Close to 190 banks could face Silicon Valley Bank's fate, according to new study | Hacker News Reader

Close to 190 banks could face Silicon Valley Bank's fate, according to new study

usatoday.com

> even if only half of their depositors withdraw their funds

yes, obvious

consider which business wouldn't be at risk of closing down when half of their customers run away _at nearly the same time_.

similar consider which liquidity focused/dominated business would be at risk of they randomly lose half their liquidity

the only reason why it's "only" nearly 180 banks is because many banks are as much or more focused on "other" money business then things like deposits (e.g. land)

We have a local community bank. The bank served the needs of a single small New England town and small liberal arts college. Starting with 80's and 90's the banking deregulation caused the bank to start working the college's endowment to the point where the Financial Services part of the bank felt compelled to buy the banking services arm.

Needless to say banking services became unusable. The best example is an 8 year old child had their birthday account become a deficit for not maintaining a minimum balance. Plenty of tears were shed as the mother tried to explain to child the bank didn't take all your money...

For banks, this scenario is much more probable than you think. The US treasuries is paying much more than banks can pay, so people just need to move their bank balances to treasury bonds and their deposits will go puff!

This is the point when banks are starting offering higher rates themselves to depositors.

But the banks themselves have to be able to exceed those returns in order to actually pay out interest to depositors and make money for their shareholders. That's not an easy task in this environment; everyone's chasing safe yield.

>similar consider which liquidity focused/dominated business would be at risk of they randomly lose half their liquidity

Except, the way banking is set up in the US, there exists a lender of last resort (the Federal Reserve) that can step in to replace that liquidity, if the bank is really solvent -- and even then, that's assuming other banks won't lend to it. So yes, I except 50% of funds being withdrawn to be survivable if the banks is otherwise solvent.

> consider which business wouldn't be at risk of closing down when half of their customers run away _at nearly the same time_.

Almost all businesses that fail do not take their customers life savings with them when they fail. That same life savings that’s being used to profit off interest bearing loans and risky investments at a disproportionate benefit to the bank.

People might consider them savings (and they can, because feds explicitly guarantee a certain amount, and implicitly more), but they are actually investing their savings, which means a possibility of loss.

Even your savings in your home without a bank have a possibility of loss due to things like theft or pests or natural disaster. Or more commonly, inflation.

Except the main job of a bank is (was) to deposit my money and give it back to me when I want it back. I’m not providing “liquidity” - I am depositing my money.

(I know of course that’s not what banks are primarily do today - which is probably one of the root causes of all these problems)

I don’t understand how we keep allowing this industry having such a huge impact on people’s lives. They makes tons of money when things are good and when they blow up, the whole economic policy needs to be adjusted for years and decades to come as we have seen after 2008. The idea of a “financial system” should be rethought so there is a stable banking system that actually serves the economy instead of dominating it. Let the gamblers blow themselves up but they need to be contained.

It’s really insane what is going on.

I agree. I don't understand why the entire population of the world should be a slave to a clearly broken fractional reserve system. What is stopping someone from creating banks that take ZERO risk but just let people park money for a fee?

Because bank operations cost money, and given that the federal government guarantees deposits of $250k per bank per account holder, it makes no sense to patronize a bank that will charge depositors to use the bank, plus offer less interest compared to a bank that offers free services and more interest.

There's nothing stopping anyone from creating such a bank, but in economic times with high interest no one would put their money into a bank that doesn't pay interest as they would have no hope of keeping pace with inflation.

Also, if every bank operated in this way then no one would be able to get a loan and debt drives the modern economic systems. Meaning no one would be able to make investments based on debt anymore, at least not with a loan from a bank.

Banks can hardly get people to park their money in them right now because of the fact that they don't pay ENOUGH interest -- everyone's been pulling money out to jump into money market mutual funds with their liquid cash, or short term fixed income products where they can afford to tie it up for a few months. I suspect the short answer is "lack of demand."

It's called "narrow banking" and apparently it doesn't make things as safe as you might think. Here's some reading:

https://www.cato.org/sites/cato.org/files/serials/files/regu...

https://www.johnkay.com/2011/06/02/should-we-have-narrow-ban...

But it could be an option? I imagine there is a market for it. No one is asking current banking to be abolished but at least there should be an option for people who want to keep their money away from fractional reserve.

Seems reasonable to me. I'd probably use it!

I had heard somewhere that the Fed doesn't allow for narrow banks to exist. I haven't verified this for myself, however.

The bankers are very well paid, the politicians are very well paid-off, and "we" has a very poor record of actually showing up at the table when decisions are being made on such matters.

My cynical self says this is the primary reason for political rhetoric - to distract the populace from what's really going on that will have a direct impact on their lives. Such as banking.

I don't care which political religion you subscribe to, people need to understand all politicians worship the same god: money, and all the power money provides.

Our "leaders" aren't serving their country, they're lining their pockets. With our money. I'm amazed at how docile Americans have been after being robbed so many times. You can thank rhetoric for that.

Imagine you are them, and you say "What are you going to do about it?" What's the answer you get?

No mention of the years-long (and finally "successful") lobbying effort by big banks, to get Congress to let them do far riskier stuff.

No mention of SVB's high-risk bets that the shape of the (interest) rate curve wouldn't change much.

No mention of the American financial sector's long, long history of suffering big losses, after high-risk bets on that curve's shape went sour.

And (sadly, once again) there seem to be no chance of those responsible facing any serious consequences.

>No mention of the American financial sector's long, long history of suffering big losses, after high-risk bets on that curve's shape went sour.

Can you provide some examples? For instance, the GFC was caused by bad loans, not interest rate risk.

The Savings and Loan crisis of the early 1980s was kicked off by rising interest rates that simultaneously made the assets (mainly mortgages) they already held not as profitable and also made their depositors want to pull their money to get a better rate on their savings accounts.

This also led to some of the S&L’s betting more on riskier loans and assets, hoping to make it all back later.

https://www.federalreservehistory.org/essays/savings-and-loa...

I think the Banking industry should bear the responsibility for the shortfall in depositors funds. I think they should be free to figure out among themselves and when things go so wrong that the Banking industry can't figure out we need Congress to regulate. I have no problem looser regulation but I believe it comes with greater responsibility.

> I think they should be free to figure out among themselves

Why should it be normal or even ok for bankers at competing banks to come together to "save" another bank (more specifically their depositors)? That seems like a recipe for a cartel in any other industry.

> I have no problem looser regulation but I believe it comes with greater responsibility.

This seems non-sensical to me. You want some set X of measures to be respected, but you don't want that to be explicitly enforced by government regulations - why exactly? If that set X is important, then why not make it explicit and directly enforceable? If it's not important, why should bankers be held responsible if they fail without following it?

I think it's pretty clear that the proper way of doing this would be to have official government regulation + official government guarantees for depositors at any bank that follows those regulations + actual enforcement and verification of those regulations. And any regulated bank failure should mean additional regulation to prevent those failures, similar to how the airline industry (used to) operates.

I don't think we disagree. I will try to restate my point more clearly. Banking isn't life or death. It's depositors and corporations. I place the highest value on depositors. If depositors expectations aren't met the Banking industry is responsible. If the entire banking industry can't figure out amongst themselves how to meet the expectations of depositors without going bankrupt the government regulations would require the banking industry assets liquidated. The new banking industry would start with depositors made whole and what if anything if left over could be used to fund a new banking industry under new government regulations.

> No mention of SVB's high-risk bets that the shape of the (interest) rate curve wouldn't change much.

They for sure weren't good bets, but what part of that bet is high-risk? They're government bonds, you still get the complete investment back with interest and there's (supposedly) no chance it will fail. The only thing that made it risky is their lack of liquidity combined with the subsequent bank run.

"You'll get your money back 10 years later" is not exactly "low risk" for any significant amount of money, even for a bank.

What's the alternative? That banks make no long-term investments at all? If government bonds are too risky to make a 10-year investment on, then what is? Should we just stop investing in projects that take 10 years to get a return entirely?

Regulation to prevent them from getting into dangerous situations.. financial regulations on capital requirements and stress tests, the sort of the things that in 2018 the SVB CEO worked successfully to be removed.

"SVB CEO and President Greg Becker "personally led" the bank's $500,000 lobbying efforts to reduce financial regulations on capital requirements and stress tests, according to the Accountable.US report." [0]

https://www.salon.com/2023/03/15/rolled-back-regulations-got...

Fully agreed there, we should indeed be focusing on the lack of regulation of the bank rather than whether 10-year investment are good bets or not. Because even a bank with lots of short-term bets can be driven into the ground without those kinds of regulations.

Bank assets are typically laddered so that they aren’t dominated by 10 year assets that were all originated at the same time.

A well run bank keeps some amount of assets in lots of different durations including longer terms, just not all at once.

Right, but that's more of a problem with diversification, it doesn't make a 10-year investment inherently high-risk.

It’s not exposed to credit risk but is exposed to interest rate risk.

What SVB did was not best practice, as shown by the fact that they are now bankrupt and the FDIC had to step in to make depositors whole. Why are you painting it as if it was?

I didn't mean to defend SVB, I'm just taking issue with the conclusion that banks should not make 10-year investments and instead only focus on investments that have short-term returns. As if banks weren't already overly focused on that.

Their CRO should have told them this was a risky strategy, or how to hedge interest rate risk. Ooops, they've been without a CRO since Q2 2022.

Bank risk has 2 major components credit risk and interest rate risk (duration risk is a subcomponent).

SVB was over indexed on credit risk and under indexed on interest rate risk (so they could make more profit).

This is banking 101 stuff and risk managers (including those at SVB) will point out when this imbalance happens.

2008 was about credit risk, large swaths of bank assets went down because the underlying credit defaulted. 2023 is about interest rates, large swaths of bank assets went down because they were attached to too low interest rates for too long.

10 years. That's the risk.

Locking up your money for 10 years is a huge risk. SVBs risk department told the business that slapping the money in 10 year bonds was wrong and that they should put it in short dated bills but the exec team didn't like the lack of profit that would result in so decided to take a massive risk instead.

If you are dealing with people who don't understand bond investing, and can disable their sense of caution with "US Govt. Guaranteed!" - then it is very easy to lose a boatload of their money. (As I learned the hard way, 4+ decades ago.)

A very basic example - take a peek at the 1-year return on investing in US Treasury 20- to 30-year STRIP bonds:

https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us...

(Summary - the 1-year return is negative 23%.)

Honest, competent bond investment managers will be very cautious about investing in longer-term bonds, and will hedge interest rate risk, and etc. etc. etc. Bond investment managers who lack those virtues can - most of the time - offer better yields and returns. Their blow-ups more than ruin that, long-term...but how many American financial sector executives care about the long term, these days? Certainly not - as other news stories have made clear in considerable detail - SVB's leaders.

> No mention of the years-long (and finally "successful") lobbying effort by big banks, to get Congress to let them do far riskier stuff.

First, the 2018 Dodd-Frank modifications did not affect the Big Four banks at all.

Second, the 2018 modifications had nothing to do with SVB's collapse. SVB collapsed because it made a bad bet on where interest rates were going (and did not hedge for risk), making it vulnerable to short-term liquidity issues. That has nothing to do with the 2018 raising of the minimum AUM for application of Tier 1 capital requirements from $50 billion to $250 billion.

To put it simplistically, Dodd-Frank has to do with solvency. SVB was solvent; it was not liquid.

It would not have passed a stress test.

The SF Fed's warnings last year were that, warnings; SVB management did not listen (quite possibly because the bank lacked a CRO for most of the year). That's not the same thing as the bank failing an actual, formal stress test.

While SVB and Credit Suisse's collapses' causes are directly unrelated, depositor outflows were involved in both, as opposed to fundamental issues with their balance sheets. Credit Suisse's Tier 1 ratio was as good as that of UBS or any other big European bank. <https://www.wsj.com/articles/credit-suisses-death-gives-birt...> At the end of the day, a loss of clients' faith in a bank is something that no stress test can directly measure ahead of time.

EDIT: SVB's Tier 1 ratio was 12%, among the highest for US regional banks. <https://www.morningstar.com/articles/1144363/which-bank-stoc...>

Larry Summers and Dan Tarullo explicitly confirm that SVB would have passed a Fed stress test in 2022. <https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s>

What worries me, is articles like this could just cause it to happen.

I mean under "normal" circumstances what is the real chance of half of their members pulling out all of their money. I feel like that happening on its own is a concerning issue.

I know this is some new study but I would be very curious if this is really that much different from more normal times?

Future decisions influencing the past?

What worries me, is articles like this could just cause it to happen.

Same. Particularly concerning in the linked article is the suggestion that insured deposits could be at risk(!) Such a suggestion seems right up there with SNB's statement last week on Credit Suisse..

> On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found.

Which is something that normally doesn't happen, a bank simply can't function in an environment where such large bank runs are a common occurrence.

The SVB situation exposed such weird kink in the Fed's financial plan. The whole economy would be forced to contract to fill the gap between credit and deposits. I think the Federal Reserve is doing a good job. Wiping out the corporate books and trying to divide the assets among the depositors makes sense. I believe the Banking industry making up depositors shortfall makes sense. The Banking industry should be responsible for failures of their members. The federal reserve being the regulator with some sort of role.

Not so. There are over 4000 banks. If 186 would fail in that situation, that means that 95% of them would not fail in that situation. So most banks can function in that environment.

(Unless the study just looked at 200 banks or something...)

Yes, everything I have heard so far seems like they handled the situation well and everything seems to be working. I was impressed that the quickly analyzed the problem with 10 year bonds and set-up an appropriate system for the next bank. They did that over the weekend.

If only there had been legislation preventing financial institutions from engaging in high-risk investment and lower risk deposit operations at the same time.

SVB bought the most boring assets possible

which is what caused the problem

Shorter term treasuries would have been more boring.

I'm not an expert or a bank examiner but have read a number of explanations for SVB over the past week or so. All of them seem to paint the same picture of SVB owning a lot of "safe" but long-dated government bonds, with the long-datedness actually being pretty risky because it exposed them to risk of interest rates rising suddenly, which then happened. Is there some nuance I'm missing where the "safeness" of the bonds caused the problem rather than the "long-datedness?"

No, it was the long dated part that was the issue. It magnifies the losses when interest rates go up.

I think they bought the "boring" investments as a risk hedge against the corporate paper they were buying. If they weren't so heavy in channeling cheap QE-esqe fed cash to small caps that were selling paper to buy back stock, the down-side of mid-term fed notes wouldn't have been as large a percentage of their risk budget.

Other institutions bought the exact same fed securities and are not going insolvent. Either that means they have better risk management strategies or the corporate paper bubble hasn't caught up with them yet.

I've been hearing about a corporate paper bubble for at least a decade, yet it never seems to pop. What do you call a bubble that doesn't pop?

> What do you call a bubble that doesn't pop?

Capitalism!

Technically it bought incredibly boring assets with too-long maturity dates. But yeah, blaming this on excess risk is a joke.

Too-long maturity is a risk, as indicated by the word “too”.

"Risk" has mutliple dimensions. But by over-optimizing on one kind of risk they completely dropped the ball on other risks. They also whiffed on the kinds of risks that come from building a business based on the flywheel effects of a social network. Works great when times are good, but disastrous when tbe same effect works against you.

And failed to hedge or prepare for higher interest rates despite seeing them coming from 18 months ago.

It’s like standing at the mouth of a train tunnel, hearing a train, seeing the reflections from its lights, and deciding to walk through it anyway with no contingency plan.

I think this is being oversold as a solution. These insurance policies are just that, insurance policies. I'm sure they are not all independently backed by enough currency to make everyone good, any more than any other insurance policy is. Those "hedges" are probably derivatives stacked on other derivatives stacked on other derivatives until the situations has been satisfactorily fudged to everyone's satisfaction that permits them to pretend they're "hedged", but I'd bet if the entire banking system tried to draw on them at once it would rapidly turn out there wasn't anywhere near enough "there" there. You can't have a system where everybody pays X into it and then simultaneously tries to draw 1000X (who knows what the cost of this was, but certainly much greater than X) out of it. You can build a derivative structure that hides this fact from everyone as long as they don't test it, but there is no derivative structure that can make that work if they do.

Proper hedging might have delayed this, but something bad still would have happened. It's possible proper hedging might also have put the first fire out, but it would have over time only made the situation more volatile as those hedges would have had to spike in cost and possibly driven other things over the brink.

The fundamental problem is that the financial system is so stuffed with tinder that it makes the California forests look like they're not even trying. What sparks it is of a certain amount of academic interest, but in the end, it's not the sparks that create the raging conflagration. A spark may cause a fire, but the raging conflagration is caused by the fuel. Sparks are inevitable. A "hedge" that promises to send out a couple dozen fire fighters if a particular spark starts a fire is of little consequence if a hundred fires start at once and the "hedge" is the exact same dozen fire fighters for all of them.

Yes, there’s limitations to hedging.

The problem here is making a huge directional bet that interest rates won’t go up, not adjusting that bet as it becomes clear they will go up, not adjusting as they start going up, etc.

It’s like you bought a stock with half your portfolio that’s clearly going to suffer and you hold on hoping you’ll be able to get your money back in 10 years. Oh and using 10x leverage too, so even a 20% drop is enough to wipe out your portfolio completely. It’s just so stupid. And predictably stupid.

And didn't setup a swap to protect it, which any bank in europe would have done.

Or any competent bank in the US.

Overexposure to interest rate risks taken on to increase profits is what caused the problem.

And Janet Yellen, before Congress, will NOT commit to backing all account holders to 100% of their account balance unlike the FDIC did with SVB. Community banks are seeing a massive outflow of large accounts to banks which are considered to be "preferred" and will have all accounts fully protected which could cause a cascade of failures of community banks as their assets under management start to disappear.

> Community banks are seeing a massive outflow of large accounts to banks which are considered to be "preferred"

I don't doubt this, but do you have a source? I'd love to know the actual numbers behind this.

The result of this is going to be everyone putting their funds into "too-big-to-fail" banks and we'll see the largest consolidation of banks in recent history. Which means a few institutions will have all the negotiating power to screw over depositors as much as they'd like. This is all just a big self-inflicted wound, wealthy depositors are cutting off the arm to try and save the hand.

This is just the expected outcome of too-big-to-fail banks. The small and medium size banks cannot compete with the big ones, and in stress situations people will run from these smaller banks.

If banks want to be too big to fail that have to prove by not hurting depositors. I think the corporate assets of banks and the banking industry as whole should be fungible that depositors can always be made whole on cash accounts. This may help contain a bank run.

Let's not forget that SVB was solvent at the time of its collapse. That may sound like a contradiction but it isn't. SVB had more assets than liabilities.

On the Friday 25% of deposits were withdrawn. There is literally no bank that could sustain that.

I'm fine with the solution too: the FDIC seizes the banks and sells it for parts. Great. This isn't 2008.

Interestingly the risks posed to these banks may be the one thing that calls off the Fed from further raising interest rates. Maybe then we can get to the actual good solution to inflation: taxation. Specifically of windfall corporate profits. But probably not.

I don't think we know yet if SVG was solvent until FDIC realises the sales on their assets.

I don't think FDIC would have seized it if there was 0% chance it was insolvent

In fact, i think it's clear creditors and shareholds are going to be wiped out, so that means they _were_ insolvent, even if their assets are able to cover their deposits (deposits are not their only liabilities)

Also I hope you aren't using the definition of solvency that ignores the time value of money, because that's nonsense

I mean solvent as having a positive book value based on the market value of their assets.

The government requires banks to maintain various ratios. A certain percentage in liquid assets to cover withdrawls, etc.

The big problem was in 1 day 25% of their deposits were withdrawn. Literally no bank can sustain that, from JP Morgan down to your local community bank.

The Feds seized SVB because it fell out of compliance with its required ratios but it still had a positive book value for the assets it had.

Seems like the system working well to me; government moved swiftly and is protecting depositors.

Not sure if we need more regulations or we don't. It's a balancing act because we want a certain amount of risk taking along with security and public confidence.

I am sure though that there seems to be a concerted effort through rhetoric to convince people a "bail out" is occuring and "rules are being broken"(re 250k deposit insurance) and this seems to be working it's magic.

link to the study

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676

People are very disappointed that they didn't get some depositors blown up in a bank run and are now going to push for it again, huh.

On the other hand, FDIC covers something like 4,000 banks, and I think it might be time for a little consolidation in the US market.

Short sellers pushing their agenda in the media?

Not just shorts

Other than the "run" scenario (which has existed since the days of Venetian banking), there is no material evidence of a special risk that has emerged in the last two weeks.

Look at how SCHW was driven down 20% for nothing...talk about easy money...thank you for selling me SCHW at a 20% discount

Now its FRC...please show me tangible material evidence that it is going to collapse

This feels like a contrived sell off to give some traders a new entrypoint

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