The chart titled “Impact of unrealized securities losses on capital ratios” really shows just how inadequate the tier 1 capital ratio is (what regulators use). Ignoring the impact of unrealized losses in assets marked as held to maturity is crazy. Seems like a regulator problem to me, no bank taking deposits should be able to make high duration and negatively convex (from high MBS holdings) without hedges.
Silicon Valley Bank Failure [pdf]
61–70 of 152 posts
Re: Silicon Valley Bank Failure [pdf]
#62Maybe a stupid question: if banks can collapse from a bank run, shouldn’t the entire model be questioned? A bank run is simply when a threshold number of customers decide to withdraw their cash, with every right to do so. With social media + frictionless mobile banking, the entire notion of teetering your model on mitigating the risk of a “bank run” seems anti-customer, regressive, and unsustainable.
SVB didn’t collapse because of the bank run. There was a bank run because they collapsed. It is true that the bank run may have accelerated the collapse slightly but they were in really bad shape before it started. A lot of people want to blame depositor panic, but I don’t think that is really fair. In a properly managed bank, the assets exceed the liabilities, which means that if people want their money out, the ban…
I’m not blaming depositors. In fact, I think depositors have a right to panic withdraw. They’re making a decision to take business elsewhere, as they should.
That that can cause or accelerate collapse makes me question the entire bank model.
What other model leads to instant death, damage to their entire customer base, and collateral damage to the broader system, when a certain number of customers decide to go elsewhere?
Re: Silicon Valley Bank Failure [pdf]
#63Maybe a stupid question: if banks can collapse from a bank run, shouldn’t the entire model be questioned? A bank run is simply when a threshold number of customers decide to withdraw their cash, with every right to do so. With social media + frictionless mobile banking, the entire notion of teetering your model on mitigating the risk of a “bank run” seems anti-customer, regressive, and unsustainable.
> How can a business model rely on this? Customers also want to earn easy, high interest, that's the main issue. You're taking a risk (albeit a small one) with your deposits; your money is being lent by the bank and they pay you interest in return. If you only want your cash to be held safely, put it in a safety deposit box.
a safety deposit box is not safe by a long shot. if the bank burns down you're screwed. safety is the $250k FDIC limit, period
Re: Silicon Valley Bank Failure [pdf]
#64the 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.
Mercury insures up to $1m deposits by splitting your funds across multiple banks.
"Mercury checking and savings deposits are FDIC-insured up to $1M. As a broader effort, we are working on expanding all coverage up to $4M."
Re: Silicon Valley Bank Failure [pdf]
#65An important stand out quote to me here: “ It’s fair to ask about the underwriting discipline of VC firms that put most of their liquidity in a single bank with this kind of risk profile“. I really don’t understand why these firms didn’t use at least two banks for their deposits. Surely these tech firms have heard of single points of failure being problematic?
If you get any kind of loan from SVB, you're required to keep your cash with SVB.
I think it was entirely reasonable for Series B and earlier startups to keep all their money in SVB. It was wrong, in hindsight, but reasonable. Bank failure is not the thing that's going to kill most startups. SVB just failed spectacularly, and it sure seems like it's not going to put anyone out of business.
Re: Silicon Valley Bank Failure [pdf]
#66I 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…
What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's?
Re: Silicon Valley Bank Failure [pdf]
#67This really sheds clarity on the situation. SVB was in bad shape long before the run, and there is no apparent next domino to fall. FDIC limits are very well understood and relatively easy to work with (despite the rampant FUD about “who’s going to use multiple bank accounts”, deposit sweep programs are highly available and convenient). This is a risk management failure by depositors (in addition to the bank of cours…
what you have to ask is how much of the "deposits" were loans from SVB? that is the real issue. SVB "loaning" money to startups on the premise that they would park it in SVB accounts. nobody knows how big that number is, but it is the real problem.
Re: Silicon Valley Bank Failure [pdf]
#68Does any one knows if VCs have contracts with startups where they have to deposit X amount weekly or monthly? Now if they can't because of the SVB debacle, can the startups sue them? This would put these VCs in even worse situation - not only they could be out of their money deposited at the bank but now they owe even more money to the startups.
The VCs don't "owe" money to the startups: they "buy" equity with their money. The VCs aren't "out" the money deposited by the startup at SVB; that money was already exchanged for equity in the startup.
The VCs aren't happy because they and the startup both expected that the money-equity exchange meant that the startup would have working capital, so potentially the value of the equity that they got has fallen. This is a problem for both parties.
Re: Silicon Valley Bank Failure [pdf]
#69I 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.
> This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank.
And those startups should have diversified their millions of VC cash to reduce their exposure and over-centralization on a single bank. In fact, they should not have been over-relying on VC cash in the first place. Now they will be getting $250k out of the millions of VC cash they chose to place in SVB.
The FDIC system working as intended once a bank goes under. No bailouts and no exceptions.
> I bet a bank like Mercury or some other ones will grow to take SVB’s place.
Mercury is not a bank. [0] It just works with other FDIC banks like Evolve Bank & Trust and CFG (Choice Financial Group).
Re: Silicon Valley Bank Failure [pdf]
#70"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…
On the one hand this does provide some clarity. On the other hand it also reeks of “this is why this could never happen at JPM.”