?

Very blatant weaponization of FUD to drum up deposits for their investments in Brex, Ramp, and Mercury.

Capital has a special meaning to banks, and deposits are absolutely not capital from their point of view of the bank (they are from the point of view of the depositor). To the bank, deposits are on the liabilities side of the balance sheet.

A bank’s capital is only equity put in by shareholders and retained profits from previous years. This is important, because how much a bank can lend is only determined by the amount of capital they have, not the amount of deposits (since deposits are on the wrong side of the balance sheet for lending from).

Yes, they sold the treasuries and took a bath. But if that was their best option, it speaks very poorly to the other "assets" they held on their balance sheet.

We may find out in the coming days that they had a big position in Silvergate, which went bankrupt yesterday, and they had to mark their position to zero, creating the need for liquidity.

[1] - https://twitter.com/jamiequint/status/1633956163565002752

That tweet is unattributed verbatim from https://www.livemint.com/news/world/explainer-silicon-valley...

[EDIT:] See the thread, it seems that the story may have stolen from the tweet! Pretty shocking for one of India's biggest business publications (and with 2 million Twitter followers).

https://www.msn.com/en-us/money/other/billionaire-investor-b...

Would be interesting to see where that money came from. That has all the markings of a pump before a dump, the dump being 2023. They didn't even have to dump, they just had to stop the pump to auto dump once the interest rates went up.

SVB opened themselves up to an attack vector and one thing the banking industry likes to do now and again is consolidate and shakeout. That amount of inflow in good times can make you do funny things. The better way to go about it is be scrappy always, and expect the attacks.

There were way too many companies in this bank, it had too much concentration of startup/VC/PE money. Regulations will probably have to be made around this now more robust.

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.*

[1] https://hbr.org/2019/01/the-high-price-of-efficiency

Why can’t so many folks who are doing well enough just act with basic common sense and integrity these days?

This is exactly a definition of liquidity issue... Owning enough assets but not being able to cover short term liabilities.

In opposition to not owning enough assets to cover liabilities.

https://www.bitsaboutmoney.com/archive/deposit-insurance/

I should add: apart from 2008, bank failure has historically been quite rare

But why didn't they just hold money at the Fed given that they are a bank and they can?

It's literally splitting hairs between what the Fed Fund Rate is and what they got on their MBS.

Explainer post says end of 2021 they made that trade, in March the Fed raised the Fed Fund Rate to 0.20%, and by April it was 0.77%.

Had they waited just 5 months they'd have got a better Risk adjusted return by just keeping the money at the Fed

apart from the loss of $1.8bn and the delta of the interest - growth from their assets.

Isn't everyone still going to get their money back - the percentage of the loss that SVB has which should be less than 5-9%? Sure FDIC has to liquidate all the money from the assets and it takes time. But at least the impact is not going to be as hard as losing all the money like FTX or Maedoff in 2008 right.

> the value of SVB’s MBS plummeted.

How much 'plummeting' did they do in numerical terms? Something with those kinds of yields doesn't sound like it ought to be a super risky asset. The mortgage lending market tightened up a lot after the great recession...right?

(i think HN needs a black bar, we are all screwed)

https://twitter.com/AhmadBaracat/status/1634293096639787008?...

Do we now have people making decisions on stuff like this who are too young or clueless to remember what happened with the 2004-2007 mortgage backed security bubble that popped in the 2008-2009 financial crisis? Seriously? Did nobody learn the lessons on this? Countrywide and other originators of MBS and CDOs?

You mean it's not a solvency issue? It sounds like a textbook liquidity issue.

Yep, all of SV is truly made of bumbling idiots. That whole solution is truly hilarious and watching all these clowns lose their money is going to be fun.

That means it didn't have a liquidity crisis, and it didn't have reserves in excess of it's liabilities, it had a solvency crisis, and it has more liabilities than it has assets (before even considering the haircut it's assets will suffer at liquidation prices).

The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. So SVB was sailing along nicely whilst it's bond portfolio slipped further and further under water, and wasn't required to recapitalise when it should have done.

[1] https://ir.svb.com/financials/annual-reports-and-proxies/def... [2] https://www.wsj.com/articles/bond-losses-push-silicon-valley...

1. Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired. It's totally possible (and regularly done) to spread out cash among several financial institutions to protect against this very issue.

2. Any regular account with two or more signers (very typical for a business account) is insured up to 500k.

3. If spreading out your 6- or 7-figure assets to multiple institutions is too much of a burden, literally every business bank has special accounts or add-on features that either raise the FDIC default limit of 250k, or supplement it with external insurance. Again, if any startup's financial handlers didn't recommend this: fire them because they entirely failed to do their job.

That's not normal; FDIC works quite hard to find a bank willing to take over - usually they can work out what the "cost" is to take over, and FDIC pays the receiving bank that amount to "eat" the dying one.

If they don't announce they have a bank to assume SVP by Monday, it's quite abnormal.

https://twitter.com/business/status/1634211584657571843?s=20

If I had $1m in my account and it was invested 100% in MBS around in 2021, it could take 10 years to actually get the whole $1m back, and only be worth like $800k now. I have effectively lost that 20% because you could just give me $800k now and I could put it in a MBS myself to get the same results.

https://dfpi.ca.gov/2023/03/10/california-financial-regulato...

- "it had reserves in excess of its liabilities" - "They can't unwind that position and cover all possible demands"

I'm guessing that you're thinking of some sort of valuation of their assets that says something like "well they're really worth more than they're currently valued at", which is a common claim on this story but it's a pretty bold one?

Agreed. The FDIC report shows $209b in assets and $175b in deposits.

Even if they took the full $15b estimated loss to liquidate their HTM bond portfolio, they'd have $20b to spare before not being able to cover deposits.

Am I misunderstanding?

You go ahead and think that...

https://www.svbsecurities.com/team/joseph-gentile/

Joseph Gentile is the Chief Administrative Officer at SVB Securities.

Prior to joining the firm in 2007, Mr. Gentile served as the CFO for Lehman Brothers’ Global Investment Bank where he directed the accounting and financial needs within the Fixed Income division.

Does that really matter though? Anyone can buy and hold to maturity. The market price indicates that that's not good business.

The reason why depositors are going to lose money I think is because the fire-sale valuation of the assets << valuation on the books. I think depositors will lose a fairly big chunk of their money, maybe 10-30% if not more.

Their money was not sitting around in cash. It was in bonds which lost a lot of value in the last several months. They also have more exotic investments in the startups they work with, which depending on how it works, could get a really bad valuation as well.

I think you'll find a lot of the people complaining are people who got hit and are bitter about it.

e.g. some CFO's seem to be complaining about VCs - the CFOs likely didn't do their job, one part of it is "treasury/cash management". Some VCs are complaining about other VCs - probably they weren't paying attention and their portfolio companies got hammered.

Remember - SVB dusted ~$15 bill on their long term bond bet, it was almost their entire equity base. Pulling your money out was the only sensible action.

https://en.wikipedia.org/wiki/Bank_run

In more mature industries, people would have been confident that the government wouldn't let their bank go under, because the government usually doesn't, and as a result the government usually doesn't have to. Instead, startup culture is so low-trust that we shot ourselves in the foot.

https://www.bloomberg.com/news/articles/2023-03-10/svb-s-uk-...

https://www.usatoday.com/story/entertainment/celebrities/202...

This chart of historic bank failures paints a different picture:

https://www.fdic.gov/bank/historical/bank/

That's not quite true; the FDIC will pay uninsured depositors an advance dividend within the next week.

The reality is they try to protect as much of the assets as they can and even those over 250k will probably not lose as much as they would have without the FDIC

Now imagine you've finally settled on a cost structure that can pay all of your insurance, operating costs, payroll, and everything else. You charge monthly fees and you might also charge per-interaction fees to do anything or talk to anyone.

Then a competitor comes along that operates in a fractional reserve manner. They not only offer zero fees, they actually pay customers interest to keep their money in the bank. There is a risk of failure, but it's rare and all evidence points to customers not suffering massive losses when it does happen due to various regulations. Inconvenient, yes, but it's unlikely that you're going to lose all of your money.

The majority of your customers would leave for the competitor bank.

Also, in your model, where does money for loans come from? How are borrowing costs impacted by a major source of funds for loans going away?

It generally works because while any one depositor's funds are short term, the pool of such deposits is generally stable. A good chunk of today's deposits will fund tomorrow's withdrawals. Banks also have elaborate instruments like commercial paper and the Fed discount window to cover short-term liquidity gaps. A bank with assets it can't sell quickly enough can generally borrow briefly from some other bank to cover the term gap. But there is a limit on how much such borrowing a bank can do, and SVB has hit it.

It seems that SVB made a classic mistake of putting a lot of "hot" money into long-term assets, thus taking on interest rate risk. They probably should have put the surge of deposits into shorter-term instruments, but that would have forced them to reduce interest on deposits or their own profits.

But from time immemorial banks work by taking money from you (short term) and selling it to someone else (long term). Originally the banks were "protected" by being able to claw back the long term at anytime; but that caused even worse problems.

FDIC provides a way for "common people" to be protected from this; the other option would involve something like the USPS offering cash-only banking for people.

Which services? And those services would need to be something that I can only provide by being your depositor (otherwise I'll get beaten by someone who provides those services without the added burden of holding and securing your physical money.

You've basically designed a system that increases the costs of being a bank, and eliminates the main source of profit, and hand-waived over how to close that gap.

I suspect it's simply unprofitable to run a bank in the model you've provided. I suspect the only way to make that system work is by saying "banking is a public good, it's OK if it runs at a loss" and making it a gov't provided service. I don't really see a path to private banks existing in the model you outlined.

How banks actually work was described well by the Bank of England. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

The point of a bank is to loan money. That's it. This is how they make money. They need deposits so they can loan money. They pay the depositor a part of the interest on the loans they write. They don't exist to sell services because that's a really bad business. They provide services to attract deposits so they can write more loans. That's what banks are.

> ...and then invest that money trying to make a return on it.

No, they don't do that. They loan the money. If they can't loan it then they put it into a variety of safe places that can earn some interest, among other things. But they don't gamble depositors money. Investment banks may, but that's an entirely different thing.

People don't want to lose their money to inflation, so banks are implicitly required to make up for that. Also, it's just too tempting for them not to use the money that is collecting dust.

Hopefully people will emerge from this with a better understanding of Bitcoin's advantage to normal fiat system, which is something that is severely lacking in discussions I see here in HN.

This is such a great question. It has depth and nuance. If I understand it correctly, it comes from a place of wanting stability. Why wouldn't anyone design a banking system that is fully backed and stable? Who the hell wants these violent booms and busts? This looks like something that can be kept stable right from the get go.

I hear you. The main reason I can think of is that "banking is crookery".

The old goldsmiths were crooks who understood fractional reserve. Imagine if we were to ban the current system and asked banks to hold every deposit 1:1, they could - for a small fee. But that will mushroom a black market of lending for interest. All the banking crooks will have no choice but to go to the black market. This will cause the black market to grow faster than stable banking, which will lead to more unregulated chaos.

The only alternative I can think of is equity-based islamic finance style banks. While these banks have interest in varying forms, they don't have as much asset risk because the interest rate is largely meaningless because lending/borrowing is not the main way to earn money.

How you think the banking system works is how "educated" people think it works and even that isn't correct, by the way. There is no reserve. The funds aren't real. It's all just made up numbers. There have been several Hollywood films made about it (e.g. The Big Short and Margin Call). It's almost so stupid you think there must be something else to it, but it's just people playing with numbers.

Probably invest then. Why would the bank put its money in the bank if you are not?

So it looks like in this case SVB chose MBS with a pretty low interest rate and long maturity, which they now have to sell due to the bank run you mentioned.

Because people want economy to be self-regulating. What is the correct amount of money in circulation? What are interest rates? Let the market decide. Banks is how market decides, basically.

>> Silicon Valley Bank Had About $209.0B in Assets

I'm not an expert, but aren't deposits in a bank liabilities? Assets are things like treasury bills and loans held by the bank.

Would an incident like this make other banks shore up their defenses about this sort of thing happening to them, or will more banks fall due to market conditions in general?

Was Silvergate bank not FDIC-Insured?

"Company is 200 years old and we will go for another 200 years more!"

2 Days later

"Whoops, all the moneys gone. Bye!"

The irony is, if this doesn’t resolve itself relatively soon, we won’t be able to pay down the loan precisely _and only_ because of the terms of the loan that they set in the first place.

I don’t know yet how it’s all going to shake out, but I’m pretty excited to have the experience of trying to navigate through all of it.

> In many cases, startups exclusively banked with SVB because doing so was listed as a covenant of their debt!

> So CEOs across the tech sector on March 9 faced a hard choice: You can pull your deposits from the bank in order to save them, but then you would be in breach of covenant, and at risk of default on your venture debt. Of course, the alternative was that you risked losing everything if the bank failed. Many chose to hold tight as SVB’s outright failure seemed outlandish even a few short hours ago.

Top 1% of U.S. banks is not "relatively small." Technically regional, but had locations across the country. I'm in Utah there's a location across the street from my office.

> why

It was tech-forward and offered debt financing based on ARR.

Why do >90% of online retailer companies use Shopify? If it's better, people will use it.

it's an 800 number, perhaps you should be clear to where you're directing people: the American National Suicide Prevention Lifeline.

I get that you're trying to be light-footed around the topic, but I feel as if I must point out that not all people that need to talk to someone even have the concept of self-harm on their mind.

If you actually just need to talk to someone , try a Warmline. [0]

[0]: https://warmline.org/warmdir.html#directory

If I had a nickel for every time I heard this from actual friends in the past couple decades, or for when I said it myself a few times... :)

Gonna be quite a show, this.

https://en.wikipedia.org/wiki/Fucked_Company