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Comment by goodoldneon | Hacker News Reader

Why is "too much money" a thing? If a bank only wants $100 million in deposits, but customers deposit $150 million, why can't the bank set the extra $50 million to the side and pretend like it doesn't exist until customers want to withdraw it?

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Because now the bank has to pay interest to depositors of $150M instead of $100M, which means that they'll pay a lower, less competitive rate. So, in order to keep customers, banks are incentivized to lend out any and all spare cash for whatever yield that they can get, in order to give attractive rates to depositors. Losing customers though shouldn't really be a problem for the bank, after all, those customers did deposit "too much" money - once enough have left to seek higher yields elsewhere, there will be less cash on the sidelines, and so higher yields for the remaining customers. I suppose if your whole philosophy is "growth at any cost", and you're measuring growth not just by AUM but also by number of customers, you get excess risk taking and yield chasing.

At the SVB bought the securities in question, interest rates were 0 across nearly all savings products. SVB was trying to maximize profits for itself and shareholders. This isn't about attracting customers with high-yield accounts.

... though it may well be relevant that they might have felt great pressure to /retain/ customer deposits in a world of competitive yields.

How bad can it be when most banks are paying 0.2% on savings accounts and nearly 0% on checking?

I feel most banks are coasting off the inertia from longtime and/or unsophisticated customers.

Up until I switched to a neobank late last year to get some actual yield on my savings, I'd been using the same brick-and-mortar checking and savings account I opened in high school.

Apparently your average person is much more likely to move homes than move banks. Bank accounts are incredibly sticky, and even though it's not really that hard to open up a new account (and maybe switch over some recurring transactions), people nevertheless don't do it.

So the conversation goes:

A: We have too many depositors! We are not getting enough yield to pay interest without taking on risk.

B: What if we reduced the interest we pay on deposits?

A: Then we'd stop getting new depositors! Our only option is to take on risk.

You are right, this feels like a very unsympathetic problem to have. If you are a regulated bank you need to act like a grown-up and understand that overworking the soil and underworking the soil will both give you a bad yield in the end.

paying a lower rate literally solves the problem of having too much deposits.

they wanted a higher return so they increased their risk and blew up.

Well, yes, if your bank is receiving too many deposits and you didn't want to be vulnerable to a SVB-style failure, then you could:

- set your rate of paid interest on demand deposits quite low - what's going to happen, some people will pull their deposits? That's fine, that's what you want.

- re-deposit those excess deposits at other banks, taking only their meager interest payments on demand deposits

The math here works fine. As long as there's some difference between the rate you're paying on deposits and what you're getting, no matter how small, you're fine. And if you need cash quickly, hey, those are DEMAND deposits at other banks, you should be able to withdraw them immediately. You can spread the risk of a run on your bank around to every other bank.

The customers who deposited $150 million expect some rate of return on their deposits - in fact, you promised it to them. In a year that $150 million needs to turn into $155 million or whatever.

So you need to lend it out, and charge interest, and use that interest income on your loans to pay the interest on your deposits.

Sounds like SVB made a lot of loans or investment purchases quickly, and then some of those went bad.

Is this not what bonds are for? Savings accounts earn less than just buying bonds, and the bank pockets the delta.

They got greedy.

The bank has short-term liabilities to their customers, and decided to lend out the customers funds to someone else for the long term.

Total non-sense and greediness.

That's exactly what the bank did - they bought bonds. The type of bond they bought doesn't matter, what matters is that in a rising interest rate environment, the face value of the bonds fall and they are no longer producing higher yields than the saving account rates.

They didn't get greedy, they failed to anticipate the speed and amount that interest rates would rise.

Yeah, but they bought bonds to make their numbers work. They had a choice of getting like 0.08% in overnight funds or 0.36% in short term T-bills or locking it up and getting ~3% in MBS. They chose the latter to make more money. If they had chosen the former things would have been far less critical.

In retrospect this was a huge risk. They locked up way too much money in long term securities for how flighty their deposits could be.

They too, thought that the world had fundamentally changed as a result of the pandemic.

3% MBS, that's a good one. Try more like 1.25% coupon rate with the crazy low mortgage rates were at when SVB got the inrush of deposits (the banks and the GSEs gotta make their money too, with mortgage rates near 7% UMBS coupons are only at 5.5%).

The type of bond would matter if default risk was a meaningful piece of the puzzle here, but in this case it isn't (IIUC).

They did not get greedy. They bought bonds, and those bonds turned into a liability. Because the bonds were bought when interest rates were extremely low, they are worth less than bonds at current rates and had to be sold at a loss in order to shore up liquidity. That spooked investors and prompted a run on the bank.

> They did not get greedy. They bought bonds

they got some bonds which had an interest rate risk, in order to earn a higher interest. This is "greedy", but it would've been fine under normal circumstances, since they did not break any banking regulations.

You said they didn't get greedy but the next sentence is the description of an extremely greedy act. They did not need to buy 10 year bonds. They could've bought 1 year bonds, or any other length shorter than 10 years. Or just less 10 year bonds.

Bonds have a duration until maturity. Savings accounts can be withdrawn at any time. The bank normally pockets the delta by taking up the risk of this mismatch. In this case the risk became too much.

Think about it from the other end. You have a mortgage. But the bank needs money now and asks you to prepay your mortgage. What do you do?

I can't edit this anymore, but: there are multiple articles explaining that SVB owned mortgage-backed-securities, which is what I meant by "getting greedy".

I believe it's because depositors want a return on their "investment"

Because the customers expected interest and the bank’s investment portfolio can’t provide the necessary return to pay the interest rate they used to attract the customers.

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