Report from the California Department of Financial Protection on SVB [pdf]
dfpi.ca.gov
dfpi.ca.gov
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
_No_ bank has the ability to handle all of their depositors pulling their money out at the same time. I'm not sure how many could handle 25% + however many pulled in the preceding days either.
Bank runs caused banks to default because the banks have run out of cash, plenty of banks have failed despite having sufficient assets to cover their depositors.
An easy way to understand this, imagine a teeny tiny bank:
* 100k cash on hand
* 10 customers with 50k deposits
* 100 customers with 100k mortgages
This bank has 10 million in assets, and 500k in debt, so has 9.5million in net assets
Now 2 customers withdraw 30k each, you still have 9.5 million in net assets but you only have 40k cash. So you sell one of the mortgages at a discount to get some cash on hand. You lose 10k and you report that you did that, and now you have say $130k cash again. But now some of your customers friends hear that some people withdrew a lot of their money, and that you're selling things at a loss so they go oh no, I'm going to with draw all my money. So 2 customers come in to withdraw their money and you say "we don't have enough cash to do that", so you get a super expensive loan and start trying to sell more assets at increasing discounts. People see you doing that and go "oh shit" and now all of your depositors come to get their cash. You have now sold of a bunch of your assets at potentially steep discounts, have some very expensive credit, and still can't give people their deposits back. Congratulations on experience a bank run.
Because of this your bank is now legally insolvent and is seized by the government despite clearly having more assets than debt, you are unable to service that debt.
Alternatively consider someone with a mortgage. They have a property worth $X, and a debt of $(X-Y). Now imagine the bank comes to them and says "you need to pay back your mortgage in 24 hours or we will seize all your property". You can see how that might cause problems no matter how much of their mortgage had been paid off.
In the real world banks have lots of other things set up to reduce risk, but the core principle is the same. No significantly sized bank can handle a full bank run - that's why things like the FDIC were created: it means most people don't have to worry that if they don't immediately pull their money from the bank they'll lose all their money, and so they don't panic withdraw, and so reduce the risk of a run-induced bank failure.
What happened here is that SVB was apparently endeavoring to rebalance its (in fairness terrible) asset mix and was taking a loss on doing so. But that spooked a bunch of billionaire VCs who instructed all the startups they were funding to withdraw from SVB, which caused other VCs to do the same, and pretty soon all these companies with assets far beyond the FDIC limit and/or completely uninsured _they_ did have a reason to fear losing their money if the bank failed. That triggered a run, and because it was actual companies the size of the withdrawals were far more than any well run bank would ever expect to suddenly need so the result was inevitable.
Just to add, I would expect the big US and international banks, and probably most of the slightly smaller and mid sized ones as well, to be able to weather a run from individuals but I don't think any bank in the world could handle all their corporate clients simultaneously demanding all their assets as cash in the space of only a day or so.
[edit: HN ate the formatting on teeny bank so I've added moar newlines]
This kind of event is ostensibly prevented by regulations requiring "shock testing" of banks, but the GOP and trump rolled back those regulations for banks like SVB because government regulation is bad, and the CEO of SVB told congress that despite the established history of unregulated banks failing just like this, it would not happen again because magic.
I guess that's why we have the FDIC, and why banks pay into the insurance. And why 2008 wasn't as bad as the crash that led to its creation. It looks like the fund has $124 billion as of 2022.
https://www.fdic.gov/news/press-releases/2022/pr22064.html
That doesn't sound like enough to do much more than cover $250k on all accounts, but I guess that's the idea.
If SVB or any bank wasn't underwater on an enormous amount of investments, this wouldn't happen. They could sell or borrow enough to cover the withdrawls.
I'm afraid there's some evidence that there are other very large banks with unrealized losses which might be in similar situations soon.
Since then all major investment banks are salivating over the idea of setting up retail arms for this very reason. Goldman Sachs tried launching "Marcus" for example.
All for the very reason you describe.
Meaning, 97.3% aren't FDIC insured.
Source: https://twitter.com/GRDecter/status/1634208652595699713
* Bank announced it was selling assets to ensure liquidity
* This caused a run
* The bank became illiquid
* The bank can no longer pay things when they become due
* Therefore the bank is insolvent
* The commission was ordered to take possession of the bank
* The commission has taken possession of the bank
Seems very much like a boilerplate "well that happened" form
that's how law works.
In other words, are any banks solvent if a run happens to them?
If not, then at what point are banks considered solvent.
Also, if no bank can survive a bank run, would the CEO be at fault here for kind of inciting one (by essentially saying in the call “we’ll be alright, as long as you guys don’t run”)?
You're asking more about liquidity, than solvency. All banks in the US that are following regulations should be solvent. But, most banks in the US would not be liquid enough to survive a run.
> If not, then at what point are banks considered solvent.
Solvency is basically: "does the long-term value of your assets exceed your liabilities". Liquidity is: "can you sell assets right now to meet your outgoing liabilities right now".
The problem for banks is, in almost all cases some loans will have longer-term time-frames, while almost all depositors can theoretically ask for their money back at any given time. So, for almost any bank a strong enough run will cause them to fail a liquidity test (even if they are solvent).
The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes.
For any large bank, there is an amount of withdrawals that can take it out. And that amount is nowhere near 100% of deposits.
As I specified in my original comment, a systemic panic, rather than a specific panic at a single bank would result in mass withdrawals, but a roughly equal number of deposits (from panic withdrawals from other banks), because we live in a largely cashless society. That is the point. The system isn't crashing down.
A niche bank like SVB was always more liable to have a run and should have been better capitalized than a normal bank. This is because probably close to 100% of their clients had other primary bank accounts that they could instantly transfer funds to, whereas an exodus from something like Wells Fargo would require tons of people to set up a new bank account.
Regarding the CEO, one has to keep in mind that the CEO is responsible for being honest towards the shareholders as well as for keeping his bank solvent. He also has to disclose any material risk to the shareholders in a timely manner. Well it is easy to see this was a material risk. It is difficult to say what the CEO could have done better. If he said the bank is absolutely fine and it was impossible for it to fail to pay depositors, and the bank still failed, then the shareholders would have sued him.
I think he got in trouble when he tried to call on the community spirit of silicon valley. When he said that his customers should support the bank as the bank has supported them. He should have known that kind of call for community spirit and non-contractually obligated decency would ring alarm bells in the minds of a bunch of silicon valley CEOs. And Peter Thiel.
I think the lesson to learn here is that perhaps the FDIC insurance limits should go up. The FDIC has done a great job in ensuring ordinary people that their bank accounts are safe, as ordinary people usually keep less than 250K in their accounts. But, businesses tend to keep much more. And some venture funded tech businesses tend to keep even more. And silicon valley bank was unique in that most of its deposits were from venture funded tech businesses.
So while the FDIC insurance does generally prevent runs on banks by ordinary people, it does nothing for businesses. As far as a business with 20 million in the bank was concerned, most of their money is at risk and the situation is not that different as it would have been 100 years ago in the 1920s. And thus, the very painful process of a bank panic happened to silicon valley bank just like it used to happen to old US banks back in the 20s and 30s, before FDR created the FDIC.
So I think the government should seriously consider expanding the FDIC insurance to higher levels, perhaps in exchange for additional fees.
100% this. $250k is reasonable enough for most individuals, but it's far too low for businesses. You don't want people worrying about if their paycheck will clear and companies going under because a traditional bank failed.
In exchange, unlimited FDIC insurance would prevent runs like we saw at SVB. There would be no reason to rush to withdraw if you know that you'll be made whole at the end of the day.