A Bank of One's Own
nayafia.substack.com
nayafia.substack.com
Clearly they were not giving sufficient attention to the core business for one reason or another.
If your lenders are all from one especially volatile and incestuous industry, you put yourself at especially high risk of experiencing a run and defaulting. You need to manage risk and investments accordingly.
They took a high-risk position with eyes wide open and have collapsed as a result.
But then how could they offer above market rate yields on their checking accounts, right?
If the answer is nothing, then you now know why.
Like I don’t want to defend the execs too much as they are the responsible people. But the gov and Fed did this. Erratic economic policy did this. It’s sad so many people think it’s a greedy bank. Being named Silicon Valley Bank doesn’t help.
Classic libertarian chant assigning the success to the private individual and blame to the government. Everyone is dealing with the same macroeconomic environment. SVB execs don't get a pass for poor risk management and not understanding their customer base.
Something like 50% of mortgages were written between 2020 and 2022. So many of these are about to be underwater due to the whipsaw.
There’s going to be a lot of failures in the coming months.
Long-term fixed-income investments lose a LOT of value when rates go up and gain a lot when rates go down, and the relationship is nonlinear and kind of hard to model since it's so dependent on people.
The irony is, eventually they will be vindicated, when the Fed is forced to start QE all over again.
Ie. they got greedy.
The fed could have done a better job giving long term guidance and honestly should set up a facility to exchange debt when the interest rate risk couldn’t have been reasonably know.
"Getting unlucky" in banking is making a few risky loans, getting defaulted on, and coming below projected growth for the quarter. The bank's revenue gets a hit, the shareholders takes a haircut, all part of the playbook, happens every now and then. What "getting unlucky" is not is not understanding interest rate risk so much that you blow your entire bank up. It's like calling someone who drove drunk and killed 16 pedestrian "little unlucky while turning a corner", absolutely not in the same ballpark.
SBN isn’t the only bank in this position. I read a NYT article from 2021 describing this situation and like every bank is in this position.
Interest rates whipsawed from record lows to 20 year highs in 12 months. No one was ready for that. This is all because of gov and fed policy.
We will see a lot of banks failing in the coming weeks and months.
Easy, buy treasury bills. What? They don't pay interest through the nose? Guess SVB is not getting double digit revenue growth this year, and you're not getting that big bonus. So sad. Anyway.
> SBN isn’t the only bank in this position. I read a NYT article from 2021 describing this situation and like every bank is in this position.
Link? Also I am quite sure most other banks had the good sense to understand that they need to hedge against interest rate risk.
> Interest rates whipsawed from record lows to 20 year highs in 12 months. No one was ready for that. This is all because of gov and fed policy.
Yes, and gov and fed policy was there to address acts of God (aka COVID) and Putin (aka the Russia-Ukraine war). Should we send a list of demands to them?
2. It’s literally impossible that other banks did a better job as the asset class for treasury and MBS is the same for every bank. The difference is that SVBs customers were more negatively affected by rising rates after also being more positively affected by low rates than other banks. So I don’t expect a systemic problem here but SVB was structurally unlucky.
3. The fed could have acted sooner to raise rates, that would have allowed a more gradual process. They could also have set up an exchange program as they are doing now. Plenty of banks bought long term treasuries that are underwater now but will recover in the long run. So if a member bank is facing liquidity problems it should be able to access the discount window or some similar facility to smooth the timing risk.
Let’s all remember it’s in everyone’s interest to have safe banks and a functioning financial system. When macro policy has unintended consequence there is nothing wrong with supporting the system.
the fed can't give long term guidance, because they can't possibly predict shocks that would happen that require them to change the interest rate.
It's like asking mother earth to give a warning before an earthquake.
The odds of any given crisis being caused by government are good enough to justify it being the base-case assumption before any real evidence comes to light. Although in this case, the long stretch of time at near 0% interest rates and a culture of bailouts encouraging reckless financial decisions are probably going to turn out to be major factors.
the Feds did what they had to.
The outcome of this fiasco is not a reason to conclude that ZIRP is wrong.
It seems that the institution that is most susceptible to this will be an institution in a field where most people are parrots and fast parrots too.
SVB did the "right" or safest thing by buying Treasury (the next safest will be to hold $200bn in cash). Treasury is the real money. Most people think of $1 in their account as $1 but it is not. Buying shorter-term treasury might have saved them or not.
These collapses will continue until the Fed thinks that enough liquidity have been removed from the market and inflation is stabilized again.
The bank bought long-dated treasuries for the 2% yield (as opposed to short-term treasuries yielding next to nothing). The moment rates went up they were going to start losing a lot of money mark-to-market. This could be tolerated, except they also had an undiversified deposit base withdrawing money and forcing them to take the losses, and so they blew up.
Of course, hindsight is an completely other thing and everyone has it once the events unfold.
The thing is, they did make risky investments. Going heavy long-term treasuries is risky, because you lose money if you have to sell them early. Banks get some privileges when holding them on balance, but they are still assuming a lot of interest rate risk when they buy them. Shorter term treasuries would definitely have saved them, but also ruined their profit margins (at least in 2020~2022), so it's neither here nor there.
The Fed (meaning, the authority in broad) will continue to remove liquidity and as a consequence kill businesses. This is not an unintended result. This is, in fact, the wanted result and what they are aiming for.
Long-term debt is more sensitive to interest rates. It’s also less liquid than the gold standard for liquidity, on-the-run Treasuries.
Any entry-level CFO/CRO knows they should've done either of:
- <=2y treasuries
- some kind of money market account at a larger institution
- or at the very least get a rate swap to cover for rate hikes
claims they didn't have a Chief Risk Officer for most of 2022 however, so if true, might that have contributed to not seeing the approaching difficulty as mortgages became stressed?
There is probably some value in having banks to do loan underwriting and allowing private credit creation but this whole thing if allowing private banks to run everything and then providing a federal guarantee of some deposits is absurd, just take that function away from the private sector.
but why would you ever put your money in a commercial bank when you can deposit at the federal reserve with 0 risk?
But yes private banks could also operate term deposits and pay interest to attract deposits to satisfy net flows of funds with other institutions.
https://youtu.be/gI86w6bSmS0?t=445
Presumably to avoid exactly what happened in the sub-prime mortgage crisis :)
https://au.finance.yahoo.com/news/silicon-valley-bank-served...
There was nothing especially "startuppy" about their traditional banking services.
You do not want the government, which is supervised by politicians, picking who gets loans.
I don’t think however having the Civil Service running a public bank would be a bad thing though. Career government employees are at the whims of politicians no more than private businesses are, has been my observation, and can when structurally enabled make good sound decisions.
I think having a public option for banking in this light would be positive
Yes that's why I said there's some value in having private credit creation. In fact, my comment was just lifted from this lecture by Randall Wray where he says precisely what you just said:
https://youtu.be/gI86w6bSmS0?t=445
Although correction to another comment I made: he does specifically say loans should be held by the issuer until maturity.
Loans create deposits.
Deposits in a bank never go anywhere. All that happens as you “move” money around is the ownership tag changes. And that tends to change the price the bank has to pay on those deposits.
The idea of separating deposit and investment banking goes back to the 1930s. It's known as "The Chicago Plan" (full reserve deposit banking). The IMF published a study that estimates no negative impact on economic growth.
https://en.wikipedia.org/wiki/Chicago_plan
https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The...
This has nothing to do with separating deposits from investment activities, no one is alleging that SVB was speculating in stock or risky securities. They were placing deposits grade A securities as any regulatory body would sign off on.
With banks paying almost nothing to depositors, I don’t see why we should be forced to use them. Give us the same deal they get with the Fed.
Therefore, it is always an incentive for a bank to attract deposits.
This is incorrect. Most bank assets are not Fed financed. (That’s the discount window and reverse repo operations.)
Deposits don’t move banks. What happens is the ownership tag changes.
So when you “move” your money to an account at the central bank, the central bank necessarily takes over your old deposit in the bank you’re moving from. That becomes an asset of the central bank and they create a new deposit for you against that.
That’s how all bank transfers work at root.
Could you explain this better? I don't understand
"Making loans to startups that otherwise wouldn't get a loan because they are too risky for traditional banks" does certainly grant more people access to the high-cost high-risk world of tech startups, but I dunno that it's a terribly compelling method to level the playing field because it does nothing to challenge the system itself, only gives new players a chance to spin the wheel.
The backlash against tech in general stems from the system itself and the things it prioritizes, like massive scale at all costs in service to investors being a vehicle for the rich to become richer. If you start from a position like "tech billionaires and their antics are a significant source of problems in the world" then a bank like SVB that lets more "normal" folks participate doesn't do anything to stop those said billionaires from _also_ profiting off these new incoming startups, except making the pool to choose from even bigger.
It's frustration with the system that drives these sentiments, not specifically SVB as the "secret backdoor for poors into the startup casino".
It’s the 3.6 Roentgen of banking. Everyone with no money was able to buy. Startups are too many being created. Flooding the economy with Covid money made that everyone had way too much money. Everything is in flames, we’re just merely discovering it.
It’s gonna be a tough year.
SVB was uniquely positioned to help the startup ecosystem in a way that larger banks were not. I hope something similar replaces them (albeit with better risk controls for their asset portfolio).
Silicon Valley apparently had better access to a bank that took risks and SVB seems to be the bank of over half of tech and public health startups..
Other jurisdictions should feel a bit cheated if their regulators didn't help their small business get the most out financing and FDIC bailouts.. Internationally, other countries have to question why they aren't giving some kind of handouts to gain more of the startup scene for occasional crises.
Really a fine mess.
The alternative is scarier: infinite deposit insurance exposes government to larger and larger defaults requiring them to regulate banks down to which industries and loans they can work with or not.
I think the reason such institutions don't exist is that they are very unprofitable compared to regular banks and would be expensive to keep deposits in them.
With deposits in excess of FDIC limits? Yes, absolutely. There are a number of options to manage cash more securely than just putting it all in a single bank.
Either one of 2 things must be true:
1. The FDIC 250k limit is real, and so deposits in excess of that limit must be subject to the risk of failure.
2. The FDIC 250k limit is fiction. If that's the case, then we should be honest and acknowledge that, and price any additional insurance accordingly.
Everyone clamoring for a bailout now wants to have their cake and eat it, too. They want the luxury of pretending like their deposits are insured without paying the premiums.
There are no doubt certain banks that would be more palatable politically to backstop further. I could imagine a national bank with mostly retail depositors and few over-250k accounts is "prettier" politically than if you had a tightly focused regional player that had mostly corporate accounts. I could see politicians saying "Why should Iowa bail out the bad decisions of Bay Area investors? Nobody in Dubuque actually has an account there."
Well, option three is basically what we have now, and my argument is that it's supremely fucked up. As you point out, it highlights how vague, unclear laws or backstops are ripe for corruption and political cronyism.
It also adds a new form of moral hazard: if you're going to blow up, make sure you blow up big. Some small little bank that is pretty contained? Sorry depositors, you're all screwed. But scream "contagion" enough times and use the "nice economy you got there - be a shame if someone were to ruin it" tactic, and get Washington to come to your rescue.
I mean, if banks offer 5% interest and the fed raises interest to 4%, then there is no problem but if the Fed goes to 6%, it becomes a problem because people switch to the narrow bank. In other words, the banks in the real world cannot compete with banks that take government subsidies, so the subsidy must be carefully chosen instead of being raised arbitrarily.
This is a very strange take that I disagree strongly with. There is no such moral hazard, and I would not call depositors being made whole any sort of bailout.
I would argue that one of the most important functions of the government, right alongside national security, is maintaining the illusion that bank deposits == money, and that they are callable on demand at par value for any individual or firm in the country.
The point is, right now, and in previous failures, uninsured depositors were not made whole. And, if the feds weren't worried about contagion, then they absolutely would not bail out depositors. So the moral hazard is "if you're going to blow up, make sure you blow up big, and get enough powerful people to contact your congressmen, otherwise, you're screwed".
So I have been out of this mess for a long time, but at least at some point, this was literally the definition of being "a partner" in a firm (investment or otherwise). It's not a title you get by working hard. You buy in if you want the gains, and that means you're also taking on the risk.
This whole essay feels like someone reckoning with the capitalist class, or difference between being rich and being wealthy, for the first time. "What do you mean risky investments don't always shake out fairly? That's not what I learned in my MBA!"
* Owned by those who bank there
* Non-profit organization -- "Excess" profit is typically returned to members as a dividend
* Savings from your accounts are used to invest in mortgages and bonds and securities in your community
* Deposits up to $250k are insured by the National Credit Union Share Insurance Fund (is all of this sounding familiar?)
signed, a happy credit union member
I've been bootstrapping my startup with Regions bank for 3 years and it has been one unending nightmare after another.
It's been like having an active and hateful adversary at every single moment when you need help most.
I was extremely fortunate to be able to open an account with SVB late last year and it had been an enormous relief.
The unreasonable delays, hostile policies, nickel and diming, obvious incompetence, all gone.
Fast loading web experiences, instant transfers, employee credit cards, full service treatment, everything has been seamless with SVB.
My account is below the FDIC threshold, so I'm optimistic about Monday, but the loss is so huge and so much more than the money.
Huh? I live well outside SV, and have for over two decades, and I have encountered zero examples of this. Are people inside SV "gleefully celebrating"? So far, no one I have mentioned this to had heard of it happening before I told them.
This is completely bullshit. Unless SVB was subsidizing loans to risky startup employees by lending assets at longer durations, the risks they were taking with those mismatched durations has nothing to do with altruism or philosophy. It’s just greed and lack of foresight to risk the rate hikes.
For example I once read an Ikea blog post titled "A Storage Space of One's Own", and the content of the post was nothing at all to do with how women can achieve the same things as men if they are allowed the space to do so, the blog post was about Ikea's top five storage units.
This was one was suspect until the end, and then I think it wraps up quite nicely. All people should be allowed to flourish. And we should take that positive note away from it.
But I can't help but think that part of the problem is the American lifestyle that does a poor job of allowing people to live both well and frugally while fully participating in life.
We have a gun to our head to own a car, to have a large home, etc. There's a cost to that, both individually and societally.
I don't really understand what this means. What specifically did SVB offer that, say, Chase or BoA didn't?
> When a founder goes to the bank to get a mortgage, it's difficult to explain to someone at, say, Bank of America that yes, their savings and income don't look very impressive, but they do have a lot of equity in a promising company – which, by the way, isn't yet profitable, but it will be! (Maybe.) A Big Banker doesn't look at that story and see a potential high earner. They just see someone who is incredibly cash poor and risky.
> "Boo hoo," you might think. "Pity the poor venture capitalist who can't afford to buy into their fund." But this person did not come from a wealthy or privileged background. They were relatively young. They didn't have family who could advance them the cash.
They offer loans and financial products to employees, founders, and VCs (new to me), that are cash poor but have equity in presumably valuable companies. A relationship that is supposedly hard to forge with other banks.
So, ease of banking access, for one thing, led to the unique mix of SVB clientele.
Edit: Currently, after SVB's demise there is Mercury and Novo, I believe, that are banking partners of Stripe-Atlas.
“just got first founder email saying they are looking at moving their capital out of *all banks* due to contagion risk”
Wth man, you cant throw a bomb like that and not say what the outcome was!
Using borrowed money for venture capital seems very risky and not something that a bank should be celebrated for enabling.
It made bad bets on bonds and lost $2 billion dollars of the $200+ billion dollars it held in deposits.
I must be missing something, because I fail to see how this is such a big deal, or why anyone will be taking much of a haircut on their deposits.
Selling it all, today, would mean that they get back far less than the total deposits.
Selling it over time or parking it with a temp bad bank would be fine though and that is what fdic will probably do.
I do feel the svb ceo/cfo etc should face consequences for their actions, bonuses should be clawed back, but really those are not the important actions here - providing stability to the entire banking system and making sure hundreds of businesses do not close at once because of a bank run are far more important. Otherwise there is significant systemic risk.
The unrealized loses were a further 16Billion+.
18Billion lost of a capital base of 200Billion is clearly a big deal.
> "Some employees can't afford to buy their equity at all, so that when their startup is acquired or goes public, they earn nothing from the outcome, looking on in silence while their colleagues become millionaires. The people who find themselves in this situation are, of course, disproportionately those who work in lower-paying roles, and who don't have family or friends to borrow from."
A society in which each person is given something like a 'equity stake' at adulthood might work. It would be their decision as to how to use it - buy equity in a startup, pay for a college education, start a small business, etc. Maybe certain limitations on frivolous activities would make sense. It's similar to universal basic income, but more delivered in one chunk rather than as a pittance spread out over time. It would create a much more even playing field while still allowing for competitive success stories.
RSUs cost nothing. ISOs are heavily discounted especially because they are offered years before IPO.
Yes there is a case where employees give up equity entirely, but I would guess this is < 15%. And when the 16th percentile is the aristocracy...
Dataset needed.
It isn't about being gleeful. This bank took massive risks, which were enabled by Trump changing the laws (and they supported), which then allowed them to take even more risky bets (aka: level the playing field).
https://www.motherjones.com/politics/2023/03/silicon-valley-...
Now we get to see the fallout from all of that, which was even predicted by someone who was paying attention...
https://seekingalpha.com/article/4565388-svb-financial-blow-...
https://seekingalpha.com/article/4586033-svb-financial-blew-...
https://seekingalpha.com/article/4586342-svb-financial-today...
The sob story about the partner at the VC firm did pull at my heart strings though.
The CEO of SVB spent half a million dollars to roll back banking regulation five years ago. Hoisted by his own petard...well not really - bonuses went out hours before the seizure and he was selling shares like crazy before the collapse.
Now David Sacks and all the tech bro libertarians want the taxpayer to bail out the SVB depositors beyond the FDIC limit.
Most other US banks are just as exposed to long term bonds and mortgages and have also been hung out to dry by the fed raising rates after a decade of zirp and we distorted yields and prices.
Yes this bank failed to hedge risk appropriately, but if customer confidence fails, all major US banks would be vulnerable to exactly the same situation.
IMO share/bond holders should lose if all but depositors should lose nothing/very little (which is perfectly possible and not too expensive). Otherwise the risk of contagion is very real.
Which fractional reserve bank is actually safe from a bank run without the implicit promise of an fdic backstop?
And maybe that is the crux of the issue here?
https://www.cnbc.com/2018/05/24/trump-signs-bank-bill-rollin...
“When the president signs this, we put community banks back in the mortgage lending business, which is really exciting for me,” Sen. Heidi Heitkamp, D-N.D., told CNBC on Wednesday.
"exciting"
> Which fractional reserve bank is actually safe from a bank run?
No FRB is 'safe', but the people who hold money in there are safe as long as they are managing their 250k risk...
Company bash balances are the problem here, which for any companies greatly exceed insured deposits and these cash deposits are required to meet payroll and other commitments if they are not making profit at present (most startups).
Hundreds of thousands losing their jobs because of multiple bank runs is the risk at this point, because of companies unable to pay workers/services and unable to raise more money.