Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

FDIC Takes over Silicon Valley Bank

fdic.gov

Post reply on HN
Print view View original

411–420 of 1001 posts

Re: FDIC Takes over Silicon Valley Bank

#411

Post by PragmaticPulp »

kuczmama wrote: post #361

What I don't understand is why do banks work this way? Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers. If I had to bet, most people who have…

> Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers.

Now imagine you've finally settled on a cost structure that can pay all of your insurance, operating costs, payroll, and everything else. You charge monthly fees and you might also charge per-interaction fees to do anything or talk to anyone.

Then a competitor comes along that operates in a fractional reserve manner. They not only offer zero fees, they actually pay customers interest to keep their money in the bank. There is a risk of failure, but it's rare and all evidence points to customers not suffering massive losses when it does happen due to various regulations. Inconvenient, yes, but it's unlikely that you're going to lose all of your money.

The majority of your customers would leave for the competitor bank.

Re: FDIC Takes over Silicon Valley Bank

#412

Post by blantonl »

BlandDuck wrote: post #389
somenameforme wrote: post #367

An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate): "- 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!…

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

“Eventually”

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

Re: FDIC Takes over Silicon Valley Bank

#413

Post by suresk »

kuczmama wrote: post #361

What I don't understand is why do banks work this way? Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers. If I had to bet, most people who have…

1:1 banking essentially guarantees long-term loss of principal for depositors, albeit slowly. The main "service" a bank would provide in that scenario is holding onto your money for you and instead of paying interest on it, charging you a few percent per year to hold onto it for you.

Also, in your model, where does money for loans come from? How are borrowing costs impacted by a major source of funds for loans going away?

Re: FDIC Takes over Silicon Valley Bank

#414

Post by gumby »

purpleblue wrote: post #374
gumby wrote: post #161

I suspect all depositors will be made whole. The bank had a liquidity crisis; it had reserves in excess of its liabilities. 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…

No, I think you're wrong. The reason why depositors are going to lose money I think is because the fire-sale valuation of the assets 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.

See my reply to kmod in regards to this. It's the FDIC's current balance sheet we're talking about, not SVB's. In a liquidity crisis you don't have access to your capital. So FDIC spends theirs, and takes control of SVB's balance sheet. Also SVB is a small bank.

Re: FDIC Takes over Silicon Valley Bank

#415

Post by davidw »

somenameforme wrote: post #367

An explainer post [1] connected to that Tweet is something I found extremely informative (assuming it's accurate): "- 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!…

> 10+ year duration, with a weighted average yield of 1.56%.

> 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?

Re: FDIC Takes over Silicon Valley Bank

#416

Post by wbl »

renewiltord wrote: post #342
stephenhuey wrote: post #225

Earlier quoted context omitted.

Disrupt disrupt disrupt! Those old stodgy banks just slow us down with their old-fashioned risk-averse ways! The cool kids can do it better! 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... :)

HN really is like a ChatGPT version of itself. SVB is a 40 year old bank, bro. They are the old stodgy bank. The Meows and Mercurys are all still around. 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 co…

40 years ago is 1983. https://fred.stlouisfed.org/series/FEDFUNDS

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

Re: FDIC Takes over Silicon Valley Bank

#417

Post by flutas »

katmannthree wrote: post #24

Yikes. Does anyone have an idea of which orgs have significant exposure (like Molly White's FTX contagion graph[0])? [0] https://www.mollywhite.net/etc/ftx-contagion

Potential contagion: https://imgur.com/a/Xh6Kudp

These are companies, sorted by PPP loan size who had SVB as their servicer.

Re: FDIC Takes over Silicon Valley Bank

#418

Post by chernevik »

I don't understand why anyone would park any sum larger than, say, $5mm in a bank deposit for more than a minute.

It isn't hard to dump those funds into a money market fund backed by short-term commercial paper or even short-term Treasury bills. Or to just buy the Treasury bills outright. Such holdings are quite liquid and can be absolutely secure.

Use the bank account for clearing, keep a couple million in it and sell assets as needed to top-up the account or to prepare for known cash outflows.

I'm sure there are cost and complexity trade-offs. But "don't lose the cash" would seem to be priority #1 and worth some trouble.

I suppose the idea was that SVB managed all that for you. But one look at its financials shows the asset/liability term mismatch, and interest rate risk, so the risk of loss of cash was nonzero. So they were NOT managing maturity risk for these large depositors, and, well, now look where they are.

Re: FDIC Takes over Silicon Valley Bank

#419

Post by mwarkentin »

dmoy wrote: post #259
FormerBandmate wrote: post #66

Earlier quoted context omitted.

This case is unique because of the sheer volume of non-FDIC insured deposits. Substantial risk of depositors not being made whole for a while, they’ll probably get all their money but it will still be bad

It's a little unique because it's a top 20 bank failing. As far as I can tell, it's not super unique in terms of % of fdic insured deposits. As a whole it's like > they’ll probably get all their money but it will still be bad They may not. Even for banks where most assets are FDIC insured, you'll see that not 100% of deposits are returned. Selecting a random recent one: https://closedbanks.fdic.gov/dividends/bankfind…

Looks like 2.7% of their deposits were > 250k. So yes, it seems relatively unique (there are only 5 banks on this list with https://twitter.com/GRDecter/status/1634208652595699713?s=20

Re: FDIC Takes over Silicon Valley Bank

#420

Post by ThrowawayTestr »

kuczmama wrote: post #361

What I don't understand is why do banks work this way? Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers. If I had to bet, most people who have…

[flagged]
Post reply on HN