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.
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... :)