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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

#51

Post by anonymouskimmer »

trhr wrote: post #39
hackly wrote: post #4

My bank (in Canada) has limits on how much I can withdraw per day, per week, per month. Furthermore, there could be a delay of up to 5 business days before I can get the money to its destination. And that’s for money in the thousands only. How is that money in the billions can be withdrawn so quickly esp. since these were high value accounts each in the millions/billions? Couldn’t they just use one of their terms or…

You're confusing real money with fake money. In America, we can only withdraw so much real money every day, too. The banks will tell you things like "We only keep $2000 in real money in the safe." But the fake money never gets printed. It just lives in bits and bytes. You can move it around as much as you want. Fortunately, it's as good as real money. It's just not as good as real wealth. Real wealth is in ammunition…

> People downvoting this are politically opposed to guns

Are you sure they're not downvoting you for being completely off topic while ranting about a hobbyhorse?

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

#52

Post by helsinkiandrew »

chmod600 wrote: post #46
stephen_g wrote: post #45

I don't think it would have mattered. A loan wouldn't have helped their situation much - the extra liquidity might have kicked the can down the road a few days or weeks, but they still would have been basically insolvent. Probably only a big capital injection and the interest rate quickly dropping by a significant amount would have saved them (or being bought by a bigger bank that could absorb the losses and hold the…

How does holding the bonds to maturity help? Sure, interest rates might go down, but the expectations are already factored into the market price. If they go down more than expected, the bigger bank wins. If they go down less than expected, the bigger bank loses. Overall, should be neutral.

Say you bought a $100 5 Year US treasury bond paying 1% a year interest ($1) from the Government for $100 a year ago. Now interest rates have risen to 4-5% and any buyer could buy something else that would give them more interest so they will pay less than $100 for your bond.

If you hold that bond to maturity in 5 years the US government will give you your $100 in full though.

The Fed has now started a program that lets banks use their treasury bonds as collateral against cash loans - if this was going a few weeks ago it would have saved SVB.

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

#53

Post by quesera »

tripletao wrote: post #48
quesera wrote: post #38

Earlier quoted context omitted.

> they should have legally obligated SVB to remain solvent! They did! When SVB failed to meet those regulatory obligations, the bank was seized and the depositors were made whole. So the system worked, right?

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 will get their money back. Providing liquidity to the system is part of the Fed's job.

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

#54

Post by khochesh_kushat »

bunabhucan wrote: post #37

"It was a dark and stormy night when the regulators showed up at the {$RecentlyFailedFinancialInstitution} and greeted the ashen faced C suite" is a genre the journal excels at. It's like scary campfire stories for CEOs.

To be fair, it's a good genre. Books like Barbarians at the Gate, The Big Short, Smartest Guys in the Room are all wonderful, and I'm sure some of the journalists started writing after reading them.

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

#55

Post by lordnacho »

helsinkiandrew wrote: post #52
chmod600 wrote: post #46

Earlier quoted context omitted.

How does holding the bonds to maturity help? Sure, interest rates might go down, but the expectations are already factored into the market price. If they go down more than expected, the bigger bank wins. If they go down less than expected, the bigger bank loses. Overall, should be neutral.

Say you bought a $100 5 Year US treasury bond paying 1% a year interest ($1) from the Government for $100 a year ago. Now interest rates have risen to 4-5% and any buyer could buy something else that would give them more interest so they will pay less than $100 for your bond. If you hold that bond to maturity in 5 years the US government will give you your $100 in full though. The Fed has now started a program that l…

What is the downside of this program? It sounds like it would be much better just to get that cash loan than deal with depositors?

As in, does the program let you borrow cash from the government at a lower rate than the bonds are paying? How could that work?

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

#56

Post by tripletao »

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…

While alive, the SVB deliberately avoided designation as "systemically important", in order to avoid the corresponding regulatory burden. Then as soon as it failed, its depositors got beneficial treatment under a "systemic risk exception". I'm not saying that was necessarily the wrong choice; but do you really think that's a coherent rules-based system?

> These are not risky investments, just illiquid.

It's not a question of liquidity. Similar assets trade with tight spreads, at prices very closely predicted by a textbook NPV model. The price just went down when interest rates went up, exactly as expected. There's no significant uncertainty in the price. Waiting won't make it go up, except in the same sense that waiting turns $100 in Treasury bills into $104 a year from now.

The Fed is making an undercollateralized loan. If a bank fails with such a loan outstanding, then the Fed will lose money. Interest rate risk is as real as credit risk or any other risk, and this would be a real economic loss.

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

#57

Post by tripletao »

lordnacho wrote: post #55
helsinkiandrew wrote: post #52

Earlier quoted context omitted.

Say you bought a $100 5 Year US treasury bond paying 1% a year interest ($1) from the Government for $100 a year ago. Now interest rates have risen to 4-5% and any buyer could buy something else that would give them more interest so they will pay less than $100 for your bond. If you hold that bond to maturity in 5 years the US government will give you your $100 in full though. The Fed has now started a program that l…

What is the downside of this program? It sounds like it would be much better just to get that cash loan than deal with depositors? As in, does the program let you borrow cash from the government at a lower rate than the bonds are paying? How could that work?

The program charges market rates, so that part isn't a subsidy--they're effectively letting banks bleed out the loss over time instead of recognizing it all at once, hoping (probably correctly in most cases) that other parts of the bank's business will be profitable enough that they can slowly earn their way out of the hole.

The program is undercollateralized though, so if a bank fails with such a loan outstanding then the Fed loses money. That part is a subsidy.

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

#58

Post by [deleted] »

lordnacho wrote: post #55
helsinkiandrew wrote: post #52

Earlier quoted context omitted.

Say you bought a $100 5 Year US treasury bond paying 1% a year interest ($1) from the Government for $100 a year ago. Now interest rates have risen to 4-5% and any buyer could buy something else that would give them more interest so they will pay less than $100 for your bond. If you hold that bond to maturity in 5 years the US government will give you your $100 in full though. The Fed has now started a program that l…

What is the downside of this program? It sounds like it would be much better just to get that cash loan than deal with depositors? As in, does the program let you borrow cash from the government at a lower rate than the bonds are paying? How could that work?

[deleted]

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

#59

Post by blitzar »

lordnacho wrote: post #55
helsinkiandrew wrote: post #52

Earlier quoted context omitted.

Say you bought a $100 5 Year US treasury bond paying 1% a year interest ($1) from the Government for $100 a year ago. Now interest rates have risen to 4-5% and any buyer could buy something else that would give them more interest so they will pay less than $100 for your bond. If you hold that bond to maturity in 5 years the US government will give you your $100 in full though. The Fed has now started a program that l…

What is the downside of this program? It sounds like it would be much better just to get that cash loan than deal with depositors? As in, does the program let you borrow cash from the government at a lower rate than the bonds are paying? How could that work?

> let you borrow cash from the government at a lower rate than the bonds are paying

one-year overnight index swap rate plus 10 basis points - so call it (currently) 4.7%

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

#60

Post by inglor_cz »

chii wrote: post #23
bitdivision wrote: post #6

Earlier quoted context omitted.

I doubt those limits would apply to business accounts, which I'd guess were the majority of the withdrawals here. Are you sure the limits on your account would apply to e.g. a wire transaction? Of course there are limits on ATM withdrawals and some other transfer methods, but I'm not sure they'd apply if you wanted to send a wire.

> I'm not sure they'd apply if you wanted to send a wire. Not many people (at least, people who don't deal with large sums) have experience with doing a wire transfer. Sometimes they're a bitch to deal with - but it's what you'd use if you are doing very large sums (like, in the order of 6 or 7 figures or more).

Interesting. Where?

In most of Europe, wire transfers are really easy to do, and where I live, most banks now support instant wire transfers (10 seconds) under some limit (in my case, 15 000 Eur). Doing them using QR codes and smart banking apps is really straightforward and user-friendly, so people do them routinely even for small sums.

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