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Some Random Musings on a Bank Failure
I’m not an expert on banking but I came across an interesting post on Substack written by Marc Rubenstein.
The problem at Silicon Valley Bank is compounded by its relatively concentrated customer base. In its niche, its customers all know each other. And Silicon Valley Bank doesn’t have that many of them. As at the end of 2022, it had 37,466 deposit customers, each holding in excess of $250,000 per account. Great for referrals when business is booming, such concentration can magnify a feedback loop when conditions reverse.
The $250,000 threshold is in fact highly relevant. It represents the limit for deposit insurance. In aggregate those customers with balances greater than this account for $157 billion of Silicon Valley Bank’s deposit base, holding an average of $4.2 million on account each. The bank does have another 106,420 customers whose accounts are fully insured but they only control $4.8 billion of deposits. Compared with more consumer-oriented banks, Silicon Valley’s deposit base skews very heavily towards uninsured deposits. Out of its total $173 billion deposits at end 2022, $152 billion are uninsured.
So how could the bank have satisfied customers’ deposit demands?
One thing it couldn’t do is tap into its held-to-maturity securities portfolio. The sale of a single bond would trigger the whole portfolio being market to market which the bank didn’t have the capital to absorb.
As the story unfolds it appears that regulators were remiss in monitoring the bank. The entire post I linked to is worth your time if you are interested in what happened to SVB. There are some issues that transcend basic depositors.Published in Economics
They will get a full bail out.
Perhaps, but the impact of full refunds for SVB depositors presents a problem. The FDIC has about $25 billion on hand to reimburse depositors. The SVB has $152 billion in uninsured accounts.
From the post:
Yes, but the FDIC also now owns their bond portfolio and other assets. They’ll sell those off. FDIC doesn’t care about mark-to-market. Depending on just how underwater the bond portfolio is, there’s a decent chance they’ll recover enough to cover all the deposits.
And if they don’t the Fed will crank up the printing presses to cover the difference.
This is making people nervous, not matter what caused it or how it plays out………https://www.marketwatch.com/
Ripple effects are affecting trading today – it wouldn’t surprise me if this was somehow orchestrated to start something that will force digitized central banking……….there seems to be a crisis around every corner since Biden and Co took the reins. Personally, I think they are getting their marching orders from bigger entities….
I thought part of the 2008 reforms was that each financial institution had to go through regular “mark to market” exercises. Am I mistaken on this? Is it only the biggest institutions that need to do “stress testing”?
Update: Banks with > $100B in assets/holdings must do stress testing, but that did not include SVB in 2021.
It looks like the scenarios include big changes in interest rates. See here.
We can condemn SVB for its woke agenda, but the real culprit here is government profligacy. Quantitative easing and continued borrowing and spending created uncertainty, inflation and the resultant rise in interest rates. It was this money printing that flooded these banks with deposits. They rushed to buy treasuries to park these deposits, were encouraged to do so. Then the Fed discounted their treasury holdings by rapidly raising rates, putting SVB and many other banks into a capital and a liquidity crisis. They moved their short term portfolios to their long-term portfolios to protect themselves from taking further unrealized losses, a move that further reduced liquidity. Already structurally insolvent or nearly so given how bank regulators measure equity and suddenly, they are essentially bankrupt. A run ensues and there we are. Of course there are no banks willing to buy SVB. It is busted. The only way it can be taken over is for the government to bail it out. Otherwise, there will be a cascade of business failures, businesses that cannot access their uninsured funds for payrolls, vendor payments, debt service or what have you. This is the stuff of depressions in the making. All because the federal government created inflation through quantitative easing and attempts to quash it, not with real incentive for economic growth, but with more borrowing, more spending, more money creation and increased tax burdens. It’s like putting out an economic wildfire by first burning up the forest.
Thanks, Doug. I’ve been curious about the cause of the failure. None of the news channels have explained it.
The article you linked to makes it very clear.
They will just get the money from someplace else.
The elite will take care of their own as always.
They can take it from the proles by letting inflation run a little longer.
Some things to note:
Silicon Valley Bank was the only game in town for tech start up lending. No other bank would touch it. Fully half of tech start ups banked with SVB which is why their customer base was so screwed.
Typically banks now want a year and a half of profitability before they will lend to you, which begs the question at that point do you really need a bank?
We have ceased effectively to be a “capitalist” economy because capital no longer flows to where it is most needed but where the corrupt FED, the Deep State and UniParty want it to go politically in their corruptfinancialization schemes.
While SVB was very woke, it’s investment schemes were fairly conservative with investing in government bonds and the like. Where they went wrong is that they didn’t see coming the FED’s hyper aggressive raising of interest rates which wiped out a lot of bond holder’s and will wipe a lot more small banks with similar investment strategies.
This bank failure was not due to bank chicanery, bank corruption, or poor regulatory oversight. It was a logical result of the FED’s incredibly Ill conceived monetary policy which will wipe even more small banks and businesses.
I keep on editing my post to use the word “skewed” but Siri keeps changing it to “screwed”.
Based on the couple of news stories that I read about the SVB “failure,” the bank appears to be solvent, but to have a cash flow problem after a run on the bank. At present, the reports appear to indicate that there will not be a loss to be borne by either the taxpayers or the FDIC.
The point of deposit insurance is to prevent a bank panic from spreading, causing runs on one bank after another, which can then cause widespread bank “failures” due to cash shortfalls, even when the banks themselves are solvent.
By “solvent,” I mean having positive equity, i.e. total assets exceed total liabilities.
That is true, from an accounting/reporting perspective, but from a regulatory perspective, they are insolvent. Why? Because if you hold a bond or treasury in your long-term portfolio, you expect to carry it until it matures, so you don’t have to write it down when interest rates rise. However, when you are insolvent regulatorily, that is when carried long-term losses exceed capital, then you are toast; the regulators are forced to take over. No one will touch SVB in this rapid rise interest environment. They don’t want to take the certain risk that SVB’s capital will continue to erode. All big banks have this issue already and don’t need to make it worse.
Ssh! The American public is never supposed to know this.
A bank or credit union will almost certainly post its “FDIC protection” plaque if they hold such.
The fact that when the proverbial hits the fan, only the first group of losers will be made whole is not at all something the financial industry wants us to think about.
But the banks don’t have to pay inflation-rate interest on deposits, so how does it really matter if T-bills aren’t rising as fast as inflation?
I believe it has to do with the fact that if its long term positions are now obsolete, then SVJ is no longer the best game in town.
So depositors would leave the bank for banks where the newer more profitable game is being played.
However given that many of the tech entrepreneurs who formed the base of their customers and clients are supposedly parking their business there due to contracts which they signed with SVB forcing them to do that when SVB provided them VC funds, I am not sure why it should be assumed that the bank would go belly up.
So we are back to asking, “Why?”
I suppose that brings it back to the idea that SVB had a “cash flow” problem but wasn’t actually “insolvent.”
They just blew the lid off of the FDIC deposit limit. The fund is not intended or designed for saving large depositors, it was meant to protect the average Joe from losing his life savings. This guarantees going forward that when a crisis accelerates, the average Joes are going to be the ones left holding the bag until Uncle Sugar makes them whole with more Funny Money.
Of solvency, the banker had plenty. ‘Twas only money he lacked.
Bond traders were even less sympathetic to SVB than the depositors whose deposits vanished. They would only pay market price for long-term bonds paying .25% interest, and a big pile of crashing mortgage-backed securities.
Even when the banker could show them his books, which clearly stated that they were worth much, much more!
The article Doug linked to explained why very clearly.
I think Doug and several others here can answer any specific questions you and kedavis have after reading it. It’s all just common sense, once you get through the language barrier! Everyone involved except the government is simply making trade-offs for the exact same reasons that you would in the same position.
(I understand the answer after reading the article, but unfortunately I am not good at explaining things.)
I do think that the entire post I linked to should be read. It is a far better explanation than what you will hear in 90 second sound bites in the mainstream evening news accounts. SVB no longer exists as a separate entity. Two more banks have collapsed. At its most basic level they do not have the money to cover their losses or to reimburse their depositors. It appears that the price for shares in these three banks have cratered.
If you bought a ten-year Treasury in March 2019 at par for $100K with quarterly interest coupons at 1.5% and want to sell it today, 4 years later, no one will give you $100k for it. They will pay less, much less, to achieve something closer to the current 4%+ yield available in today’s treasury auction. The shortfall of 2.5% per year, with six years remaining, represents a lot of implied interest. The calculations are a little complex, but this gives you the gist of it. In the end, the market sets the discounted price, but these discounts are substantial and represent the mark to market unrealized loss figures regulators apply when assessing a bank’s capital in their financial health assessments.
Doug gave the first step in answering your and CarolJoy’s excellent question:
It’s only the first step because it just leads to another question:
“How did a drop in the market value of SVB’s securities cause the bank to fail?”
I will let Doug or others answer it.
Note that I changed your term “T-Bonds” to “securities” because there is a very important difference in this case.
So this is cute
Silicon Valley Bank collapse: CEO cashed out millions while employees got bonuses
In addition. The bank was without a compliance officer for about 8 months during this most critical period of rising interest rates, mitigation of which would have been the job a compliance officer.
They are not solvent, certainly not within the meaning of–
“Financially Solvent means the entity is able to pay its debts when due.”
They were short by about $1B when they were taken over by regulators.
I read somewhere that in months leading up to the run on SVB, the bank was trying to “raise capital” and simultaneously secure a loan from another entity to raise liquidity. Raise capital means that it was trying to sell stock, probably a private offering (a sale to an institution with restrictions as to how the stock might later be sold to the public.) This effort was obviously unsuccessful. The investor(s) backed out while Wall Street, sensing blood in the water, started a sell off. That left SVB in very, very hot water. BTW, the officers who sold stock in the lead-up to the melt-down may have spooked the investor and queered their own deal. Very dumb. And they will have to unwind those sales and pay some hefty fines as well as face lawsuits from the remaining public shareholders.
That is what I always thought solvent meant.
I believe that SVB shares dropped around 60% of their value which ended any hopes that SVB was going to survive. There are allegations that on the Friday before they locked their doors SVB employees received bonuses. Other bank stocks dropped in value as well as a result of SVB’s closure.
Lost in the claims of Woke investments is that inflation has risen again to about 6%. The Fed is still indicating that they will keep raising interest rates. This hammers the middle class and most of the wealth earned in the US comes from middle class wages. You can take every dollar that a Warren Buffett, or Bill Gates has, and it will not change a bleak economy, nor will it reduce the national debt.
The word “solvent” is used in both ways, sometimes, which creates the ambiguity that led me to state the definition that I was using.
Sometimes, a person or entity that is “solvent” in the sense that I meant — i.e. positive net worth — can have a liquidity problem in the short term that makes it unable to pay its debts at the moment. The word “solvent” is also sometimes used for this situation, which obviously presents a problem also, but it’s a different problem, a cash flow problem.
As Doug (Kimball) pointed out above, there are also regulatory issues relating to the valuation of loans and loan portfolios. The story that Doug (Watt) quoted in the OP explains that these rules can cause a cash flow and regulatory problem to arise suddenly.