That's not normal; FDIC works quite hard to find a bank willing to take over - usually they can work out what the "cost" is to take over, and FDIC pays the receiving bank that amount to "eat" the dying one.
If they don't announce they have a bank to assume SVP by Monday, it's quite abnormal.
So I don’t think there was much for Chase to buy. SVB has been in decline for a while
So if you marked to market all those long term bonds and then sold SVB to a bigger bank at the resulting (possibly negative) valuation. Why wouldn't a big bank take that deal?
This arrangement usually results in all depositors being made whole, and the FDIC fund not taking any, or many, actually losses, because most of the loans will still pay back, at least partially
They also do this before seizing the bank, so that it's all very orderly and calms any panics
SVB was looking for a buyer on the open market and that failed--no surprise
That the FDIC also could not find a buyer that they could subsidize and announce the same day as the seizure is very damning. I would be shocked if someone comes in later and tries to buy it
Also, the fact the seizure happened in the middle of the business day, and not at the close of business yesterday points to a somewhat disorderly and rapidly deteriorating condition. I think maybe the run picked up a lot faster than they expected
Even WAMU (a huge FDIC action) was done after banking hours closed on the west coast. https://en.wikipedia.org/wiki/Washington_Mutual
I would surmise that the news spread fast among the tech demographic the bank services and the run is really bad.
We don't know the timeline here, but speculating that "it must be bad" because things didn't happen overnight isn't really responsible.
If so, then the difference doesn't imply much about the banks asset level, just the idiocy of its bosses.
A lot of folks (like the top of thread) want to suggest that because it didn't play out like the 60 minutes story, it must mean something significant. That story barely touched on the weeks of leg-work the FDIC did for that particular bank, for example. If you weren't paying close attention, you'd miss it.
https://money.stackexchange.com/questions/129772/has-anyone-...
The oft quoted 'nobody has lost money' is from the FDIC, and specifically says 'insured deposits.'
1. Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired. It's totally possible (and regularly done) to spread out cash among several financial institutions to protect against this very issue.
2. Any regular account with two or more signers (very typical for a business account) is insured up to 500k.
3. If spreading out your 6- or 7-figure assets to multiple institutions is too much of a burden, literally every business bank has special accounts or add-on features that either raise the FDIC default limit of 250k, or supplement it with external insurance. Again, if any startup's financial handlers didn't recommend this: fire them because they entirely failed to do their job.
https://www.usbank.com/bank-accounts/fdic-deposit-insurance-...
Is it typical for business accounts to be owned by someone other than the business?
Banks that primarily serve ordinary workers typically have over 50% of total deposits in accounts that are under the limit, and are fully insured.
But for SVB, less than 3% of deposits are in accounts with less than $250k.
The cold, hard fact is that the bank doesn't have sufficient assets to pay back depositors, and no regulatory sleight of hand changes that fact.
There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't co-opt the power of the state to force ordinary people to subsidize them when their bets go bad.
It would be hideously immoral to bail out fabulously wealthy VCs with funds from taxpayers and small depositors.
This is not obvious at this time. This is not a cold hard fact. They absolutely, undeniably had assets in excess of depositor liabilities at the end of Dec 2022. They incurred losses since then. The accountants are still accounting.
> and no regulatory sleight of hand changes that fact.
There literally is regulatory "sleight of hand" to do this, and the FDIC has a demonstrated history of doing it, many times. When banks like this fail, they shop the assets and existing customers around to other banks, and critically: will pay the acquiring bank to close the gap between assets and liabilities + provide liquidity while assets mature.
> There's a reason why large deposits aren't insured, and that's because the rich have the knowledge and resources to take care of themselves, and shouldn't force ordinary people to subsidize them when their bets go bad.
The FDIC is entirely funded by insurance premiums paid for by the banks themselves. They are not tax payer funded.
Your fear is causing you to spread misinformation and scare people more than necessary.
Were these assets marked to market, or were there billions in unrealized losses even then?
> regulatory "sleight of hand"
When claims on the FDIC exceed premiums paid, they are absolutely backed up by taxpayers.
There's a cap on what deposits are insured, it's not a secret. Large depositors knew their funds were not insured.
It's not "sleight of hand" to shop the assets in the market, maximize recovery, and make all depositors whole if possible. By all means do this!
But using FDIC funds to bail out uninsured depositors, or monkey business with quasi-government agencies backed by taxpayers paying above-market prices for securities, or agreeing to accept below-market interest rates on loans is definitely "sleight of hand" to obscure a direct subsidy to extraordinarily wealthy people.
By no means should insurance premiums paid on insured deposits be misappropriated to bail out uninsured depositors.
Wealthy individuals constantly try to game the system. Not letting the games they play hurt the rest of us is an entirely proper role for the government to take on.
I agree that it's a good move for the government to use taxpayer money to prevent an economic collapse. But that's still the lesser of two evils: the government should be working harder to disincentivize the kind of behaviors that make wealthy individuals think that playing these sorts of games is worth the risk.
I'm not sure what "working harder" should entail (I'm no expert on this sort of thing; others are), but I think it's pretty clear they're falling short.
That's not true. As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. Even if liquidating assets forced a 15% haircut, depositors will be made whole.
If a bail out is necessary, it's likely in the form of a short-term loan to make depositors whole sooner rather than later. And, such a bail out can/should be structured as a loan with significant interest in which case it's not really a cost to taxpayers.
The cold, hard fact is that if the bank had sufficient assets to let depositors withdraw their cash, then they wouldn't be in receivership now.
You can argue that they actually do have sufficient assets, but they just can't access them right now, and we just need to wait ten years for bonds to mature.
But that argument only makes sense if you also say that large depositors should wait ten years to get their money out.
Naturally, a dollar that you might receive ten years from now is worth a lot less than a dollar you can actually spend today, and if regulatory sleight of hand obscures that essential fact to bail out the 1% of the 1%, that would be extraordinarily unjust.
It is not a cold, hard fact that they don't have sufficient assets. It's entirely possible that after liquidating their assets (on the time scale of months), they can make depositors whole even after factoring in the time cost of money.
It's possible the $80 billion in mortgage-backed securities they bought yielding 1% and maturing in 10 years might be salvaged. They're now worth far less than they paid because interest rates are up to 5% and nobody wants to buy bonds that yield 1%.
Maybe this receivership will bork a thousand startups, throw a bunch more people out of work, and cascade into a larger recession, driving interest rates back down to 1%, and restoring the value of the mortgage-backed securities, and making the bank solvent again!
Contractual obligations often prevent this, btw. Many SVB customers had loans with SVB, which prevented them from using other banks.
Wealthfront offers me as an individual better tools for managing risk that it sounds like people who banked with SVB were getting.
Looks like not just startups, e.g. Roku had ~500M in SVB
https://edition.cnn.com/2023/03/10/business/roku-svb-cash/in...
https://twitter.com/business/status/1634211584657571843?s=20
The first half is what FDIC insurance means. The FDIC helps distressed banks in a variety of ways, including insuring deposits under $250K, but typically all depositors are made mostly whole again.
Typically, but no guarantee. And on what time frame, nobody knows.
I suspect many depositors will be taking losses in this failure
https://www.ocregister.com/2009/03/20/depositor-losses-final...
In fact, to the extent ordinary bank failures don't result in paying back all or almost all of the sum owed, the regulator has been far too slow to step in and more aggressive regulation is needed.
Agreed. The FDIC report shows $209b in assets and $175b in deposits.
Even if they took the full $15b estimated loss to liquidate their HTM bond portfolio, they'd have $20b to spare before not being able to cover deposits.
Am I misunderstanding?
Unfortunately much of their balance sheet is illiquid (consider loans they've made to venture-backed businesses, and of course a poor choice they made in government debt maturity).
Thus a liquidity crisis; technically also insolvency, but not gross mismanagement and excessive leverage by any means. Unwinding it will be quite routine (see my reply to kmod).
https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
If the asset/deposits balance hasn't changed much since December (which I'm not sure is the case), depositors are likely to eventually be made whole for the deposit amounts, but liquidity issues and facilitating sale of assets to make that happen may result in substantial delays. For depository accounts businesses relied on for regular operations, that...may still create substantial additional costs that will not be compensated.
So, in a more holistic sense, it seems likely that depositors will not be made truly whole for the impacts, even if they eventually recover deposits.
In a extreme example, getting $100 in 10 years is not as good as getting $70 next month.
- "it had reserves in excess of its liabilities" - "They can't unwind that position and cover all possible demands"
I'm guessing that you're thinking of some sort of valuation of their assets that says something like "well they're really worth more than they're currently valued at", which is a common claim on this story but it's a pretty bold one?
An analogy: you (hypothetically) keep your money in some 6-month CDs, with about a month's worth of expenses in your savings account in case something unexpected comes up. Then you lose your job and by the end of the month you haven't found a new job. You could liquidate your CDs, but the early-liquidation penalty might mean you still won't have enough to pay your bills. If only you could wait for maturity.
So yes, at mark-to-market firesale prices that means SVB can't pay out in full today to every account holder and so FDIC has to step in. But FDIC (who has a very large balance sheet) also seizes those assets. They give the accounts to another bank. Then FDIC can unwind those seized assets in whatever timely fashion it wants.
There's a second factor: in a secular banking crisis they may pay out only the guarantee (currently $250K; for a while (during the GFC IIRC) it was temporarily $500K. But we are not in a secular banking crisis; not only has the Fed completely restructured bank reserve requirements in response to the GFC but SVB is a single small bank, not even a regional one, with a run-of-the-mill crisis. This is the kind of failure that you put all the new hires on because they can learn without any up-to-the-minute crisis stress. This is what they learned during onboarding :-). In such a situation it's better to pay out move than the $250K, probably several million, to prevent any "contagion" (since SVB has "Silicon Valley" in its name). They could
I have no special knowledge of FDIC's internal thinking: they could make them whole now, or make up to $250K whole now and pay out some later, or yes, they could force a few people to take a haircut. Those (small number of) panicing VCs would be better off calling their senators than their portfolio companies.
PS: BTW hypothetical you has more options than those above: you could take out credit card debt, perhaps tap a HELOC you might already have in place, etc. SVB had similar options: they did have a $15B fire sale and got an investment from General Atlantic. It wasn't enough.
The closure of the bank was due to a classic bank run after depositors panicked upon hearing of the decrease in value. They had 45 billion in withdrawals in a single day, out of ~175 billion in deposits. No bank could survive that.
The reason why depositors are going to lose money I think is because the fire-sale valuation of the assets << valuation on the books. I think depositors will lose a fairly big chunk of their money, maybe 10-30% if not more.
Their money was not sitting around in cash. It was in bonds which lost a lot of value in the last several months. They also have more exotic investments in the startups they work with, which depending on how it works, could get a really bad valuation as well.
SVB was the 15th largest bank in the US. That's not a small bank.
The account holders' accounts, and likely all the loan portfolio, will go to another bank. The new bank will adjust its reserves from the Fed in the usual way, and may get some capital from the FDIC (warning: I am not au courant how the latter works post the GFC).
The FDIC uses its own large (and augmentable by congress, not that it matters in this case) balance sheet to back some or all of the deposits. It seizes all of SVB's assets and unwinds them as it decides to...with the proceeds going to FDIC.. Whether it dumps them on the market or holds to maturity is the FDIC's decision and has nothing to do with what happens to SVB. The people who went to SVB HQ and the people who decide what to do with SVB's assets are completely different people.
Read my reply to kmod.
> SVB was the 15th largest bank in the US. That's not a small bank.
The money center banks are the ones that matter. Most retail deposits are held by a handful of banks. Being the 15th largest bank is not like being the 15th university in the rankings (i.e. not that different from the top 10) but more like being the 15th biggest car company. I wouldn't call FDIC's balance sheet "enormous" but it can handle SVB without breaking a sweat.
If I had $1m in my account and it was invested 100% in MBS around in 2021, it could take 10 years to actually get the whole $1m back, and only be worth like $800k now. I have effectively lost that 20% because you could just give me $800k now and I could put it in a MBS myself to get the same results.
That means it didn't have a liquidity crisis, and it didn't have reserves in excess of it's liabilities, it had a solvency crisis, and it has more liabilities than it has assets (before even considering the haircut it's assets will suffer at liquidation prices).
The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. So SVB was sailing along nicely whilst it's bond portfolio slipped further and further under water, and wasn't required to recapitalise when it should have done.
[1] https://ir.svb.com/financials/annual-reports-and-proxies/def... [2] https://www.wsj.com/articles/bond-losses-push-silicon-valley...
I don't think that's right. It would be a liquidity crisis if the market value of everything they own is higher than their liabilities but they can't find a buyer at this time. You are saying that a liquidity crisis is when they can find a buyer but everything they have is worth less than their liabilities. That's not the case.
This is not accurate, and the inaccuracy is the difference between solvency and liquidity.
If svb had longer (ie weeks), they still wouldn't be able to cover their debts. Its not a matter of needing time to arrange buyers for their assets; their inability to pay isn't related to liquidity today or tomorrow, it's related to their asset's value. If they snapped their fingers and marked to market all their assets, they would be in debt because they're insolvent.
How do you calculate that precisely? That seems like a fuzzy distinction, considering that the value of things change over time.
Not really. Insolvency is by definition time independent. If you owe more than you have, you're insolvent. It doesn't really matter if you might make enough to cover the difference in the future.
In practice, you might get away with it if no one forces the issue upon you, but that doesn't change the math of whether or not you could pay your debts.
Liquidity is different. It is time dependent by definition. Some things take time to structure, deal, and sell. You can also get away with this in practice.
They can both have similar effects when they happen, but their causes are sharply different. I have a house I can sell to cover my mortgage, but couldn't sell it in less than a couple weeks or maybe even months. Illiquid but solvent.
If you think it is anything else you are just being an apologist.
This isn't true. If you eat at a restaurant but forget your wallet, you can't pay your bill but you're still solvent. You have assets to cover your debts. "Can't pay your bill" is too broad a statement to be meaningful. There are many complicated financial instruments and needing time to make a payment doesn't automatically make you insolvent.
I don't know the answer, but I see both sides. As of today, their liabilities exceed their assets worth, so it does feel like solvency fits.
They NEEDED to raise capital.
Their liabilities > assets.
They were 100% insolvent.
If the interest rate goes up while you are holding your low interest bonds, that means that your future cash flow from the bond (the repayment) is literally worth less than what it was. Your bond payments have a lower real value due to the higher interest rate of the surrounding environment and the increasing price levels, despite being the same nominal amount. That's why the bond's price plummets in the market, which is why this is a solvency crisis: because the assets really are not good for the liabilities at present value, which is the only kind of valuation that makes sense here.
1 2023USD =/= 1 2033USD
Those aren't the same currency.
Solvency is whether you could go to market today (or soon) and show more assets than liabilities.
The asterisk is that the liabilities are generating interest, but this is fine because (one very safely assumes) that’s covered by the interest on the long-duration assets SVB bought.
Depositors now expect higher interest rates which cannot be covered by those assets. They will withdraw their deposits and move them to a bank that can offer higher interest rates.
Those are short term liabilities. The ability of depositors to withdraw their funds is part of the liability.
If the bank wanted to raise long term deposits it would have had to pay much higher interest rates.
Once they withdraw the bank can not raise additional funds because all other depositors have better interest rates in other banks.
No amount of time will cure this situation, the values of those bonds will not recover. This is not some temporary panic.
The only way for the situation to improve is if interest rates go down in the short term. Unless that happens, the bank remain insolvent.
SVB's systemic risk was just that the vast majority of their depositors are startups, and can corralled into action by VCs. Thiel decided all the startups he backed should withdraw all their money from SVB at once, and knew the rest of the VC world would follow suit.
I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.
Of course here it blew up, but even marked to market assets will depreciate in value if a bank tries to liquidate tens of billions of dollars worth.
Which table in the 10-K would I look at to see this?
Does that really matter though? Anyone can buy and hold to maturity. The market price indicates that that's not good business.
You go ahead and think that...
https://www.svbsecurities.com/team/joseph-gentile/
Joseph Gentile is the Chief Administrative Officer at SVB Securities.
Prior to joining the firm in 2007, Mr. Gentile served as the CFO for Lehman Brothers’ Global Investment Bank where he directed the accounting and financial needs within the Fixed Income division.
Every bank borrows short term (you can walk up and withdraw your money at any time) but lends long (e.g. mortgages, though SVB writes few of those). The recent management grabbed some very long federal bonds; as rates have risen the resale value of those long term assets (paying a lower interest rate) fell. They can't unwind that position and cover all possible demands.
FDIC will transfer the accounts to another bank, guaranteeing the 250K at least (I believe SVBs own liquid assets could cover that) and may use its own asset base to cover the balance, siezing SVB's other assets and stuffing them into FDIC's piggy bank. It's not like those government bonds won't pay out...eventually.