“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.”
Silicon Valley Bank Failure [pdf]
71–80 of 152 posts
Re: Silicon Valley Bank Failure [pdf]
#72The other thread was wild and the conclusions in this memo disagree with many of the assertions that commenters have been throwing around–accusing depositors of recklessly banking at SVB to chase higher yields and accusing SVB of playing fast and loose with risky investments.
JPM says neither of these were the case:
> “At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%.”
> “The irony of SIVB is that most banks have historically failed due to credit risk issues. This is the first major one I recall where the primary issue was a duration mismatch between high quality assets and deposit liabilities.”
Re: Silicon Valley Bank Failure [pdf]
#73An 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.
“If you get any kind of loan from SVB, you’re required to keep your cash with SVB”.
Really? How would this be enforceable or even discoverable?
Re: Silicon Valley Bank Failure [pdf]
#74Earlier quoted context omitted.
> 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.
How many people are actually parking their money at a bank to earn high interest? My guess is for most, the safety deposit box is their bank account.
Don't want to move the goalposts, but I think it's more accurate to say that most people (and companies) park their money in banks with the following expectations:
* It's easily and quickly available
* The number only goes smaller when the account owner authorizes it for stuff the account owner wants to spend money on
* The account owner does not have to think about any of the actual logistics of making the above
Naturally, these are in tension - it costs money to make all of this happen. And since people want the number in the account to not go down (through fees or whatever), then 'naturally' the bank needs to make $$$ somehow.
The flip side of your original question about "business model" validity is that the business model is heavily subsidized by the state and overall society because this particular business model generates a lot of liquidity, which is generally believed to be net beneficial for governments, societies and countries.
In effect, this entire business model and all the regulation and laws and structures put in place are attempting to systemically will into being a high-trust environment. The possible downsides of this system more or less scale with the size of the gap between the actual underlying society, and the degree of trust implied by the system.
Re: Silicon Valley Bank Failure [pdf]
#75Earlier quoted context omitted.
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.
no. the problem with long term AAA securities was only 100B of their 200B book. the dead loans to startups are a much bigger problem and why nobody would buy them.
[deleted]
Re: Silicon Valley Bank Failure [pdf]
#76This 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?
Re: Silicon Valley Bank Failure [pdf]
#77This 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…
100% agree, taking huge unhedged duration risk and then loading up on negatively convex MBS again unhedged is so crazy.
Re: Silicon Valley Bank Failure [pdf]
#78An 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?
This whole incident should disabuse anyone from believing that VC money is “smart money”.
Re: Silicon Valley Bank Failure [pdf]
#79Earlier quoted context omitted.
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 elsewh…
I wasn't talking about you when I was saying that some people are blaming depositors. Some other commenters are really angry at the VCs that participated in the run. Their anger is understandable, but misplaced in this case IMO.
> 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?
None of these things happened because some customers decided to go elsewhere. They were going to happen anyway. SVB was in really terrible shape and was already in the process of collapsing.
Re: Silicon Valley Bank Failure [pdf]
#80the 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.
We use Mercury, they're a frontend though. They're not a bank. Our checking/savings are with Choice Financial, and swept into at least four of these banks: https://co-mercury-prod.s3.amazonaws.com/legal/Choice+-+Depo... We use their Treasury account type for most of our cash. It's split between Morgan Stanley and Vanguard funds. Now, if Mercury fails it's going to be a pain in the ass to get at the money in these bac…
also use mercury for the same reason. they are a tech company that provides a good interface to baking services at a wholesale price, which is very different than trying to be a bank. for actual banking i see know reason to use anyone other than jpm chase.