How this is managed is by making sure you have enough capital on hand or in assets you can liquidate immediately to cover customer withdrawals, which wasn't possible for SVB because 20-30% of their total customer deposits were leaving each day by the end. In that regard it is true that the bank run caused the failure. However, what caused the desire to get out is bad management at the bank and unrealized losses because the bank had a large portfolio of mortgage backed securities they weren't required to mark to market (thanks dumb regulators) and the loss on them from the sudden increase in interest rates was large. In addition they had a very large portfolio of loans to startups that were questionable given the massive shift in that market so there really is a big question mark on how many billions that portfolio would be down which makes it really questionable whether the bank was actually solvent or not and that drove the panic to get out.
So the correct answer here is the regulators screwed up allowing losses to not be marked to market, the bank management screwed up exposing themselves to a very risky duration mismatch and very risk asset mix and when the bank customers figured it out they caused the bank to officially fail by trying to protect their assets by moving them elsewhere.
There are reports that, on a mark to market basis they were insolvent since September 2022.
It is very plausible that sooner or later we remove HTM accounting.
SVB wasn’t insolvent if they held their assets to maturity though. The issue was that the market to market vale was significantly lower than the hold to maturity value.
The difference was still a liquidity issue. It was magnified by the fact that the market value of their assets was dropping precipitously.
I can take my cash and purchase a 10-year zero-coupon Treasury paying ~4%; so my $1000 now buys me a payment of 1000*(1.04)^10 = $1480 in ten years. Would you say that I'm solvent now?
NPV is what matters for solvency; a cash flow later is worth less than the same cash flow now. Interest rates were ~zero for long enough that everyone seems to have forgotten this, but I guess Peter Thiel didn't.
Opinions may differ, but nothing about it is “made up” or arbitrary. It’s a generally accepted practice and reflective of very clearly defined income.
Regulators can draft whatever they want, but if their rules depart too much from economic reality then bad stuff tends to happen. I think that's what happened here.
If I'm not mistaken that's one of the services the Fed offers.
Also by using the Fed’s discount window. If you’re illiquid, and not insolvent, you borrow from the Fed. If your assets are worth less than your liabilities, you’re insolvent, and the FDIC takes charge.
It's not "dumb regulators". The regulators didn't "screw up".
The government isn't coming to save you and you shouldn't expect it to, because it's literally controlled by the same griefters who have learned to perfect the art of milking money from everyone by taking innocent people hostage.
Let them blow the hostages. Or get more hostage situations. I'm all in favor of letting them blow the hostages this time. The good startups will be forced to dilute the corrupt VCs who pointed them towards SVB, and raise money elsewhere. The bad startups should just fall.
The bad startups that... failed to do due diligence on which bank they chose? Do you really think that we should add "financial risk analyst" to one of the competencies required for a startup founder?
It is unfortunate, but it seems like if you allow bad people to take innocent people hostage and reward them for that, you only get more hostage situations.
This is coming from a bank who had lobbied for the regulation to be repealed. That had the CFO of Lehman brothers from 2007. These are professional hostage takers. I would say persecute them, but we all know this isn't going to happen, and they aren't the only people acting this way. They are getting away with scamming people because we let the government make up the losses to the people they scam.
It's no wonder the VCs fled the ship so fast, many of them knew what was brewing. This is VCs money that is lost. That's where startups get their money. These startups slept with dogs, they shouldn't be surprised they wake up with fleas. It's VC bank using VC playbook of zero or hero. Let them get the zero. Do you honestly think all those VCs had no choice in where their startups deposit their money?
Banks are not balance sheet insolvent at all.
The problem is that their liabilities are deposits which are very short term and depositors can show up and demand money, while their assets are loan paper which is typically very long term.
They can become cash insolvent fairly quickly during a run, that doesn't mean that they are "insolvent by design" though.
> However, what caused the desire to get out is bad management at the bank and unrealized losses because the bank had a large portfolio of mortgage backed securities they weren't required to mark to market (thanks dumb regulators)
Rather the inverse. If they had been able to hold their securities to maturity then they would have been fine. The problem is that the drawdown in deposits forced them to sell securities and inherently mark them to market, which made them balance sheet insolvent.
If regulators forced them to market to market that would have just created more panic, that isn't really a solution.
What they needed was to stress test their portfolio back in 2021 when they were buying mortgages against a 6% federal funds rate, and avoid buying so much in order to not have so much interest rate exposure. In 2021 that would probably have been considered laughable.
The difference here is that SVB’s customers did not understand proper corporate cash management practices and had deposits far in excess of FDIC insurance. So from a game theoretic perspective if you hear a whiff of insolvency then you want to pull your cash as fast as possible.
This is on startup CEOs as much as it is on SVB.
In fact, it's probably true of pretty much every bank every day, since this is partial-reserve banking. If everyone wants their money back, NOW, the bank doesn't have it, but in normal banking, the institutions can be stable for centuries.
SVB put themselves in a somewhat bad situation by heavily concentrating the high levels of deposits in 2019-2021 in long-term treasury bonds (which would not have been permitted had not the previous administration not rolled back Dodd-Frank regulations, in no small part due to the lobbying of SVB's CEO).
So to service the net withdrawals that started earlier this year (lower levels of VC investment and higher expenses in the concentrated startup community SVB served), after the big interest rate increases, they had to start cashing out their T-Bonds at ~80% of face value. This lead to need to raise new capital, which reduced confidence in the bank...
Had everyone, including Thiel, stayed calm instead of Thiel yelling "FIRE!!", it is entirely likely that it could have been at least calmly wound down or sold.
It's kind of like crossing thin ice. If you can keep your weight spread over enough surface area with no mis-steps, you can get across just fine. But if you take one wrong step focusing the pressure at one spot, you are now in the freezing water with a life expectancy of minutes if you are helped.
And they put even more into 30-year mortgage backed securities. Bonds are normally purchased across a mix of maturities by banks. It's strange how everyone is absolving them for the mistake of holding almost no 1-2 year bonds and instead blaming VCs for pulling out.
To be explicitly clear: it's the responsibility of the bank to maintain their own liquidity (just like the borrower needs to do the same with their loan repayments), and putting $100B (33%+) of assets into 10-30Y securities was highly irresponsible and poor risk management.
The root cause is in this headline:
>>SVB CEO Greg Becker lobbied the government to relax some Dodd-Frank provisions on regional lenders in 2015. Trump did in 2018. [0]
All to chase a couple extra basis points (1/100 of a percent) of yield to increase the bank's profits.
Both Glass-Stengal from the 1930s and Dodd-Frank from 2010 segregated the investment (read market gambling) activities of banks from the deposit activities.
After a period of no crashes, they always lobby to gut such laws to increase their profits (of course privatizing the profits, but socializing the risk, which will fall on society whether or not the taxpayers bail out anyone).
Politicians who are fools comply with these requests because the voters will not notice right away. In this case, it wasn't until the next administration that we have the 2nd largest bank failure in history. Or when Clinton rolled back Glass-Stengal in 1999, it was nearly two full terms later before the banking system came to a new near-collapse crisis.
So, yes, root cause vs proximal cause.
[0] https://fortune.com/2023/03/11/silicon-valley-bank-svb-ceo-g...
"Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule."
https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-...
Source? My understanding is that they fucked up by buying long dated bonds/MBS rather than short dated ones. Surely the difference between a 5 year treasury and a 1 year treasury would surely be bigger than 1 basis points?
This is the prisoner's dilemma, though. Unless there is sufficient, government-esque coordination across VCs (and founders, etc) to force everyone to remain calm, no individual can rely on the others remaining calm, and they are all in a position to individually lose if they remain calm while others do not.
If anything I think it would be extremely spooky if that level of coordination did exist across VCs. The lack of strong coordination this has demonstrated is almost heart warming, in a way (if you like free markets).
You are correct that there is a bit of prisoner's dilemma here. I'm sure Thiel's portfolio companies that successful transferred funds had an awesome maybe even productive weekend while the rest had to scramble to figure out what this all means for them.
I think there's also tragedy of the commons at play here and this is where some level of orchestration would have been beneficial to optimize the common good or at least prevent unnecessary depreciation for the overall ecosystem.
But in this case the assets (at present market value) are literally worth less than the deposits. Yelling "FIRE" seems totally justified in this case.
This is Fractional Reserve Banking [0].
There are almost NEVER enough immediately available liquid assets to survive a bank run.
Deposits are the inventory of a bank. They then hold a small fraction in reserve, while loaning out many times that value. They can also have other assets.
The TOTAL VALUE of all the assets is usually greater than the liabilities, which is the deposits, i.e., the bank is solvent.
That does NOT mean that the same fully solvent bank could immediately cash out those assets at full value to meet a surge in withdrawal demands.
Take any bank, both most solvent and with greatest liquidity. If we had enough clout to start enough insolvency rumors that we can precipitate a big run on Monday, they'll be shut down by Tuesday. All you need is a big enough "megaphone". Once it starts, it is self-reinforcing, because only those who pull their deposits early get anything.
Thiel had exactly such a megaphone, on a bank with assets and deposits highly concentrated in his industry. It is entirely possible, even likely that SVB would be open right now if Thiel had not openly made that call.
We do not have anything near enough information to claim that it was "totally justified", and it may in fact turn out that it was entirely unjustified and created a rapidly self-fulling prophecy.
You can have a huge pile of tinder with gasoline on it, but without anyone actually lighting a match to it, it could be disassembled and made safe. But as soon at that lit match is tossed, it's done.
[0] https://www.investopedia.com/terms/f/fractionalreservebankin...
Are you suggesting that SVB's assets at present market value might actually be worth more than their liabilities and/or that we don't know for certain? My impression is that the fact that they were insolvent was well known. See for instance matt levine's writeup:
>Basically SVB ended up with a large portfolio of held-to-maturity bonds with an average duration of 6.2 years at the end of 2022, “and unrealised losses snowballed, from nothing in June 2021, to $16 billion by September 2022.” These losses “completely subsumed the $11.8 billion of tangible common equity that supported the bank’s balance sheet,” meaning that SVB was technically insolvent
https://www.bloomberg.com/opinion/articles/2023-03-10/startu...
Illiquid is not the same thing as insolvent, so no.
That simply isn't true.
One of the functions of the Fed is to lend money in situations like that.
If the bank has illiquid assets they can borrow whatever they need.
It looks like at the end of the day, the total shortfall was something like 2-3 billion dollars, and that is at literal fire sale prices.
In a few hours on Thursday, over $42 billion was pulled.
The loan facilities simply could not react that fast, and if there was full knowledge instead of "the fog of war", they certainly would have been able to cover the full amount and make a bridge loan to keep SVB solvent.
But it all collapsed too fast. I'd be astonished if this wasn't the fastest bank run of such a scale in history (2nd largest bank to fail). Having effectively ALL of your customers concentrated in the same industry, and all connected by the fastest comms network on the planet, and electronic transfers, just made for a run of unprecedented speed. All of Theil's companies were surely transferring funds within seconds of his text msgs to them. Everyone else is only 1-3 hops away by text message, and then the public tweet t pull funds - it's over...
Time matters.
In "It's a Wonderful Life", the bank has the money, but not right now. If the depositors all wait, then they'll all get their money. If they do a bank run, then the first movers get their money, and the rest get left with nothing, as good assets get liquidated at heavy discounts in a fire sale. So compared to waiting, the bank run is negative-sum to the depositors in aggregate, and zero-sum to the first movers. (It's positive-sum to Potter, who wants to buy the bank's assets at a discount.)
In either a mark-to-market or a net-present-value sense, the SVB doesn't have the money. When interest rates increased, their long-term bonds lost value. The hold-to-maturity accounting treatment saved them from reporting that, but that accounting is a fiction; it's a real economic loss, same as if they'd lent to a bankrupt startup. If the depositors all wait, then they'll get the right number of dollars in ~ten years, but those dollars will be worth less by then. So a bank run is positive-sum to the first movers, who can get their dollars now and buy Treasury bills at five percent (or put them in a better bank, or wherever else). It's roughly zero-sum to the depositors in aggregate. That makes a bank run relatively more attractive.
I think there's confusion because in both cases, "if you wait then you'll get your money". They're completely different reasons to wait though, the first economically rational, the second not.
The rationale presented alongside the urging to pull out doesn’t have to be fabricated, just hypothetical. That the risk become real as a consequence of being suggested is potentially interesting, but ya know.
Isn't any identification of a run risk hypothetical? I think the question is whether it was a reasonable concern or not. If it was a reasonable concern, then the run is simply rational behavior for an uncoordinated group. If it was not a reasonable concern, then the run was irrational and panic driven. My issue with it being an unreasonable concern is that I haven't seen anyone claim this explicitly or provide a rationale. If anyone has a rationale for how it was an unreasonable concern, I am interested..
Take a deposit from another bank to offset the deposits being withdrawn. Through funds or repo. If it was a short term funding issue, this is normal (at a system level, interbank lending always balances, just an accounting identity). But that wasn't done. Whether that's because other banks were unwilling to step in may be interesting to see.
There was an easy mechanism for that - simply purchase the shares SVB was offering.
But no, community that claims they are going to save the world couldn’t exercise enough long-term thinking to even save their piggy bank.
There should be no bailout by the Fed. This community has enough resources. If they can think long term and act together, they’ll reorganize themselves in a responsible way. If they can’t, then they deserve to fail financially and they’ll have less resources to control.
It wasn't done because the assets SVB had at current market values was worth less than their liabilities. You'd be crazy to lend money to SVB.
https://en.wikipedia.org/wiki/Interbank_lending_market
But people weren't withdrawing because of a funny Reddit meme; they were withdrawing because SVB was underwater.
And creditors don't like underwater debtors
Imo the question isn’t whether Thiel privately emailed founders advising them to pull money but whether they made a decision to leak their advice to the press to incite broader panic (eg how did Thiel’s advice make it into the headlines to begin with? who tipped off reporters?)
There is plenty of evidence that Founders Fund wanted to fan the flames: a Founders Fund partner literally published a “some VCs are saying to pull money out” the night before. Not sure how anyone can read this and think there was no intent to broadcast panic.
https://www.piratewires.com/p/some-vcs-advising-founders-to-...
They could borrow as much funds as they need from the Fed or other banks as long as they have assets to cover it.
The issue here is not a bank run it was simply that they were insolvent.
This is potentially going to be a problem for other banks (although SVB seems to have been unusually susceptible), as when interest rates are so high but banks can’t afford to pay anything like that on deposits (because all their loan book and much of their bonds is at lower rates), there will be a lot of cash flowing out of banks into treasuries…
It's part of a general sliminess that is and always will be a part of corporate finance, and that sounds quite reminiscent of narcissism: when we're doing good, it's because we're super smart, innovative, good, and hard working (oh and that means we should keep all the rewards); and when we're doing bad, it's because other bad and silly people have done it to us, we did nothing wrong and are blameless, and we're the victims (oh and that means we should be bailed out at everyone else's expense).
Never forget 2008. None of them have paid for it yet.
And by the way, without commenting either way on their politics, a handy trick anyone can use to determine if a behaviour is narcissistic, is to ask "if this position came from the mouth of Trump or Trudeau, would it sound like them?".
The answer to this question is a resounding "yes." As far as I can tell, the prisoner's dilemma, as well as a wide-spread ignorance of it, can pretty much explain the totality of human behavior.
These people are led by propaganda. Modern banking is evil and the fact we put up with "losing lotteries" like this is so despicable.
the underlying issue was that SVB knew they were f'd and so they were begging VCs to stop taking money out because they knew they couldnt cover and those VCs turned around and pulled money faster, because that is what smart money does.
SVBs bargaining chip was that the VCs wouldnt want the books being opened, which is what happens when the fed takes over, but the VCs called their bluff, because they figured they were well enough insulated from any potential fall out.
this is america, so we have the keating S&L scandal, ltcm, enron, worldcom, countrywide financial, 2008. the game never stops.
This can be anything from how the bank values its assets (which... who cares, they're going bankrupt anyway, right?) to director malfeasance or negligence which can result in jail time. In normal circumstances almost all businesses operate this way at least a little bit, but in banking there's a paper trail and when it's under a regulator's microscope, it's much more likely to get noticed and punished.