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FDIC Takes over Silicon Valley Bank

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Re: FDIC Takes over Silicon Valley Bank

#581

Post by coredog64 »

pishpash wrote: post #545
joosters wrote: post #480

Earlier 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.

6 month T-bills were yielding 0.7% last year at this time. Inflation for 2022 was over 6%.

It’s not that people are greedily chasing returns, it’s that they don’t want to lose significant chunks of their capital due to loss of value.

Re: FDIC Takes over Silicon Valley Bank

#582

Post by kgwgk »

davidw wrote: post #415
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?

The risky part is (or more precisely has happened to be) the 10+ year duration, more than the ~1% yield over treasuries (which may be too low to compensate for the additional risk but is not what has brought the bank down).

Re: FDIC Takes over Silicon Valley Bank

#583

Post by avidphantasm »

joosters wrote: post #480
duxup wrote: post #435

Earlier 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…

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)

Running a bank sounds like a huge PITA.

Re: FDIC Takes over Silicon Valley Bank

#584

Post by EMM_386 »

LanceH wrote: post #525
itissid wrote: post #443

Earlier quoted context omitted.

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 tha…

I don't understand why you would lock up that much money for 10 years at 1.5% interest.

Did they expect interest rates to stay at 0 for 10 years? That is illogical.

Re: FDIC Takes over Silicon Valley Bank

#585

Post by zamnos »

dpweb wrote: post #521

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.

Eventually, sure, but we don't really know where. And neither does the Fed, though I'm sure they have ideas on how far they want to go. They don't control the jobs report though.

Rates are 5% now, so a spread of 3.5%. If rates go above 8.5% (which they were, from 1973 to 1992) then the acquirer is in basically same hole as SVB, no?

Re: FDIC Takes over Silicon Valley Bank

#586

Post by twblalock »

walrus01 wrote: post #468
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!…

> 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?

Any investments whose value was sensitive to the Fed's rates would have had the exact same problem.

In 2008 MBSes were bad because the underlying value of the investment turned out to be bad. That's not happening this time. All that's happening is the same thing that happens to any bonds -- when rates increase, older lower-rate bonds lose value because why would anyone pay full price for them when they can get a new one with a higher rate?

Re: FDIC Takes over Silicon Valley Bank

#587

Post by rvnx »

voisin wrote: post #469
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!…

> - 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?

As a bank, parking the money into long maturity bonds, especially when it's not your money, and your customer can take the money back anytime, and the current rates are 0% (so can go upward only...).

Sounds like an insane investment decision.

Re: FDIC Takes over Silicon Valley Bank

#588

Post by elliekelly »

mixdup wrote: post #450
bombcar wrote: post #176

Earlier quoted context omitted.

The thing that's strange is FDIC took control and setup a receiving bank for liquidation. That's not normal; FDIC works quite hard to find a bank willing to take over - usually they can work out what the "cost" is to take over, and FDIC pays the receiving bank that amount to "eat" the dying one. If they don't announce they have a bank to assume SVP by Monday, it's quite abnormal.

Exactly. The fact they didn't have a bank lined up points very heavily to the fact that they are not going to be made completely whole. In the past, the FDIC has found a buyer and as part of that process guarantees some amount of the losses. IE: Savior Bank buys Failed Bank for pennies on the dollar, or even for a negative amount. They get all deposits, insured or not, and all assets--meaning loans. Then, the FDIC gu…

It seems like there’s a lot of uncertainty around the dollar amount of the deposits in excess of FDIC limits which would make it difficult to figure out a deal.

Re: FDIC Takes over Silicon Valley Bank

#589

Post by dang »

Related ongoing thread:

The Demise of Silicon Valley Bank - https://news.ycombinator.com/item?id=35098607 - March 2023 (64 comments)

The previous major threads appear to be these (did I miss any?):

SVB in talks to sell itself after attempts to raise capital fail - https://news.ycombinator.com/item?id=35094466 - March 2023 (270 comments)

Ask HN: How is the SVB situation affecting your startup? - https://news.ycombinator.com/item?id=35094447 - March 2023 (130 comments)

Banks lose billions in value after tech lender SVB stumbles - https://news.ycombinator.com/item?id=35087666 - March 2023 (9 comments)

Bank run on Silicon Valley Bank? - https://news.ycombinator.com/item?id=35086836 - March 2023 (791 comments)

Re: FDIC Takes over Silicon Valley Bank

#590

Post by zamnos »

xnx wrote: post #183

A lot of talk about the $250K FDIC insurance limit in this thread. It took me a long time to learn that you can have up to $1.25 million insured at an institution if you designate multiple beneficiaries: https://www.fdic.gov/resources/deposit-insurance/brochures/d...

If that's of interest to you, you might also want to look up "FDIC sweep" or "insured cash sweep". Basically your bank makes accounts at other banks, and each sub-account only has up to $250k in it, so you're totally covered.

https://en.wikipedia.org/wiki/Certificate_of_Deposit_Account...

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