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Comment by nr378 | Hacker News Reader

The press release is somewhat difficult to parse, but it appears like First-Citizens Bank acquired:

Liabilities: $56bn (all of SVB's remaining deposits)

Assets: $56bn (SVB's illiquid loan book notionally worth $72bn at a $16.5bn discount)

(With a loss-share agreement depending on how the loan-book evolves over times.)

This implies that First-Citizens just acquired $56bn of flightly deposits with no additional liquid assets, and those depositors just lost their FDIC insurance for any amounts over $250k. If you're one of these depositors, why wouldn't you run to a big 4 bank?

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You have that backwards (and it's a common mistake!). Loans issued by banks are assets; deposit accounts are liabilities. Although it seems counterintuitive, it makes sense if you think about it: loans are how banks (traditionally) make money, while deposits have to be surrendered by the bank on demand.

My understanding is that banks are required to have a certain level of liquid assets. For example, a safe liquid asset is gold. On the other hand, a cash deposit is not a safe asset because the entity that deposited the cash can easily remove it. Moreover, a loan will have collateral. Some collateral is much more liquid than other collateral. For example, if the collateral is gold, it is considered very differently than if the collateral is a building (which the bank provided the loan for) or stocks and bonds that the borrower can't trade for the duration of the loan.

What about US Treasury Bonds? Are those not safe? Yes, they are very safe, however, if they are low yield and the interest rates increase, they are not liquid so they at that point don't provide the requirement banks have for liquid assets.

> My understanding is that banks are required to have a certain level of liquid assets.

In the US this is called "Reserve Requirement". In 2020 it was lowered to 0%

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

(Not sure about the rest of the world currently)

Treasuries are always liquid. Just about the most liquid instrument out there. They can drop in value, but that’s not the same thing as illiquid.

Ah, I see. I misunderstood something I read earlier. Silicon Valley Bank had to sell Treasuries at a $1.8B loss which caused them to not meet capital ratio requirements. Their problem was a combination of their bond holdings decreasing in value and a bank run forcing them to sell the bonds at the discounted rate.

Sort-of, yes. But bank run makes it sound like something immoral or at least irrational. A bank that’s insolvent (has greater liabilities than assets) should expect and deserves a bank run.

The bad version of a bank run is when a bank is solvent but illiquid. It has a bunch of loans that are preforming and haven’t lost value due to interest rate changes, but there’s no easy way to sell them because they are just individual loan agreements between the bank and some borrowers.

But again, that’s not what happened here. The bank was in trouble because its assets were worth* less than it’s obligations.

* in the only sense of worth that matters

> a safe liquid asset is gold

Unless you're talking about melting gold, I can't see how gold is liquid. Bid/ask spreads are wide and it's hard to (literally) move a lot of it without both incurring costs and moving prices.

Gold is considered a Tier 1 safe investment under Basel III which banks can use to meet the capital ratio requirement. Under Basel III, physical gold is considered the same as cash. [0] Either solid or melted gold will work meeting the capital requirements.

[0] https://www.marketwatch.com/story/why-basel-iii-regulations-...

I learned something new today! And I suppose that makes sense. Gold has been a medium of exchange for millennia, so the convertibility or not (in my discussion of liquidity) of gold to USD isn't as important as it might be for other commodities.

It's good to see that Basel III treats paper gold (gold futures or shares in gold-holding ETFs) as more risky than actual gold-in-hand.

Most people don't own commodities in physical form for long, usually they buy some stock or ETF which tracks the price of the commodity, typically the ETF or stock issuer carry the physical commodity, so each stock is backed by the physical commodity. This mostly circumvents the issues of moving a lot of it around and the liquidity issue, albeit you pay a management fee which is fractions of a percent typically. Doing it this way is probably cheaper than the alternative of buying and selling the commodities yourself depending on the quantities you're buying as the firm managing it benefits from economies of scale.

Banks are required to have a certain amount of collateral (cash) on hand, but SVB was one of the banks whose cash holding requirements were loosened in the 2018 rollback of some Dodd-Frank rules.

Still weird to me. Even with that reasoning, deposits can be lent out to make money. Loans might not be paid back. I would think a bank with $100 in deposits and $50 in loans is better off than a bank with the reverse.

It sounds like you might be inferring that $100 in deposits is both a) $100 owed to their banking customers and b) $100 in cash. It is only the former, though - the cash was lent out to make the loans or used to purchase income-producing assets. A bank with $100 in deposits and $50 in loans is insolvent - it owes $100 to its customers whenever they decide to withdraw it, but only has $50 of assets (loans) to back that. In the reverse, the bank only owes $50 to its customers, and meanwhile has $100 of assets - if the customers all wanted their money back, it could sell the loans, and as long as it got more than half of its nominal value they'd be able to repay everyone.

> deposits can be lent out to make money.

Your intuition is correct to some degree - if you imagine I go down to the bank and deposit $50 in cash, that deposit is both an asset and a liability to the bank (it expands both sides of the bank's balance sheet by $50). It's an asset in that the bank now owns $50 of paper notes, and it's a liability in that the bank now owes me $50.

The bank can then choose to loan out those paper notes to someone else, and therefore you're entirely correct that it can be lent out to make money, however the bank can't lend out the fact they now owe me $50 (that's just a liability to them).

They didn't receive the cash backing the deposits, just an obligation to pay those deposits back to depositors.

The cash backing the deposits has already been lent out to create the $56 million in assets that they are also receiving.

I use these two tricks to remember it.

1) Assets make the bank money (loans. interest collected), liabilities lose money (deposits. interest paid).

2) Deposits are loans the bank takes. (As in it has to pay interest to service the "debt".)

In your example a bank with $100 in deposits is paying interest on $100, but only receiving interest on $50. In the reverse it is receiving interest on $100, but only paying interest on $50. So the reverse is much more profitable for the bank.

>(As in it has to pay interest to service the "debt".)

I get no interest on my checking account.

Most likely you technically get 0% interest. I'm currently at something like 0.05%.

I remember back around 2005 I'd get 4% interest on my checking account. Feels bizarre now.

Think about it like this: The bank can sell the loan to someone else because it produces positive cash flow, but the bank can't sell someone's deposit because if that person comes for their money, they expect the bank to pay them back.

It is backwards from the normal business model, but that's because a banks business is to make money lending instead of borrowing to make money.

You deposit $100 with me. I now have the $100 (an asset) and owe you $100 (a liability)

When you give the bank a $50 deposit, they put it somewhere and importantly, mark $50 on a ledger for your account. The mark in that ledger is a liability for the bank, it is money they owe you.

Say they then use that $50 to buy office paper (it's a small bank).

They then owe you $50 and have several thousand pieces of blank paper.

The thing you are tripping on is that the deposit doesn't necessarily represent something the bank actually has.

It's really just a convention.

But if you wanna discuss the convention, in your example the $100 in deposits might vanish overnight (as in fact did in the case of SIVB) whereas the $50 loans is a LOT less volatile.

Apologies, typo corrected

They can. It won't matter to First-Citizens who will just backfill the deposits using Fed BTFP loans, or higher duration better matched deposits from elsewhere.

That book is worth $72bn on run off. $16.5bn pays an awful lot of interest.

> those depositors just lost their FDIC insurance for any amounts over $250k

Did people think that, just for them, a special institution disguised as as a defunct bankrupt bank, was never going to be "that one trick they dont want you to know about" and you would have infinity insurance for $0?

> you would have infinity insurance for $0

Post-SVB, this is the system we’ve got.

If you hit the one that they dont extend the limit at their discreetion, good luck explaining to the investors why you lost all their money.

What do we expect small businesses to even do with their cash? It's conceivable that many of them have more than $250k for payroll at any given time.

Without a solution, we run a bank run risk _at all times_. This seems untenable. Perhaps we should raise the limit to quite a bit higher, and charge large account holders for that?

From the news I've been hearing recently, I think the idea is that you use a sweep account/purchase overnight bonds from the fed so that your deposits leave the bank every night and are put back the following day. So you're covered in case of a bank failure.

(Banks are already charged for the current insurance up to $250K)

Interesting. Is that a service banks offer? I suppose that it would mean that the bank truly could not lend against deposits that use this mechanism, so I wonder how much they would charge for this.

I don't know about banks but eg Wealthfront will do that for you and give you 4.3% APY on cash!

https://www.wealthfront.com/cash-account-participant-banks

Yes banks offer this through a network with others banks,and they have reciprocity so if I puts $250k in another members bank they put $250k in my bank so the members banks don't really "lose" deposits. Net, the deposits can be used by the bank in the same way they usually are.

A sweep account is a very common business account and most banks offer this, if you don't pick it based on your balances they'll call you up and try and sell you this service. SVB strangely did not have this product for some reason.

It's not obvious to me that First-Citizens got "no additional liquid assets"?

When SVB failed, the Federal Reserve said they would give banks a one year loan at par for treasuries and mortgage-backed securities: https://www.federalreserve.gov/newsevents/pressreleases/mone...

> This implies that First-Citizens just acquired $56bn of flightly deposits with no additional liquid assets, and those depositors just lost their FDIC insurance for any amounts over $250k. If you're one of these depositors, why wouldn't you run to a big 4 bank?

Well, you never really had it (except for the last what, two business weeks) and you won't have it at a large bank either.

That's ok, you can probably insure in the private markets (I've never looked into it but you can insure literally anything else so) or you can adjust your treasury program.

> $56bn (all of SVB's remaining deposits)

Wasn’t it $178bn at the end of last year?

I heard a few people took their money out.

And 20 billion loss out of 57 billion deposits is quite the haircut. Would have been a terrible precedent to set to allow a run and then stick the saps that were too slow with all the losses.

> 20 billion loss out of 57 billion deposits is quite the haircut

First-Citizens is buying $72bn assets for $56bn. They're leaving behind "$90 billion in securities and other assets...in the receivership for disposition by the FDIC." Nobody would have been haircut.

The press release says this is going to cost the FDIC ~20 billion. If they didn't shoulder that loss, who would have except for depositors?

> press release says this is going to cost the FDIC ~20 billion. If they didn't shoulder that loss, who would have except for depositors?

I'm not familiar enough with FDIC jargon to know what this means. My guess is it's an accounting figure, incorporating the $16.5bn discount given to First-Citizens, not a cash outlay from the DIF, though the wording suggests the latter. (It may be a reference to the expected loss-sharing agreement outlay.)

Cost of funding overnight to maturity? 90bn for 5 years @ -3% carry, +/- defaults / refi on loan book? ~= 20bn?

Also total losses are FDIC + the already defauted on share capital + any bonds the bank had issued. The hole in the balance sheeet is a lot bigger than it first looked.

Better to stick it to the saps that picked a better bank, eh?

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