There have been 562 bank failures since 2000
yarn.pranshum.com
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Imagine you take your $10 million fortune and convert it all into gold bars and hide it under you bed. Then you order a pizza. When the pizza guy shows up, even though you are "rich," you are also in that moment broke and can't pay for the pizza. Not only will the pizza guy not take gold, you can't find someone to convert your gold into cash before the pizza guy gives up and leaves.
For SVB, the knock on the door is more like a loan shark coming by to call in for their return. You have gold under the mattress that is sometimes worth plenty, but it’s value isn’t determined until it sells and it isn’t looking to square up with what’s due.
In their case, the market value of the TBills that they purchased slipped too much. Because that’s just paper value and could have recovered or been been balanced for eventually, it might not have been an issue without a run of withdrawls. But buzz hit that they were in an unexpectedly and unisually fragile position, and that made people start the run that broke them.
Really? Most of the reporting has described them as having a crisis in part because lots of treasuries that they had classified as "held to maturity" needed to be reclassified as "available to sell" which required marking them to market.
They weren’t trying to tie up their funds in extremely low-yield assets for the next decade. They were parking it somewhere that made their books work until they could move it somewhere else.
I don't know why HN seems to have locked into this meme that SVB does not have a shortfall. It does not reflect reality.
SVB overleveraged into long-term bonds in 2021 when interest rates were at an all time low. A financial institution/bank normally would hold a mix of maturities in their fixed-income holdings - 1 year, 3 year, 10 year - to maintain liquidity and reduce insolvency risk.
"If they were able to hold them to maturity there wouldn't have been a problem" does not make any sense - it's as if your company told you just wait an extra month for your paycheck, there won't be a problem. And then you told the mortgage lender to forget about this month's payment - if they just wait until next month, there won't be a problem.
Not to mention they had well over a year's advance notice to do _something_ because they knew exactly by how much their assets would decline in value. In March 2022 the Fed announced the decision to raise rates and continuing to do into 2023. By Sept they had announced the terminal rates would be over 4%, and have continued to openly increase that target since then.
Bond prices moving inversely to interest rates is Econ 101; anyone (at SVB) could've quite literally calculated their ~$25B 10-year 1.8% notes would drop by _at least_ $5B in 2023 before the terminal rate is even reached.
The run was the result of a clearly impending liquidity issue due to lack of near-maturation assets, not the other way around.
But they don't have time and did have a bank run, and therefore they do have a shortfall.
I think you might be able to argue that the bank itself had enough intrinsic value beyond it's ledger which could make up the shortfall, but that's all in the eye of the beholder who might want to buy them. We'll really see whether this is the case or not based on whether they have a new owner on Monday or they don't.
of course, we've already done all of the tests to prove it is gold and not lead dressed up in sheep's clothing
A bank the size of SVB has a whole team that does that - it’s just a necessary part of operating at that scale.
Blowups like SVB happen when an entire team of financial experts have tried everything - and have nothing left they can do.
Then it blows up big, because all their other moves ‘come due’ at once.
Also, the shortfall is never tiny (else there wouldn't be a failure) not is ever large (else there would have been a failure sooner).
So there is some standardized range.
I'd also like to see "Years of Banking Institutions Lost"... SVB is supposedly 40 years old... how old were banks that had failed in the past? That'd be an interesting other way to tally/view the magnitude of what happens, a kind of indicator of volatility.
My thought is... if a whole bunch of banks open then shut down 3 years latter, it doesn't seem as notable as a bunch of more established banks going under.
I’m not being argumentative, just trying to understand. In physical systems, that view would be used to apply additional stress testing early to reduce the overall risk exposure (e.g., test a pump for a certain run time to be assured it’s made it out of the early failure age and is more likely to last a lot longer). I’m not quite sure how this applies to contrived (non-physical) systems.
1) a young bank is more likely to experience a high-growth phase, which produces operational challenges
2) a young bank might be founded to serve a new business niche, and experience with the challenges of that niche might be less prevalent in the banking sector. Like airplane regulations, rules are written in blood.
A panic moves a lot faster if each person is pulling 8+ figures from the bank, and you have a lot more incentive to panic if you have more than the 6 figures of FDIC insured balance in the bank. There's also a measurable difference in hearing crazy Jim down at the pub pulled his $400 out of the local credit union because he heard the fed was raising rates and hearing from the VC on your startup's board that three guys -- guys you know and think are cooler than you -- have pulled their next year of runway from SVB because they're worried for vague handwaving macroeconomics reasons that sound plausibly impressive to you.
Inflation must be tamed, it's detrimental longterm effects is magnitudes worse than a bank deservedly going bust for it's lack of risk management.
Congress are cowards and won’t do what should be done - raise taxes. That is likely the fastest least painful long term solution to quickly climbing inflation
I say likely solution because at this point economies are so complex I’m not certain there are solutions without any butterfly effect consequences
My fantasy would be for the government to abolish taxes altogether and just print the money they need, then use whatever mechanisms they have to take enough money out of the market to keep inflation in check.
That way we wouldn't have to pay taxes and the government could just get whatever money they need when they need it. I mean, they already do, so why make people jump through hoops and threaten them with jail for not paying taxes properly, if they could just do without taxes in the first place?
It kinda feels like the whole system is a scam to keep control over the population.
What mechanisms would these be, if not taxes?
The other main contemporary mechanism is raising interest rates, which only works on money that has been previously loaned out at a lower rate, and thus isn't a long term sustainable mechanism for recapture.
But I’m guessing that taxes isn’t the only or even the biggest way in which money is taken out of circulation.
In fact, if you ask google “how is money taken out of circulation?”, the first few answers don’t mention taxes at all.
But all things considered, 5% is not really a high interest rate. People are just acting as if it's unreasonable because they'd become accustomed to ZIRP. Personally I hope rates stay above several percent for the foreseeable future, for climate/resource reasons.
I don't know what this has to do with climate or resource reasons. Cutting down the rain forest, polluting the planet with CO2 and sitting on interest payments are optimal in that scenario. Ultimately positive interest rates encourage corruption and short term thinking because earning money today ,no matter the cost, is better than earning money in the future.
Meanwhile with lower interest rates the future isn't discounted anymore and it is worth it to invest in emission reductions.
Also focusing on executive spending is a bit of a red herring given how much outflow has occurred from the Fed itself over the past few decades via low interest rate loans. Basically rather than letting the gains from technology and offshoring accrue throughout society (via price deflation), or be spent purposefully (executive spending), the Fed has been squandering these gains to create an asset bubble.
Combined with other factors too numerous to really go into here, we are seeing the emergence of essentially an aristocracy in the USA and Europe, consisting of, as the earlier aristocracy, of the pillagers of their own people and the people of the rest of the world.
One HN comment == ten years of economic debate. :-)
has any currency ever done this? isn't there a risk of a Japanese-style concurrent inflation and recession?
They're still cowards for not doing it but what should've been done is an increase in interest rates half a decade ago.
[https://www.cnbc.com/amp/2018/12/22/trump-reportedly-wants-t...]
Almost 5 years ago exactly.
All of those are to me basic infrastructure to support a healthy economy.
Instead, once things got super hot inflation-wise, then they flip flop and start a very rapid pace of rate hikes, unsurprisingly something broke and here we are once more talking about bailouts, about more QE. We're frenetically going from rapid tightening of financial conditions, to potentially, rapid loosening of said conditions. The Fed is supposed to raise rates in two weeks, I'm not sure if they will change their mind given what just transpired this last week.
I agree inflation must be tamed, I criticize the Fed's inability, or unwillingness, to start addressing it at least a year earlier. From my cynical perspective, keeping rates super low is a fucking party to the stock market and lots of powerful people want to keep the party going and they closed their ears to the inflation alarms. Now we're facing the possibility of another crisis (we'll see how things play out next week) and we know that the proposed solution will be to lower rates and accommodative policy that actually contributes to inflation. It's a shit show I'm tired of seeing repeat.
That there maybe shouldn't be as many:
> Basel exempted businesses’
Trying to control it solely with interest rates makes as much sense as trying to fly a beach ball to Mars.
https://economicsfromthetopdown.com/2023/01/17/is-stagflatio...
Don't bet on it. One of the big changes after the 2008 crisis was the passage of Dodd-Frank, which was then repealed in large part in 2018.
Some of the repealed provisions in Dodd-Frank would likely have mitigated or even prevented this bank run, due to the capital and liquidity testing requirements.
National City Bank was the US' 7th largest banks. It didn't "fail", but the US Treasury gave another bank, PNC, $5.7b in a capital injection to buy it in late 2008.
https://abcnews.go.com/Business/story?id=6107696&page=1
https://www.cleveland.com/business/2008/10/national_city_mov...
My very weak understanding is that in 2008 a ton of assets turned out to be valueless junk mortgages that were all going to default. Is that true for SVB or are their assets just too locked in for now?
What that graph doesn’t show is the percentage of the blue bars that are recoverable assets.
* Depositing money in a fed account (available to banks)
* Depositing money in a money market savings account
* Every treasury instrument you can buy today
When they go to sell those assets, they may take a much bigger haircut than the pricing models suggest given the supply and demand. The assets definitely won't be worthless, but they may not be worth very much.
Treasuries don't even need to pay more than a savings account to be the rational choice as they aren't subject to local/state income taxes. That's a bigger than average advantage in California.
Add to that no $250k limit either.
In this case, there is no doubt about the value of SVB’s assets: they’re lower than they were a year ago simply because they were heavily long duration and rates went up a lot. That’s bond pricing 101.
That, in combination with a low diversity of depositors that starting withdrawing at once, set up the bank run that VCs created by emailing all their portfolio companies to run.
I'm not in finance (clearly), but it seems to me there are a lot of similarities with interest rates rising and forcing banks to re-value their investments in bonds and mortgage backed securities. The clear difference this time IMHO is that valuing bonds based on interest rate movements is much less opaque (even fully transparent) compared to valuing mortgage backed securities based on default rate predictions that are outright lies.
We know, or should know, how many of these investments are held by large banks and what the rates and maturation dates are. The big question I have is the more traditional financial contagion. If companies that had millions in SVB lose that money there will be impacts for other banks as the companies and bank investors become more conservative or paranoid. If many of those companies go out of business that means fewer deposits and fewer investment opportunities.
[1] https://www.fdic.gov/bank/historical/bank/ [2] https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...
Right now we're dealing with the psychology of markets, if a large enough group of people get scared and want their money out, there's no amount of assurance that can stop that. They will only be appeased once they know their money is safe with them.
Even officially denied rumors can be true. See FTX ensuring panicking users that they were very much liquid, days (hours?) before they announced bankruptcy
Well, no, people were saying “Get your money out of SVB if its above the insurance limit”, because the run was already happening and that SVB couldn’t handle the run was a pretty widespread opinion.
But, while there are systemic/institutional/regulatory reasons why SVB’s conduct which created the vulnerability was possible, it doesn’t seem that the vulnerability itself is systemic in a way which makes other similar failures likely to be imminent.
Or withdrawing entirely from niche/smaller banks and into bigger/more diversified ones?
(diversified banks are great because payday becomes mostly book entries instead of massive inflows/outflows on payday)
I’d expect big orgs to mostly have money in banks specifically for reasonable cash needs (or temporary inbound flowthrough), and to have it in treasuries or other assets otherwise, but I wouldn’t expect to see much change. There’s no news here impacting accounts in other banks: the $250K insurance limit isn’t news, and there’s no reason to think that SVBs particular concentration of assets in long-maturity illiquid assets that have lost value is systemic rather than sui generis.
The ripple effects that will occur, I would think, will be more through companies that were dependent on SVB than companies with money in other banks.
Most past bailouts have been sui generis actions with rules adopted for individual or small numbers of institutions currently in trouble, not forward-reaching “rights” that future actors could exploit. So I don’t see why you characterize this as impossible here; if there is any bailout beyond regular FDIC process, the most likely case would be a unique specific plan for this institution that creates no general rule that anyone else could force the government to use in the future.
Can't they?
> Silvergate Capital Corp.'s voluntary liquidation process is being supervised by the state of California, and the company has not entered the Federal Deposit Insurance Corp.'s receivership program at this point, a spokesperson for the California Department of Financial Protection and Innovation confirmed.
https://www.spglobal.com/marketintelligence/en/news-insights...
Other banks in the past have "failed", but not from FDIC point-of-view, instead merged into others through a shotgun marriage facilitated by the feds, e.g. Bear Stearns and National City Bank[0] (formerly a top10 US bank until late 2008)
These failures aren't common, especially of SVB's size. Washington Mutual is the only larger failure at the height of the 2008 financial crisis (47% larger). The next largest was IndyMac, but SVB's failure is 6.5x larger than IndyMac (which also failed during the financial crisis).
As the article shows, there were many years of fallout from the 2008 crisis, but then bank failures became quite rare again.
The author believes that SVB will be acquired given that's what happened to Washington Mutual. The author doesn't talk about Wachovia and they technically were bought before failure, but they were bought as well. However, I'm less sure of this for SVB. WaMu and Wachovia had vast branch and ATM networks allowing Chase and Wells Fargo to hugely increase their footprint. SVB doesn't come with that. Given that SVB has seen a run on its deposits and its reputation shredded, is it coming with enough stuff to be worthwhile? I guess it'll depend on how bad its situation is. When Wells Fargo bought Wachovia, they essentially doubled in size and had the largest branch network in the US. WaMu essentially doubled the size of Chase. In both cases, it opened up huge new parts of the country to the acquiring banks. What does SVB offer? Existing relationships with tech companies which have now soured?
I think calling this "not just SVB" is misleading. SVB really stands alone as an extremely large failure and the only large failure since the end of the 2008 financial crisis. Maybe that will change in the coming weeks or months, but lumping them in with 562 other failures (most of which were a result of the 2008 financial crisis) is really misleading - especially for an article that is actually good.
Edit: randomly spotted that I asked a duplicate question from another subthread https://news.ycombinator.com/item?id=35111958 According to the reply there, it's not adjusted, so the highscore seems a bit meaningless
These are common when inflation rate grows faster than expected. Since 2016 is a small timeframe to find the average.
Although it's not easy to call the exact timing, the same manic depressive financial cycle has been happening for centuries.
Banking is supposed to limit its effects. Somehow - inexplicably, to the constant shock and surprise of economists and the industry - it seems to make them worse.
[1] - https://www.fdic.gov/resources/resolutions/bank-failures/fai...
[2] - https://www.fdic.gov/news/press-releases/2023/pr23016.html
SVB happens to be notable here because lots of HN posters are customers or employes of customers.
And it's notable elsewhere because this is sort of a capstone on the current era of cheap VC money. The proximate cause may have been some questionable investment decisions, but the root cause of SVB's failure is the fact that startup funding dried up.
And... is that maybe a good thing? Over the last few years, the tech community, and HN in particular, has been been almost entirely fixated on funding and not technology. We talk about "founders" and not products these days. Series B rounds and not launches. Companies get acquired before an MVC is ready. No one even remembers "ramen profitable" any more.
At different points of time, yeah. But not recently. Last "bank failure" in the US before SVB seems to have been October 23, 2020. Not sure you can call something that hasn't happened for the last ~2.5 years is "routine".
The days of dorm room wunderkids are over. You don’t build a company like Facebook anymore with one guy and a website. Big tech is always watching and anyone that is doing anything of potential will attract money. If they aren’t, then it’s because the potential isn’t there, so we don’t care.
Interestingly, we've been here before, in the hangover of the dot com boom. And what lifted us out of that mindset was... Y Combinator. Now? YC is maybe the biggest single part of the problem. Just go look at their funding list for the last 3-4 years and genuinely think on how many of those ideas really need the kind of funding you're imagining.
Those banks total $23.6 trillion in assets. Looking at the tweet cited by ezekg, I'd eyeball that as about $1 trillion in assets in the banks that have failed in the last 23 years. So, 11.8% by number of banks, but only 4.2% by assets.
That's still more than I thought. But the real question is, of those $1 trillion in assets, how much did people actually lose, and how much did either the FDIC or a taking-over bank cover? Anybody have that number?
Just looked up a US sibling's bank and it was chartered over 100 years ago and has 3 branches.
Then there are credit unions, which are another beast that sits outside of FDIC.
I lived in a small city for a few years. Annually, I saw the cycle of failed bank buildings having a new banks name put up, only to fail.
Zero.
Since the FDIC was founded, no depositor has lost a dollar of deposits in an FDIC-insured institution.
There are some non-deposit things that, if you squinted, looked a bit like deposits, and people have lost out on those.
It is correct that no depositor has ever lost a penny of FDIC-insured deposits. This is excellent for the average person, as the average normally-employed person isn’t the one worrying about losing large piles of money.
Uninsured deposits is an entirely different ball of wax. In the case of IndyMac for example, of the ~$19B in deposits, roughly ~$1B was uninsured. This was out of ~$32B AUM. I’m not sure what haircut was taken on uninsured deposits, nor other instruments. FDIC’s Sheila Behr has spoken about the receivership of IndyMac in the past and has said that the FDIC’s reserve took about a $9B hit to deal with IndyMac.
As a disclaimer, I'm not an expert and am unaware what flaws my analysis may have.
SARS 2002, Afghanistan 2001, Dot-com crash 2000.
AIDS becomes the leading cause of death for men 1991, Gulf War 1990, Collapse of USSR 1991, early 1990s recession.
AIDS 1981, Soviet Afghan war 1979, early 1980s recession
> On March 19, 2009, a seven-member investor group, IMB Holdco, led by Steven Mnuchin—which included billionaire Christopher Flowers, John Paulson, Michael Dell, and George Soros—purchased Independent National Mortgage Corporation (IndyMac Bank) of Pasadena, California for $13.65 billion from the FDIC and created OneWest from the remains of IndyMac, which then had 33 branches and $32 billion in assets
> as of December 2014, the FDIC had already paid over $1 billion to OneWest Bank under the shared loss agreements it secured from the FDIC when it purchased IndyMac and La Jolla Banks, and that the FDIC expected it would pay another $1.4 billion.
The problems with SVB are specific, not systemic, and there are other banks and they may also have this specific issue, but if they do then people will pretty quickly catch on (hint: these issues weren't hidden). You can make a broader point, which is that SVB failing will impact a lot of silicon valley businesses, and you can do your best to argue those businesses are creating a fantastic new world and there worth saving (and definitely aren't causing teen depression, minting billionaires who use their wealth to destroy free speech, and generally just enriching loathsome fraudsters), but then you are basically arguing for the Fed to step in and socialise the losses of douchebag libertarians. Fine, save SVB, funded by a 1-off 100% wealth tax on anyone worth over $10m in silicon valley. Welcome comrade.
The interesting part to this is that if wealth (assets) were taxed thusly, they would probably lose a lot of value when liquidated to pay taxes, thus decreasing the realized taxable amount. As I understand it, a similar principle was behind SVB’s “losses” as well.
I can understand legacy banks not wanting to touch crypto, but what about the rest?
Or was a lot of SVB adoption just due to name recognition in the startup ecosystem?
See Lighter Capital.
Whether that was smart or dumb, idk
Starting in 2009 (iirc), the requirements changed to be so stringent that basically the only people who would be on the board of directors were people that lie about their kickbacks for being on the board. You'll notice a sharp falloff of the banks being created after that time, and banking has become so consolidated now that if one of the majors goes under, the others are unlikely to be able to absorb the costs or losses.
I mean, who in their right mind would sit on a bank board, accept personal liability for decisions made, and be prohibited from receiving any kind of compensation for those risks (including just a basic salary).
The horror stories from her experiences were nuts.
They are all bad.
I met a Giannini in San Mateo (I went to school with his (great?) grandkids in Tahoe (they use to be dropped off in a bently each morning to north lake tahoe HS...
The bank consolidation has been bad.
I met Giannini in San Mateo, and he was telling me how "important family is"....
It was tough to hear how the most important thing is "family" from a billionaire who has never struggled with money and owns Bank of America.
Fuck banks.
it does seem like the current banking system is weird and full of vestigial features, they are so regulated they might as well be publicly owned
This "Not just SVB" and "There have been 562 other bank failures before" deflection doesn't help those affected.
You can accuse the financial sector of many moral errors, but I don't think SVB would intentionally fail.