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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
Great post. Thank you.
Solvency can be “non-existent” but still exist.
If a company I run was one billion bucks in the toilet, but I am expecting a deal to close 96 hours hence that would bring in 1.5 bil, am I solvent or not?
If there are wolves running the hen house, could my business suddenly find itself being managed by someone else overnight, due to the “insolvency”??
The big concern for the public is that over and over again during the last 5 years, we have seen that the politically weaponized agencies can stymie one business while promoting another. All based on political positions.
Since the beginning of the Federal Reserve, Dec 1913, we can realize that there has been little concern by those who massage the national economy as to whether or not it provides prosperity for the middle class.
In fact, less than 16 yrs after its creation, The Fed Reserve allowed the GreAt Depression to sweep on in, bankrupting middle class Americans. (This happened even though the chosen reason for creating the Fed was to ensure that there would no longer be huge market fluctuations bringing about economic collapse.)
If the uber giants of American wealth cared about the USA at all, like Warren Buffets and Bill Gates, these people would abandon their practice of running “Charitable foundations” which then stop the Feds from getting a fair enough slice of those men’s wealth.
Instead, at least in Gates case, the foundations’ monies are used to control the media, allowing for a plandemic to destroy mom & pop businesses as well as monetize our health.
There is a liquidity component to solvency that Jerry seemed to have missed.
edit: He caught it later. But solvency is not just “positive net worth.”
There is ambiguity in the article.
For those who already understand the matter, the ambiguity is not apparent.
Plus some of the remarks Doug made are just opinion.
Do all the members of SVB know each other? Most depositors don’t know each other. Many of these people don’t even see that much of their families.
In the tech world, rarely do people starting out know that many people. The VC people most likely know each other. Those who are established millionaires might.
But if it is truly a bank for start ups that were rejected by the larger banks, the tech people now getting on the bottom rung of the ladder that is tech industry are too busy keeping their prototypes up and running, let alone meeting everyone.
Unless the people running the bank go to prison and lose all their wealth there is no justice.
The elite always skate. They destroy lives nut never theirs.
I
If I have a liquidity problem, I go bankrupt
So should they
And people should be punished but they won’t be.
The following is the announcement about this new plan which was just posted over at the Federal Reserve website.
I am certain that having only a single person on the Board of Directors with banking experience had something to do with it.
Story here
How the heck are corporations expected to do business if they can’t have simple bank accounts? Are banks expected to tell businesses, “sorry, we can’t take your money unless you also get us several thousand customers who can deposit less than $250,000″?
What would a regulator have been able to do? The bank had almost all its money tied up in AAA federal bonds, which are pretty much the most conservative investments one can make!
It seems to me that this is exactly why the Federal Reserve was created in the first place, to provide cash to banks that didn’t (seem to) do anything wrong per se (especially considering that it was the same Federal Reserve that caused much of this bank’s problem in the first place).
(Of course, it would be a lot easier to have sympathy for the bank if its management hadn’t sold all their shares right before the collapse, but still…)
If the bank needs to sell its T-bills in order to raise cash to pay depositors, who is going to buy the bank’s T-bills when the government is selling new T-bills that pay a much higher rate of interest? Of course investors are going to buy the T-bills that pay higher interest, so the bank ends up with a whole lot of T-bills it can’t unload.
The bank failed because it found itself competing against the US government in the bond market. No business is big enough to win that fight.
At least, that’s how I understand the situation. I’m not a licensed investment manager…
Maybe I’m not seeing a big enough picture, but if SVB bought T-bills that would appreciate whatever, 2.6% or whatever, at maturity, while they’re paying maybe 1% interest on those funds that were deposited, how does that lead to insolvency even if T-bills are CURRENTLY being sold at higher rates?
You got the main idea in the explanation more or less right. Market interest rates on securities were up, so older SVB long-term securities with fixed interest rates a .25% were therefore less valuable. That led to a chain of events ending in an old-fashioned bank run and collapse.
I want to correct one mistake that is kind of on the medium-big side, though.
It’s around “…T-bills it can’t unload”. Everyone can always unload all Treasury Government securities so far in history, including T-Bills(2,3, 5, 7, or 10 year maturity) but also T-Bonds (20 or 30 year maturity) and T-Notes (up to 1 year maturity)
The problem is with the price the bond market will pay for them, vs. what your balance sheet tells the regulators they are worth. SVB was caught in a regulatory zug-zwang. They needed to lay their hands on a bunch of money to handle a big outflow of deposits as its customers with big uninsured deposits started to panic.
No problem for a banker, just sell as many securities on the market as you need to.
But in this case, management had previously decided on a strategy of holding an excessive proportion of low interest securities with suddenly depressed MARKET values under a regulatory category that gave them crazily high accounting/regulatory valuations.
The rules were such that if they sold even ONE 10,000 USD security out of their huge portfolio of inflated-assessment securities, they would have to immediately lower the accounting values values of ALL of them to the current Market Value.
They couldn’t afford to sell them, and they couldn’t afford to not sell them.
In effect, they would have to admit that they were in fact too close to being insolvent to be allowed to remain in business. One report I read, it might have been the one linked in the OP, said that SVB probably WAS insolvent at one point (in the “you owe more than you’re worth sense, not the liquidity sense).
If that’s the regulation, I don’t see how it makes sense. If they were going to hold the rest until full maturity, why wouldn’t they still have that value?
Here’s the highly simplified version.
The depositors were lined up outside the door waiting for the bank to open so they could take all their money out. Typical bank run scenario right out of the movies.
The Bank was out of money. So it needed to sell a lot of securities on the bond market right away so it had money to give the money to the customers.
If they didn’t sell them, they would have to keep the door locked, suspend all payments, and the government would shut them down.
If they did sell any of them, unfortunately, by government rules they would have to adjust the values of that entire portfolio. That would drop their Net Worth to a value less than the minimum set by the government, and the government would shut them down.
Even if the Net Worth (also called “capital” or “equity”) didn’t go to zero (===”insolvent” by the more common definition) it would be too low for the government to let them live.
Are they necessarily required to disgorge millions/billions in cash Right Now just because someone wants them to? Aren’t there any contractual limits?
Referring to “bank run” scene in the movie “It’s A Wonderful Life,” the Building & Loan customers had agreed to wait up to 30 days or 60 days or whatever, if needed by the company, to make withdrawals. Perhaps only for closing out an account, but even a small withdrawal may have been classified as a “loan” rather than a “withdrawal.”
In fact, Jimmy Stewart didn’t have to give them any money at all, let alone his own money, on demand. That happened because otherwise the depositors – shareholders – were going to sell to Potter, and then Potter would have basically owned the B&L and could have closed it down as was his desire.
But what would have been the problem with other shareholders or whatever, ending up owning SVB?
I assume at first glance that the Fed’s intent for the regulation is to protect its clients (ostensibly, the hardworking Americans who are investing in Our Future, by sitting around the kitchen table scrutinizing the quarterly financial statements of the 1500 companies in their 401k portfolios).
To protect those investors, plus bank depositors, from a bank concealing liquidity problems in its public financial statements. Those Fed clients, plus, I don’t know, the top five Wall Street firms where the Fed’s employees hope to get their NEXT job, the same ones where they had their LAST job?)
How do these Accounting rules protect investors and depositors? This way:
Reporting an Asset portfolio as Hold to Maturity in a quarterly financial statement tells the public this: “Don’t worry about the fact that this 30-year T-bond isn’t worth much on the market right at the moment because the Fed just meddled in the bond markets to suddenly crash bond prices. In 28 years when it pays out, no one will even remember.”
But what if a bank’s managers suddenly decide to sell a few T-Bills or T-Bonds that it had claimed it would NEVER sell, to raise cash, one would have to wonder what the bank’s management knows that no one else knows.
So, as soon as the managers start to cash in those supposedly I Will Never Cash This In assets, let’s be skeptical. “Mr. Bank Manager, why don’t you tell us, like, right now, what your net worth is, assuming you need (for some reason known only to you and a few shrewd analysts) to cash in a whole bunch of them, really soon? Not in 28 years?
So, 3 of 5,000 banks fail and it is a Fed cause? Seems more like mis-management at those 3 banks. 99.9% of banks have been able to handle the rise in interest rates.
Yes. According to its checking account (i.e., loan) contract with you, your bank is required to disgorge 100% of its debt to you right now, just because you want them to. SVB had a lot of customers just like you and they all wanted SVB to disgorge the entire amount of its liability right now.
That is what happens in every bank run that ever happened.
Yes, your contract with the bank specifies the contractual limit. It is the loan balance, i.e., your checking account balance that the bank sends you.
The shareholders exclusively owned 100% of SVB from the time it was born until the government legally confiscated 100% of it from them.
I meant, as in the movie, letting the shareholders sell their shares to someone else for half price or whatever they could get, and then whoever pays them off, some private party or investors not the gubmint, now owns SVB.
For those over the $250k limit anyway.
Meanwhile one nation that is unconcerned about bank failures, it’s the nation possessing “The First National Bank of The Ukraine”
Depositors are insured by FDIC for up to $250k of lost deposits.
The shareholders (i.e. the owners of the bank) have no protection at all. Just the opposite: under the law they are the party to the contracts who committed the breach of contract with the depositors, and they are fully liable for the damages they caused to those they contracted with.
Because they were negligent in their duties to approve Board members with actual banking experience, instead of being politically connected.
Political connected-ness is helping the depositors, but not the shareholders.
Unsk, I have been repeating this, but haven;t seen it sourced anywhere. It makes sense to me — can you back this up?
I am interested to see the source, as well. It seems curious based on the articles I’ve read:
I could be wrong…it is complicated, I realize. And I know that SVB did invest a sizable proportion of their funds in business loans (not just fixed-income securities), especially earlier on.
So I would like to understand these complexities, by reading reliable sources.
By now we know that the bank will have redemption, via Federal Reserve actions.
I am not saying that is right or wrong – just the facts, folks.
While people on this topic opine that SVB owners & those with a lot of money on deposit with that bank, like Oprah with her over-400 million, should have watched the activities of the bank’s execs & its board of directors more carefully, there are 2 other culprits.
What is concerning is that these culprits are entities on the Fed level. If they did not do proper oversight here, we can assume they did not do proper oversight of America’s other banks as well.
From Bill Ackman @billackman on twitter:
“The @FDICgov and the OCC also screwed up.
“It is their job to monitor our banking system for risk and SVB should have been high on their watch list with more than $200B of assets and $170B of deposits from business borrowers in effectively the same industry.
“The FDIC’s and OCC’s failure to do their jobs should not be allowed to cause the destruction of 1,000s of our nation’s highest potential and highest growth businesses (and the resulting losses of 10s of 1,000s of jobs for some of our most talented younger generation) while also permanently impairing our community and regional banks’ access to low-cost deposits.
This administration ‘s SNIP approach to SVB’s failure guarantees duopolistic banking risk concentration in a handful of SIBs. My SNIP review of SVB’s balance sheet suggests even in a liquidation, depositors should eventually get back about 98% of their deposits, but eventually is too long SNIP.
“So even without assigning any franchise value to SVB, the cost of a gov’t guarantee of SVB deposits would be minimal. On the other hand, unintended consequences of the gov’t’s failure to guarantee SVB deposits are vast and profound & need to be considered and addressed before Monday the 13th 2023. Otherwise, watch out below.”
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The “unintended consequences of…” What?? The gov’t’s failure to guarantee SVB deposits?!?!
The more moral hazard gasoline the interventionists pour onto the fire, the bigger the fires get, and the more gasoline they demand.
No, let’s not remove ALL of the remaining capacity of the markets to weigh the price of risk. It will lead directly to the CBDC goal of eliminating private banking and replacing it with totalitarian money and banking systems. They won’t even need CBDC!
I appreciate your remarks, Mark. I’m trying to figure out how I feel and think about this, so your thoughts are something I will consider.
I will repeat the one fact I do take seriously, about which my mind is made up, which was from Bill Ackman: “
“The @FDICgov and the OCC also screwed up.
“It is their job to monitor our banking system for risk and SVB should have been high on their watch list with more than $200B of assets and $170B of deposits from business borrowers in effectively the same industry.”
:
I definitely agree with that!