If I had a nickel for every time I heard this from actual friends in the past couple decades, or for when I said it myself a few times... :)

We shall see.

Say you are a Small Company with $5mm in a recent fund raise that you have at SVB. You use that $5mm to make payroll, pay amazon, your office, AT&T for your fiber, buy macbook airs for your employees, etc...

Now - you are listening to the recent news, and it looks like SVB is going to be taken over by the FDIC. If that happens, you will be insured up to $250K, but the rest of your $5mm, all $4.75mm is now frozen. You will be given a certificate for the uninsured funds, and you will be in line to be paid back, but (A) Not immediately, and (B) you may lose part of your funds.

You, as a rational CEO, would probably want to put your money in, say, Wells Fargo, where it wouldn't be frozen, and you wouldn't lose any of it.

That was the basis of the liquidity event that just happened.

It’d be like a traditional bank not reselling mortgages to Fannie Mae. You can’t have $1B of demand deposit liability and $1B of 10-year treasuries because a rate hike will wipe you out immediately if you need liquidity.

Liquidity is a key feature of banks and it relies on trust. Without it, they have nothing. Trust isn't some ancillary thing for a bank. It is almost everything.

Source?

SVB had an unusual amount of long-duration assets. Most banks maintain a buffer of low-yielding, highly-liquid on-the-run Treasuries.

Maybe ZFRB was just a really, really bad idea.

The only difference is that panic set in and there was a bank run, largely led by VCs telling startups to pull their money.

By a Thiel-backed company, after he initiated the bank run?

https://dfpi.ca.gov/2023/03/10/california-financial-regulato...

(The investors don't actually know the money won't grow as fast... the Fed could decide to drop interest rates tomorrow, or something else could intervene making it sensible to drop interest rates. But "not growing as fast" was the very likely scenario).

Once everyone decided to pull, they were tanked because no bank keeps 100% liquidity.

SVB disclosed they took massive losses from high risk, high duration assets and were desperate for cash. Investors took large (up to 60% over 24h!) losses, paper or otherwise, to get out of the stock. That can't be just concern over not growing as fast, that's concern about solvency. VC's and depositors saw the same writing on the wall, but it was SVB who wrote it there.

If they were able to cover their normal operations, they wouldn't have needed the emergency equity raise.

The thing that killed SVB was the bank run. They would have been fine with the raise. Panic set in and killed them. FRB is not in a better position, but nobody is panicking, so they’ll survive.

Doesn’t feel much different than a yield farming crypto bank going under when they are forced to fire-sale thinly traded sh*tcoins and take a beating.

Every one in the past few years looks like it was acquired.

And the point is that there may be many reasons why a bank may want to acquire a smaller failed one to integrate it in its operations but "the previous owners used to have a well-capitalized until they somehow lost it all" is not a strong reason on its own.

> At the time of closing, the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.

No bank is gonna buy another bank until that is cleared up.

Who is going to buy this bank? I wouldn’t take it if you gave me 40b. That’s why they had to make a new bank.

The main question is whether they were forced into these investments via regulations. It's likely they could have bought shorter dated treasuries and been fine. In the end, regulations may change such that banks can only buy short dated treasuries... or limitations on the level of duration they can hold.

They're not being punished for losing money; they're being punished for not having the money put somewhere it could grow faster.

I can't escape the feeling that America has lost its grip on what banks are supposed to be for.

Duration risk is risk. Taking on 10-30y maturity is not "risk free"

Many of these banks are holding Munis and other non-treasury bonds, which are not free of credit risk and can be worth 0 in some circumstances. I don't know about SVB's balance sheet, just speaking generally

What you mean to say is there's no credit risk. Not the same thing as you can't lose money. Saying you are guaranteed X dollars 30 years from now does not mean much at all if people need money today. This is not "safe" or prudent

Also, $5 today is not the same currency as $5 in ten years.

This has nothing to do with America, this is you not understanding duration risk.

... so SVB not only didn't have cash, it didn't have assets people were willing to buy / loan against to cover enough withdrawals to stop the run even though those assets had guaranteed ROI, which is interesting to me. Not enough lenders / potential creditors think some 10-year T-bills (and bailing out one of the biggest banks in the country on the lender's terms) is worth it?

Interesting.

No, it's because they didn't properly manage their assets to serve existing depositors if those depositors wanted to withdraw. Locking up money for 10 years has obvious liquidity consequences. I knew that when I first learned what a "CD" is when I was like 10.

What I'm having a hard time wrapping my head around is what the investors saw that made them decide to all withdraw at once.

Correct, but the GP’s point was that it was not “startup creditworthiness risk”, the thing SVB was most ridiculed for taking on.

This sounds like risk taking to me.

https://www.cnbc.com/2023/03/09/svb-financial-falls-more-tha...

That seems an odd position to allow to build given the current macro. Post-Fed changing their mind on inflation, the course was charted.

I'm guessing they held to avoid taking losses, and at some point it became untenable?

Do you think that long maturity bonds are more conservative than short maturity bonds?

No. Nobody does. That’s why they typically yield more.

Why do you say that he doesn't?

Within the set of long-maturity bonds, Treasuries are conservative. That doesn’t make them conservative per se.

What exactly makes you think that the "(i.e. super conservative)" remark is not about "long maturity bonds" - which is the think that he just referenced?

He didn't mentioned Treasuries at all. I find quite difficult to interpret the "super conservative" as being about some kind of long-maturity bonds relative to another kind of long-maturity bonds.

Their problem was that their risk management didn't keep up with the changing times (rapid interest rate changes).

Please go on and tell us more HN tropey things like "oh they shouldn't have sold customer data!" or more things that could be an autogenerated robot comment by ELIZA.

Their risk management might have overeindexed on the post recession era but the bank itself lasted through some pretty wild rate shocks.

Mostly, though, all this talk about them like they're a neobank is because everyone appears to think they are one.

SVB was an old stodgy banks that companies went to instead of the new kids like Mercury, specifically because of the trust. They have terrible UX and mobile app but at least they were solid and had a 40 year track record.

Some claim that these accounts are insured/protected up to $125m, but I can't find any info online to corroborate that.

Gonna be quite a show, this.

What I meant by VCs have a tiny fraction of their fund as cash is that cash is held by LPs and is called upon only when the VC funds a startup. When a VC raises a $1B fund they don’t get the money, they get commitment that the money will be available. So this means that this failure shouldn’t affect VCs ability to invest in the future as most LPs didn’t hold their money in SVB.

[1] https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03...

The majority of VCs use this product simply to help smooth working capital needs and to be able to make new investments without needing to call capital sooner than LPs would prefer (also to juice IRRs), but there's almost certainly some minority that have basically taken an advance on their entire fund size, or at least a large portion of it. And now any of that cash still held at SVB is obviously at risk.

> most LPs didn’t hold their money in SVB.

At the very step of funding, do LPs wire the money to a single bank (SVB) and then the VC dispurses it to the startup in one lump sum? Or do the LBs wire the money to the startup's bank account (at SVB)?

I've heard that UHNW individuals also individually banked with SVB. Wouldn't they have their money at SVB?

Also, wouldn't the VC's long-term relationship w/ SVB give them (the VCs and the startup they're funding) much more leeway with what the bank considers acceptable behavior (ie not money laundering and worth filing an SAR over)? Now that those relationships are gone and the VC has to go through the front door and deal with, say, BankOfAmerica or Chase like the rest of us chumps; doesn't the loss of that relationship materially hurt the broader environment?

Not as extreme maybe, and less fraud got us here, but $assets < $deposits

whereas an exchange shouldn't have a position at all

and a hedge fund normally doesn't allow withdrawals at all (without vast notice)

>> As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits.

Two things got SVB down. First, a rapid change in interest rate got their assets repriced down. It did not need to be fatal, this happens to all banks when interest rates rise quickly.

Second, its customers did a ran and went to pull their money. If all depositors of the BoA or Chase pull money out, those banks will collapse, too. This is highly unlikely for the BoA -- if folks start saying that BoA will collapse most depositors would shrug it off; the diversity of its base will make a run highly unlikely.

But as SVB was a much smaller bank and had a lot of similar customers (startups advised by similar VCs) the ran was seen as plausible at which point it was over -- customers pulled enough money to kill the bank. This is the price we pay for the flexibility of the current banking system that allows people to get loans and free checking accounts. My 2c.

The only job for these execs was to know which way the wind is blowing and they showed themselves to be not much better than every other rabid fool that bought GME etc. thinking things would never change and bull runs and low rates would last forever.

I've seen several versions of this sentiment here. What are people basing it on? I don't know much at all about the situation.

first HN said there was no problem

then HN said everyone will get their money back

what next?

HN is full of dreamers, the kind who wander into traffic

But if you're curious, and want a layman no-jargon version the press release from the FDIC is pretty good.

I mean this in no uncertain terms. HN users know nothing about this and are regurgitating pure rubbish over and over again in this thread. If you're concerned, don't even trust me, but go read the press release. CA put out one too.

https://www.fdic.gov/news/press-releases/2023/pr23016.html

Money there to to be spent over the next six months is now not available.

Payroll in Silicon Valley is going to be a mess this week.

Companies that lend to startups short term are going to have a busy time.

Except the last couple years have been bonkers with little revenue / spending alignment during fundraising. Early stage burns are above that level, which makes the situation worse for current crop of co's. Ouch and good luck :(

https://en.wikipedia.org/wiki/Fucked_Company

"- In 2021 SVB saw a mass influx in deposits, which jumped from $61.76bn at the end of 2019 to $189.20bn at the end of 2021.

- As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital. As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio.

- 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.

- The issue is that as the Fed raised interest rates in 2022 and continued to do so through 2023, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration "risk-free" bonds from the Fed at a 2.5x higher yield.

- This is not a liquidity issue as long as SVB maintains their deposits, since these securities will pay out more than they cost eventually.

- However, yesterday afternoon, SVB announced that they had sold $21bn of their Available For Sale (AFS) securities at a $1.8bn loss, and were raising another $2.25bn in equity and debt. This came as a surprise to investors, who were under the impression that SVB had enough liquidity to avoid selling their AFS portfolio."

[1] - https://twitter.com/jamiequint/status/1633956163565002752

They expanded in some areas by buying other small community banks, specifically in areas where there was a big increase in income in the local area (from mineral rights, etc).

The smaller banks that they bought were in a situation where suddenly they had large amounts of cash incoming, and customers who were paying off / not taking out loans like they used to.

They didn’t have the reach (mostly confined to a small rural region) to use that cash to give out loans elsewhere so they looked to merge or be bought by someone who did.

Until I heard about those banks I hadn’t considered “too much money” was a problem.

(Yes, this is a gross over-simplification)

On my balance sheet, money I deposit is an asset: The bank owes me.

On the bank's balance sheet, money I deposit is a liability: The bank owes me.

https://www.federalreserve.gov/releases/h8/current/

Note that cash is a single line item. The banks could get that from other sources, such as loan repayments.

Individual investors don't even have that option and also have inflation to deal with. Banks don't.

It’s not that people are greedily chasing returns, it’s that they don’t want to lose significant chunks of their capital due to loss of value.

Real rates were negative for 10+ years (and still are on the short end!). That's everyone paying for trillions of dollars of wars, speculation and bad investments. The bill has to be paid.

But as mentioned, none of this applies to intermediaries like banks. They aren't forced to take on any risk.

They sure were, and fortunately humanity took that free money and invested it in sustainable energy technology so that at least we got a bunch of infrastructure out of it.

Oh actually wait we just had austerity for some reason.

That money isn’t doing anything to cover those expenses if some of it isn’t “working” to produce returns.

In double entry accounting, you mark any changes with both a debit and a credit. This allows you to see not only why one account changes (a single entry), but also the cause of that change (the second entry).

Double-entry bookkeeping makes sense once you understand the the invariants you have to keep, and why you need to track 5 different types of books. Some of those accounts work in opposite ways, such that credit to one is a debit to another.

It all works out and is essential for "debugging" problems (when money appears to go missing -- or worse, materializes and you don't know why). But there's some counterintuitive language and it'll mess you up until you accept it.

The answer using being some variation of "Because that's the way the Financial Accounting Standards Board says to do it."

However single entry bookkeeping is FRAUD prone. Just change one number and your theft is hard to track down!

That is why the adoption of double entry bookkeeping was critical for allowing commercial institutions to outgrow a size where owners could individually trust all who were working for them with access to money.

The ledgers are not the source of truth. No: this is a journaled filesystem; the transaction log is the ultimate source of truth. When you detect faults you recover from the journal, if something isn't completely written into the journal then it does not exist. The zero-sum property exists on every individual transaction and each transaction has an ID and the ledgers point at these IDs for auditing purposes.

So why have the zero sum property? Well, for one thing, it creates a uniform access model, I can't just credit my account, I have to debit someone else's account and they can have rules that might prohibit me from doing so. By carefully setting up these accounts you can also do what's sometimes called "behavior anomaly detection."

So for instance normal financial cards kind of work by opening up your entire wallet to a cash register and asking the cash register to pull out exactly the amount that you owe, understandably this might not be desirable if you are tracking some in-game-gold transactions in an internet game. You can get as elaborate as you want but think for example of a quick-consistency-check rule saying that “accounts starting 4xxx (player balances) never transfer directly to each other, instead users are expected to put the exact sum of money plus a little 5% padding into one of their 5xxx accounts and then give someone else a token permitting them to withdraw from that account." Stuff like that. A developer tries to code something up that doesn't go through this process and runs into errors in testing and has to conform their code’s behavior to the less risky process so that nobody is ever opening their entire wallet to a griefer.

Double entry basically just means that for every transaction on your books, you are showing where the money/asset/liability came from and/or where it's going. If you enter that you paid $100 for the AWS bill, you need to indicate from what account that money came from. So you would debit AWS Expense and you would credit your Wells Fargo Checking Account. With modern software, this basically just amounts to entering the expense and specifying which account it came from.

Doble entry accounting is very similar to a checksum in that sense. It provides error detection. If you make a mistake in one of those two places you will now immediately. As opposed to single entry, where you can carry that error indefinitely until somehow you catch it.

Wikipedia tells us that double-entry bookkeeping is first attested in the late 13th century.

But commercial institutions larger than the personal-trust threshold are attested as far back as written history goes.

[citation needed]? I don't necessarily doubt you but I'd like to see an example. The only thing I can really think of would be governments, but that was definitely personal trust (mixed with a little bit of threat of summary execution if the king didn't like you).

The smallest amount of tribute listed there is more than five and a half tons of silver. If we make the assumption that each of these districts was handled by a different person, we already have a staff of 20 people plus the king.

(Not to mention, the large majority of Achaemenid taxation was not collected in this form. It was collected in kind and stored in an empire-wide system of distributed warehouses. I assume metal tribute was centralized. If you think the warehouse administrators - who inventory the goods and are responsible for making payments out of them - are "responsible for money", you're probably adding at least a couple dozen more people.)

By contrast, https://www.theofficialboard.com/org-chart/exxonmobil suggests that the top two levels (including the board) of Exxon total 26 people, or (excluding the board as a level, but still including the CEO) 24 people. The CEO has 13 direct reports.

So if the argument is that ancient kingdoms were below the personal trust threshold because the king had a low - and therefore manageably trustworthy - number of direct reports, it appears to be the case that our largest corporations today are also comfortably below the personal trust threshold, so there was never any need to exceed the threshold and in fact we never have.

On the other hand, if we think Exxon is beyond the personal trust threshold by virtue of its geographic extent (huge!), or its total number of employees (huge!), or its total number of employees touching money with the potential opportunity to steal that money (still huge!)... I think we have to say the same thing about ancient palaces, and really about ancient temples. A temple might "only" employ a few hundred people, but that's more people than you can personally trust. An important temple employed a few thousand people.

In a business I hand you my money and trust that you will hand me back my profits.

A ancient government put someone in charge and demanded tribute. Failure to produce tribute resulted in an army showing up to collect tribute. It was so common as to be expected that the administrator, called a satrap, would collect excess tribute and live a lavish lifestyle. The king sent spies to root out the worst of the abuse, but it was an uphill battle.

Governments can be run this way because efficiency is not particularly essential to their profitability. But efficiency is required for commercial enterprises. It is not enough to collect money and let your subordinates enrich themselves. You want to track all the money and not let your subordinates cheat the enterprise to their personal profit.

> But efficiency is required for commercial enterprises. It is not enough to collect money and let your subordinates enrich themselves. You want to track all the money and not let your subordinates cheat the enterprise to their personal profit.

The first two sentences are obviously false; you want to track all the money, but you have no particular need to do so as long as some of the money is making its way to you.

But to be fair he did pretty much the same when I tried to explain programming.

Always important to step outside your software bubble once and a while.

OTOH, once you have double-entry bookkeeping in your brain, you won't want to go back. I now feel that, from the perspective of a business or consumer, money is never created or destroyed, it only moves between accounts.

Double-entry bookkeeping is creating of an audit-trail/error-evident data store; which is the purpose of the apparent duplication. But it can be viewed as a view of dataset reflecting a single source of truth, that documents value flows; every movement of value has a source and a sink, and the amount that moves from the source must equal the amount that moves to the sink. Losing the redundancy that allows error-checking of records, you could view each accounting transaction as a triple of (source, sink, amount).

You couldn't do bookkeping with actual books that way, and historically this way makes sense. Nor is it likely that the accountants are going to rethink their field from the ground up for the convenience of programmers.

That is actually how it works, if you don't have "flows" you don't have accounting postings and if you have to fix an error you redo the postings from the flows. In this sense I would say that the "flows" are the source of truth.

Now, on the other hand, it is especially designed to account correctly for that amount in order to keep your accounts correct and balanced. It is be much easier to lose track of things with single-entry accounting.

If you were accounting with pen and paper, you would write the transaction amount twice — positive in one column and negative in another. This maintains the invariant that money cannot be created or destroyed.

In terms of an abstract data model, though, each transaction is best thought of as a flow, or a weighted arrow. It has one amount and two ends: a source and a destination. The "double" in "double-entry" really just means that the arrow has two ends. Obviously every arrow has to have a head and a tail — it doesn't make sense for there to be no source or no destination.

The credit vs. debit thing confuses people a lot, and in my opinion is a red herring. If I could wave a magic wand, I would delete the words "credit" and "debit" from accounting because they are hopelessly inconsistent.

All you have to do is think of the conservation of money like the conservation of mass — when it moves, it leaves one place and arrives at another. The moment I stopped using the words "credit" and "debit", my understanding of accounting went from "I have no idea what I'm doing" to "Everything is intuitively obvious."

And if you wonder, if money cannot be created or destroyed, how does a monetary system handle the population tripling over the past 50 years?

The answer is national debt. The US national debt is just an artifact of this double entry bookkeeping. In order for there to be +money in the economy for the ever-growing number of citizens to do commerce with, the treasury incurs on itself -money. That's national debt.

The corollary then, if the US ever pays back all of its national debt, the economy will crash because there just aren't cash available for people to do commerce with. A +90trillion on the government balance sheet equals a -90trillion on the private sector balance sheet.

If the private banks have conjured up 100x the monetary base in 1970, then when the population doubles by 2020, the banks cannot multiply further up to 200x. The treasury has to expand the base while the banks keep their multiplier fairly constant.

There is ONE special actor (in the US) that can create money out of the thin air: the Federal Reserve.

It alone can "buy" securities by crediting banks with money created out of nothing. Banks simply see a transaction with a dollar amount on their accounts within the Federal Reserve, and that's it. The money just appears.

The invariant "money can't be created or destroyed" holds for everybody else, including individual banks.

> The answer is national debt.

That's completely incorrect. The Federal Reserve can arbitrarily create (or destroy) money even if the national debt goes away entirely.

Saying that the Fed can arbitrarily create and destroy money misses the point, that they then have to buy SOMETHING with those money, and there are strict rules about what they can buy, and it just happens that the Treasury controls the supply of the primary asset class that the Fed is allowed to buy. Once you clear out all the dance and ceremony, you arrive at the conclusion that the Treasury issues new money by issuing new securities.

That's true, simply because they're the most convenient way to manipulate the monetary supply. Not much else is readily available in the volumes needed.

But they are not _essential_.

> Saying that the Fed can arbitrarily create and destroy money misses the point, that they then have to buy SOMETHING with those money, and there are strict rules about what they can buy

Sure, the invariant: "money goes out, asset goes in" holds.

But they can buy quite a lot of different securities if needed. E.g. the Fed directly bought about $3T of MBS: https://www.newyorkfed.org/markets/programs-archive/large-sc...

Also, I would say transactions are actually “multi-arrows” since there can be multiple sources and/or multiple destinations. A Bitcoin transaction captures this structure more or less perfectly.

There is a reason why planes use 3+ CPUs running the same code, or why Google runs more than just one cluster of search.

In essence you are just recording transactions with source and destination accounts and the amount. And at least in principle you could just log all transactions in this way without any redundant information. If you insist on making the change to each account more obvious, then you will have to record the amount twice, once for each account, but if you are doing the accounting with a computer, then I would guess that you always just record the transaction and only show the amount twice with different signs for the two involved accounts. Or does bookkeeping for some weird reasons really record each amount twice?

There is a surprisingly common reason, but it isn't weird. Consider a paycheck. You have income, but then you split that up. Some pays for insurance premiums, some is withheld for taxes, some may be contributed to a retirement account, and some is deposited into a bank account. Earnings is a credit to an income account, but everything else is a debit to some other account. The total debits equal the total credits, but each credit and debit must necessarily be a separate entry, because they all affect different accounts.

That's equally true in programming. The problem is that it only helps you debug problems that it created or participated in...

The difference in accounting is that it's not "two entries for the same thing". It's a credit and debit entry. It's a source and a target entry. It's two different entries for two different things, even though some of the details (like the transaction that they actually relate to) will be shared.

(And they're treated as separate "rows", rather than as additional columns on a single row, because it's a many-to-many relationship. Very database-designy!)

That's really the big reason why savings rates vary so much between banks, if you have a bunch of consumer credit lines then high savings rates make sense, if you have a bunch of lower fixed-rate collateralized loans then you can't get away with lowering your spread so much.

There's other epicycles to this too. For example, a bank can just "buy" deposits through a correspondent bank (a bank-for-banks). So the direct connection between your kind of borrowing and kind of lending, particularly when its consumer / credit card stuff, can be tenuous. In SVB's case, though, all of the stuff happened in a tight echo chamber ecosystem -- SVB got deposits from tech cos, who got money from VCs, who were working off of capital call LOCs from SVB. So your observation is germane.

But that does not reflect risk.

For instance, now they take thos $1m in cash and use them to make risky loans or investments. At face value the balance sheet is the same because they still have $1m in asset... except that the risk that this asset turns into eff all has significantly increased.

Theoretically they had assets, but most of them were just internal magic beans.

Until we all can self-bank!

Money for banks is what raw material is for manufacturing. What they are doing is risk management (analyzing risk, packaging risk, selling it, buying it).

The primary business of a bank is borrowing short and lending long - where short and long refer to the holding time: i.e. taking demand or short-duration term deposits and making mortgage, car and other types of loans.

If you do this badly, you can lose money due to duration risk (you might end up paying more on your demand deposits than your mortgage book is bringing in), but you also have liquidity risks because your depositors can ask for those deposits back faster than you unwind your lending.

If you have both of these occurring at the same time, you're then in severe difficulty, because the only way to repay your depositors is by borrowing money ... which is going to be harder if you look unprofitable ... and that very borrowing can exacerbate the perception of a bank in trouble.

That's basically what happened here.

Do they? Reserve requirements are almost non-existent. A better way to put it is that banks pretty much have a state-granted privilege for creating money and in the form of loans.

Banks create money from nothing to lend out:

> Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.

> This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.

* https://www.bankofengland.co.uk/explainers/how-is-money-crea...

> This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Money is a psychological construct of humans to facilitate trade and the exchange of goods and services. Some societies don't (didn't) even have money/currency: everyone kept a mental 'tally' of who gave or took things, and there were social expectations of giving "gifts" for repayment. Physical tokens (bones, shells, gold, paper, etc) came later.

When you decrease the reserve requirement, you're unlocking reserves that were previously locked up to back your deposits so that they can be loaned out to other customers, who will then promptly either directly or indirectly end up depositing their loaned amount into the banking system again, where the part that remains after the reserve requirement once again gets loaned out, deposited back in, etc.

In effect, because you're making this money go around, you're increasing the total supply of money, because these deposits are the money supply, and there can and often is more than a $1 net increase in overall deposits for each $1 deposited with a bank. Another way to state it is like so: you deposit $1, bank loans out $0.90, someone else deposits that $0.90, their bank loans out $0.81, so on and so forth for $10 of net deposit generation for a $1 initial deposit at 10% reserves held.

Of course, individual banks can elect to lock up more reserves than necessary, which would negate this effect.

This primer from the Bank of England is very clear: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

This says otherwise.

https://fred.stlouisfed.org/series/TOTRESNS

Lots more real evidence here https://fred.stlouisfed.org/categories/123

And in Canada, Australia, etc, they are zero:

* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...

"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."

It's not like banks suddenly loan out all the money. The Fed page has a FAQ and you can look up related papers.

From the FAQ: "For many years, reserve requirements played a central role in the implementation of monetary policy by creating a stable demand for reserves. In January 2019, the FOMC announced its intention to implement monetary policy in an ample reserves regime. Reserve requirements do not play a significant role in this operating framework."

People see the change, which is a good move for good reasons, and flip out, just like goldbug times or when CPI get adjusted and so on. A simple way to look at it for a long time there has been a idea battle between what's called endogenous and exogenous money creation (somewhat overview of the debate [1]), and over the past 50 years, most central banking systems have evolved as market needs evolved, to allow banks to lend beyond reserve requirements as long as they soon replenish, which was done via overnight lending windows through central banks. The practical effect is there has not been a "reserve requirement" except in name only for decades. Banks can lend whatever they want, and only have to borrow back to the old requirement which is simply an inefficiency.

This is summed up in one sentence on the Wikipedia article on reserve requirements as "Under this view, reserves therefore impose no constraints, as the deposit multiplier is simply, in the words of Kydland and Prescott (1990), a myth" [2]

Under the new system, the Fed changed other rates to account for this bookkeeping trick, with the same net effect on the banking system, but under simpler and more transparent accounting. They're not idiots.

So, since this was the reality of banking, the FED changed how things are tallied. Just like when CPI changed some terms to handle changes in reality, changes that were well documented, for good reason, people not reading carefully got upset and were sure they got cheated somehow.

So setting the old rate to zero and adopting the new methods for monetary control are the same pattern: terms change, in practice things are actually better off, but people used to the old term are upset and mischaracterize it as some a sign of financial calamity or underhandedness.

It's not. When people dig this out during an unrelated bank issue as some smoking gun it's worth stopping the nonsense in it's tracks in the same vein as COVID or climate or goldbug nonsense.

[1] https://www.sciencedirect.com/science/article/pii/S109094431...

[2] https://en.wikipedia.org/wiki/Reserve_requirement

In fact, reserve requirements became meaningless because banks had (and continue to have) so much more in reserves than they were ever required to have under the prior system.

If banks choose to keep lots of reserves (because you’re paying interest on them), it’s hard to change the willingness of banks to lend by changing the reserve requirement, right?

In economic terms, the supply of reserves is meeting the demand curve for reserves in an inelastic region.

So the Fed decided to announce a new approach; the so-called “ample reserves regime” where short term interest rate control would be achieved by administered rates rather than by the reserve requirements of the “limited reserves regime” that went before.

If this sounds very far from the quotidian business of deposit taking and loan making: that’s because it is.

Try this thought experiment. You and I are in a bar. We order drinks but oh no the bar's card machine is down and you don't have cash. No problem I'll lend you a tenner.

1) Am I a bank?

2) Did I first contact the state to check it was ok to create money in the form of a loan to you?

I go back to the bar on another day on my own. Oh no! Their card machine is down again! This time I don't have cash on me. No problem the barman sees me all the time I can have the drink this time and pay up when I next get there and either have cash or their card machine is working.

3) Are they a bank?

4) Did they first contact the state to check it was ok to create money in the form of a loan to me?

The answer to all these questions is obviously no. Credit is created throughout the economy at all levels and it is not a special function perculiar to banks.

A better example would be if you were in the bar alone, and had no money, and instead just wrote an IOU on a bit of paper with your contact details. If we lived in a mythical 100% trustful utopia, then the barman would just accept this as money and so would anyone else in future who the barman needed to pay for anything. But we obviously don't live in such a society so unfortunately no, not anyone can just create money!

The explainer videos I have seen are wildly wrong. I learned this stuff by reading the Basel accords [2], working with banking regulators and central bankers, working on banks' capital reserve models etc. That is to say I know how this actually works because I have been inside the sausage-making process for good or ill - I didn't learn it second-hand from someone who probably also learned it second-hand which is the feel I get from these videos.

Almost any time you see someone "explain" fractional reserve banking it is about 99% probably total bullshit. It's got to the point where "fractional reserve" is almost a trigger phrase for me - I know when I hear it that it is highly likely the speaker doesn't know what they are talking about. Almost like when you hear the word "fiat currency" you know it's very likely someone is going to try to shill you some crypto. An explanation which is not nonsense is here. [3] Fractional reserve banking means the bank doesn't need to keep the full amount of deposits in reserve, but can use some percentage to make loans. These loans are assets the bank has, but as with the example I gave above where you lend to a friend, no additional money is created in this process and when a bank does it, it's not fundamentally any different.

[1] You can find the definitions of M1 and M2 money and a good explanation of what's included in the definition of "money" here https://www.investopedia.com/terms/m/moneysupply.asp

[2] Which are not secret by the way - you don't have to be initiated into the templars or something to understand them. They are boring as all hell to read but otherwise reasonably understandable with a little bit of background https://www.bis.org/basel_framework/

[3] https://www.investopedia.com/terms/f/fractionalreservebankin...

Yes, it creates credit that people think is money. I suspect that's a big problem with it. People think their money is in the bank. Instead the bank is just extending them some credit that they can pass on to others when they "purchase" something.

https://news.ycombinator.com/item?id=35108659

When a bank gives someone a loan M1/M2 increases (unlike in your loan-between-friends example). The increase in "currency in circulation plus deposits" is the very thing that those numbers try to measure.

You can look at it either way; or indeed you can a third view, the fraction reserve theory of money, which suggests that the banking system as a whole creates money in aggregate, but not individual banks.

All of these are theories with their adherents and none has yet been proven right or wrong. The only wrong position is a failure to acknowledge that discussion is still open on this point, or to believe that these are anything other than macroeconomic models.

> The only wrong position is a failure to acknowledge that discussion is still open on this point

Saying that bank lending doesn't increase M1/M2 money supply is wrong. I don't think that discussion is still open one that. It's just how those things are defined. That's the only thing that I asserted.

Right. That is the basic definition of the financial intermediation theory of money. It's actually a predominant view in the literature: for example, the Diamond-Dybvig model is based on the assumption that banks are not special as intermediaries; and it won the Nobel Prize for its authors in 2022.

If money supply is "currency in circulation plus deposits[, etc.]" how does bank lending not increase the "currency in circulation plus deposits[, etc.]" amount?

(Of course lending between friends doesn't: the $100 bill in circulation is the same as before and the friendly IOU is not a deposit nor included in the [, etc.]")

This is not, prima facie a bad theory, right? Go take a look at JP Morgan's balance sheet. The asset and liability sides of the sheet are basically loans and investments (on the asset side) plus deposits and outstanding debt (on the liability side), and these balance.

One may also say that turning up the heater doesn't increase the temperature of a room - because I open the window at the same time.

Anyway, my point was that saying that bank lending is like lending money to a friend and "You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed." doesn't make sense.

M1 would change if it was defined as "currency in circulation plus debts between friends" and the "oh, but my friend would sell the debt to the central bank or whatever in the end so there is no change in money supply" argument doesn't save the analogy and doesn't support the "Fractional reserve banking absolutely does not create money" claim.

On the one hand, you go to a friend and say "hey, can you lend me $100; I'll pay you back $105 in a year?" and your friend agrees.

On the other hand, your friend puts $100 into a 12 month CD, and the bank pays him a 2% interest rate. The bank then turns around and lends $100 to you as a 12 month personal loan with 5% APR.

Can you not see why there are some who would say "it is obviously wrong to suggest money has been created in the second case, but not the first" or indeed "in neither case has money been created"?

By the way, in case it is not obvious: the fact you don't have a compelling rationale to make me believe your description of the world, and I don't have a compelling rationale to convince you of my view of the world is why there are multiple competing theories.

I am not trying to tell you that you're wrong; just that you're not right.

I'm just claiming that saying that M2 money supply doesn't change in the second case is wrong because it has been defined to measure exactly that. Under the assumption that money has been created in the second case, but not the first - whether we find that obviously wrong or not is irrelevant.

> the fact you don't have a compelling rationale to make me believe your description of the world

I'm only trying to make you believe that the thing that seanhunter wrote is seems incompatible with his own definition of money supply which makes the bank loan situation different from the friend loan situation.

These are macro theories; they don't tell you anything at all about an individual loan - only aggregate behavior of the entire system.

The only think I've been repeating all along is that in your own example

  On the one hand, you go to a friend and say "hey, can you lend me $100; I'll pay you back $105 in a year?" and your friend agrees.

  On the other hand, your friend puts $100 into a 12 month CD, and the bank pays him a 2% interest rate. The bank then turns around and lends $100 to you as a 12 month personal loan with 5% APR.

In the second case, the friend has given the bank $100 and won't see it back for a year, and will then get $2 interest. The bank then lends you $100 which it won't see back for a year, and will then get $5 in interest.

The cases are economically the same; except in the second case, the bank takes the net interest margin of $3.

The second case, scaled up hugely, is observably what happens in the real world; it's not my theoretical construct. I refer you again to JP Morgan's balance sheet - the extent to which assets (mostly loans) exceed liabilities (mostly deposits) is simply the equity of the bank. That's the whole point of a balance sheet; it balances. If deposits exceed loans then, well, we saw what happens there, right?

You can't break half of the balance sheet off and say "look, these loans are increasing deposits at other banks; M2 has gone up"; that's literally meaningless.

But that's literally the definition of M2. You look at the currency in circulation, the deposits at banks and other things not present in that example and you add them up.

(I'm not sure why would you think that I'm not aware that the balance sheet of a bank is full of deposits and loans among other things, by the way. The whole discussion is about banks taking deposits and making loans!)

>The fractional reserve banking process creates money that is inserted into the economy. When you deposit that $2,000, your bank might lend 10% of it to other customers, along with 10% from five other customers' accounts. This creates a loan of $1,000 for the customer needing a loan.

>The bank essentially created $1,000 and lent it to the borrower.

The above explanation was always my understanding. Is this a case of semantics?

You might enjoy this light reading: https://www.investopedia.com/terms/n/npv.asp

There is no reason to lock money in 10 year notes, it can stay as cash or go to money market or short term obligations.

As for money markets, don’t those get invested in treasury bills/notes anyway? Why go through a “middleman” when one has enough volume to invest directly?

Short-term obligations may not provide the yield that their financial structure requires.

10-year notes, in certain situations, provide an optimal combo of yield and risk. Provided, of course, that nothing major happens to the economy which wasn’t the case here. Then again, who’s good at predicting that?

In the end, it seemed like, given what was true at the time the decision was made, SVB made a rational choice.

Yeah, but the market price basically stays at $1 and whenever they "break the buck" it's a huge deal.

10 year loans "break the buck" so often that it's extremely strange SVB didn't do anything about it.

Basically they should have invested in securities that were safer and fluctuated less, but they got greedy chasing yield and got found out.

Bank lending always creates new money. They don’t (and can’t) “lend deposits”.

The BOE is simply pointing out in the link that they are the only proper bank in the UK. All the others borrow from the BOE to make loans. Commercial banks don't "create" money any more than the BOE "borrows" it from elsewhere.... The BOE creates money and lends it to commercial banks who put up a deposit and make a reasonable case for credit.

This, plus the other effects (like what the BoE calls “prudential regulation”) are the reason why you don’t see banks with zero deposits and a trillion pounds of loans.

- the bank records an asset (the loan) and a liability (the deposit in the borrower's account) - the borrower records an asset (the loan money now deposited at the bank) and a liability (the loan)

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

At this point the money literally came out of thin air, there's more total currency in the system then there was before.

It might seem like an irrelevant nuance but it's pretty important to understanding how the money supply works

So even though the amount of currency looks like it has increased, it hasn’t really… unless I’m misunderstanding still. But my impression is this is pretty much what happened yesterday with SVB.

It's very hard for people to accept this because of how most people basically trade 1/3 of their lives to get some. It just doesn't "feel right"

Currency is just a physical representation of that unit.

Perhaps because of the insurance from central banks this problem is avoided.

If the bank is giving cash to the withdrawer, that would come out of their capital reserve I guess. If they didn't have that, they FDIC insurance would kick in.

You can say the loan is a number in a database, but once it’s withdrawn from the bank the bank can’t just go into the database and undo the loan.

Your example doesn't make much since because any bank has many good loans and a capital reserve to deal with the few bad loans.

Economists actually refer to the USD in your account as bank money because it did not come from the government. You could just as easily think of that money in your account as a bank issued stablecoin pegged to the dollar that's convertible to dollars.

Maybe that’s already implied in your description but they don’t need to borrow from anyone if they had enough reserves to start with.

Yes. Money isn't 'real' in the sense people typically mean. It's an accounting unit, so it's exactly as real as a liter or a kilometer.

Also, if it was all withdrawn it's a bank run, which has not been a problem in the US for quite a while.

Overall it cancels out for the large banks, of course people transfer money they just borrowed from the bank away, but that bank also has customers that are recipients of money. That, and other mechanisms between banks and banks and central bank(s) to balance such things within all the banks in the overall economy. Money withdrawn from one bank goes to another one, and everybody is not just sender but also recipient from someone else.

> Bank lending always creates new money. They don’t (and can’t) “lend deposits”.

It's just not true. The banks do transfer literal cash from deposits out of the system through loans.

Why do you keep insisting on the "cash"? The by far least important kind of money? First of all everything is just virtual, electronic. Only a tiny fraction - and only temporary! It's not stocked at home, but used to buy something and that means deposited again in another bank - is "cash".

And yes, the bank deposits are "out of thin air" -- https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

Yes banks need some reserves, but this is waayyyy more complicated than them using the deposits. Which, for the most part, are not cash. That's only that tiny fraction of paper money use din circulation, which also is a lot less than it used to be with all the card-money.

https://www.bankofengland.co.uk/explainers/what-is-money

In the UK, as an example:

> 96% is electronic

> 4% is cash

USD is different because that currency is used for far more than just regular circulation, and world-wide. But even then estimates are ca. 8% cash maximum, for the world, which includes a lot less sophisticated economies. A bit more for the USD for obvious reasons, but most of that is not circulating in the US economy.

In any case, even in the US, with all its cards and card payments, money is mostly electronic and not cash and is transferred from bank to bank and hardly leaves the banking system.

ABOUT THAT TERM "OUT OF THIN AIR"

I've seen articles arguing money is not create out of thin air, e.g. https://cepr.org/voxeu/columns/banks-do-not-create-money-out...

> commercial banks create private money by transforming an illiquid asset (the borrower’s future ability to repay) into a liquid one (bank deposits); they would quickly be insolvent otherwise

Uhm.. yes, exactly. They can't do it at will, they need a borrower to sign. I mean, now we start arguing definitions, always a bad sign, especially when both sides actually are in perfect agreement and it's about the words used.

According to your theory, what is the total amount of deposits at this bank after making the loan?

If, as you say, banks were lending deposits, then the total amount of deposits cannot possibly have changed and that new loan of £100 would have to come out of some other customer's bank account.

I would be pissed if my bank account balance suddenly dropped and the bank told me, sorry we have lent your money to someone else.

So this is clearly not what's happening.

Incorrect, banks create deposits when they issue loans and only require reserve balances sufficient to satisfy net flows of funds between institutions.

They can also borrow those reserves.

So deposits are required to increase profitability, and of course a minimum level of profitability is required to be solvent, but banks in now way “lend out deposits”.

TWB (unrelated to SVB) realizes that it’s in trouble - customers are taking a lot of their deposits out, and confidence in the institution is low.

So, instead of trying to liquidate some of their assets or raise capital (which is what would be conventional) they decide to lend their bank president a trillion dollars of interest free loan with a recall feature, on the contingency that he deposit it in a non-interest bearing account with a 300 year notice requirement.

In your understanding of the mechanics of banking; this is fine. The bank magics $1tn of deposits out of thin air, records an equivalent asset, and can then just pay all of their customers from these new deposits they have.

Or not? And if not, why not?

Which means banking system as a whole creates 'private money' when flows of 'central bank money' between banks are balanced, but each individual bank cannot do it faster than others, otherwise these flows will be negative and it will be losing 'central bank money' and/or hard assets (which would be sold to acquire 'central bank money').

In your worldview, can you explain how it is possible for a bank to have far more loans on their books than they have deposits (see: fractional reserve banking)?

The answer in the US is simple: the Fed.

A bank can make an infinite amount of loans. They are not constrained by anything.

The only "limitation" they have is the future default rate of the people who accept loans from them.

The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan.

Now, many banks take customer deposits. I think there are 2 reasons they do that:

1. Deposits may be less expensive than borrowing from the Fed.

2. Account holders are warm leads for future loans.

But in principle, a bank doesn't have to take any deposits.

Ehhh, how does that work exactly? They go up to the discount window and borrow from the Fed every time they issue a loan?

I don't know. I don't work at a bank.

But loans aren't typically available immediately - they take time to clear. It doesn't seem unreasonable to me that they'd bundle the day's loans (or maybe a few hours at a very large bank) to limit the number of transactions they'd have to make.

tl;dr yes, banks create money out of thin air. It's been this way for decades.

  A bank can make an infinite amount of loans. They are not constrained by anything.

  The way a loan works is: they make a loan to someone and then "just in time", they borrow the money from the Fed to cover that loan.

See https://www.federalreserve.gov/monetarypolicy/discountrate.h...

That's incorrect, there are very strict limits on the solvency ratio placed on the banks that you usually deal with.

https://www.investopedia.com/ask/answers/052515/how-are-risk...

If none of the loan money was redeposited than the bank couldn’t create new money.

But a bank could easily (as long as the bank is 'solvent' according to the local central bank) write a loan will in excess of it's deposits, technically it need not have any deposits at all.

Fractional reserve banking is about having more deposits (on the liability side) than reserves (on the assets side).

I won't say that it's not possible for a bank to have far more loans on their books than they have deposits (they could finance themselves differently) but I'm not sure if that actually happens. Can you give an example of a bank having far more loans on their books than they have deposits?

Also why link an article from the UK when the subject is a US bank? There are differences between the two countries banking systems and monetary policies.

No, the excess does not come from anywhere. It is created by the act of loaning out. (Or rather, all of the loan amount is created; but it's backed by assets the bank holds.)

Banks have a serious problem in their hands as they have to figure out a way to keep buying assets that they have to buy by law, while the Fed is going to keep increasing the interest rates via selling their MBS portfolio at a rate that makes "yesterday's treasury or MBS" the loser.

If action is not taken we haven't heard the end of this.

No, it's cash.

If I deposit $1m in cash at the bank, the bank suddenly has an extra $1m liability and an extra $1m cash asset.

The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.

> The point is that when banks receive deposits, in the short term, their assets/liabilities doesn’t change.

They do change: Cash is a (risk-free, modulo safe storage) asset, the deposit is a liability. This has consequences for all kinds of metrics vital to the running of a bank.

The deposit creates a cash asset and an equal liability for the increases account balance.

Other transactions have other effects.

Yes, it is initially cash. But if the bank wants to make any money, it needs to convert that cash into some other vehicle for generating interest.

https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...

That $1M you're depositing is presumably the liability of another bank.

I don't think that's right. There are banks outside the US that hold US dollars that the Federal Reserve has no jurisdiction over. They create more currency through fractional reserve lending for their local currency as well as any dollar denominated loans they make. I don't see how those are liabilities of the Federal Reserve, but maybe I'm missing something?

It doesnt matter if the US dollars is held outside the US. The dollar represents a promise by the fed to pay, and thus is a liability to the fed.

Of course the fed has the power to create and destroy dollars.

So to banks outside the US. That's how fractional reserve banking works. If I go to the UK and deposit $1m USD, and they loan out $900k of that to you, that UK based bank has created $900k.

To my sibling: Missing is the fact that US dollars are bank notes issued by the Federal Reserve. Issuing a note creates a liability.

https://www.federalreserve.gov/monetarypolicy/bst_frliabilit...

The value being in MBS now is a result of a separate transaction (well, a lot of them, probably) where (in aggregate) the bank takes a bunch of money from its cash assets and trades them for an (initially) equal value in MBS assets.

It becomes a problem when the MBS assets lose value, and the bank needs cash to cover withdrawals.

MBSs tend to remind people of '08 when MBSs lost value because too many had a bunch of garbage loans which defaulted, causing MBSs' face values to decrease. In this case, the fact that they were MBSs is mostly a coincidence. If SVB had invested in Treasuries, they'd be in the same world of hurt that they're in today.

Not necessarily, if they were investing/laddering in short term Treasury Bills (< 52 weeks) instead of longer dated bonds things might have panned out differently.

”97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%.”

Treasury Bills from 6 months ago had yields of 3.37%.

(Often, the asset comes from the bank making a loan. You can pay later.)

Let debt be a graph where the nodes are people (with ledgers) and the edges are all of the form "alice rents $x from bob for y% APR". Actions that resolve/relax graph are payments of the form "alice pays bob $z", that lead to all balances being 0. Let the edges decay to null when balance is 0, such that a 'resolved graph' is simply a list of nodes with no edges, meaning 'no one is in debt to anyone'.

From this we can infer:

   1. There is only one logical 'debt graph' in the world since they can (and do) all join.
   2. The people running the graph do not want the graph to die, ever.
   3. The profit of the debt business is proportional to transactions over time,
      which is proportional to edges of the debt graph.
   4. They want to (add, prevent from decay) as many edges as possible.

Thanks for this, I am now also having some thoughts.

A few thoughts to add:

1. Should individuals inherit edge weight from their employers/governments? What should this inheritance be like? If I have no debt but have very little in savings, and if my company has debt to some other company which they have to default on, leading to my getting laid off, I can still be affected by debt.

2. I do not think it is accurate to think if "the people running the graph". I think it's more accurate to state local laws such as: any node which has more outgoing weight than incoming weight (i.e. net lenders) wants to prevent edges from decaying as much as possible while simultaneously making their borrowers more financially stable.

3. Would it be possible to quantify each vertex's credit-worthiness from just the labels you mentioned on edges? Would we need to add any other weights to the edges? e.g. the lender's estimate of the borrower's credit-worthiness?

Also, I think it's reasonable for individuals to inherit edge weights from their governments, as a way to model taxes, national debt, etc.

Now “They want to (add, prevent from decay) as many edges as possible” becomes “They want to encourage different parties to lend each other things they want”.

In a sense Alice also buys physical capital to use them, but she's not using physical capital because of its specific qualities but instead because of the money the products it produces will fetch when sold on the market. Alice wants a vacation because she wants to go to Paris or New Zealand or whatever. Alice wants a machine part because she wants the money it will make her. Two very different categories of thing!

I bring this up not exactly as a critique of your analysis, but instead because none of the discussion in this thread is particularly tethered to the process of production, and it's specifically the disruption to production that makes the SVB collapse troubling.

The problem with formulating it like this is it makes readers think that the set of people is a small-ish set of globalists or capitalists (or insert conspiratorial "others" as appropriate). But the set is far from small: basically anyone who ever wants to acquire debt for any reason (most common reasons include "attend college", "buy a car", or "buy a house"), or anyone who wants to profit from lending money to people, which is a fancy way of saying anyone who wants to invest money (such as buying stocks or bonds).

Or in a larger macro sense, positive central bank interest rates create a requirement for everyone to acquire some debt in order to counterbalance the drag.

It is troubling that the debt industry will attempt to increase the total debt in the world however it can. This is like a doctor attempting to increase the total sickness in the world - which is evil (not a word I use lightly, btw). But to say that either debt or medical industries should 'die' because perverse incentives exist seems wrong to me.

If I'm not mistaken, Debt: the First 5000 Years and the Dawn of Everything books examined this.

Your graph is a formalization of such relationship, no?

The basic nature of finance is that some people have money they don't immediately need and others have needs they can afford over time but not upfront.

It's basically a layer on top of money in general, which is a way of decentralizing value production. Instead of pairwise trades, money serves as credit for value creation, recognized by 3rd parties.

The people running the graph are everyone with excess money or the ability to acquire it. Basically, everyone but the poor.

It produces a grand, generational historical narrative, but it's also a form of pyramid scheme and guaranteed to run out of runway at some point when the graph, rather than expanding, finds ways to get by with different trade flows that ignore the center - and each time that happens, you get a massive economic crisis, elites vying for power and drumming up scapegoats to avoid heat, but also waves of material change(different lifestyles and work arrangements).

So there is downside to debt in that it can reinforce hierarchies, but also upsides in that the network itself is acting to transfer useful information about material needs. All things that, having becoming so much more digitally connected in the last 30 years, we can probably revise again to become more abstracted.

2. There is noone running the graph

3. This is true of all econonomic activity in a free market economic model. The assumption underlying market capitalism is that on net rational actors will only perform transactions which add value to them. Therefore the profit of the system is proportional to transactions over time which is proportional to the edges of the "financial transaction" graph. Debt is not required for this observation to be true - it's intrinsic to the model or the transactions won't occur.

4. There is no "they" other than "all the participants in the financial system". On net everyone participating in the financial system is doing so for their own benefit and therefore are invested in keeping the system running.

So given an interest per annum of 1% (for example), a $1m deposit would add $1m liquid, non-earning assets while also adding $1.01m to their liabilities. So, effectively, they’d have $10,000 in unsecured liabilities.

To counter that imbalance (as well as protect the cash from the effects of inflation), they’d have to put some of that cash to work via various investments.

Not quite. It actually has both.

Yes, it owes $1m to the depositor, but it also has $1m in cash now, at least for a while. Until it does something with it, like loaning it out or investing it in some debt instrument. The cash is an asset, as is the loan or debt instrument it exchanges the cash for.

This isn't really an over-simplification as it is wrong. When someone deposits $1m in the bank, the bank's assets increase by $1m in cash, while liabilities also increase by $1m and owners' equity is unaffected. The problem is that for interest-bearing deposit accounts, those liabilities increase over time, which decreases owners' equity in the absence of a sufficiently appreciating asset (such as a good loan or cash flow-generating security). Further, the bank has certain operational costs that must be paid, and investors must make some return or they'll pull capital from the bank (that's a simplification for publicly traded banks like SVB). In practice, it seems that banks need about 3 percentage points above the interest rate they pay on deposits to cover these costs, based on the typical spread between the Prime rate and the Federal Funds rate, though I imagine this necessary yield has a much higher variance for smaller banks.

When interest rates were effectively zero and their deposits increased by a huge amount, SVB decided to buy long-term bonds w/ 1.5% interest to cover the extra liability over time so that assets would grow with liabilities. Then interest rates went up. Cash assets stopped growing, but liabilities remained the same, so they started selling their bonds. Bonds lose value when interest rates increase, so their bonds sold for a loss, decreasing asset values. In the last 48 hours, depositors got spooked. SVB's equity effectively went negative, since asset values decreased below outstanding liabilities. That's typically when the FDIC steps in to liquidate a bank.

For banks, assets must in general be growing faster than liabilities. If the bank experiences a situation where assets are not growing relative to liabilities, they need to have sufficient capitalization (i.e. owners' equity) to weather the storm.

That said, I think historically many banks can easily avoid the "too much money" problem by setting the interest they pay on deposits to be low, and maybe even negative.

Of course if you dump it all into unwise investments, that’s a problem.

Up until I switched to a neobank late last year to get some actual yield on my savings, I'd been using the same brick-and-mortar checking and savings account I opened in high school.

A: We have too many depositors! We are not getting enough yield to pay interest without taking on risk.

B: What if we reduced the interest we pay on deposits?

A: Then we'd stop getting new depositors! Our only option is to take on risk.

You are right, this feels like a very unsympathetic problem to have. If you are a regulated bank you need to act like a grown-up and understand that overworking the soil and underworking the soil will both give you a bad yield in the end.

they wanted a higher return so they increased their risk and blew up.

So you need to lend it out, and charge interest, and use that interest income on your loans to pay the interest on your deposits.

Sounds like SVB made a lot of loans or investment purchases quickly, and then some of those went bad.

They got greedy.

They didn't get greedy, they failed to anticipate the speed and amount that interest rates would rise.

In retrospect this was a huge risk. They locked up way too much money in long term securities for how flighty their deposits could be.

they got some bonds which had an interest rate risk, in order to earn a higher interest. This is "greedy", but it would've been fine under normal circumstances, since they did not break any banking regulations.

Total non-sense and greediness.

Think about it from the other end. You have a mortgage. But the bank needs money now and asks you to prepay your mortgage. What do you do?

- set your rate of paid interest on demand deposits quite low - what's going to happen, some people will pull their deposits? That's fine, that's what you want.

- re-deposit those excess deposits at other banks, taking only their meager interest payments on demand deposits

The math here works fine. As long as there's some difference between the rate you're paying on deposits and what you're getting, no matter how small, you're fine. And if you need cash quickly, hey, those are DEMAND deposits at other banks, you should be able to withdraw them immediately. You can spread the risk of a run on your bank around to every other bank.

You can always buy crypto if you think you have too much money. Or find a nice Ponzi scheme and invest in that.

So I need to lend it out so I can make the spread and I’m not just bleeding it money

Its not so much this as deposits are bank liabilities.

But that's exactly the problem. With higher interest rates, those deposits will be looking for a higher deposit rate. With their assets tied up in low-paying long-term bonds, SVB will not be able to pay that higher rate.

It would only work out "eventually", if the depositors would accept a below-market rate until the bonds matured.

EDIT: This is indeed a solvency issue, not a liquidity issue, as also pointed out below.

They were stuck with assets earning <2% for 10+ years, meanwhile depositors were demanding higher returns (else they would put their money in other banks, in 6m tbills, 10yr treasuries, etc.. all of which paid a lot more).

And thus, "it's not a solvency issue as long as depositors are stupid and don't realize they can get more $$$ from other banks" ends up being quite misleading

The markets can stay irrational longer than you can remain solvent.

If a firm's assets will eventually mature and be worth more than the current liabilities, then a private rescuer can make a lot of money by bailing them out. If the assets will never recover or pay out, then someone will be holding the bag.

Mark to market is real. If you need liquidity immediately from the market, whether through a rescuer or otherwise, you do your accounting using that value and in SVB's case they were insolvent.

There are some possibilities. Perhaps there was no single buyer that also had the (potentially hundreds of billions of dollars of) liquidity you would need to rescue the bank. Perhaps there were buyers who could come up with that liquidity reasonably quickly (on the order of a week or a month) but certainly not in the 48 hours it took for the bank to be completely vaporized. SVB was intending on raising liquidity from the market, and just the act of announcing their intent to do so triggered the bank run in the first place.

Really it is not so obvious to discern between them at the moment that the crisis is at its worst.

I'd like to learn more about the dramatic drop in MBS - elsewhere, downthread, it is asserted that they have dropped 30-50% ?

I understand the inverse relationship between bond price and yield ...

... but I am surprised that an asset yielding ~1.5% drops 30% in value when treasuries of similar duration rise to 3-4%.

Are there other factors at play with MBS in early 2023 - such as increased delinquencies - that are putting downward pressure on their price ?

If you're investing in bonds without building a ladder you're honestly doing it wrong. With the past 15 years of easy money and low yields it might have seemed pointless given rates barely moved, but completely giving up on any ability to capitalize on higher yields if rates move up is just poor investing :/

In this case it's a little more complicated since you also get the principal back in pieces, but you can calculate the price today to create the equivalent of a 3% yield instead of 1.5%, and you'll get a significant price reduction.

Let's assume you buy a $100 bond with 0% rate for 10 years. For simplicity, let's assume it's a riskless bond. Now, let's suppose those same bonds now pay 5% a month later. Well, the smart thing to do would be to sell your 1-month old bond and buy the new one. Of course, everyone is doing the same thing so the price has to drop until the bonds are equivalent. You would get $100/1.05^10 = $61.39. Of course, the old bond still pays 0% but now, on paper, the price of the bond should grow 5% every year as we get closer to maturation.

Going to the real world, it would be something like 4.5% (current Fed rate - expected to be higher) minus 1.5% (the MBS rate they have) is 3% difference and so $100/1.03^10 = $74.41. Now, you said 10+ and so doing the same thing with 15 years is $64.19. This is also not including the fact that MBS is strictly worse than treasuries in terms of riskiness and so it's easy to imagine 50% off.

Emphasis on the exponential decay relationship between market price and time-to-maturity. If you change that 10 to a 30, the bond is worth $23, and if you change it to a 50, it's $8.72. For a bond that pays $100 at maturation.

I think laypeople intuitively guess that long-dated bonds are safer, because that is sort of how it feels when you are borrowing money to buy a house. But in terms of the market value of the bond, you add exponentially more interest rate sensitivity as the time-to-maturity increases.

So a bond with five years to maturity would lose 5%, and a bond with ten years to maturity would lose 10%.

If SVBs bonds had a ten year maturity when purchased, that's probably nine years remaining when interest rates increased from 1.5% to 5.0%, so that's 9 * 3.5 = 31.5% reduction in value.

If they bought $80 billion of these, that's a $25 billion dollar loss.

If their shareholders equity was $16 billion, then that's zeroed and a combination of depositors, the FDIC (for insured deposits) and other creditors would have to eat the remaining $9 billion.

> the value of SVB’s MBS plummeted.

How much 'plummeting' did they do in numerical terms? Something with those kinds of yields doesn't sound like it ought to be a super risky asset. The mortgage lending market tightened up a lot after the great recession...right?

Then Freddie packed my loan and sold it to others for something likely to be below 1.7%...

Not a few years ago. T-Bills were paying like 0.1% in 2021[1]

[1] https://home.treasury.gov/resource-center/data-chart-center/...

https://fred.stlouisfed.org/series/DGS10

To make things more straightforward, let's just compress it to a 1-year time frame vs a 30-day bond. So a $100 MBS at 1.5% would pay you $101.50 if you held it for 1 year. If you have $100 in deposits and a $100 MBS bond, you're "solvent". But what happens if after 30 days, your depositor asks for his $100 back? You either need to sell your MBS or find other money to pay them.

If you try to sell the MBS to pay that $100 deposit liability and interest rates are about the same as they were when you bought it, you'd likely get around $100 and things are okay. If however, rates have spiked since then (like they have here), investors can either buy your bond that pays 1.5% or they can buy a new issuance 1-year bond paying 4% or 5%, or perhaps a 30-day bond paying 1.5%. So you need to give them a discount in order to sell your bond -- in this case it might be upwards of 30% or 40%.

So if you sell your MBS, you'll only get $60 or $70 for it -- leaving you a huge shortfall that you need to makeup from your other reserves. If you could convince your depositor to leave his money in the bank until that bond matures, you'd be completely fine -- but the timing mismatch and interest rate spike just kills the bank.

You answered your own question. People will very likely get most, or even all, of their money back, just after the gov is able to offload some of the assets. Problem is, if you're a startup, you can't just wait a few months for the cash to make payroll.

The economic good times are when confidence, trust, risk taking are all high. That music stops when people lose confidence, the Great Financial Crisis, just like all recessions are fundamentally a loss of confidence. This causes people with funds to claw them back, and retreat into their castle, and wait for the bad times to blow over. This is what happens when the economy collapses. When prices and asset liquidity crash. When rates go up. When you can’t borrow anymore and when you have to pay back the money you are borrowing, because it’s in the fine print that they can ask for it back whenever they like. Then inflation goes up. Borrowing rates go up. Asset prices go up, unless no-one has confidence in that particular asset (eg stocks or property where those companies are based).

Consumer leverage is not a bulwark against recession.

This is a pretty insane bet. Why didn’t they ladder the maturities to have a lower average duration and less risk?

Sounds like an insane investment decision.

https://www.svb.com/about-us/living-our-values

On its face, such a purchase would only be done assuming rates and markets will remain the same. I wish I could say that accusing a bank of making such a naive purchase means that interpretation is wrong, but these banks keep doing things like this since it's always worked out before. I'm sure it's much more complicated, but sometimes that's because it should have been a lot less complicated.

Did they expect interest rates to stay at 0 for 10 years? That is illogical.

Maybe the market expects a likely range of 1%-2%. Maybe the market expects a likely range of 0%-5%. Those could both have an expected value of 1.5%, with much different levels of risk for this use case.

Do we now have people making decisions on stuff like this who are too young or clueless to remember what happened with the 2004-2007 mortgage backed security bubble that popped in the 2008-2009 financial crisis? Seriously? Did nobody learn the lessons on this? Countrywide and other originators of MBS and CDOs?

I'm not sure you learned the lessons. Other than MBS being coincidentally involved, this has literally nothing to do with 2008.

The MBS wasn't even the problem here. If they had 10Y corporate bonds or Treasury notes paying the same rate, they would have had the same problem.

A bubble 15 years ago? We're in a massive housing price increase bubble now.

Buying $80bn of MBS in the middle of a well-known housing price bubble is catastrophically stupid.

I think heavy exposure to a single type of long-term asset for a retail bank is always going to be a bad investment decisions, because risks materialize, and correlated risks tend to materialize together, and when a retail bank suddenly lacks liquidity...

In 2008 MBSes were bad because the underlying value of the investment turned out to be bad. That's not happening this time. All that's happening is the same thing that happens to any bonds -- when rates increase, older lower-rate bonds lose value because why would anyone pay full price for them when they can get a new one with a higher rate?

This situation today has nothing to do with the failure of the MBS'S to payout like 08.

It really is just a matter of money making. They didn't want to accept the low yield, but certain safety, and accepted a higher yield, but with risk. It caught up to them.

But why didn't they just hold money at the Fed given that they are a bank and they can?

It's literally splitting hairs between what the Fed Fund Rate is and what they got on their MBS.

Explainer post says end of 2021 they made that trade, in March the Fed raised the Fed Fund Rate to 0.20%, and by April it was 0.77%.

Had they waited just 5 months they'd have got a better Risk adjusted return by just keeping the money at the Fed

You are confusing the Great Recession with the Great Depression.

The 2007 crisis and subsequent Great Recession was contributed to by the 1999 repeal of that rule, adopted in response to the Great Depression; there were several efforts to restore it after the Great Recession, but none succeeded.

I think the financial crisis ended in 2009, when at the time there was fear that Citibank would be the next to collapse. A rule change was made to allow banks to value "hold to maturity" assets at the purchase price instead of the current market value, so that they could avoid an insolvent balance sheet. The problem for Silicon Valley Bank was apparently that they needed to sell some of the assets and take the loss.

* https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...

Yep, all of SV is truly made of bumbling idiots. That whole solution is truly hilarious and watching all these clowns lose their money is going to be fun.

I don't think the depositors, investors, or VC's that pushed for SVB were idiots. SVB was a good bank, with a good reputation, and good services that got mismanaged into oblivion.

Very blatant weaponization of FUD to drum up deposits for their investments in Brex, Ramp, and Mercury.

And if B2B is relevant, well, have an accoubt, or multiple, at a bank with Stripe integration to handle customer payments anf refunds. And keep everything else at different banks.

The problem is that SVB tied up their liquidity for 10 years at a yield far lower than they would get with more secure investments after the FED's rate hikes.

The specific assets they invested into are immaterial.

The irrational exuberance in price increases in this segment of the market over the past 4-5 years is not sustainable.

It is not logical, sane or normal for houses that were valued at $150k five years ago to now be valued at $400k in some suburbs and metro areas.

How much would you spend on the house if you're only alternative is to watch your capital disappear

If I'm worried about 10% or 20% disappearing to inflation, I'm certainly not paying 2x on an investment to prevent that.

Capital needs somewhere to go as long as money keeps being printed. If there is more capital than profitable investment opportunities, it will flow into housing.

As a thought experiment to illustrate the point, imagine a world where there are no investment opportunities and the only place to store value is cash or housing. In this case, housing prices will continue to climb because money keeps being accumulated and there is no place to put it.

Of course this is a hyperbolic example, but I think our world is moving closer towards it as truly valuable Investments dry up. Certainly in the short term, and possibly in the longer term as well

Narrow banking never works because at the first regulatory lapse (my employer got fined 200M because we used whatsapp, not even for committing crimes), BAM no money left for deposit liabilities.

And dont forget here that as long as people eventually pay their mortgage in the expected default risk, the money will eventually come back, at an opportunity cost.

[1] - https://twitter.com/jamiequint/status/1633956163565002752

That tweet is unattributed verbatim from https://www.livemint.com/news/world/explainer-silicon-valley...

1) You wrote the Mint article.

2) Mint took the text from your tweet unattributed.

3) ???

Wow, this appears to be the case, at least judging from the timestamp on the first reference I could find: https://twitter.com/livemint/status/1634091187442266112

That's massive journalistic malpractice!

When interest rates raise, previously issued bonds lose in value because there are more attractive ones available.

It's like if they missed the Chapter 1 lesson about investing into bonds.

You can see that managing money responsibly is not one of their values.

I’ve seen a few conservative tweets trying to tie DEI and ESG into SVB’s collapse in a weird attempt to tie it to a cultural war. It just doesn’t make any sense. DEI and ESG are side shows for just about any company and probably pay for themselves as marketing and employee retention for a Silicon Valley focused bank.

The values “We keep learning and improving”, “We take responsibility”, and “We speak and act with integrity” would all play into managing money responsibly.

Not enough to put it on the page where they discuss things they value as an enterprise. Seems kinda important to leave out. And speaks to the failure of competency.

They don't value merit, they value meeting arbitrary quotas to look good, and now they met their end. Totally relevant.

Let's be clear, the issue wasn't that the Fed raised rates to a historically average level, it was that they were manipulating the bond market in 2021 with trillions of dollars of QE.

Over the last few years the Fed has basically done a pump and dump on the bond market, and SVB being a bank was basically forced by regulation to buy long-dated bonds for yield.

I've seen a lot of people speak critically of SVB and I get it, but I think people should take a minute to ask why the hell bonds were yielding such a low amount in 2021. I just wonder how much longer we're going to blame, banks, crypto investors, bond investors, equity investors, home buyers, etc for what's happening to the value of their assets. When central bankers make government bonds trade like meme stocks this is what happens. Perhaps if we didn't do that, SVB and many others wouldn't be in this position.

They bought $80b of fixed-rate bonds at historically and artificially low interest rates in a time of massive QE. Even based on the information available at the time, this is not a surprising outcome at all.

In retrospect, the Chief Risk Officer leaving and not being replaced immediately was a bad sign: https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...

100% speculation: the CRO told them loading up on long term bonds was crazy, and that they'd just have to eat lower earnings. The CEO/CFO disagreed, and the CRO didn't want to have any part of it. Hindsight is 20/20, but... this really was a disaster waiting to happen.

"A risk officer typically anticipates and manages regulatory, operational, competitive or other risks faced by a firm."

That looks like _non-financial_ risks. If that was the role of the CRO at SVB, the risk for this event probably should have been with the CFO?

The charge of "manipulating bond markets" is pretty absurd - their mandate is to influence inflation and employment via interest rates. Of course it has an impact on bond markets.

>They did a pretty good job during COVID

One word: "transitory".

Note all the months since July 2022. It's good to read the source material rather than hyperventilating news articles.

Mean MoM % change in CPI-U from January to preceding July, 2016-2023:

* 2016: 0.01

* 2017: 0.27

* 2018: 0.27

* 2019: 0.10

* 2020: 0.21

* 2021: 0.30

* 2022: 0.61

* 2023: 0.27

Raw monthly data: https://data.bls.gov/timeseries/CUSR0000SA0&output_view=pct_...

I am eager to see Tuesday's numbers for February inflation.

I just don't know if I'd call it a "pretty good job," is all. They were caught-off guard and didn't move quickly enough.

The idea that they aren't doing a good job because they aren't perfectly precise with their timing is silly.

You'll have to support thay with something. Again, the language of their correspondence over the past few years says otherwise.

Unless, of course, you are expecting the Fed to predict the war in ukraine, the energy crisis, etc.

And in any case, people who take the Fed's predictions at face value, and base their financial positions on it, can only blame themselves when the Feds do something contrary (as they are always entitled to). These predictions aren't promises.

It has been. We're barely at 1.5-2 years in length and it looks to be either stabilized and perhaps dropping.

A number of folks estimated that the COVID recovery stimulus would take about this long to work its way through the system, using Korean War spending as an analogue:

* https://www.piie.com/blogs/realtime-economic-issues-watch/in...

The fact that energy and food prices spiked due to geopolitical events threw a monkey wrench in the works temporarily, but now that those have stabilized, so has inflation.

The first half of stopping a panic is always easy if you're the Fed with the exorbitant privilege to print money with virtually no immediate ill effects. The second half is the hard part and they've failed 11 times out of 10.

They acted as aggressively as possible to remedy a short term problem, which just created longer term problems. Its easy to throw money at a problem and worry about the consequences later.

SVB wouldn’t have failed if the Fed hadn’t artificially suppressed rates to the extent they did, for example. And Id venture there’s a lot more to come on the economic front. Many assets became extremely overvalued which makes the larger downside on price more disruptive. Commercial real estate is a big one to watch in the coming years

If inflation remains entrenched we may require a GFC style hard landing to quench it.

The fed did head off an immediate disaster through suppressing the rapidly widened credit spreads, but everything after that will likely be remembered as a failure

Because after all the purpose of society is to serve the market, not the other way around, right?

One of the principle, statutory purposes of the Federal Reserve is to conduct monetary policy to achieve maximum employment and stable prices. That means it's the job of the Fed to manipulate interest rates.

The Fed knows that there is no real ongoing inflation. The devaluation of the dollar already occurred and the new price has to propagate through the market. Their actions have no effect on the cause or broader course of apparent inflation only on who “wins and loses.”

Can you cite any metric showing there is "no real ongoing inflation"? CPI, PPI, PCE, and other less-commonly used metrics all indicate ongoing inflation. It would be interesting to understand how you've arrived at the conclusion there isn't ongoing inflation.

>The devaluation of the dollar already occurred and the new price has to propagate through the market.

The DXY has been uptrending for nearly a decade, even more rapidly so since mid-2021.

It's a dual mandate. If I'm not mistaken, we recently reached pre-pandemic employment levels. There is no way we would have reached this point without low interest rates through the pandemic.

Other countries have the same inflation rate that we do, but with lower employment rates. Ours is a better position to be in.

(this is not to excuse the greed of the bankers - this crisis is the purest essence of capitalism, it's inherent contradictions on full and gory display.)

The Fed can’t end the invasion of Ukraine or cure avian flu or speed up cargo ships. They can raise rates and that’s about it.

No, the economists at the Fed do not think that. Or rather, they try to find out what is driving inflation in any given situation, like they did with this 2022 study:

> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.

* https://www.frbsf.org/economic-research/publications/economi...

Having unstable prices for staple goods will lead to unrest very, very quickly, which in term results in a downturn in the econonmy, which in term leads to even more unstable prices and thus more unrest.

QE and ZIRP is the original sin here which created the dilemma the fed now faces - hard inflation or hard recession. They didn’t solve the GFC or Covid, they just postponed the impact and made it far worse.

I have absolutely no objection to counter-cyclical monetary policy but the monetary policy has become the cycle.

HN will blame crypto for everything, for ever. Because it's trendy to do that.

It hasn't.

When the assets haven't even moved in the same direction, I don't know how you are going to blame federal policy to counteracted the recessionary impact of covid for moving them. Whereas the fed has caused significant damage & also been ineffective at fighting the current supply-side inflation caused by Russia's war of aggression.

No one expects that real estate will skyrocket and tank like shitcoins (even in 2008, the residential real estate market didn't bottom out until 2012). But that doesn't mean that Federal Reserve policy has been good.

I'd highly recommend the book (or audiobook) "The Lords of Easy Money: How the Federal Reserve Broke the American Economy" for anyone who is interested in a historical summary of the FOMC.

That’s what happens when people buy meme stock. I think the failure of the goverment and the bank are unrelated here.

Is this true?

Sticking to unrealistic goals seems to to be the downfall of a lot of financial institutions (and probably a lot of other companies). Same happened with Deutsche Bank in the 2000s. The CEO declared that they wanted to achieve higher ROI and to achieve this they had to start doing ever riskier stuff until it blew up in their faces (and the taxpayer generously bailed them out so they could keep their big bonuses).

In this case you’re sort of right in that they found have hedged a bit more by diversifying into more shorter term assets.

Hindsight and all.

And even if that white knight or even off-white-ecru knight did come along and want to buy the bank next week, what if they don’t decide to make every depositor whole, for those holding cash above FDIC limits? They certainly don’t have to do that. They could just buy the loan book. Or the warrants or early debt for a number of Silicon Valley startups. They can be vultures, not Santa Claus…

I think people don’t quite grasp what could be coming next.

Agreed on that. The FDIC will make the best deal possible for depositors, but they'll spend a very busy weekend figuring out what that maps to in reality.

We don't know yet.

Just by coincidence Wells Fargo is having "technical glitches" affecting account balances the exact same day this happens.

The wisdom on the street is that the FDIC will not let that happen as it would potentially cause a run on every bank outside the top 5. If there is a bank large enough to make every depositor whole without causing stress, then the FDIC (on a 10 year time frame) is handing you $100B "for free".

For what crime?

If someone unintentionally but ineptly writes code that crashes Amazon on Black Friday, did they commit a crime?

Yes, they sold the treasuries and took a bath. But if that was their best option, it speaks very poorly to the other "assets" they held on their balance sheet.

We may find out in the coming days that they had a big position in Silvergate, which went bankrupt yesterday, and they had to mark their position to zero, creating the need for liquidity.

https://www.msn.com/en-us/money/other/billionaire-investor-b...

It's crazy to realize how brazen Wall Street bankers and Hedge Fund managers are when it comes to asking for taxpayer dollars during distress, while decrying any attempt to add to that taxpayer dollar pool from their billions in earnings when the times are good.

This in theory creates a diverse non-correlated system of capital deployment with the best projects winning over the bad ones.

However when the central bank offers interest rates that a private bank cannot match even when it's deploying into safe and endorsed assets like MBS then some weird stuff happens...

The Fed can promise risk-free returns at whatever rate they want but once it exceeds the private banks', then the banks no longer serve any purpose. If there were a way for individuals to hold accounts directly w/ the Fed, they'd all do that. Money will be sucked away from banks that deploy capital in the private sector and squeeze into ones that just passthrough to the Fed's like money market funds.

With high enough interest rates, the Fed can end up sucking up liquidity even from good and safe projects and cause widespread asset collapse b/c the entities that are supposed to be doing price discovery can't compete anymore.

https://www.bitsaboutmoney.com/archive/deposit-insurance/

I should add: apart from 2008, bank failure has historically been quite rare

You mean it's not a solvency issue? It sounds like a textbook liquidity issue.

https://twitter.com/AhmadBaracat/status/1634293096639787008?...

They also could have hedged the interest rate risk. Likely there will be policy change as a result of this. Banks over some AUM requiring stricter regulations

The Fed is complicit in encouraging moral hazard through distortion of the bond market. Pretty much every crisis in the modern era is precipitated by fed policy from years earlier

They could have just stored the money in the proverbial vault. But if they do that, then they have to charge the depositors a fee to be a customer. And competition has pushed in the other direction.

And probably more importantly that whole "profit" goal.

Would be interesting to see where that money came from. That has all the markings of a pump before a dump, the dump being 2023. They didn't even have to dump, they just had to stop the pump to auto dump once the interest rates went up.

SVB opened themselves up to an attack vector and one thing the banking industry likes to do now and again is consolidate and shakeout. That amount of inflow in good times can make you do funny things. The better way to go about it is be scrappy always, and expect the attacks.

There were way too many companies in this bank, it had too much concentration of startup/VC/PE money. Regulations will probably have to be made around this now more robust.

HBS is even realizing too much optimization/efficiency is a bad thing. The slack/margin is squeezing out an ability to change vectors quickly. This is happening from supply chain to credit to food and more.

The High Price of Efficiency, Our Obsession with Efficiency Is Destroying Our Resilience [1]

> Superefficient businesses create the potential for social disorder.

> A superefficient dominant model elevates the risk of catastrophic failure.

> *If a system is highly efficient, odds are that efficient players will game it.*

[1] https://hbr.org/2019/01/the-high-price-of-efficiency

would you mortgage (no pun intended) your family’s entire financial health on something that works “in general”?

You take a collection of n mortgages and rank them by how likely they are to default, and then you divide them up into say 5 different securities each containing n/5 mortgages. The top 20% will be considered the least risky and the bottom 20% the most risky, and yields will reflect that. There are also rules on what risk level different asset managers are allowed to take on, so random retirement accounts wouldn't take the bottom 20%. No problem yet.

But then some "spherical cow" style math was applied to these things. If mortgage defaults are independent events then mathematically you can smooth out the risk even from the high risk ones by just grouping a bigger number together. So they took say 5 different shit tier mortgage collections, lumped those mortgages together to create another pool of size n, and repeated the process. Now the top 20% of that pool was given a very low risk rating, yet it still paid a greater yield than the original pool's top 20%, so why wouldn't an investor want to get in on this high yield safely rated security?

And it didn't stop from there, the bottom say 20% of those pools were again pooled together to create more supposedly safer securities.

This could've held up for a long time in a vacuum, as long as mortgage default rates didn't change too much. But part of what incentivized this system in the first place (and in turn what this system incentivized) was to hand out mortgages like candy basically.

So it was a house of cards waiting to fall, and once some of these securities faltered it also caused a bank run on a wider set of MBS structures that probably could've held out if not for the panic. Plus big failures like Lehman Brothers and Bear Stearns had impacts on firms that went beyond MBS activity, so there were some crazy cascade effects too.

Anyway, there's nothing inherently wrong with MBS, it's just important to know what you're buying. This situation is weird because it's not that the security itself is unsafe, it's the context in which they are using it that is risky. Though I suppose it relates on the high level that they probably thought "this security is rated very safe and it gives relatively high yield" without an actual understanding of the risk involved in their use case.

They bought bonds when interest was low, now interest is high and they’re worth less.

SVB wouldn’t have lost cash on those bonds if they didn’t experience a bank run.

Not disagreeing that MBS is irrelevant, and yeah the risk rating of the bond wasn't a problem as this will pay what it said is would. Just saying it was a stupid move to buy such a large amount of such a long term bond when interest rates can't go anywhere but up and you're using borrowed money to do it. From that perspective it was a risky move.

apart from the loss of $1.8bn and the delta of the interest - growth from their assets.

Isn't everyone still going to get their money back - the percentage of the loss that SVB has which should be less than 5-9%? Sure FDIC has to liquidate all the money from the assets and it takes time. But at least the impact is not going to be as hard as losing all the money like FTX or Maedoff in 2008 right.

The recovery rate for the Madoff Ponzi is 88.35%: https://www.justice.gov/opa/pr/justice-department-announces-...

Why can’t so many folks who are doing well enough just act with basic common sense and integrity these days?

Capital has a special meaning to banks, and deposits are absolutely not capital from their point of view of the bank (they are from the point of view of the depositor). To the bank, deposits are on the liabilities side of the balance sheet.

A bank’s capital is only equity put in by shareholders and retained profits from previous years. This is important, because how much a bank can lend is only determined by the amount of capital they have, not the amount of deposits (since deposits are on the wrong side of the balance sheet for lending from).

This is exactly a definition of liquidity issue... Owning enough assets but not being able to cover short term liabilities.

In opposition to not owning enough assets to cover liabilities.

We really don't need a bunch of fake money flying around. It's time to have every dollar in the wild be a real dollar.

Certainly we can argue about the precise percentage of the fractional reserve, but keep in mind that "100%" is not a panacea.

If I wanted to put money to productive purposes (at risk, with reward) I would do so myself. I'd buy bonds, stocks, options, lend money out, whatever. I already do this.

Whatever I keep in cash, without investing, is intentionally kept as cash, and I want that part to be zero risk, I don't need the bank to help me invest it at nonzero risk.

CASH is cash. Keep it in a vault. The cost of holding it is not nothing.

The same traits are present with every industry. How many BS oil fields are funded but turn out to be over hyper. What about real estate scams?

Right wing media has done a great job of changing the conversation from big oil to big tech and many people here are helping, maybe with geniue intention, but foxnews or whatever is attacking tech because it's mostly liberals not because they are concerned with the industry's practices