May be nice for an acquirer. Roll those long term bonds into very short term treasuries - take that big loss now - and earn 4% going forward.
Rates will eventually top out - they just had made a very bad bet at 1.5%/10 yr.
FDIC Takes over Silicon Valley Bank
521–530 of 1001 posts
Re: FDIC Takes over Silicon Valley Bank
#522Earlier quoted context omitted.
I have some family who (with some other partners) founded a small community bank that has grown over the years. 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 wer…
with interest being zero as it was the past couple of years, can the bank not just sit on that money and literally do nothing? What operational expenses do they have?
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Re: FDIC Takes over Silicon Valley Bank
#523What's the best brief summary of what has happened so far?
During the last couple years, SVB got a ton of deposits, and they didn't have matching loan demand. So they invested the money in bonds. Unfortunately they make a bet that interest rates would stay low, and bought longer duration (~10 year) bonds. Interest rates have gone up, so the bonds they bought have lost value. They tried this week to fix that by selling part of the portfolio and raising capital, but did it in…
I think an important backdrop here is the initial catalyst for this (to my understanding) was a decline in VC funding and elevated cash burn in their clients, leading to a net outflow of deposits, which is ultimately what necessitated selling securities in the first place.
When the economy is generally healthy and your clients are diversified, deposits remain fairly stable. If this had happened, SVB likely would not have needed to sell the low-yield mortgage backed securities to cover liquidity. SVB is very exposed to the venture community and very impacted by the changing climate.
Re: FDIC Takes over Silicon Valley Bank
#524An 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!…
I had the vague impression that after the 2007 crisis, banks holding retail deposit accounts were not allowed to invest in stuff like MBS, only investment banks (without retail accounts) were.
Re: FDIC Takes over Silicon Valley Bank
#525An 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!…
Noob Questions: How do banks typically diversify their investments so that this kind of thing does not happen? Also don't they have to have some kind of liquidity cushion? Can't they just cover their short term costs by borrowing(I thought there is an overnight facility for lending between banks to borrow at low rates)
With only a look at the summary numbers above, it looks like they tied up 40% or so to 10+ years. I don't know what the right percentage should be, if that much is going to be tied up in hold-to-maturity, you would expect it on a rolling basis which reflects the long term liquidity of your deposits.
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.
Re: FDIC Takes over Silicon Valley Bank
#526Will startups have problems paying salaries now?
If the company's payroll is under the $250K FDIC insured amount, they can make payroll on Monday. If the company's payroll is like $1 million a month, maybe not.
I can't see many startups having that sort of salary bill, unless they are a small seed with just a few founders working on a small wage as a sacrifice for their own investment. A lot of these startups would have hired during the frothy 2021 early 2022 phase when $250k might just cover a single employee.
Re: FDIC Takes over Silicon Valley Bank
#527Earlier quoted context omitted.
I have some family who (with some other partners) founded a small community bank that has grown over the years. 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 wer…
with interest being zero as it was the past couple of years, can the bank not just sit on that money and literally do nothing? What operational expenses do they have?
Sure, if depositors said "ok we'll let the bank ride this out." But that's not what happened.
Re: FDIC Takes over Silicon Valley Bank
#528An 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!…
> As a result, they purchased a large amount (over $80bn!) in mortgage backed securities (MBS) 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?
The problem is with MBS but not for the same reason.
Re: FDIC Takes over Silicon Valley Bank
#529Earlier quoted context omitted.
> - 97% of these MBS were 10+ year duration, with a weighted average yield of 1.56%. This is a pretty insane bet. Why didn’t they ladder the maturities to have a lower average duration and less risk?
My pessimistic view is that bonuses were paid out on invested cash not on cash just sitting there. So they had to buy something to get a fat bonus.
Shocking portfolio design isn’t regulated given how much of banking is regulated.