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How the last-ditch effort to save Silicon Valley Bank failed

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Re: How the last-ditch effort to save Silicon Valley Bank failed

#81

Post by tripletao »

hackernewds wrote: post #74
ouid wrote: post #31

Without reading the article, I can give you the answer immediately. SVB failed because they were bankrupt. This is what it is called when your liabilities are in excess of your assets.

They were not insolvent. They had a liquidity crisis. This has been stated hundreds of times in depth now.

They were mark-to-market insolvent, and those marks look economically rational--they agree with a simple NPV calculation, and there was no indication that the markets were disorderly. The marks were just lower than the SVB's management wished.

For regulatory purposes, the SVB was permitted to ignore those losses in bonds that it intended to hold to maturity. Accounting doesn't change reality, though. If the SVB's assets are actually worth more than their liabilities to depositors in any economically meaningful sense, then why do you think the FDIC was unable to find a buyer?

Re: How the last-ditch effort to save Silicon Valley Bank failed

#82

Post by thakoppno »

hackernewds wrote: post #73
yieldcrv wrote: post #61

That’s such an embarrassing indictment of the US payment system. Banking on the West Coast is hard, even harder in further flung areas like Hawaii. The banks open in normal business hours but cant get a single thing done if its after 4pm in New York City. So the further west you go, the fewer amount of hours you have to get anything moved.

Not to mention, ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii. Despite all the travelers there that could need cash and services. Often, overregulation by Hawaiian authorities is cited which is a just criticism. So it is for crypto as well, nonzero but very limited

> ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii

That is truly fascinating and something I hadn’t noticed when visiting. I wonder what implications this has for capital intensive construction projects there.

Presumably the builders still finance through major institutions but need to pay out all local labor via bank accounts from institutions on the island? So the local authorities have essentially taxed banking generally?

Re: How the last-ditch effort to save Silicon Valley Bank failed

#83

Post by yieldcrv »

thakoppno wrote: post #82
hackernewds wrote: post #73

Earlier quoted context omitted.

Not to mention, ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii. Despite all the travelers there that could need cash and services. Often, overregulation by Hawaiian authorities is cited which is a just criticism. So it is for crypto as well, nonzero but very limited

> ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii That is truly fascinating and something I hadn’t noticed when visiting. I wonder what implications this has for capital intensive construction projects there. Presumably the builders still finance through major institutions but need to pay out all local labor via bank accounts from institutions on the island? So the local authorit…

You can walk into any bank there, sign up with your drivers license, and wire money from your other bank same day.

I needed a deposit for a sublet there, and needed lots of cash for that. So when it posted the next business day, I walked to the teller and asked for cash. It wasn’t a problem except for everyone else that didn't imagine and was trying to use fintech apps and learned about arbitrary transaction amount limits.

Re: How the last-ditch effort to save Silicon Valley Bank failed

#84

Post by anonymouskimmer »

tripletao wrote: post #67
anonymouskimmer wrote: post #50

Earlier quoted context omitted.

My guess is that bond prices drop because there are better yielding things to buy instead. But for a bank the solvency concern is not that the yield will be "better" yielding, but merely sufficient to cover the obligations it owes along with its operating expenses. Having to fire sale bonds (to meet withdrawal obligations) that are selling at a discount because any potential buyers have better yielding instruments to…

> (along with the cost of the money you used to pay for them, which is very cheap for most large banks) Why should depositors leave more money than they need for short-term working capital in the SVB at 0% when a Treasury bill pays 4% with less risk? When all rates were roughly zero, it was easy to just lazily leave everything in the bank; but when rates increased, the reward for leaving and the risk of staying (beca…

> Why should depositors leave more money than they need for short-term working capital in the SVB

> Their managers and shareholders presumably hoped that would be the depositors, by leaving their money in a risky bank earning interest below the risk-free rate, slowly accepting the loss over time. The depositors had no economic incentive to do that though, and they didn't.

That's why the grandparent comment mentioned a large bank buying SVB out. Large banks have diverse, non-business deposits, many of which tend to sit, and not chase yields. People in more precarious positions keep emergency funds in the bank, not in CDs or bonds that they can't easily cash out on a moment's notice, or stocks that are risky. People in even more precarious positions are constantly paying money to the bank at a steep interest to cover their credit card payments. This is really cheap money to the bank (and more easily liquidatable at par than low-yielding bonds), though it has to cover those in the most precarious positions who default.

Re: How the last-ditch effort to save Silicon Valley Bank failed

#85

Post by anonymouskimmer »

barrkel wrote: post #80
tripletao wrote: post #67

Earlier quoted context omitted.

> (along with the cost of the money you used to pay for them, which is very cheap for most large banks) Why should depositors leave more money than they need for short-term working capital in the SVB at 0% when a Treasury bill pays 4% with less risk? When all rates were roughly zero, it was easy to just lazily leave everything in the bank; but when rates increased, the reward for leaving and the risk of staying (beca…

Exactly. Low yielding long maturity assets are worth a lot less in a higher interest rate environment. The assets the bank held declined in value. This would have been a solvency issue, if not today, then someday very soon.

Only if the depositors cash out en masse. Which SVB was at greater risk of than most banks, because of its particular clientele.

Re: How the last-ditch effort to save Silicon Valley Bank failed

#86

Post by randomname11 »

quesera wrote: post #53
tripletao wrote: post #48

Earlier quoted context omitted.

The FDIC and Fed made policy changes in response to the SVB's failure--the FDIC is insuring all the SVB's deposits, including those >$250k, and the Fed is allowing all banks to borrow more than the FMV against certain assets that lost value when interest rates increased. Without these changes, the SVB's depositors would have had access to maybe 50% or more of their uninsured money immediately, and maybe 90% or more e…

FDIC did not need a policy change to insure more than $250K per, that was a predefined option in existing policy, available if the bank failure was judged to have risk of systemic contagion. I'm no economist, but I think the (1-year) window for banks to borrow against the full face value of government bonds and MBS assets is interesting and probably reasonable. These are not risky investments, just illiquid. The Fed…

Well the fed already has the money which was used to purchase the bonds that they’re are now lending against. So I think that this amounts to giving some of that bond principal back early but slightly less in total in the form of interest on the loan.

Re: How the last-ditch effort to save Silicon Valley Bank failed

#87

Post by tripletao »

anonymouskimmer wrote: post #84
tripletao wrote: post #67

Earlier quoted context omitted.

> (along with the cost of the money you used to pay for them, which is very cheap for most large banks) Why should depositors leave more money than they need for short-term working capital in the SVB at 0% when a Treasury bill pays 4% with less risk? When all rates were roughly zero, it was easy to just lazily leave everything in the bank; but when rates increased, the reward for leaving and the risk of staying (beca…

> Why should depositors leave more money than they need for short-term working capital in the SVB > Their managers and shareholders presumably hoped that would be the depositors, by leaving their money in a risky bank earning interest below the risk-free rate, slowly accepting the loss over time. The depositors had no economic incentive to do that though, and they didn't. That's why the grandparent comment mentioned…

But interest rates went up. A different bank with less flighty depositors might indeed still have lots of cheap deposits, due to the stickiness that you note. But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? They'd happily buy the SVB's assets at the right discounted price; but that's the mark-to-market price, and the SVB had been mark-to-market insolvent since September.

I guess a lot of people hoped that a different large bank would buy the SVB or its assets at a price that would have maintained the accounting fiction that it was solvent. Such banks had no economic incentive to do that though, and once again they didn't.

Re: How the last-ditch effort to save Silicon Valley Bank failed

#88

Post by anonymouskimmer »

tripletao wrote: post #87
anonymouskimmer wrote: post #84

Earlier quoted context omitted.

> Why should depositors leave more money than they need for short-term working capital in the SVB > Their managers and shareholders presumably hoped that would be the depositors, by leaving their money in a risky bank earning interest below the risk-free rate, slowly accepting the loss over time. The depositors had no economic incentive to do that though, and they didn't. That's why the grandparent comment mentioned…

But interest rates went up. A different bank with less flighty depositors might indeed still have lots of cheap deposits, due to the stickiness that you note. But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? They'd happily buy the SVB's assets at the right discounted price; but that's the mark-to-market price, and the SVB had been mark-to-market insolve…

> But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%?

Hypothetically because they are martyrs who also want whatever goodwill SVB created in its clients (which now become the clients of the other bank). But yeah, it's a stretch.

Re: How the last-ditch effort to save Silicon Valley Bank failed

#89

Post by disgruntledphd2 »

anonymouskimmer wrote: post #88
tripletao wrote: post #87

Earlier quoted context omitted.

But interest rates went up. A different bank with less flighty depositors might indeed still have lots of cheap deposits, due to the stickiness that you note. But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? They'd happily buy the SVB's assets at the right discounted price; but that's the mark-to-market price, and the SVB had been mark-to-market insolve…

> But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? Hypothetically because they are martyrs who also want whatever goodwill SVB created in its clients (which now become the clients of the other bank). But yeah, it's a stretch.

I mean, if you think that you can grow your business by getting in early with tech founders, then it makes sense.

But that's pretty risky for a bank.

Re: How the last-ditch effort to save Silicon Valley Bank failed

#90

Post by tripletao »

anonymouskimmer wrote: post #88
tripletao wrote: post #87

Earlier quoted context omitted.

But interest rates went up. A different bank with less flighty depositors might indeed still have lots of cheap deposits, due to the stickiness that you note. But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? They'd happily buy the SVB's assets at the right discounted price; but that's the mark-to-market price, and the SVB had been mark-to-market insolve…

> But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? Hypothetically because they are martyrs who also want whatever goodwill SVB created in its clients (which now become the clients of the other bank). But yeah, it's a stretch.

I do think that's a fair point in general, and one that I'd neglected above--lots of marginally insolvent banks have been rescued in exactly that way, with an acquirer paying a premium for the value of the business, not just the financial assets.

The mark-to-market hole at the SVB was pretty deep though, and their depositor base had just made itself look particularly unattractive. So maybe the FDIC will eventually manage to find a buyer, but it indeed looks pretty hard.

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