I’m curious how the tech sector matters here specifically?
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the bigger issue was just a lack of liquidity and a sudden bank run - 45 billion (out of ~175 billion in deposits) was withdrawn in a single day before they ran out of liquidity.
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.
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.
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.
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 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.
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.
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.
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?
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...
Unless you are borrowing, then the opposite.
Depositors weren’t getting anything. I’m guessing SVB wanted yield for shareholders.
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
As rates have increased, long duration treasuries and MBSes are now worth 20-30% less.
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 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.
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.