Please reboot Silly-con Valley...I mean the show. With everything that has happened with crypto and the current mayhem I think two solid additional seasons can be made.
Why make another documentary when you can just watch the news?
FDIC Takes over Silicon Valley Bank
911–920 of 1001 posts
Re: FDIC Takes over Silicon Valley Bank
#912It seems to me that there is an upper limit to a bank where they just cannot do business efficiently. If a bank has more deposits than they can grow their loan book, they’ve crossed that line. This bumps up against the too-big-to-fail problem we had in 2008 as well. If the banks can’t manage their growth, perhaps they should be broken up and/or have limits placed on their size.
Re: FDIC Takes over Silicon Valley Bank
#913An 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!…
It’s probably not material to the overall picture, but just for accuracy, the wording of this is inaccurate - “As deposits grew, SVB could not grow their loan book fast enough to generate the yield they wanted to see on this capital”
Capital has a special meaning to banks, and deposits are absolutely not capital from their point of view of the bank (they are from the point of view of the depositor). To the bank, deposits are on the liabilities side of the balance sheet.
A bank’s capital is only equity put in by shareholders and retained profits from previous years. This is important, because how much a bank can lend is only determined by the amount of capital they have, not the amount of deposits (since deposits are on the wrong side of the balance sheet for lending from).
Re: FDIC Takes over Silicon Valley Bank
#914Earlier 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)
The transfers are settled in central bank reserves, so the net change of assets and liabilities should actually be zero for deposits coming in.
Re: FDIC Takes over Silicon Valley Bank
#915Earlier 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)
> (Yes, this is a gross over-simplification)
This isn't really an over-simplification as it is wrong. When someone deposits $1m in the bank, the bank's assets increase by $1m in cash, while liabilities also increase by $1m and owners' equity is unaffected. The problem is that for interest-bearing deposit accounts, those liabilities increase over time, which decreases owners' equity in the absence of a sufficiently appreciating asset (such as a good loan or cash flow-generating security). Further, the bank has certain operational costs that must be paid, and investors must make some return or they'll pull capital from the bank (that's a simplification for publicly traded banks like SVB). In practice, it seems that banks need about 3 percentage points above the interest rate they pay on deposits to cover these costs, based on the typical spread between the Prime rate and the Federal Funds rate, though I imagine this necessary yield has a much higher variance for smaller banks.
When interest rates were effectively zero and their deposits increased by a huge amount, SVB decided to buy long-term bonds w/ 1.5% interest to cover the extra liability over time so that assets would grow with liabilities. Then interest rates went up. Cash assets stopped growing, but liabilities remained the same, so they started selling their bonds. Bonds lose value when interest rates increase, so their bonds sold for a loss, decreasing asset values. In the last 48 hours, depositors got spooked. SVB's equity effectively went negative, since asset values decreased below outstanding liabilities. That's typically when the FDIC steps in to liquidate a bank.
For banks, assets must in general be growing faster than liabilities. If the bank experiences a situation where assets are not growing relative to liabilities, they need to have sufficient capitalization (i.e. owners' equity) to weather the storm.
Re: FDIC Takes over Silicon Valley Bank
#916Libertarian, "small govt" VCs squealing for govt intervention... It would be funny if not for tens of thousands of people who might not receive their paycheck next week.
There are many ways to avoid that.
Agreed with the first part, amazing how quickly Tan and Sacks turned to government for a handout. If they get one, that will only incentivize bigger problems next time.
Re: FDIC Takes over Silicon Valley Bank
#917An 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 underlying problem in the 08 collapse was poor/non-existent underwriting of the mortgages and those loans being rated AAA when packaged in an MBS. When the economy slowed just a bit people started defaulting because originators were writing NINJ (No Income, No Job) loans, something that is illegal today.
This situation today has nothing to do with the failure of the MBS'S to payout like 08.
Re: FDIC Takes over Silicon Valley Bank
#918Earlier 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…
That’s not how it works. This is a good primer by the Bank of England: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Bank lending always creates new money. They don’t (and can’t) “lend deposits”.
Re: FDIC Takes over Silicon Valley Bank
#919An 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%." I'd like to learn more about the dramatic drop in MBS - elsewhere, downthread, it is asserted that they have dropped 30-50% ? I understand the inverse relationship between bond price and yield ... ... but I am surprised that an asset yielding ~1.5% drops 30% in value when treasuries of similar duration rise to 3-4%. Are there other fac…
MBS have a double whammy when rates rise. Not only are the mortgages yielding less relative to current rates but prepays decline so the duration extends. A lower relative rate for a longer time means a lower market price.
Re: FDIC Takes over Silicon Valley Bank
#920An 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!…
If that's even mostly true, it sounds like the SVB was set up to fail. It almost sounds like like Biden is trying to crash the US economy.