I’m surprised the author didn’t include a chart like this: https://twitter.com/alistairmbarr/status/1634275645235793920. It shows how bad the SVB situation really is. It’s been very quiet since 2008 and its aftermath. Until now.
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.
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.
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.
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.
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.
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.
of course, we've already done all of the tests to prove it is gold and not lead dressed up in sheep's clothing
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.
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
has any currency ever done this? isn't there a risk of a Japanese-style concurrent inflation and recession?
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. :-)
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.
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.
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.
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.
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.
All of those are to me basic infrastructure to support a healthy economy.
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...
That there maybe shouldn't be as many:
> Basel exempted businesses’
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.
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.
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.
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...
Can't they?
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.
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.
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
> 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)