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FDIC Takes over Silicon Valley Bank

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Re: FDIC Takes over Silicon Valley Bank

#631

Post by eftychis »

treis wrote: post #622
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)

This isn't an over simplification it's just wrong. The bank does have more assets (the 1 million in cash) that balances the liability (the 1 million they owe to their customer).

Yes, but the problem is the 1 million is unlikely to be in cash. Here, it is in MBS issued at low interest rates and thus practically ~$500k if the security is sold right now.

Banks have a serious problem in their hands as they have to figure out a way to keep buying assets that they have to buy by law, while the Fed is going to keep increasing the interest rates via selling their MBS portfolio at a rate that makes "yesterday's treasury or MBS" the loser.

If action is not taken we haven't heard the end of this.

Re: FDIC Takes over Silicon Valley Bank

#632

Post by rafaelero »

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…

> What I don't understand is why do banks work this way?

People don't want to lose their money to inflation, so banks are implicitly required to make up for that. Also, it's just too tempting for them not to use the money that is collecting dust.

Hopefully people will emerge from this with a better understanding of Bitcoin's advantage to normal fiat system, which is something that is severely lacking in discussions I see here in HN.

Re: FDIC Takes over Silicon Valley Bank

#634

Post by foreigner »

EVa5I7bHFq9mnYK wrote: post #297
NordSteve wrote: post #126

Earlier quoted context omitted.

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…

So they did exactly the same thing that FTX did - gambled with clients' money and lost.

That is what all banks do.

Re: FDIC Takes over Silicon Valley Bank

#635

Post by twelve40 »

So it seems like they mismanaged their assets and their liabilities, taking on a lot of expensive deposits while investing at low yield.

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...

Re: FDIC Takes over Silicon Valley Bank

#637

Post by ezekg »

mywittyname wrote: post #358
game_the0ry wrote: post #11

2008 bear sterns vibes. The fed's move in interests rates was bound to break something. This is the first big name and, while banks are taken over by the FDIC often and it never makes the news, this one will be especially interesting bc it is Silicon Valley Bank. Naturally, people and the media will associate with the rest of silicon valley, bringing extra scrutiny to every brand name tech company, especially the one…

Edit - this has been the first fdic takeover since 2020, so no, it does not happen often. This chart of historic bank failures paints a different picture: https://www.fdic.gov/bank/historical/bank/

And this chart paints an even different picture:

https://twitter.com/alistairmbarr/status/1634275645235793920

Re: FDIC Takes over Silicon Valley Bank

#638

Post by opportune »

eftychis wrote: post #625

Just because there is a whole lot of misuse of terms that makes it hard to understand certain comments and debate over if SIVB is insolvent or illiquid, here are some definitions: https://www.investopedia.com/terms/s/solvencyratio.asp#toc-s... Defn. (informal) A company is illiquid if they can not service short term liabilities/debt as it comes due. This includes the ability to quickly sell assets to raise cash. Acco…

The maturity value of a bond/mbs is not really the true value at a given time between it being issued and maturing. You can treat it that way as a person holding the bond if you pinky-promise to yourself to not sell until maturity, but since banks need to periodically sell these to let customers get their deposits, that fiction doesn’t work for them.

These things trade on the open market and adjust to interest rate changes. What really happened is that they bought a bunch of securities backed by depositors that lost value at mark-to-market. This is poor risk management, not some unfortunate unavoidable issue caused by a bank run. They are insolvent at market prices - illiquidity would be more like they have a bunch of contracts or snowflake assets (like buildings, or a security that doesn’t trade on the open market).

As a depositor, saying “in 10 years you will get the full value of your deposit back” is bullshit: you could give me the actual reduced value now, and I could invest it in the same kind of instrument, and in 10 years I’d also have the full value back - but I could do other things with it too, which may be preferable considering it’s my deposit that I may need to spend now rather than in 10 years.

The fear is that many other banks are in the same position, that they are technically underwater and vulnerable to runs because the true value of their deposit-backed assets have decreased due to interest rate increases, but that SVB was affected first because their customer base of VC-backed businesses just happened to have their withdrawal:deposit ratio increase the most.

Re: FDIC Takes over Silicon Valley Bank

#639

Post by nr378 »

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…

SVB held $21bn of 'available for sale' bonds and $91bn of 'held to maturity' bonds on its balance sheet, that were actually only worth $19bn an $76bn respectively on a mark-to-market basis, which means a total unrecognised hole its in balance sheet of $17bn. SVB's total equity was only $16bn[1][2]

That means it didn't have a liquidity crisis, and it didn't have reserves in excess of it's liabilities, it had a solvency crisis, and it has more liabilities than it has assets (before even considering the haircut it's assets will suffer at liquidation prices).

The crux of the issue here is that, for many types of assets, banks are able to test whether they meet capital requirements based on the price they paid for the assets, rather than the price the assets are currently worth. So SVB was sailing along nicely whilst it's bond portfolio slipped further and further under water, and wasn't required to recapitalise when it should have done.

[1] https://ir.svb.com/financials/annual-reports-and-proxies/def... [2] https://www.wsj.com/articles/bond-losses-push-silicon-valley...

Re: FDIC Takes over Silicon Valley Bank

#640

Post by fairity »

panarky wrote: post #610
bityard wrote: post #299

Earlier quoted context omitted.

Agreed. Lots of people here in the comments are making assumptions about a system they don't understand. Depositors with > $250k aren't necessarily going to "take a haircut," for the reason you mentioned, plus a few others. Additionally: 1. Any financial advisor who recommended to these startups that they should keep >250k in a regular bank account should be fired. It's totally possible (and regularly done) to spread…

SVB is not a typical regional bank taking deposits from middle-class workers, where most accounts are under the 250k insurance limit. Banks that primarily serve ordinary workers typically have over 50% of total deposits in accounts that are under the limit, and are fully insured. But for SVB, less than 3% of deposits are in accounts with less than $250k . The cold, hard fact is that if the bank doesn't have sufficien…

> The cold, hard fact is that the bank doesn't have sufficient assets to pay back depositors.

That's not true. As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. Even if liquidating assets forced a 15% haircut, depositors will be made whole.

If a bail out is necessary, it's likely in the form of a short-term loan to make depositors whole sooner rather than later. And, such a bail out can/should be structured as a loan with significant interest in which case it's not really a cost to taxpayers.

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