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Bank run on Silicon Valley Bank

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Re: Bank run on Silicon Valley Bank

#831

Post by dheera »

notch898a wrote: post #554
dheera wrote: post #328

Earlier quoted context omitted.

Can't someone open a bank that takes money and just keeps it like a well-behaved child and doesn't secretly mess with it?

Yeah there are precious metals demand deposit vaults that do exactly that. The cost to have that fully insured and also audited to make sure your exact serial numbers are actually stored and not secretly being loaned, etc, it works out to roughly ~0.4%/yr cost to store money in a bank like that. Which compared to ~0% interest rates in a saving account isn't that bad I guess.

Cool ... I guess you could vlog about the precious metals and get 1%/yr from Youtube to make up for it ... Keep saying "my precious" and you'll probably get a few million followers on Tiktok

Re: Bank run on Silicon Valley Bank

#832

Post by JustLurking2022 »

recursivedoubts wrote: post #249
JustLurking2022 wrote: post #159

Earlier quoted context omitted.

That's insanely unrealistic in the near zero interest rate era of the past decade and merely a really terrible idea with more normal rates. Banks have some set of relatively fixed cost, in terms of systems and staff. In a low rate environment, there's virtually no margin to be made on short term lending. Stretching the duration for higher yield is the only way to get margin to cover expenses. Even in a high rate envi…

That's right. Banks would have to charge fees for the services they provide, or become more efficient, or both. They certainly would become less of a profitable and shrink as a percentage of the economy. Which is good: smart folks would be incentivized to go into things like manufacturing and research, and produce actual value.

You think banks would become less profitable by charging fees?

Retail banking is not some wildly lucrative enterprise, generally speaking - it's the boring, stable-ish segment of finance. They're gonna make roughly the same margin, whether through fees or spread.

Re: Bank run on Silicon Valley Bank

#833

Post by strbean »

spongebobism wrote: post #751
jcbrand wrote: post #696

Earlier quoted context omitted.

> The rest by design is to be lent out, that's how banks offer loans, mortgages etc. When banks lend out money, they don't lend out existing deposits, they create new (debt-based) money from nothing and this new money is fractionally backed by deposits. With 10% fractional reserves, if they have $100 in deposits, they can lend out $1000, thereby creating $900 of new money from nothing.

The second sentence is a bit misleading. Reserves are not a prerequisite for lending in our monetary system. The bank gives out all the loans that it deems profitable and only has to ensure after the fact that its balance with the central bank is sufficient (in your example, if it had loaned out 1700$, it would need to increase the balance by 70$, e.g. by taking out a loan with the central bank). edit: Here is a grea…

Is this not wildly glossing over the fact that there was a reserve requirement until very recently?

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

Re: Bank run on Silicon Valley Bank

#834

Post by strbean »

zht wrote: post #545
nico wrote: post #155

SVB CEO to VCs: please don’t tell anyone to withdraw their money or we could be in trouble VCs: [immediately texting after hearing the above from the CEO] attention all portfolio companies, SVB seems to be in trouble, don’t keep your money with them

It would be surprising if VCs exhibited any original thought, after watching them fomoing into one thing after another

Someone at Founders Fund had an original thought (start a bank run at SVB). Everyone else FOMOd after them.

Waiting to see how this shakes out for Peter Thiel.

Re: Bank run on Silicon Valley Bank

#835

Post by amluto »

RC_ITR wrote: post #802
amluto wrote: post #483

Earlier quoted context omitted.

> SVB has a fine balance sheet for now, they’re just running out of easy things to sell. Do they? If SVB is sitting on a pile of Treasury bonds that mature in 20 years, they can “hold to maturity” and get their principal plus some very low interest rate. But this is useless! In a fantasy world in which all their depositors leave and they keep those bonds for 20 years, they are indeed worth that amount in 20 years, wh…

You’re confusing liquidity with solvency. For most banks, it is fine to assume a 20 year deposit window because deposits are fungible and for most of recent history deposit bases have gone up. SVB was wrong for not assuming that the 2021 deposit spike was (in hindsight obviously) a short term blip, but you can look at their loan book on page 19 of [0]. It's not immediately clear to me that there's some sort of system…

> For most banks, it is fine to assume a 20 year deposit window

Let me try again. You're still thinking about liquidity -- assuming a 20 year deposit window seems okay to me.

But the problem is solvency. It's not that the assets are illiquid -- it's that they insufficient. If you run a bank, assume a 20 year deposit window, and invest those deposits in safe assets that carry similar interest rate risk to the deposits themselves, then you are solvent. If depositors leave faster than expected, you may be forced to pay a spread or other haircut to sell your long term assets early, but that's a small effect and can be managed gradually as long as you stay on top of it.

This isn't SVB's problem AFAICT. SVB bought assets that were perfectly liquid (T bonds!) and (if I read the filings right) assets that are still fairly liquid (MBSes), but they had interest rate exposure that did not match the deposits. Savings account interest rates (at SVB!) were up to 4.5%, and those T bonds had much lower fixed interest rates. [0]

If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative.

[0] Whether you think about them as paying low interest for a long time or as being marked to market at a loss and then paying current interest rates at maturity is immaterial. You end up with the same number of actual dollars at the same times.

Re: Bank run on Silicon Valley Bank

#836

Post by zamnos »

twelve40 wrote: post #665
zht wrote: post #546

Earlier quoted context omitted.

Sure and there’s also anecdotes of larger banks doing the exact opposite

Ok, let's chalk it up to my irresistible charm when I showed up at the branch that day, I can live with that.

I'm guessing your corp didn't have a 1 million dollar check to deposit, with expectations that most of that would get sent out to employees and AWS/GCP over the next few years, and that you would be receiving another 10 million dollars shortly thereafter.

Bragging about getting a car loan when (I assume) you have good history and credit? Unless it was a $1.5m Mclaren P1 supercar or something, that's not remotely in the same category.

Re: Bank run on Silicon Valley Bank

#837

Post by frellus »

lxgr wrote: post #281
frellus wrote: post #69

Earlier quoted context omitted.

> telling two or more people they own the same dollar This is the main issue, and it's called a "reserve requirement", which is a percentage of the deposits that the bank must keep on hand to mitigate risk of issues like this. https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta... In March 2020 the US Federal Reserve lowered it from 8% to 0%, which is where it is today. Just to give you an idea of how the ec…

This "money multiplier" model is not an accurate description of how money creation actually works in modern central banking. Besides a minimum reserve requirement, banks also have liquidity and (risk-weighted) capital adequacy requirements, which are practically much more relevant. The 2008 financial crisis was effectively caused by "laundering"/structuring the risk weights.

I get what you're saying, but also I'm going to call BS on whatever liquidity testing banks need to do currently to satisfy the Fed. They're obviously not required to cover changing risks.

I think what's happening now is equivalent to 2008, it's just the underlying security was bonds and, in SVB's case, emerging equity. There were risks on all sides of the equation.

Re: Bank run on Silicon Valley Bank

#838

Post by danielmarkbruce »

willmadden wrote: post #825
danielmarkbruce wrote: post #635

Earlier quoted context omitted.

It's a pretty standard example of a prisoners dilemma. Each VC telling their companies to pull is the right thing for them in isolation.

The fractional reserve banking system is a perpetual prisoner's dilemma, and VC's are smart enough to know this. The same VC funds influence all of the startups with deposits at SVB. This happens on the tails of Silvergate, where the major exchanges (who also share investors and have overlapping board control) coordinate a bank run, while Elizabeth Warren did everything she could to rug that bank, by spreading FUD an…

>> Call me crazy

Crazy :)

It's a pretty bog standard bank run. Bank takes a stupid risk, blows up. We see less of them now because of the FDIC, but most of SVB's deposits were non-insured so it was almost an 1890's style bank run. There was nothing "controlled" about it.

Re: Bank run on Silicon Valley Bank

#839

Post by zamnos »

bink wrote: post #643
sanderjd wrote: post #340

Earlier quoted context omitted.

I don't remember hearing that in 2007. Pretty much the first thing I heard about the financial crisis was that there was gigantic contagion risk throughout the financial system.

Maybe not that exact phrase but it does conjure to mind the video of Cramer saying Bear Stearns was fine. https://www.youtube.com/watch?v=gUkbdjetlY8

Ah yes. Cramer, the man who's right about the market so much that there's an ETF that just does the opposite of what he says.

https://www.thestreet.com/etffocus/blog/inverse-cramer-etf-i...

Re: Bank run on Silicon Valley Bank

#840

Post by pishpash »

makomk wrote: post #705
pishpash wrote: post #397

Earlier quoted context omitted.

Why would customers be pulling deposits unless you are offering lower than market interest rate? If T-bills are 3%, they can pay depositors 2% now and so whatever condition kept the customers there at -1% risk premium would still keep them there. No run on the bank. And given they are T-bills, duration is minimal, so $1000 might be worth $990 even before coupons. Whoop-de-doo! There would only be a problem if the ban…

This doesn't work either. Remember, the reason that the market value of the T-bills in their reserves has dropped is that the interest rate on them is lower than the current interest rate that people can get by buying them now, so the bank likely cannot afford to pay their customers a market interest rate of 1% below that. The only way for the hold-to-maturity value of their reserves to actually be realised is if cus…

I was talking about offering it on new deposits. If your old deposits are not duration-matched then yes, you are screwed.
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