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Comment by gumby | Hacker News Reader

I suspect all depositors will be made whole. The bank had a liquidity crisis; it had reserves in excess of its liabilities.

Every bank borrows short term (you can walk up and withdraw your money at any time) but lends long (e.g. mortgages, though SVB writes few of those). The recent management grabbed some very long federal bonds; as rates have risen the resale value of those long term assets (paying a lower interest rate) fell. They can't unwind that position and cover all possible demands.

FDIC will transfer the accounts to another bank, guaranteeing the 250K at least (I believe SVBs own liquid assets could cover that) and may use its own asset base to cover the balance, siezing SVB's other assets and stuffing them into FDIC's piggy bank. It's not like those government bonds won't pay out...eventually.

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SVB held $21bn of 'available for sale' bonds and $91bn of 'held to maturity' bonds on its balance sheet, that were actually only worth $19bn an $76bn respectively on a mark-to-market basis, which means a total unrecognised hole its in balance sheet of $17bn. SVB's total equity was only $16bn[1][2]

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...

People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis.

EDIT: To be clear, think of it this way. I have a piece of paper saying you'll give me $100 in 1 year plus 1% interest that I bought for $98.

No-one buys that piece of paper for $98 today, because they can get the same deal with better interest. But that doesn't change the fact that I will get $100 for it.

If deposits hadn't shrunk, $100 would go to SVB in 1 year and everything would be fine, it's the fact that they have to sell it so far ahead of maturity that's the problem, we just didn't notice this phenomenon in the past few decades b/c rates fell and prices went up.

This is not because SVB has a particularly risky book (we're talking treasuries here), it's because they didn't account for declining deposits (itself a very stupid, but unique bad decision unrelated to their risk tolerance).

> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities' when that is the definition of a liquidity crisis.

I don't think that's right. It would be a liquidity crisis if the market value of everything they own is higher than their liabilities but they can't find a buyer at this time. You are saying that a liquidity crisis is when they can find a buyer but everything they have is worth less than their liabilities. That's not the case.

> People keep talking about how 'this is a solvency crisis because if SVB had to sell everything today, they wouldn't cover liabilities'

This is not accurate, and the inaccuracy is the difference between solvency and liquidity.

If svb had longer (ie weeks), they still wouldn't be able to cover their debts. Its not a matter of needing time to arrange buyers for their assets; their inability to pay isn't related to liquidity today or tomorrow, it's related to their asset's value. If they snapped their fingers and marked to market all their assets, they would be in debt because they're insolvent.

> to pay isn't related to liquidity today or tomorrow, it's related to their asset's value

How do you calculate that precisely? That seems like a fuzzy distinction, considering that the value of things change over time.

> seems like a fuzzy distinction

Not really. Insolvency is by definition time independent. If you owe more than you have, you're insolvent. It doesn't really matter if you might make enough to cover the difference in the future.

In practice, you might get away with it if no one forces the issue upon you, but that doesn't change the math of whether or not you could pay your debts.

Liquidity is different. It is time dependent by definition. Some things take time to structure, deal, and sell. You can also get away with this in practice.

They can both have similar effects when they happen, but their causes are sharply different. I have a house I can sell to cover my mortgage, but couldn't sell it in less than a couple weeks or maybe even months. Illiquid but solvent.

Insolvency is a state of financial distress in which a business or person is unable to pay their bills.

If you think it is anything else you are just being an apologist.

> Insolvency is a state of financial distress in which a business or person is unable to pay their bills.

This isn't true. If you eat at a restaurant but forget your wallet, you can't pay your bill but you're still solvent. You have assets to cover your debts. "Can't pay your bill" is too broad a statement to be meaningful. There are many complicated financial instruments and needing time to make a payment doesn't automatically make you insolvent.

However, if SVB had EVEN longer, say, 10-15 years, they would have been fine, right?

Over what time scale delineates the two? If they were say, 1000 year bonds, would you feel the same?

I don't know the answer, but I see both sides. As of today, their liabilities exceed their assets worth, so it does feel like solvency fits.

yep, it's a solvency issue. The minute they tried to offload the bonds at a price lower than they paid for them (which seemed like the right thing to do to fix the liquidity issue), they were effectively in a hole and even if they waited 10 years later, would not have been able to cover the deposits.

They NEEDED to raise capital.

Their liabilities > assets.

They were 100% insolvent.

You need to realize that essentially bond pricing reflects the present value of all cash flows you expect from the bond. For long term bonds especially, this makes it a particularly risky book, because you are very sensitive to interest rate changes.

If the interest rate goes up while you are holding your low interest bonds, that means that your future cash flow from the bond (the repayment) is literally worth less than what it was. Your bond payments have a lower real value due to the higher interest rate of the surrounding environment and the increasing price levels, despite being the same nominal amount. That's why the bond's price plummets in the market, which is why this is a solvency crisis: because the assets really are not good for the liabilities at present value, which is the only kind of valuation that makes sense here.

sounds like you are describing a liquidity crisis to me

precisely, the maturation for the bonds were long-term. they would have been fine over time, if not for the bank run

If your "liquidity crisis" is measured in terms of years and years, you have a solvency crisis.

1 2023USD =/= 1 2033USD

Those aren't the same currency.

Solvency is whether you could go to market today (or soon) and show more assets than liabilities.

The liabilities are the same currency and the same amount in 2023 and 2033. They’re solvent.

The asterisk is that the liabilities are generating interest, but this is fine because (one very safely assumes) that’s covered by the interest on the long-duration assets SVB bought.

Interest rates have risen since those long-duration assets were purchased.

Depositors now expect higher interest rates which cannot be covered by those assets. They will withdraw their deposits and move them to a bank that can offer higher interest rates.

right, which is why this is a liquidity problem and not a solvency one. The assets cover the liabilities--you just have to wait ten years or whatever.

No their bounds are worth fundamentally less than they paid for them.

There is a continuum in how quickly you need to sell and the price you willmget for something.

No.

Those are short term liabilities. The ability of depositors to withdraw their funds is part of the liability.

If the bank wanted to raise long term deposits it would have had to pay much higher interest rates.

Once they withdraw the bank can not raise additional funds because all other depositors have better interest rates in other banks.

No amount of time will cure this situation, the values of those bonds will not recover. This is not some temporary panic.

The only way for the situation to improve is if interest rates go down in the short term. Unless that happens, the bank remain insolvent.

So it's the customer's fault?

No, it's Peter Thiel's fault for intentionally initiating a bank run?

SVB's systemic risk was just that the vast majority of their depositors are startups, and can corralled into action by VCs. Thiel decided all the startups he backed should withdraw all their money from SVB at once, and knew the rest of the VC world would follow suit.

A liquidity crisis is a solvency crisis if depositors are asking for their deposits. SVB made a miscalculation on their outflows and the price for that apparently is their whole market cap.

> 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.

I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.

The assets they were holding do regularly trade and could easily be valued. They knew that the value was down. The problem was they didn't actually have to do anything about it.

Because they planned to hold them to maturity, which meant that marking to market didn’t make much sense.

Of course here it blew up, but even marked to market assets will depreciate in value if a bank tries to liquidate tens of billions of dollars worth.

> SVB's total equity was only $16bn

Which table in the 10-K would I look at to see this?

Agreed. Lots of people here in the comments are making assumptions about a system they don't understand. Depositors with > $250k aren't necessarily going to "take a haircut," for the reason you mentioned, plus a few others. Additionally:

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.

I don't think the signers count towards the limit like a personal joint account does and would keep a business account at $250k.

https://www.usbank.com/bank-accounts/fdic-deposit-insurance-...

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

Is it typical for business accounts to be owned by someone other than the business?

SVB is not a typical regional bank taking deposits from middle-class workers, where most accounts are under the 250k insurance limit.

Banks that primarily serve ordinary workers typically have over 50% of total deposits in accounts that are under the limit, and are fully insured.

But for SVB, less than 3% of deposits are in accounts with less than $250k.

The cold, hard fact is that if the bank doesn't have sufficient assets to pay back depositors, no regulatory sleight of hand changes that fact.

There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't co-opt the power of the state to force ordinary people to subsidize them when their bets go bad.

It would be hideously immoral to bail out fabulously wealthy VCs with funds from taxpayers and small depositors.

> The cold, hard fact is that the bank doesn't have sufficient assets to pay back depositors.

That's not true. As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. Even if liquidating assets forced a 15% haircut, depositors will be made whole.

If a bail out is necessary, it's likely in the form of a short-term loan to make depositors whole sooner rather than later. And, such a bail out can/should be structured as a loan with significant interest in which case it's not really a cost to taxpayers.

That $209 billion number was not marked to market. Their assets weren't worth that much then, and they're worth less now.

The cold, hard fact is that if the bank had sufficient assets to let depositors withdraw their cash, then they wouldn't be in receivership now.

You can argue that they actually do have sufficient assets, but they just can't access them right now, and we just need to wait ten years for bonds to mature.

But that argument only makes sense if you also say that large depositors should wait ten years to get their money out.

Naturally, a dollar that you might receive ten years from now is worth a lot less than a dollar you can actually spend today, and if regulatory sleight of hand obscures that essential fact to bail out the 1% of the 1%, that would be extraordinarily unjust.

Once again, my point is that your following statement is untrue: The cold, hard fact is that the bank doesn't have sufficient assets to pay back depositors.

It is not a cold, hard fact that they don't have sufficient assets. It's entirely possible that after liquidating their assets (on the time scale of months), they can make depositors whole even after factoring in the time cost of money.

Of course you're correct, nobody knows the future.

It's possible the $80 billion in mortgage-backed securities they bought yielding 1% and maturing in 10 years might be salvaged. They're now worth far less than they paid because interest rates are up to 5% and nobody wants to buy bonds that yield 1%.

Maybe this receivership will bork a thousand startups, throw a bunch more people out of work, and cascade into a larger recession, driving interest rates back down to 1%, and restoring the value of the mortgage-backed securities, and making the bank solvent again!

Or maybe a recession severe enough to drive interest rates back to 1% would also be severe enough to prevent homeowners from paying their mortgages, which wouldn't be great for the valuation of mortgage-backed securities.

Not unless interest rates plummet, no. The bulk of portfolio losses is from long term bonds losing value with the increase in interest rates. Allowing more time to sell doesn’t help you there, especially if you have to pay prevailing interest rates on any delay.

> The cold, hard fact is that the bank doesn't have sufficient assets to pay back depositors

This is not obvious at this time. This is not a cold hard fact. They absolutely, undeniably had assets in excess of depositor liabilities at the end of Dec 2022. They incurred losses since then. The accountants are still accounting.

> and no regulatory sleight of hand changes that fact.

There literally is regulatory "sleight of hand" to do this, and the FDIC has a demonstrated history of doing it, many times. When banks like this fail, they shop the assets and existing customers around to other banks, and critically: will pay the acquiring bank to close the gap between assets and liabilities + provide liquidity while assets mature.

> There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't force ordinary people to subsidize them when their bets go bad.

The FDIC is entirely funded by insurance premiums paid for by the banks themselves. They are not tax payer funded.

Your fear is causing you to spread misinformation and scare people more than necessary.

> ... absolutely, undeniably ...

Were these assets marked to market, or were there billions in unrealized losses even then?

> regulatory "sleight of hand"

When claims on the FDIC exceed premiums paid, they are absolutely backed up by taxpayers.

There's a cap on what deposits are insured, it's not a secret. Large depositors knew their funds were not insured.

It's not "sleight of hand" to shop the assets in the market, maximize recovery, and make all depositors whole if possible. By all means do this!

But using FDIC funds to bail out uninsured depositors, or monkey business with quasi-government agencies backed by taxpayers paying above-market prices for securities, or agreeing to accept below-market interest rates on loans is definitely "sleight of hand" to obscure a direct subsidy to extraordinarily wealthy people.

By no means should insurance premiums paid on insured deposits be misappropriated to bail out uninsured depositors.

Being able to trust in the stability of banks is subsidizing the economy, not just wealthy individuals. It isn't CEOs who got tossed out of work in 2008, it was't wealthy individuals who had a 27% unemployment rate.

Wealthy individuals constantly try to game the system. Not letting the games they play hurt the rest of us is an entirely proper role for the government to take on.

I think the problem is when those games don't hurt the individuals playing them. After 2008, most of those banking executives who screwed things up saw few consequences.

I agree that it's a good move for the government to use taxpayer money to prevent an economic collapse. But that's still the lesser of two evils: the government should be working harder to disincentivize the kind of behaviors that make wealthy individuals think that playing these sorts of games is worth the risk.

I'm not sure what "working harder" should entail (I'm no expert on this sort of thing; others are), but I think it's pretty clear they're falling short.

You’re basically saying the employees at a non-tribal number of startups should not be paid payroll because “fat cat VCs”.

No, I'm saying let the fat cat VCs fund the payroll, not a quasi-governmental fund backed by taxpayers that explicitly said uninsured deposits are not insured.

> 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.

Contractual obligations often prevent this, btw. Many SVB customers had loans with SVB, which prevented them from using other banks.

Wow, is this common? From a systems perspective it seems like pure folly, increasing systemic risk and reducing resilience. (from SVB’s perspective I’m sure it seemed great …) it feels like it should be illegal !

I asked a handful of people with experience in those things and they all said it is very common. I was very surprised as well.

For Pete's sake, 1 month Treasury bills are yielding more than almost every bank account. Just set up a TreasuryDirect account and be done with it.

It seems like SVB was exploiting the lack of sophistication among early startups, and now it is going to bite all those startups in the ass.

Wealthfront offers me as an individual better tools for managing risk that it sounds like people who banked with SVB were getting.

How does that work with payroll? 500k is not enough for a moderately sized startup to make payroll.

To be clear, if you have 10 million cash, and you need >250k to make payroll a couple of times while your banks assets are sold off and you get the rest of your cash back (or 95%, or whatever), there is no need to spread that 10 mil over 40 different banks. That would be very inconvenient. Just to set it up so you have enough insurance to help you survive a short while. You can put 9.75M in one account and 250k in another bank.

> Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired.

Looks like not just startups, e.g. Roku had ~500M in SVB

https://edition.cnn.com/2023/03/10/business/roku-svb-cash/in...

The thing that's strange is FDIC took control and setup a receiving bank for liquidation.

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.

Most FDIC bank takeovers are slow moving crashes, allowing for a longer negotiation where buyers can evaluate the loan portfolio they are buying. This is a reaction to a classic run, so no time for that.

Chase has wanted this bank for years. Either they are taking advantage (takeover) or <conspiracy theory unfounded> helped accelerate it.

Most of the good staff were poached by First Republic over the past few years. That caused me to bank my current startup at FR after more than 25 years of SVB.

So I don’t think there was much for Chase to buy. SVB has been in decline for a while

Just saw a First Republic stock chart in crash territory, contagion?

Today's price range: 45-95

https://www.cnbc.com/quotes/FRC?qsearchterm=first

S&P bank sector is down across the board, but presume it will regress to the mean fairly soon. Aren't many other banks with exposure similar to SVB's.

First republic is in the same region and has a ton of tech clients. Collateral damage. So far it looks like they don't have the same exposure as SVB did though.

Interesting you say this, their stock is up despite rest of my portfolio being red

Flight to safety? Like when there was the Southwest Airlines December debacle - AAL skyrocketed for a bit.

So what I think is happening here is that if you take over a bank the traditional way, you need to mark-to-market all of the bank's assets -- so all of the losses from the long-dated MBS that would be perfectly fine if held to maturity would have to be recognized immediately, just crushing the balance sheet of anyone who bought it. Probably trying to line someone up who can either absorb that loss, figure out a way to recapitalize without recognizing the loss, or get access to some other lending facility.

But from what I read it's common for FDIC to "sell" to the acquiring bank at a price that wouldn't make a loss.

So if you marked to market all those long term bonds and then sold SVB to a bigger bank at the resulting (possibly negative) valuation. Why wouldn't a big bank take that deal?

Exactly. The fact they didn't have a bank lined up points very heavily to the fact that they are not going to be made completely whole. In the past, the FDIC has found a buyer and as part of that process guarantees some amount of the losses. IE: Savior Bank buys Failed Bank for pennies on the dollar, or even for a negative amount. They get all deposits, insured or not, and all assets--meaning loans. Then, the FDIC guarantees they'll make Savior Bank whole some percentage of losses on assets that go bad. Sometimes 80% or more

This arrangement usually results in all depositors being made whole, and the FDIC fund not taking any, or many, actually losses, because most of the loans will still pay back, at least partially

They also do this before seizing the bank, so that it's all very orderly and calms any panics

SVB was looking for a buyer on the open market and that failed--no surprise

That the FDIC also could not find a buyer that they could subsidize and announce the same day as the seizure is very damning. I would be shocked if someone comes in later and tries to buy it

Also, the fact the seizure happened in the middle of the business day, and not at the close of business yesterday points to a somewhat disorderly and rapidly deteriorating condition. I think maybe the run picked up a lot faster than they expected

That's a really good point, FDIC usually swoops in Friday night; and this was closed on a Friday during business hours, that's actually insane; they couldn't hold on 8-10 more hours, the run must have been really bad.

Even WAMU (a huge FDIC action) was done after banking hours closed on the west coast. https://en.wikipedia.org/wiki/Washington_Mutual

I just saw recent footage of 40-50 people standing in line outside an SVB branch waiting for service (withdrawals most likely).

I would surmise that the news spread fast among the tech demographic the bank services and the run is really bad.

And in this case, tech savy individuals are willing to send $XXM in 6 clicks, 3min after getting a slack message. That's a pretty quick kind of run relative to old-school 'stand in line for your personal life savings' kind of run.

It doesn't really work this way. It takes time to set up acquisitions, even by the FDIC, and the "FDIC stormtroopers sell bank overnight" is apocryphal. They do weeks of legwork leading up to the actual handover of the bank.

We don't know the timeline here, but speculating that "it must be bad" because things didn't happen overnight isn't really responsible.

During 2008 crisis it worked exactly as described. Most failures resulted in the failing bank’s acquisition being decided before the seizure happened. The way this happened is very rare

I think those actions worked out of hours because the bank's bosses let the FDIC know they were insolvent before a run happened, though? This time the bosses thought they could hold on.

If so, then the difference doesn't imply much about the banks asset level, just the idiocy of its bosses.

I mean...I think we're describing the same thing? So sure, it worked "exactly as described", but I think most folks on HN have no idea what "as described" means, in this context.

A lot of folks (like the top of thread) want to suggest that because it didn't play out like the 60 minutes story, it must mean something significant. That story barely touched on the weeks of leg-work the FDIC did for that particular bank, for example. If you weren't paying close attention, you'd miss it.

It seems like there’s a lot of uncertainty around the dollar amount of the deposits in excess of FDIC limits which would make it difficult to figure out a deal.

When was the last US bank failure where depositors lost money?

Appears to be 2020, from a cursory Google search.

https://money.stackexchange.com/questions/129772/has-anyone-...

The oft quoted 'nobody has lost money' is from the FDIC, and specifically says 'insured deposits.'

What is "SVP"?

I suspect a typo for SVB, "Silicon Valley Bank".

The size of this failed bank is quite abnormal. The business of this failed bank is quite abnormal. The surprising thing may be that the find anyone willing to take it out of their hands - let alone by Monday.

93% of deposits are uninsured according to a recent regulatory filing. So, I doubt it will be “all depositors” that would be made whole.

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

FDIC means you get paid immediately regardless, but the bank will almost invariably turn out to be good for the rest, just not quickly.

No, FDIC means you get paid up to $250,000 per insured account immediately Any amount over that you are not guaranteed to be able to withdraw. These people are a long way from regardless

> No, FDIC means you get paid up to $250,000 per insured account immediately Any amount over that you are not guaranteed to be able to withdraw.

The first half is what FDIC insurance means. The FDIC helps distressed banks in a variety of ways, including insuring deposits under $250K, but typically all depositors are made mostly whole again.

> but typically all depositors are made mostly whole again

Typically, but no guarantee. And on what time frame, nobody knows.

Typically the FDIC finds another institution to buy the distressed bank, and backstops losses on bad assets. They were not able to do that in this case

I suspect many depositors will be taking losses in this failure

IndyMac depositors got 50 cents on the dollar above the insured amount in the 2008 collapse.

https://www.ocregister.com/2009/03/20/depositor-losses-final...

It looks like since 1/1/2014 (convenient stopping point for my scrape), FDIC takeovers resulted in an average of 76% of what's owed paid out (range 0%-98%). My guess is the <50% payouts were mostly fraud rather than a situation like this where it's a more traditional liquidity event, so I'd suspect it'll be above average, probably in the 80-90% range.

That's disappointingly low. 0% is what you'd expect from an entirely unregulated "bank" which failed, so regulators were completely ineffective. Does the US just not bother actually having and enforcing capital requirements on banks?

That’s a bit of a grim take. There’s been multiple instances of otherwise well regulated banks being blind sided by deliberate concealed fraud by its employees.

https://en.m.wikipedia.org/wiki/Barings_Bank

Leeson is an example of a bank completely failing to use controls whose purpose is to prevent exactly what happened. The bank should have another employee who is in effect marking Leeson's homework, and instead he was allowed to mark his own, so when he was down a million dollars he could say he was up a million dollars, and keep his job. And of course it's quickly not just one million. This isn't hindsight, these were normal controls, but Barings just didn't bother.

The tragic part of this story is that none of those who should have been responsible for implementing such controls faced any kind of legal action.

Sure, the amount above $250k wasn't insured, so, you don't get that immediately - my core point was that the rest isn't gone and in many cases you'll get all or almost all of it back, that just won't happen soon.

In fact, to the extent ordinary bank failures don't result in paying back all or almost all of the sum owed, the regulator has been far too slow to step in and more aggressive regulation is needed.

The conundrum with underwater bonds/mbs is that you can make depositors whole, or give depositors money back now, but not necessarily both.

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.

DFPI specifically called them insolvent in their release today, does that change your opinion on depositors being made whole?

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

> DFPI specifically called them insolvent in their release today, does that change your opinion on depositors being made whole?

If the asset/deposits balance hasn't changed much since December (which I'm not sure is the case), depositors are likely to eventually be made whole for the deposit amounts, but liquidity issues and facilitating sale of assets to make that happen may result in substantial delays. For depository accounts businesses relied on for regular operations, that...may still create substantial additional costs that will not be compensated.

So, in a more holistic sense, it seems likely that depositors will not be made truly whole for the impacts, even if they eventually recover deposits.

Being made whole several years down the line may not be better than getting liquidated as soon as possible.

In a extreme example, getting $100 in 10 years is not as good as getting $70 next month.

See my reply to kmod for further explanation on my statement.

These statements seem pretty contradictory:

- "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?

They're just saying that many of the assets are insufficiently liquid to be instantly sold off to cover all the withdrawals during a bank run.

I don't think anyone is saying this? The decrease in value is due to wrong-way interest rate exposure, not due to a fire sale

Well, it's going to be both. Dumping 200b of bonds isn't going to yield premium prices.

The decrease in value was due to exposure to long duration securities yes.

The closure of the bank was due to a classic bank run after depositors panicked upon hearing of the decrease in value. They had 45 billion in withdrawals in a single day, out of ~175 billion in deposits. No bank could survive that.

That's a good question. The key is where I wrote that it was a liquidity crisis.

An analogy: you (hypothetically) keep your money in some 6-month CDs, with about a month's worth of expenses in your savings account in case something unexpected comes up. Then you lose your job and by the end of the month you haven't found a new job. You could liquidate your CDs, but the early-liquidation penalty might mean you still won't have enough to pay your bills. If only you could wait for maturity.

So yes, at mark-to-market firesale prices that means SVB can't pay out in full today to every account holder and so FDIC has to step in. But FDIC (who has a very large balance sheet) also seizes those assets. They give the accounts to another bank. Then FDIC can unwind those seized assets in whatever timely fashion it wants.

There's a second factor: in a secular banking crisis they may pay out only the guarantee (currently $250K; for a while (during the GFC IIRC) it was temporarily $500K. But we are not in a secular banking crisis; not only has the Fed completely restructured bank reserve requirements in response to the GFC but SVB is a single, small bank, not even a regional one, with a run-of-the-mill crisis. This is the kind of failure that you put all the new hires on because they can learn without any up-to-the-minute crisis stress. This is what they learned during onboarding :-). In such a situation it's better to pay out move than the $250K, probably several million, to prevent any "contagion" (since SVB has "Silicon Valley" in its name).

I have no special knowledge of FDIC's internal thinking: they could make them whole now, or make up to $250K whole now and pay out some later, or yes, they could force a few people to take a haircut. Those (small number of) panicing VCs would be better off calling their senators than their portfolio companies.

PS: BTW hypothetical you has more options than those above: you could take out credit card debt, perhaps tap a HELOC you might already have in place, etc. SVB had similar options: they did have a $15B fire sale and got an investment from General Atlantic. It wasn't enough.

> I suspect all depositors will be made whole.

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?

The assets may not be valued anywhere near market prices given the recent run up in interest rates. They don’t have to reprice the asset if they intend to hold it to maturity in the face of fluctuating rates.

> It's not like those government bonds won't pay out...eventually.

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.

But by the time the depositors get their money all of their employees will have left, and some other company will have an N year lead on cornering the AI dog washing market.

Yeah, it seems companies should be mostly fine. Like you had 10 million in cash yesterday, but now you get 10m in 10y TBills, which you have to sell for $9m to get your cash back. It sucks but it shouldn't change the trajectory of your startup.

> It's not like those government bonds won't pay out...eventually.

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

There's a $40 billion hole in their balance sheet...

As fairity pointed out in a comment to this thread, "The FDIC report shows $209b in assets and $175b in deposits."

Unfortunately much of their balance sheet is illiquid (consider loans they've made to venture-backed businesses, and of course a poor choice they made in government debt maturity).

Thus a liquidity crisis; technically also insolvency, but not gross mismanagement and excessive leverage by any means. Unwinding it will be quite routine (see my reply to kmod).

No, I think you're wrong.

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.

See my reply to kmod in regards to this. It's the FDIC's current balance sheet we're talking about, not SVB's. In a liquidity crisis you don't have access to your capital. So FDIC spends theirs, and takes control of SVB's balance sheet. Also SVB is a small bank.

The only way things are okay is if FDIC makes SVB whole on all its assets, which doesn't make sense. They are only on the hook for the 250k, everything above and beyond will get paid out by selling assets, much of which might be considerably impaired, because of accounting differences. You're telling me that if SVC had $1 billion in 0.1% 10 year bonds, they would pay them face value for that now? That's not how it works at all.

SVB was the 15th largest bank in the US. That's not a small bank.

That's not how FDIC works. Its job is to protect account holders, not banks. SVB is dead; its shareholders and bondholders will be wiped out, includng the money they raised from General Atlantic this week.

The account holders' accounts, and likely all the loan portfolio, will go to another bank. The new bank will adjust its reserves from the Fed in the usual way, and may get some capital from the FDIC (warning: I am not au courant how the latter works post the GFC).

The FDIC uses its own large (and augmentable by congress, not that it matters in this case) balance sheet to back some or all of the deposits. It seizes all of SVB's assets and unwinds them as it decides to...with the proceeds going to FDIC.. Whether it dumps them on the market or holds to maturity is the FDIC's decision and has nothing to do with what happens to SVB. The people who went to SVB HQ and the people who decide what to do with SVB's assets are completely different people.

Read my reply to kmod.

> SVB was the 15th largest bank in the US. That's not a small bank.

The money center banks are the ones that matter. Most retail deposits are held by a handful of banks. Being the 15th largest bank is not like being the 15th university in the rankings (i.e. not that different from the top 10) but more like being the 15th biggest car company. I wouldn't call FDIC's balance sheet "enormous" but it can handle SVB without breaking a sweat.

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