First Republic Bank files 8-K – Tech only 4% of total deposits; no sector >9%
ir.firstrepublic.com
ir.firstrepublic.com
- Their actual assets market-to-market (sold on the fair market) is about $26 bln less than the amount they're carried at on their books. This is as of year end 2022, probably more today.
- This would wipe out all their equity, loans, and start hitting depositors.
- If there was a bank run, First Republic probably would not be able to meet all depositors.
- First Republic in some ways is in worse shape that SVB. SVB had all their assets in medium duration (10 year) treasuries. First Republic has a lot more 30 year mortgages they gave people at ultra low 2% interest rates. Today 30 year mortgages are 6%, which means if they tried to resell these loans they'd get more than 50% off.
- Personally, I know of at least a couple of HNWIs who pulled funds other than $250K today. Who can blame them -- what's the upside if you have more than $250K in? First Republic relies on wealthy deposits, and these are not insured.
If everyone knows this, why keep your money there? Tech exposure has nothing to do with it. "In a bank run, he who runs first, runs best".
Regular people and businesses don't hear about these things. Today, only 1 other person in my friend group of 6 heard about SVB.
Thiel tells his startups to bank-run SVB, and they bank-run SVB, and all the other VC start telling their firms to follow suit. It's all herd mentality among an undiversified group of customers (startups all of which are hit hard by raising interest rates), which is perfect for a bank run.
Really? My mom knew about it, and she's a retired teacher who doesn't live in the Bay Area.
Meaning, the bankruptcy administrator will absolutely file and get a judgment on your assets, which will be forcibly collected, if you received a payment from a bankrupt entity within the window established by the court.
I don’t know if it would apply to a bank wire transfer of “your own money” unless it was a literal fraud situation (pyramid scheme).
"No we're taking your $50k life savings back so we can give it all to a client that had $5mil and deserves your $50k life savings more than you do"
FDIC doesn't claw back bank transactions that have "settled". So if you wire cleared, you are good for the money.
Search for "FDIC Discretion Without Ongoing Judicial Oversight" in the document below
No ongoing judicial oversight Pursuant to Section 11(d)(13)(D) of the FDI Act, except as otherwise provided, no court has primary jurisdiction over any claims or action for payment from, or actions seeking a determination with regards to, an institution for which the FDIC has become a receiver. Further this provision also limits courts’ ability to engage in a review of any claims relating to acts or omissions of the institution or the FDIC as receiver. Under Section 11(d)(13)(C) of the FDI Act, no court may issue an attachment or execution over the assets that are in the possession of the FDIC as receiver.
https://corpgov.law.harvard.edu/wp-content/uploads/2008/10/0...
I’ve never heard of anything even remotely like this happening. Can you provide even one example?
Because that applies to literally every single operative bank, and given FDIC insurance and other refulation, the risk of deposit losses for average joe is so small that they do not need to care.
I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.
Their shareholders are already panic selling (FRC down 36%), their bonds appear to be sinking, and few private parties wants to throw good money after bad. When you have to put out an emergency statement to reassure everyone of your creditworthiness, it's already gone.
I do agree that First Republic is in a much better situation relatively to SVB, but illiquidity and insolvency risk is real. I don't really see a reason why any business or individual with more than $250K shouldn't be wiring funds out ASAP, unless you're feeling extra charitable and want to be the bail-in to those who run before you.
There is nothing to lose, other than setting up new accounts.
SVB though sounds like nobody should go to jail it was just really bad investment decisions.
I’m sure the SEC will have some questions about that.
https://fortune.com/2023/03/10/silicon-valley-bank-ceo-greg-...
Everyone saying "they will be made whole" is completely missing the fact that money has a time value. There's nothing "made whole" about getting access to your money weeks or months from now.
Look at history and for example what happened to WaMu. It was literally one day.
Then again last time I thought this I had a contact text me joking he was preparing to learn Korean because his bank was probably going to get bought by Koreans. Seemed like it was just a matter of time to wait until Monday to see what the higher ups had decided.
You can guess where this contact was working. Until that Monday.
You mean like Roku, who was keeping $500MM at a depository institution instead of in T-bills or a money market fund.
https://www.fhlbboston.com/fhlbank-boston/rates#/long-term
If a bank’s portfolio of long-term fixed income instruments has a mark to market value that is $27bn less than their hold-to-maturity value, and the bank borrows $27bn at market rates to cover the shortfall, they will pay approximately, wait for it, $27bn (present value) in net interest while waiting for maturity to happen.
If the bank can manage to borrow the money in the form of non-interest-bearing deposits for the entire term of these instruments, then, sure, they’ll end up okay, because they will effectively make enough money on these deposits to cover their losses.
But the whole industry of non-interest-bearing deposits is a bit odd. When interest rates are around 2% and banks are offering maybe 0.75% interest, it may not be worth their clients’ time to try to earn interest. But when FDIC-insured banks are paying 3-4.5%, convincing a client to keep holding $2M in a non-interest-bearing account instead of spending an hour a week shuffling assets between checking and savings is a much harder sell, and much of those $27bn of required profits may well end up in the pockets of a bank’s customers. Which makes the effective value of the bank’s equity look bad, and maybe negative, and the bank may be toast.
Put another way, if you are actually insolvent, credit at market rates cannot make you solvent unless you have some other source of profit.
If there is a run, then selling is actually the worst thing to do because theoretical losses become irreversible actually losses. It’s highly likely interest rates will go down in a year or two but.
> If there is a run
If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.
You lend out on shorter terms than you figure your depositor will need and pray they don't need it back. If they all do though, you're screwed.
It's statistical multiplexing as applied to piles of other people's money.
[EDIT: corrected "limiting withdrawls" to "preventing limiting withdrawls"]
No, the inverse. Banks are required to keep a % of deposits available in cash, another % in easily sellable assets, etc (lots of regulations here, esp post 2008 crisis, though the US exempted community banks from the new rules, which contributes to the current crisis) in order to reduce the risk that a bank run puts them out of business.
But a big run can exceed those safeguards, as appears to be the case here. The bank can’t offload enough investments to meet withdrawal demands.
A demand deposit or checking accound has little or no notice. A money market may take a day or so for underlying assets to be exited. CoD's and such typically don't even have the option for withdrawal. You just have to wait for maturation.
Point is, you know this when you open the account. They should take great pains to ensure you understand the instrument... And to manage things appropriately, which apparently, SVB did not.
This is why commercial banks tend to not hold on to the loans they originate any more, and instead sell them to funds. There is correlated risks for the banks, where their assets become less valuable at the exact time they need to sell them. Banks don’t like to hold mortgages for this reason.
The “demand” in “demand deposit” accounts means that selling isn't optional as the cash runs out in a run.
A bank is not an unregulated crypto exhange that can just impose arbitrary withdrawal limits to protect the absence of liquidity.
That's true for all banks, even JP Morgan Chase. Every single one of them has some withdrawal limit, past which they are screwed. And that limit is definitely lower than 100% of deposits.
If you have 5m are you going to open 20 bank accounts? If there's a wobble you'll need to dig out a lot of credentials to move your money, and you'd end up moving it to a TBTF anyway.
Actually even if you don't have millions you can use sweep accounts that automatically spread money across multiple bank accounts. Fidelity has one that anyone can use.
Treasuries (notes, etc) are backed by the full faith and credit of the USG and are available in effectively unlimited amounts.
https://www.cnbc.com/2023/01/13/us-will-hit-its-debt-limit-t...
This is about as strong as a signal they could put out to stop a possible run.
(https://www.bloomberg.com/opinion/articles/2020-03-12/the-bu... the section is called "thirty minutes")
This is one way in which the current crisis is self-limiting. It was brought about because SVB took lots of deposits when rates were low and invested them when bond prices were high, and now they don't have liquidity without taking a loss. But if banks take lots of deposits now and invest them when bond prices are low, their average cost goes down and it's much easier for them to satisfy customer withdrawals without taking large losses.
It becomes a crisis again if all the banks start failing at once, because then the likely consumer behavior is a flight to hard cash or crypto rather than another bank.
Or a desperation signal, which might actually trigger a run. Like what happened with SVB.
The minute the CEO of SVB tried to reassure investors and told them everything would be ok if they just kept their deposits with them, immediately everyone started withdrawing.
Are the “safe” banks all putting out statements about the strength of their financials? They probably don’t feel like they really need to say anything. They feel safe, and that’s what keeps them safe. The moment they panic, their clients panic.
I guess we’ll see what happens.
https://www.sec.gov/cgi-bin/browse-edgar?action=getcurrent&d...
In general, I would expect a ton of 8-Ks on Monday the 13th for companies to release information on their exposure to SIVB, particularly if their exposure is minor or non-existent.
Probably a lot filed today/monday that look like this:
Kintara Therapeutics, Inc. confirms that it does not hold any deposits or securities or maintain any accounts at Silicon Valley Bank.
2. Yes, I am that good and could certainly build it. My tech is magic. I can turn any complex domain into the simplest form possible.
Sure grandpa, let's get you to bed.
What's a bed? I sleep on a pile of keyboards and my body sends pull requests while I sleep.
I’m curious how the tech sector matters here specifically?
As rates have increased, long duration treasuries and MBSes are now worth 20-30% less.
It will also be interesting to see if someone is going to wind up in jail for initiating the bank run. Someone shared confidential info that started this whole thing.
I think insiders might not even have realized how bad their balance sheet looked. On the earnings call the CEO was talking about how much he likes cycling to de stress, etc
Which is kinda fine? Means you might lose some business as others chase yield. But I feel like most startups don’t actually have that much cash in the bank so they shouldn’t really be chasing yield anyway.
It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
Unless you are borrowing, then the opposite.
Depositors weren’t getting anything. I’m guessing SVB wanted yield for shareholders.
Everyone is a genius in hindsight. You could have made millions out of a few thousands if you were able to predict an interest rate regime change. But where are your millions?
Some banks did exactly that. Even now, when SVB is advertising 4.5% rates on business checking [1], First Republic Bank is offering 0.01% on Business Interest Checking [2]. But note that SVB's failure impacts all sorts of household names like Roku, Roblox, Coinbase, Stripe, while FRB reports that tech is only 4% of their business. Companies that don't offer yield lose out to companies that do in the yield-chasing competitive marketplace.
We're observing some form of anti-survivorship bias, where risky behavior was incentivized by the market, so market participants had to engage or get pushed out of the market, and so now we hear about the risky behavior because that's what failed. We're not talking about banks like FRB or Wells Fargo that offer 0% on their bank accounts.
[1] https://www.svb.com/business-banking/business-checking
[2] https://www.firstrepublic.com/current-deposit-rates?rateType...
The tech sector isn’t an issue in itself, it’s that (1) all their deposits all came in at once because it’s one sector, so there was a huge demand surge for deposit interest, leading to a supply shortfall of loans they could issue and hence kinda desperately parking the money somewhere, which ended up putting their risk balance off kilter (bonds with interest rate risk); (2) all of their depositors (aka creditors) talk to each other and listen to the same people, so bank runs happen really fast. Compare this to First Republic bank: demand for deposit interest does not surge dramatically because there is finite liquid cash needing to be deposited and so one sector getting a cash infusion comes at the cost of another. It smoothes out. Plus their customers don’t all talk to each other and behave like worst-case bank runners.
All sectors are pretty highly correlated in the cash they have on hand and how they behave with it. It would be equally risky to be a bank that only deals with oil companies. Nevertheless it offers efficiencies for acquiring new customers and new business, so banks do it.
SVB did have some issues with losses but they likely were still solvent; the bigger issue was just a lack of liquidity and a sudden bank run - 45 billion (out of ~175 billion in deposits) was withdrawn in a single day before they ran out of liquidity.
I agree that people below the threshold won’t see claw backs.
https://news.ycombinator.com/item?id=35096418
I admit that I don't know enough to vouch for the validity of those comments though.
Having a 90 day window before insolvency to void transactions would probably smooth out the insensitive to make a run on the bank and give the bank time to find funding. More people would keep money in on the belief they already missed the window, perhaps enough for the bank to to stay solvent. But if that money was used to pay salaries you’re now forced to extract it from people living paycheck to paycheck. Incurring an instant debt for the depositing company would be worse than losing access to cash and even more companies will be sent insolvent.
Instead I think banks should have to get full deposit insurance, if the risk premium is too high then maybe they should consider restructuring to be less risky. Instead they get a free ride by shunting risk to depositors which incentivize the banks to leverage up to the max risk they can get away with.
Every asset is a risk. Banks should have right to do exactly two things. Keep their customers saving and issue loans. There's plenty of risks even in that activity. Every other thing bank does is just piling up risk to unreasonable levels.
Banks do provide a valuable service and having them reject deposits isn’t a solution.
Banks should not gamble with their money no matter how safe the bet seems.
The only exception is issuing loans because that's one of core reasons for the bank to exist.
Unless you only make floating rate loans (which is extremely rare outside of revolving lines like credit cards) then you have exactly the same duration risk problems and you’re actually exposed to much greater credit risk with a loan than you are with a government bond.
Also, floating rate loans and mortgages are super common. Maybe not in US.
Banks are risk sources in the economy, the risk of "what if borrower doesn't pay in full or at all", the law should do everything to prevent banks from being risk sinks in the economy. Because in current setup banks just buy more an more risk and they eventually collapse one way or the other when risk is en masse converted to cost to the people and the economy.
You know, fail early.
SVB bought a load of treasury bonds which is equivalent from a risk perspective from issuing a 10 year (or whatever) loan to the government, right?
Risk. When you are issuing a loan you, yourself are in control of the risk you have created. When you buy, you can easily buy massive amounts of risk someone else have created and you can easily be overwhelmed even when you try to do industry standard, responsible, "safe" thing.
FRB wants people to believe the contagion is limited to tech and that they have limited exposure to it, so that folks don’t take deposits out en masse. If people start to think that it’s unstable, then they’ll take money out and it’ll be a death spiral like SVB.
edit: apparently getting your money is fast and easy
The FDIC almost always pays insured depositors within a few business days of a closing, usually the next business day. Payment is made either by providing each depositor a new account at another insured institution or by issuing a check to each depositor.
The FDIC arranged for Chase to take it over. Nobody lost any money, and nobody I know had any problems with checks clearing or withdrawing cash at ATMs or paying their rent or mortgages.
I think the demise of Washington Mutual is still considered the biggest bank failure in US history, it happened while quite a lot of other bad things were happening, yet depositors ended up being totally fine. The systems in place for this are actually really good, and the FDIC is fast and competent.
And to their credit, the fact that they're not tech heavy means the tech firms pulling from SVB aren't likely as scarred and pulling from First Republic. But First Republic has a ton of HNWIs too who are not insured.
This isn't Bank of America serving mom and pops, it's rich people who will pull and are uninsured by FDIC.
But keep in mind that people also went through a pandemic, where panic was the go-to option.
Should we? At minimum keep as close to $250k or less spread across however many banks as practical, right now.
Now that said, there are hot money managers that will do this for you.
You don't need 16 banks when you can bank with a "too big to fail".
https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa...
"Trading in Pacific West, Western Alliance, and First Republic were stopped due to volatility after they all initially fell 40 to 50 percent. Trading was also briefly stopped in Signature Bank after its shares fell nearly 30 percent. Several of those banks sought to reassure the market by putting out statements highlighting their differences from SVB in terms of asset and depositor base."
https://arstechnica.com/tech-policy/2023/03/silicon-valley-b...
https://www.insiderintelligence.com/insights/largest-banks-u...
Morgan Stanley is a completely different company with no (current) ties to JPMC.
The reason JPMC and M-S share the name "Morgan" is because the investment and retail sides of the bank were split during the Great Depression due to Glass-Steagall, almost 100 years ago.
I’m hoping that’s not naive.
I’m curious about Wealthfront’s strategy of spreading savings across many partner banks to get $2M in FDIC insurance per account though.
Where you can run afoul is if you personally have accounts at the same banks that your sweep accounts use. And you might not even know it. E.g., Mercury isn't a bank: they use Evolve Bank and Choice Financial Group. So if you also had an account at Evolve bank, you're capped at 250k across the total of both accounts.
More details here: https://www.fdic.gov/resources/deposit-insurance/brochures/i...
It’s whether or not they have HTM assets that will bring them under if they have a run on the bank. A lot of the depositors are rich Silicon Valley residents and they may get spooked and pull their money. That’s the issue in this phase of the contagion.
I am unfamiliar with this bank or this form.
Why? Because I'm really nervous that SVB was in no unique situation -- after all VCs / Startups share a lot of low confidence and low cash traits in common with other investors.
> First Republic’s funding relies in large part on wealthy individuals who increasingly have a range of options to seek higher yields on their cash at other financial institutions as interest rates have risen.
Over the last year I kept my FRC checking account at 100 (not the real number). A month back or so I dropped it down to 50 and moved the other 50 into T-Bills.
Is 2% good or bad?
Whoa! FRB has wealthy customers. US average cash in savings accounts is $41,600.
And this is pure cash too - not total net worth.
They also have delicious homemade cookies and free umbrellas for when you visit.
https://www.visualcapitalist.com/top-20-cities-ultra-wealthy...
I loved how they always had fresh cookies available for clients when you went in-person.
Their balance sheets says $17B assets more than liabilities, but $120B of those assets are in consumer loans and only $4B in cash... What kind of liquidity is that? $42B was just pulled from SVB. What are these banks doing?
In short, you'll still owe somebody, it just won't be a bank that doesn't exist anymore. Over the short run, the FDIC or an acquiring bank will take over the back-end of the payments, which will be made much the same way as they are today.