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FDIC Takes over Silicon Valley Bank

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Re: FDIC Takes over Silicon Valley Bank

#871

Post by mempko »

kgwgk wrote: post #743
mempko wrote: post #495

Earlier quoted context omitted.

Banks don't lend out deposits. They don't take deposits and lend out 90% or so. Fractional reserve banking is a model of how banking works but it's a wrong model. In reality banks make loans (which create deposits). They try to attract deposits from other banks because they need enough bank reserves to cover liquidity issues (like customers transferring money to other banks). When a bank transfers deposits to another…

> Fractional reserve banking is a model of how banking works but it's a wrong model. [...] They try to attract deposits from other banks because they need enough bank reserves Not completely wrong, after all.

It's a useful model the same way a toy hotwheel is a model of a car. Yes they both have four wheels.

Notice the issue that SVB had was a huge influx of deposits and not enough loans.

Re: FDIC Takes over Silicon Valley Bank

#872

Post by csomar »

nr378 wrote: post #639
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 solvenc…

> 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.

I think this will limit the types of assets banks can purchase. They'll need to purchase only assets that regularly trade (and thus are quoted) on the market.

Re: FDIC Takes over Silicon Valley Bank

#873

Post by csomar »

whimsicalism wrote: post #834
nr378 wrote: post #639

Earlier quoted context omitted.

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 solvenc…

sounds like you are describing a liquidity crisis to me

A liquidity crisis is a solvency crisis if depositors are asking for their deposits. SVB made a miscalculation on their outflows and the price for that apparently is their whole market cap.

Re: FDIC Takes over Silicon Valley Bank

#874

Post by chii »

stuxnet79 wrote: post #780
PragmaticPulp wrote: post #411

Earlier quoted context omitted.

> 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,…

I see the point you are trying to make here but your argument isn't very convincing. You are completely ignoring the impact regulatory oversight would have. If fractional reserve banking was banned outright due to the risks it poses, then the situation you just described would never emerge. As time goes on it's becoming more obvious that the current status quo is unstable. Our financial institutions regularly engage…

> then we need to come up with better reasons

the best reason is to allow more risks to be taken.

A 100% reserve system means that a bank would not be able to make loans that they'd want to make (aka, a customer wants the loan, and they can service it, etc).

A 100% reserve system would seize up at a small shock much more easily than a You pay for <100% fractional reserve system with some risk of bank runs. If the majority of people can get a gov't backed guarantee that they would be made whole, these runs tend to be minor or not happen at all. And overall economic activity is smoother due to more liquidity available to lubricate everything (e.g., it's easier to get loans to do things to provide more economic activity).

Re: FDIC Takes over Silicon Valley Bank

#875

Post by tikkun »

nr378 wrote: post #639
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 solvenc…

> SVB's total equity was only $16bn

Which table in the 10-K would I look at to see this?

Re: FDIC Takes over Silicon Valley Bank

#876

Post by sneak »

bombcar wrote: post #294
mynameisjonny_ wrote: post #166

Earlier quoted context omitted.

There's nothing wrong with your first sentence really. Banks can (and should) hedge these risks using swaps and other products. Someone really messed up here.

All banks run on exchanging short term liabilities for long-term assets. No bank is big enough that it can survive a large enough run. The whole point of capitalization stress-tests is to determine that banks can withstand a certain amount of withdrawals. It of course is going to be much much more likely on a bank that only has 3% FDIC - I have no desire to "run" on my bank because I am below the $250k limit, and eve…

It is absolutely ridiculous for someone with more than a few million sitting in checking to, well, have it sitting in checking.

Not only is there the 250k FDIC limit, but that's leaving money on the table. At least put it in highly liquid and stable securities of some kind so you're not bleeding it. And, of course, accounts can get locked out. Anything over a couple million should be split across two different institutions minimum.

Re: FDIC Takes over Silicon Valley Bank

#877

Post by mouse_ »

hinkley wrote: post #850

If we’re going to treat the US government like an underwriter, maybe we should allow the FDIC to charge fees that look a bit more like insurance. We won’t stop you from doing X, but the fees are higher because you’re more likely to default. As things are every time so thing like this happens either taxes go up, the national debt goes up, or we trigger inflation to solve it.

FDIC -is- insurance, and it's not supposed to make money, it's supposed to cost money. It's a safety net for when shit hits the fan. There should, in fact, be things you're not allowed to do as a traditional banking establishment. And I'm sure this event will be precedent for more.

Re: FDIC Takes over Silicon Valley Bank

#878

Post by markmaglana »

NovemberWhiskey wrote: post #609
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)

To my mind, although it's in-principle equivalent, the clearer way to think about this is that banks borrow money from depositors and lend that money via loans or investments. The primary business of a bank is borrowing short and lending long - where short and long refer to the holding time: i.e. taking demand or short-duration term deposits and making mortgage, car and other types of loans. If you do this badly, you…

I wonder if it’s correct to also think about it in this way: idle cash devalues over time. Coupled with interest (no matter how small) that they pay out to their depositors, this exposes banks to future liability. To counter that, they have to give “jobs” to as much of this cash as possible so that they can make those payments while also pocketing a profit for themselves.

Re: FDIC Takes over Silicon Valley Bank

#879

Post by chippiewill »

paulddraper wrote: post #861
Eumenes wrote: post #693

Earlier quoted context omitted.

The team making these poor choices at SVB should be criminally charged ... The tax payer shouldn't have to bail out banks.

> should be criminally charged For what crime? If someone unintentionally but ineptly writes code that crashes Amazon on Black Friday, did they commit a crime?

It's possible to be criminally negligent. If you took unnecessary risks then it can carry a criminal element.

Re: FDIC Takes over Silicon Valley Bank

#880

Post by emkemp »

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!…

Nitpick: The Fed isn't selling bonds. Maybe they meant the Treasury?
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