Silicon Valley Bank Failure [pdf] • Hacker News Board

Re: Silicon Valley Bank Failure [pdf]

#111

Post by inconceivable » Sun, Mar 12, 2023, 4:31 PM UTC

wcoenen wrote: post #94

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…

it's even worse than that. the pension funds were selling swaps (paying variable rates). that's why the BoE needed to step in to buy gilts - to drive the yield down and stop the bleeding from both the variable payout and capital losses incurred when liquidating gilts at a loss.

zirp has caused some pretty astounding fuckups and i'm sure there are many more to come.

https://www.reuters.com/markets/europe/why-are-britains-pens...

Re: Silicon Valley Bank Failure [pdf]

#112

Post by hirako2000 » Sun, Mar 12, 2023, 4:32 PM UTC

fach wrote: post #103

A child-like regulatory question: Why aren’t HTM portfolios for retail banks frequently marked to market? Wouldn’t this force more accurate accounting in the event a bank needed to sell bonds in a capital crunch?

Not an HTM certified, not even a practitioner here. But it's also an accounting question. The way it's done: asset is valued per maturation. It would mudd the water even further I think to have the quarterly reflect the "at current market" value. Things go up and down. What matters is how you close (realised gains or loss), and, at SVB's demise: your cashflow.

No cash? Then sell your assets. Creditors/depositors ain't gonna wait. Realised loss? That's your balance going down in true accounting terms now. Accountings get disclosed? Those quarterly release are mandatory for all publicly trading company: that could cause worry among investors, and in the case of a bank a panic a bank run.

What a market valuation made at each quarter could achieve is give a momentarily evaluation of what a fund's assets is made of if they were to liquidate right then, or that day. But it isn't how it works*

It does work for goods though, amortization is accounted for and a well oiled exercise. Futures, bonds, stocks? Good luck with that. If we could predict the future the game would be a whole lot different.

Re: Silicon Valley Bank Failure [pdf]

#113

Post by metalspot » Sun, Mar 12, 2023, 4:33 PM UTC

tempsy wrote: post #110

metalspot wrote: post #109

Earlier quoted context omitted.

they can fail all they want as long as you have less than 250K deposited. if you are using mercury as a transaction agent then you have no risk. you keep your deposits at a tbtf bank, then automate your transactions to run through mercury, so you pay lower transaction fees.

that was also true of SVB

no, it was very different at SVB. SVB was loaning money to startups on the basis of exclusivity contracts where those startups were required to hold the money in SVB accounts, so they were basically paying SVB to create the illusion of having liquidity. that is a whole different game.

Re: Silicon Valley Bank Failure [pdf]

#114

Post by chewz » Sun, Mar 12, 2023, 4:34 PM UTC

wcoenen wrote: post #94

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…

> the UK gilt crisis in December was related to pension funds holding long term gilts

No, you got it wrong.. UK pension funds didn't have much gilts. UK pension funds had swaps on gilts and mostly assets equal to long term gilts (AAA rated). Like for example ownership of a parking lots in Germany, apartments in Norway - safe, steady cash flows. This is what chasing yields at zero interest rates does.

Penions funds needed a window of few days to make a fire sale of these assets to meet their margin calls. It takes about two weeks from some junior analyst from BlackRock visiting said parking lot in Germany, checking books to BlackRock depositing money at UK Pension fund bank account. So Bank of England opened unlimited discount window for UK Pension funds for about two weeks. And then it closed.

This is what happend.

Re: Silicon Valley Bank Failure [pdf]

#115

Post by runeks » Sun, Mar 12, 2023, 4:39 PM UTC

m3kw9 wrote: post #96

runeks wrote: post #87

Earlier quoted context omitted.

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?

In simple terms, a bond is a piece of paper that pays a dollar amount per year to the holder for N number of years, after which the initial price paid for the bond is returned to the holder.

For example, a 10-year bond that pays $2 per year costs $100 today. That is, a piece of paper that pays $2 to the holder every year for 10 years, after which the holder gets its $100 back.

Now, some time passes and the market thinks the above bond is too expensive. Instead, the market will only pay $50 for the above bond, ie. $50 to get $2 per year.

This means that the price of another bond: the bond that pays $4 per year will now cost $100. This is the case because holding two bonds that cost $50 each and pay $2 per year is exactly equivalent to holding a single bond that pays $4 per year and costs $100.

If the market price of a 10-year bond that pays $4 per year costs $100 then we say that the current rate of interest for the 10-year bond is 4%. If this rate of interest falls to 2%, it simply means that the market is now willing to pay $200 per year for a bond that pays $4 per year — or, equivalently, $100 for a bond that pays $2 per year.

Re: Silicon Valley Bank Failure [pdf]

#116

Post by oarabbus_ » Sun, Mar 12, 2023, 4:39 PM UTC

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?

Any regular bond holding would include a mix of maturities - 1, 2, 5, 10 year bonds. This provides constantly maturing bonds leading to liquid cash with yield on the longest term instruments.

Re: Silicon Valley Bank Failure [pdf]

#117

Post by tel » Sun, Mar 12, 2023, 4:40 PM UTC

runeks wrote: post #95

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 s…

I'm not sure I completely follow the linked PDF, but it seems to be suggesting exactly that:

    So, the big question for investors and depositors is this: how much duration risk 
    did each bank take in its investment portfolio during the deposit surge, and how 
    much was invested at the lows in Treasury and Agency yields? As a proxy for these 
    questions now that rates have risen, we can examine the impact on capital ratios
    from an assumed immediate realization of unrealized securities losses (see next page 
    for a full explanation of our methodology). That’s what is shown in the first chart: 
    again, SIVB was in investment duration world of its own as of the end of 2022, which 
    is remarkable given its funding profile shown earlier.

The argument seems to be exactly that SVB both had highly interest rate sensitive depositors and significant unhedged duration risk. Both led to correlated interest rate risk at SVB and both were unique in the US banking world.

Another key comment by Cembalest

    As shown below, being flooded with deposits from fast-money VC firms and other 
    corporate accounts at a time of historically low interest rates might have been 
    more of a curse than a blessing.

The chart shows that SVB's balance sheet expanded by 250% from 2019 to 2022 (compare JPM at ~40%, one of the lower banks listed and the next closest, Western Alliance at ~180% and Truist at ~150%).

Re: Silicon Valley Bank Failure [pdf]

#118

Post by btown » Sun, Mar 12, 2023, 4:43 PM UTC

tempsy wrote: post #3

the irony of this whole situation is VCs and startups pouncing on the chaos to encourage people to move their money into even more opaque neobanks eg Mercury/Brex/Ramp as if they don’t have the same issues with relying on VC funded startup deposits but even worse in that their balance sheets are hidden.

Brex at least mitigates by spreading deposits across multiple banks: https://www.brex.com/journal/how-business-account-works .

But given https://techcrunch.com/2021/02/19/brex-applies-for-bank-char... and the fact that https://www.brex.com/svb-emergency-line emerged literally overnight... it's unclear to me whether these strategies are truly robust, or whether much of this is hype driven by Thiel and other Brex etc. investors - who are, at the very least, incentivized to capitalize on this situation.

Re: Silicon Valley Bank Failure [pdf]

#119

Post by tempsy » Sun, Mar 12, 2023, 4:43 PM UTC

metalspot wrote: post #113

tempsy wrote: post #110

Earlier quoted context omitted.

that was also true of SVB

no, it was very different at SVB. SVB was loaning money to startups on the basis of exclusivity contracts where those startups were required to hold the money in SVB accounts, so they were basically paying SVB to create the illusion of having liquidity. that is a whole different game.

that is true for some customers not all and not the primary reason why it failed.

and the problem is you know nothing about the financial health of the small banks that are white label providers so how can you say you’re confident in the management of these individual banks that Mercury is contracting with? you don’t know anything about them.

Re: Silicon Valley Bank Failure [pdf]

#120

Post by tel » Sun, Mar 12, 2023, 4:45 PM UTC

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.

Swaps do indeed transfer that risk to other parties, at a premium because those other parties are more able to absorb the risk. While, sure, there are systematic stresses across the whole financial system, it doesn't mean that there aren't counterparties more capable of managing interest rate risk and willing to do so for a fee. This can be done by just having a larger balance sheet, or blending durations.

Seems like SVB wasn't willing to pay the premium, though.