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SVB collapse could mean a $500B venture capital ‘haircut’

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Re: SVB collapse could mean a $500B venture capital ‘haircut’

#141

Post by LapsangGuzzler »

jjeaff wrote: post #125
nafey wrote: post #83

Earlier quoted context omitted.

> However, the "risky" investments that I have heard described thus far are mostly treasury securities You assume that all risk is default risk. The risk that SVB took wasn't that the US govt will default on its bonds. It was that the treasuries will lose their value in case of interest rate changes. SVB bought billions of dollars of US treasuries which lost their value in the last year due to rate hikes. This showed…

No, I understand the liquidity risk involved in having too much tied up in long term treasuries. But I am yet to see evidence that any bank could have withstood a run of that magnitude. Nor have I seen much evidence that most other banks have significantly less liquidity risk than svb did.

> Nor have I seen much evidence that most other banks have significantly less liquidity risk than SVB did.

In traditional banking, rising interest rates are a good thing because it means that banks in turn get to underwrite loans at higher interest rates, which positively affects their bottom line. SVB's problems were twofold: A) they had a one-dimensional investment strategy that was adversely affected by rising rates, and B) outstanding loans made up a very small portion of their business relative to their size, which made it so that they weren't able to capture meaningful value from rising interest rates. The latter is actually pretty rare for a bank, which shows how uninterested they were in actually functioning like one.

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#142

Post by bagavi »

Turskarama wrote: post #126
doktorhladnjak wrote: post #119

Earlier quoted context omitted.

There is absolutely moral hazard for depositors. If uninsured SVB depositors had gotten something like 90¢ on the dollar for deposits, every company with uninsured deposits would start thinking about how reliable their bank might be. More due diligence would happen. Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larg…

It shouldn't be up to depositors to do "due diligence" on their bank, making sure they're compliant is exactly the kind of thing government is _for_. Imagine if you had to do several hours of research on every single thing you purchased and investment you made, you'd never have time for anything else and there's still a chance you miss something. Compare that to experts doing it and spending a lot more time on it, th…

Break up your deposit into 250k$ accounts, each insured by FDIC. Let software handle the logistics of payments via multiple bank accounts.

Asking depositors to do the due deligence is a strawman.

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#143

Post by rodgerd »

LapsangGuzzler wrote: post #29
kurthr wrote: post #8

Play bank run games, win bank run prizes. Really, I don't love the regulatory arbitrage played by SVB and unhedged duration risk, nor the moral hazard created by the bailout, nor the somewhat bizarre attitude of companies holding huge $100Ms of uninsured deposits earning minimal interest (why have more than 1 months cash flow?), but really this was a bank run pure and simple. When you have to plan to lose >20% of you…

SVB also chose not to prioritize hiring a risk manager for months leading up to their collapse, which is just pure stupidity. Anyone worth their salt would've pointed out that they were at risk due to their investment strategy and homogeneous customer base. We're seeing old lessons from the 80's being retaught in the banking world. Never put all of your cash in one bank. Keep your debt and your liquidity held in sepa…

> SVB also chose not to prioritize hiring a risk manager for months leading up to their collapse

Closer to a year, I believe. On the back of lobbying for exemptions from Basel III adequacy requirements.

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#144

Post by tripletao »

jjeaff wrote: post #125
nafey wrote: post #83

Earlier quoted context omitted.

> However, the "risky" investments that I have heard described thus far are mostly treasury securities You assume that all risk is default risk. The risk that SVB took wasn't that the US govt will default on its bonds. It was that the treasuries will lose their value in case of interest rate changes. SVB bought billions of dollars of US treasuries which lost their value in the last year due to rate hikes. This showed…

No, I understand the liquidity risk involved in having too much tied up in long term treasuries. But I am yet to see evidence that any bank could have withstood a run of that magnitude. Nor have I seen much evidence that most other banks have significantly less liquidity risk than svb did.

It's solvency risk, not liquidity risk. When interest rates are 4%, having $1000 ten years from now means I have 1000/1.04^10 = $676 now. If my current liabilities exceed that, I'm insolvent, not illiquid.

Liquidity is about bid/ask spreads, disorderly markets in which the price becomes temporarily irrational. The SVB's problem was simply the time value of money, that the liquid and economically rational price of their long-term bond-like assets is lower than they wished it would be.

This paper estimates that 190/4800 ~ 4% of banks would have deposits at risk if half of uninsured deposits were withdrawn. That means 96% of banks wouldn't. The SVB's situation wasn't completely unique, but it's far from the norm.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#145

Post by tripletao »

prottog wrote: post #140
jjeaff wrote: post #125

Earlier quoted context omitted.

No, I understand the liquidity risk involved in having too much tied up in long term treasuries. But I am yet to see evidence that any bank could have withstood a run of that magnitude. Nor have I seen much evidence that most other banks have significantly less liquidity risk than svb did.

> But I am yet to see evidence that any bank could have withstood a run of that magnitude. I think you're right that no bank can withstand a run of that magnitude, and it has been pointed out elsewhere in the thread that entities that can do so aren't really a bank anymore. However, the bank run only occurred because it was public knowledge that SVB had terrible duration risk, so it's somewhat of a chicken-or-egg pro…

> I think you're right that no bank can withstand a run of that magnitude,

They're not right. No bank could sell assets quickly enough to withstand such a run, but that's why the Fed serves as lender of last resort. Even under previous policy, the Fed would lend against the mark-to-market value of the collateral. So in theory any MTM-solvent bank could survive any run, so there was no incentive to start the run in the first place.

The SVB was MTM insolvent due to that excessive duration risk, so it couldn't do that. It's not the only MTM-insolvent bank (see the link in my other comment), but that in combination with its unusually high fraction of uninsured and thus flighty deposits was apparently enough to start the run.

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#146

Post by alxmng »

kurthr wrote: post #8

Play bank run games, win bank run prizes. Really, I don't love the regulatory arbitrage played by SVB and unhedged duration risk, nor the moral hazard created by the bailout, nor the somewhat bizarre attitude of companies holding huge $100Ms of uninsured deposits earning minimal interest (why have more than 1 months cash flow?), but really this was a bank run pure and simple. When you have to plan to lose >20% of you…

Blame properly rests on the system that is designed to produce bank runs. The system is designed such that bank runs are possible and inevitable. It is not risk management or the Fed’s interest rates, it is the practice of investing deposits while simultaneously promising those deposits are available. Instead of changing this system, the Fed was created to solve a problem the system inherently produces.

If deposit accounts were held at the Fed, and investment and loans were kept separate, there would be no possibility of bank run.

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#147

Post by seizethecheese »

fairity wrote: post #36
dehrmann wrote: post #19

Is the only common thread between SVB and the haircut that it's inspiring LPs to look more closely at their investments?

I’m confused too. Seems like link bait. The article fails to connect the dots between SVB and venture valuations, which were already well into a downswing before SVB’s collapse.

Yeah this is upvoted purely from HN shaudenfreude

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#148

Post by KerrAvon »

snordgren wrote: post #34
dehrmann wrote: post #23

Earlier quoted context omitted.

> startups with 10+ years of unprofitable existence without any potential exit are going to get disrupted by newer players. It depends how unprofitable. Well-established products like Twitter and Reddit are big, have an established user base, and while not particularly profitable, I also don't see them getting disrupted by a rising competitor.

They are social media sites, the textbook example of the network effect. Them not being very profitable is almost like a moat in itself - not only is it hard to displace them, it's probably not profitable to do so either.

Mastodon — which is a non-profit — is nibbling away at Twitter.

Re: SVB collapse could mean a $500B venture capital ‘haircut’

#150

Post by kshacker »

Turskarama wrote: post #126
doktorhladnjak wrote: post #119

Earlier quoted context omitted.

There is absolutely moral hazard for depositors. If uninsured SVB depositors had gotten something like 90¢ on the dollar for deposits, every company with uninsured deposits would start thinking about how reliable their bank might be. More due diligence would happen. Of course, we also would have seen runs on many more regional banks. The "too big to fail" banks like JP Morgan and BofA would only have gotten much larg…

It shouldn't be up to depositors to do "due diligence" on their bank, making sure they're compliant is exactly the kind of thing government is _for_. Imagine if you had to do several hours of research on every single thing you purchased and investment you made, you'd never have time for anything else and there's still a chance you miss something. Compare that to experts doing it and spending a lot more time on it, th…

If you see a bank offering 4.75 percent on a certificate vs another offering 2.75, which one would you choose? If you always choose the highest, should you not have a stake if the bank was found to take a lot of risk to offer this higher rate?
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