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Silicon Valley Bank Failure [pdf]

am.jpmorgan.com

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Re: Silicon Valley Bank Failure [pdf]

#91

Post by zhte415 »

LandR wrote: post #38
yCombLinks wrote: post #26

Earlier quoted context omitted.

Most depositor's money is insured by the government, so there is no reason people would panic withdrawal their money

In the UK, you are only covered up to £80k though... I could understand people wanting to get at least money over £80k out, but also how long does it take to get access to your cash if you have to go through the government insurance procedure. Is it days, weeks, months ? I have no idea and wouldn't want to have to find out.

> In the UK, you are only covered up to £80k though...

Per bank.

Re: Silicon Valley Bank Failure [pdf]

#92

Post by hirako2000 »

senttoschool wrote: post #20
nonethewiser wrote: post #5

I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk. We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .” Also consider the past 10…

I don’t think startups will have a harder time banking in the future. This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. Buying 10 year low yield securities and not hedging them against rising rates. Plenty of banks would love to have the deposits of startups and VCs. I bet a bank like Mercury or some other ones will grow to take SVB’s place.

I think the attention is put on some, likely, bonds backfiring. Not going into questioning how a 20y old bank would buy very long bonds as historically lowest returns. There is even more likely some bad lending in there in the order of billions that either have or are going going to materialise as defaults. And that's plain'n simple having to wipe numbers from the books, and those books aren't going to look good.

Banks take deposits but also loan with a 10x or even more ratio. Not difficult to imagine a SV bank would have lended a lot of cash, with marginal interests that aren't covering the actual risk.

Only speculation on my part there but needs to see further unwinding to bring some clarity or where the hole mostly comes from.

Until then, the narrative sounds far better than pointing out a widespread bad credit issue that other banks are also going to face in the coming months.

Edit: typos

Re: Silicon Valley Bank Failure [pdf]

#93

Post by [deleted] »

m3kw9 wrote: post #84
chewz wrote: post #46

This is rather silly explanation of what happend, especially from JP Morgan... Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. SVB didn't. Since April 2022 till January 2023 SVB had vacant position of Credit Risk Officer.. And the explanation is simple - SVB's former head of risk, Laura Izurieta had left after 1Q2022 when looses from bond portfo…

what’s the point of needing to hedge if you let the bonds expire and get the payment. You wouldn’t lose anything right?

[deleted]

Re: Silicon Valley Bank Failure [pdf]

#94

Post by wcoenen »

chewz wrote: post #46

This is rather silly explanation of what happend, especially from JP Morgan... Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. SVB didn't. Since April 2022 till January 2023 SVB had vacant position of Credit Risk Officer.. And the explanation is simple - SVB's former head of risk, Laura Izurieta had left after 1Q2022 when looses from bond portfo…

> Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk.

Just a thought: the UK gilt crisis in December was related to pension funds holding long term gilts. And these pension funds all properly hedge the interest rate risk, they normally don't care how rates evolve.

However, the market value of the gilts was changing too fast for the hedging to work. My understanding is that money couldn't be moved around fast enough to meet margin calls. Which then caused a bad feedback loop of forced liquidations of gilts, and the Bank of England had to step in to handle the crisis.

So with this new story of duration risk at SVB, I'm wondering now whether other banks are in danger. They may have hedged their duration risk, but what if the hedging mechanism turns out to be broken?

Re: Silicon Valley Bank Failure [pdf]

#95

Post by runeks »

nonethewiser wrote: post #5

I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk. We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .” Also consider the past 10…

> [...] SVB was actually assuming quite a bit of risk.

Honest question: compared to what?

Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan?

Or is the case that JP Morgan is as insolvent as SVB, but JPM's depositors are less likely to withdraw their funds (because it's a big bank and it has primarily retail customers)?

These are honest questions; I'm not suggesting JPM is in the same situation. However, I'd like to see some numbers.

Re: Silicon Valley Bank Failure [pdf]

#96

Post by m3kw9 »

runeks wrote: post #87
m3kw9 wrote: post #84

Earlier quoted context omitted.

what’s the point of needing to hedge if you let the bonds expire and get the payment. You wouldn’t lose anything right?

SVB just went bankrupt pursuing that strategy... That being said, I don't think it's possible for all banks to hedge interest rate risk. The risk, to the system as a whole, doesn't go away just because it's transferred to someone else.

So their bond prices went down and made them bankrupt, how does the math work in simple terms?

Re: Silicon Valley Bank Failure [pdf]

#97

Post by [deleted] »

senttoschool wrote: post #20
nonethewiser wrote: post #5

I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk. We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .” Also consider the past 10…

I don’t think startups will have a harder time banking in the future. This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. Buying 10 year low yield securities and not hedging them against rising rates. Plenty of banks would love to have the deposits of startups and VCs. I bet a bank like Mercury or some other ones will grow to take SVB’s place.

[deleted]

Re: Silicon Valley Bank Failure [pdf]

#98

Post by ericpauley »

morelisp wrote: post #86
ericpauley wrote: post #39

Earlier quoted context omitted.

Exactly. 250k to me seems like a very logical threshold to expect at least some sophistication. Deposit sweeps get you to 3M many places after which it seems perfectly reasonable to expect people to manage treasuries. If Bogleheads can do it VCs can. Then again, you have people like Mark Cuban who clearly don’t know about basic cash management ( https://twitter.com/mcuban/status/1634413306948603905 ), so maybe Americ…

The alternative take would be that Cuban knows exactly how it works but sees a chance to push for what's essentially a federal startup subsidy because his fanboys don't know.

For sure, the assumption of ignorance definitely doesn’t apply here.

Re: Silicon Valley Bank Failure [pdf]

#99

Post by jcalvinowens »

runeks wrote: post #85
belter wrote: post #2

"The liabiity issue: extreme reliance on institutional/VC funding rather than traditional retail deposits While capital, wholesale funding and loan to deposit ratios improved for many US banks since 2008, there are exceptions. As shown in the first chart, SIVB was in a league of its own: a high level of loans plus securities as a percentage of deposits, and very low reliance on stickier retail deposits as a share of…

That's actually quite concerning, if you read between the lines. What they're saying is: "JPM is just as insolvent as SIVB. The only difference is that JPM's customers are less likely to withdraw their funds."

No, what they're saying is a far greater portion of their deposits are from depositors below $250K who have no rational motivation to participate in a bank run.

Re: Silicon Valley Bank Failure [pdf]

#100

Post by JumpCrisscross »

runeks wrote: post #76
chewz wrote: post #46

This is rather silly explanation of what happend, especially from JP Morgan... Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. SVB didn't. Since April 2022 till January 2023 SVB had vacant position of Credit Risk Officer.. And the explanation is simple - SVB's former head of risk, Laura Izurieta had left after 1Q2022 when looses from bond portfo…

> Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. How are other banks hedging interest rate risk? And how is the opposite end of this hedge hedging their position?

> how is the opposite end of this hedge hedging their position?

Plenty of financial functions create natural short interest rate exposure. Like SVB, they have no business speculating on rates, so they hedge it away. (The Fed is also involved in the repo market.)

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