Instead, they waited until it was way too late (by most accounts, the fed is going to do another 50bps hike next) and all it took was some fear for the house of cards to come crumbling down.
This does feel like a regulatory failure though. Reserve requirements don't quite prevent a bank taking on massive undiversified risk like this.
They would have had to recapitalize way earlier if that was the case.
This is the kind of thing you could get a Nobel prize for, if it was backed with data and people agreed with the conclusion.
Of course Bank of England had to bail out their pension funds for very similar reasons so it's not like this is something they're unaware of.
My guess is that come Monday they backstop all of this and only the shareholders of SVB get wiped out, sort of like the reverse of Bear Sterns (bailed out early) vs Lehman (allowed to fail). It's not "fair", it's just risk.
They absolutely deserved to fail.
The government allowing them to fail is actually a sign of the system working.
You would think that they should prevent such risks, right? If the bank loses their collective shirt on a bad bet, they will eventually fail to meet their reserve requirements, right? I don't see how you create a stronger incentive without specifically telling bankers how to do their jobs.
Is this one possibly one of the 'the Fed broke something' scenarios that might lead to quicker rate cuts ?
SVB had plenty of warning to sell securities. They didn't even have to do it overnight. They had plenty of time to slowly roll-over their bonds and sell MBS. This wasn't a surprise "gotcha" by the fed.
SVB probably should have realized that continued interest rate cuts were gonna nuke their MBS, and sold them at a loss earlier, so they could recapitalize in safer instruments like short term treasuries.
What I’m learning about reserve requirements is that this would have actually reduced their “assets in reserve” though because they were allowed to use the maturity price of the MBS for that accounting. So selling them at a loss and buying short term treasuries would have reduced the amount of assets in reserve by that calculation, even though it would have been the same amount of assets (at the time of the transaction) in mark-to-market value AND safer against further interest rate increases.
I’m guessing this dilemma at some point got so bad that they literally could not recapitalize anymore without becoming insolvent, at which point their only option was to hold the MBS through further losses
It would be very damaging for their credibility if they hiked by 50bps after already doing 25. Of course it depends on what’s the CPI next week but if it’s good/as-expected 50bps would be very surprising
If they wanted 0.5 they could just hike it by 0.25 and add another 0.25 later. Exactly the same outcome, less turmoil in the financial markets. Powell’s rhetoric seems to have staid about the same for the last 6 months.
Also the fact that their rapid rates hikes were the direct reason behind the second largest bank collapse in US history adds another dimension. Obviously I’m not saying it’s their fault. But well if bond prices go down even more than expected more banks might end up in the same situation.
It is all relative, not all relevant
Anything is liquid if you will lower the price enough
Surely they did sell those treasuries without any hiccup. (I'm not 100% certain about the MBS they hold but the main problem is that the fair value is down and not the discount relative to that price that would be required to sell quickly.)
There is no "fair price". Price is a scaler, it has no morals or ethics
It's not true that "Anything is liquid if you will lower the price enough" if we understand liquidity in the usual sense.
Bonds and stocks are liquid because the bid-ask spread is small. It doesn't matter if you bought the bond at $1000, if you can get $799 for it and it would cost you $801 to buy one you may be unhappy but your problems are unrelated to liquidity (of course that $800 market price has nothing to do with ethics or morale).
A lingot of gold is more liquid than a gold tiara.
A participation in a private company is not liquid. Being able to sell it with a large enough discount doesn't make it a liquid asset.
It's the same dynamic as the toilet paper shortages at the beginning of covid: most people weren't panic buying because they thought that there wouldn't be enough toilet paper to go around if everyone kept cool, they were panic buying because they knew not enough other people were keeping cool.
If it looks like the only reward you'll get for keeping your cool is a few weeks with a dirty bottom, it's hard to avoid joining in the run.
Bank runs are fascinating psychological dilemmas to me. On one hand the SVB CEO was correct - everything would have been fine if every depositor hadn't run for the door. But, when a bank says "please don't run for the door", it's already too late.
https://www.barrons.com/articles/svb-financial-stock-sale-ce...
So ok, we've "punished" SVB's management's poor money-management practices, but in the process we've also punished a lot of companies who had millions of dollars but now only have $250k (with uncertain future access to some portion of the remainder).
Good job! Stick it to those SVB execs! Talk about cutting off your nose to spite your face... or I guess cutting off the noses of others...
Each individual depositor has to make the bail/stay decision with extremely limited knowledge of what everyone else is going to do. They know that the market is freaking out at SVB's sale, and they know VCs are sending panicked emails to their startups telling them to bail. They know that if enough people actually do bail they may lose everything they have (in excess of $250k).
Presented with that information, the only rational move for a depositor is to bail. It's weird to blame the VCs for making the only good choice available to them.
> You're talking as though the SVB depositors are some sort of hive mind capable of acting in concert. They're not.
… is patently absurd. Startups and the VC market are all about meme copying, on everything from which front end stack or build system to use to how to write a “regretful” layoff announcement on LinkedIn, to (apparently) management of funds.
The boards are incestuous with respect to the ecosystem, and absolutely capable of acting in concert, as constantly demonstrated.
Memetic spread is not "acting in concert" in the way I meant it or in the way that OP was demanding. There is no common goal in the kinds of behaviors you're referencing.
PS. people didn't withdraw to spite anybody, this is not kindergarten. They started withdrawing because they don't want their small companies to die and need money for payroll, it's really the only sane thing to do.
And even if you're B2B, if you're 999th in line and your customers are 1000th in line, you're even more screwed. If you're first in line you at least have some remaining assets even if you have no customers. If your assets evaporate at the same time as your customer base then you have nothing.
Not all bank runs are systemic in nature.
The fact that the Feds did not maneuver this is another interesting datapoint.
TP was a result of people shifting from commercial toilet paper to home toilet paper, and supply chains not keeping up. Not from panic buying, fwiw.
https://www.washingtonpost.com/national/coronavirus-toilet-p...
(there are other better sources i'm sure)
> However, because grocery stores and other retailers usually only keep several weeks’ worth of toilet paper in their warehouses, the sudden increase in demand — largely fueled by panic-buying and hoarding — has quickly depleted stocks.
> “Consumers are experiencing nervousness and they are buying more than they should, depleting inventories of an industry that is very lean,” Gonzalez said. “It will take a couple of weeks for people to understand they have enough, and the inventories will increase on the shelves.”
Again, there are similarities to SVB. There were legitimate concerns about SVB's solvency that triggered a run. The same goes for toilet paper: there were a few legitimate hurdles which were made many times worse by panic buying.
[0] https://cnr.ncsu.edu/news/2020/05/coronavirus-toilet-paper-s...
It's just never that simple.
PS. the sentiment still makes no sense, SVB customers did not sign up for the bank to gamble with their money and they have a full moral right to do whatever it takes to get their working capital back the second they start to sense any trouble. These withdrawals are not just stupid meme stock lulz, this money belongs to the customers.
Many banks, even the big ones like Bank of America, Wells Fargo, and Chase, do not want to do this for random new small companies with no history and unknown founders. SVB was -- I believe -- founded in part to fill this gap.
Beyond that, there are also come contractual relationships between some VCs and SVB that require some VC portfolio companies to hold their deposits (at least some amount of them) with SVB. (I don't entirely understand this point, but even if I'm getting it wrong, the previous point is enough.)
The point is that they are supposed to have capitalization requirements and regulations that show they actually have more assets than liabilities.
But in reality they don’t so fractional reserve doesn’t work here. In fractional reserve the bank still has assets worth more than liabilities. That’s the whole point of the regulation.
This bank doesn’t meet that basic requirement
I think you'll find a lot of the people complaining are people who got hit and are bitter about it.
e.g. some CFO's seem to be complaining about VCs - the CFOs likely didn't do their job, one part of it is "treasury/cash management". Some VCs are complaining about other VCs - probably they weren't paying attention and their portfolio companies got hammered.
> Also, I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. If some depositors get spooked and take their money out, and other depositors evaluate your balance sheet and decide things are fine and keep their money in, and lots more depositors keep their money in because they simply don’t pay attention to banking news, then you have a shot at muddling through your problems.
But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say “hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,” then all of your depositors will take their money out at the same time. In fact, Bloomberg reported yesterday:
Unease is spreading across the financial world as concerns about the stability of Silicon Valley Bank prompt prominent venture capitalists including Peter Thiel’s Founders Fund to advise startups to withdraw their money. …
Founders Fund asked its portfolio companies to move their money out of SVB, according to a person familiar with the matter who asked not to be identified discussing private information. Coatue Management, Union Square Ventures and Founder Collective also advised startups to pull cash, people with knowledge of the matter said. Canaan, another major VC firm, told firms it invested in to remove funds on an as-needed basis, according to another person.
SVB Financial Group Chief Executive Officer Greg Becker held a conference call on Thursday advising clients of SVB-owned Silicon Valley Bank to “stay calm” amid concern about the bank’s financial position, according to a person familiar with the matter.
Becker held the roughly 10-minute call with investors at about 11:30 a.m. San Francisco time. He asked the bank’s clients, including venture capital investors, to support the bank the way it has supported its customers over the past 40 years, the person said.
Nah, man, you don’t get to be a successful venture capitalist by taking a long view or investing in relationships or being contrarian. I’m sorry, I’m sorry, this is unfair. Of course they were right — Silicon Valley Bank did collapse, and if you got your money out early that was good for you — but that is largely self-fulfilling; if all the VCs hadn’t decided all at once to pull their money, SVB probably would not have collapsed.[6]
[1] https://www.bloomberg.com/opinion/articles/2023-03-10/startu...
Probably is doing a lot of heavy lifting without telling how? Because in the first paragraph, Levine himself says SVB wasn't diversified or large enough to make it through £16b write down on their investments: https://twitter.com/RagingVentures/status/163357916752972595...
[1] https://adamtooze.substack.com/p/chartbook-200-something-bro...
They bought a bunch of long dated stuff. The credit quality isn't the problem here, it's the sensitivity to interest rates rising. The value of those long dated bonds fell by $15 billion - almost equal to their total equity capital. It was 40% of their assets. On top of that, they had flighty deposits - not grandma with her $100k in the bank which is FDIC insured, startups with millions in the bank who knew they weren't insured. It was incredibly stupid to be so heavily weighted in long term bonds. As dumb as it gets in banking.
All major banks don't have the same problem. The vast majority of them had/have a portfolio of assets with a weighted average duration significantly shorter than SVB because they understood there was a risk of interest rates rising significantly from the extremely low levels they were at. And most banks have stickier deposits than SVB. So - all banks lost money on their long dated assets, but not the same % of their equity capital (because it's a lower % of their assets) and not with depositors who are likely to pull money fast.
In more mature industries, people would have been confident that the government wouldn't let their bank go under, because the government usually doesn't, and as a result the government usually doesn't have to. Instead, startup culture is so low-trust that we shot ourselves in the foot.
What I don't get is all this pro-SVB, anti-VC sentiment, how "some VC's yelled fire in a crowded theater" and caused the poor bank to collapse. Isn't it just common sense though, to protect your money? The bank fucked up by doing risky reckless things, it got exacerbated because the customer base is not as diverse as a big bank - it's all startups that are subject to the same patterns, and SVB is not as big for the govt to bail out, so the bank customers did the only logical thing which is to withdraw your money before it disappears, yet they get lectured for doing that.
https://twitter.com/msuster/status/1634203251758469120
https://www.linkedin.com/pulse/few-thoughts-svb-jeremy-solom...