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FDIC Takes over Silicon Valley Bank
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Re: FDIC Takes over Silicon Valley Bank
#572Earlier quoted context omitted.
At first glance, bank balance sheets are unintuitive and feel 'the wrong way round'. When someone deposits $1m at a bank, the bank doesn't have $1m more assets, it has $1m more liabilities. (Yes, this is a gross over-simplification)
Too much money is only a problem if you are greedy for returns, like all the investors who lost money when yields were unsustainably low the last few years. They could have deposited it with the Fed and have been totally fine. Individual investors don't even have that option and also have inflation to deal with. Banks don't.
I think there is a limit. The bank costs money to run, customers expect interest (even if little).
That money isn’t doing anything to cover those expenses if some of it isn’t “working” to produce returns.
Re: FDIC Takes over Silicon Valley Bank
#573[deleted]
Re: FDIC Takes over Silicon Valley Bank
#574An 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!…
Investing in the exact same kind of unsafe assets that brought the 2007 crisis, as well as assets that cause house prices to stay unaffordably high. Yep, all of SV is truly made of bumbling idiots. That whole solution is truly hilarious and watching all these clowns lose their money is going to be fun.
Actually not. The kind of asset they invested in does not really matter. If they invested in super safe government bonds at exact same issue. It is the rapidly rising interest rates that did them in. If they were smarter they could have done a rolling ladder of short maturities but probably someone there was lazy.
Re: FDIC Takes over Silicon Valley Bank
#575Earlier quoted context omitted.
I don't get it. I'm no expert in finance but even I knew the fed wasn't going to stop raising interest rates because I had the common sense to know the fed would fail to trigger a recession by doing so.
When I set my ‘Hindsight Goggles’ to 100, I too saw that the Fed would keep raising interest after the initial rounds, because unemployment would stay low despite massive layoffs, somehow, and that prices would keep rising. And I am an expert in finance.
I, too, am a genius in hindsight. It's great to be in such rare company.
Re: FDIC Takes over Silicon Valley Bank
#576Re: FDIC Takes over Silicon Valley Bank
#577What 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…
> Then the bank could make money by providing services to their customers. Which services? And those services would need to be something that I can only provide by being your depositor (otherwise I'll get beaten by someone who provides those services without the added burden of holding and securing your physical money. You've basically designed a system that increases the costs of being a bank, and eliminates the mai…
That's a very good point. I think services could include things like financial management, checking, sending/receiving fees, etc.
You're right, in this model it wouldn't be nearly as profitable to be a bank as it is now. Potentially, it could be a "public good" provided by the government, or it could be like a lot of the brokerages who provide investment services and charge a commission on top.
Also, you're right it would be very hard for banks to be anywhere near as profitable as they are now if assets are backed 1:1.
But in some sense, banking is already viewed as a public good since the FDIC is backing all of the bank deposits. So at the moment we kind of have a weird hybrid situation where banks are kind of pseudo-private, but also backed by the government.
Re: FDIC Takes over Silicon Valley Bank
#578Wow, this guy called it in January...https://twitter.com/RagingVentures/status/161582608803847373...
Re: FDIC Takes over Silicon Valley Bank
#579An 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!…
Why even chase 1.5%.
They got too much in deposits very quickly and could not originate loans at the same speed. If they kept the money uninvested their operating costs would have eaten up their principal (even if they had to pay 0% in interest to their customers)
Re: FDIC Takes over Silicon Valley Bank
#580Earlier quoted context omitted.
At first glance, bank balance sheets are unintuitive and feel 'the wrong way round'. When someone deposits $1m at a bank, the bank doesn't have $1m more assets, it has $1m more liabilities. (Yes, this is a gross over-simplification)
A $1M deposit adds to both assets and liabilities. In double entry accounting, you mark any changes with both a debit and a credit. This allows you to see not only why one account changes (a single entry), but also the cause of that change (the second entry).
I think programmers find double-entry bookkeeping counterintuitive. It feels error-prone. In programming, you keep a single source of truth. Any time you copy the same data to two different places, one of them is always wrong.
Double-entry bookkeeping makes sense once you understand the the invariants you have to keep, and why you need to track 5 different types of books. Some of those accounts work in opposite ways, such that credit to one is a debit to another.
It all works out and is essential for "debugging" problems (when money appears to go missing -- or worse, materializes and you don't know why). But there's some counterintuitive language and it'll mess you up until you accept it.