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More context from another article: > The big losses experienced by the bank are directly related to the surge in interest rates over the past year, as the comp

More context from another article: > The big losses experienced by the bank are directly related to the surge in interest rates over the past year, as the company's US Treasury holdings were bought at a time when interest rates were still relatively low. Bond prices fall as yields rise. https://markets.businessinsider.com/news/stocks/silicon-valley-bank-svb-stock-price-bond-portfolio-firesale-treasury-2023-3 https://markets.businessinsider.com/news/stocks/silicon-vall... More general context: - Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC. - UST prices fall as interest rates rise - the fall of UST prices in the last year is abnormally abrupt and deep - banks are not required to "mark-to-market" their UST holdings if they plan to hold to maturity - cash crunches can cause banks to sell UST before maturity, turning unrealized losses into real losses - SVB joins Silvergate as a previously high-flying tech-related bank suffering a cash crunch and forced to liquidate bond holdings at a loss It's hard to judge the scope of the problem that Silvergate and SVB might point to. What's clear is that unrealized UST losses on bank balance sheets can surface very quickly and lead to very ugly outcomes.

tikkun 4y ago
Can you send me an email? Email in profile. I have more thoughts on the UST situation
- WJW 4y ago
  Why not just post them here in the comments?
- deleted 4y ago
  [deleted]
hn_throwaway_99 4y ago
Excellent summary. The interesting thing to me comparing Silvergate and SVB is that they both got hit by a fall in value of their long-duration bonds, but they had pretty different reasons for the "run on the bank". That is, in Silvergate's case, depositors wanted their money out because people were so fearful after FTX for anything with even a hint of crypto exposure (and Silvergate had more than a hint), and in SVB's case it's because a lot of their tech startups that hold deposits at the bank actually need their money out to spend.
pphysch 4y ago
> Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC. Can you expand on this? What is this regulation titled?
- nostromo 4y ago
  Banks are required to have reserves. Reserves are mostly held as US Treasuries.
  - pphysch 4y ago
    Gotcha.
    - mikeyouse 4y ago
      Post GFC, regulators started assigning risk weightings to bank assets — cash and treasury bills are “riskless” by this metric, most other things aren’t. So if you need $100 of reserves, that can be $100 of treasuries or $200 of car loans or $400 of mortgage backed securities. For obvious reasons, their balance sheets are heavily invested in treasuries now. https://www.investopedia.com/terms/t/tier-1-capital-ratio.asp https://www.investopedia.com/terms/t/tier-1-capital-ratio.as...
  - lxgr 4y ago
    Aren't bank reserves normally cash (or equivalently central bank deposits)?
londons_explore 4y ago
This means that anyone who has a lot of deposits at a US bank can potentially: * Withdraw all their holdings, forcing the bank to realise losses in their holdings * Buy shorts in the stock of the bank * When the losses are announced, make lots of money from their short position.
- deleted 4y ago
  [deleted]
- hef19898 4y ago
  When someone holds as much cash deposits in a bank to single handily cause that, that party doesn't need that level of petty market manipulation to make a profit so.
- WJW 4y ago
  Step 4: receive your complementary court summons for market manipulation. As a more practical matter, you would need a very large sum to do this for even mid-sized banks. SV bank alone had over 200 billion in assets, so you would need at least ~10 in cash to make a significant dent in that. If you have that much cash in any bank, there are probably many options you could go for that promise bigger profits at less risk.
  - xur17 4y ago
    So a new target for /r/wallstreetbets?
    - WJW 4y ago
      Perhaps, but probably not. Just doing some napkin math, to get to ten billion in withdrawals (ie only 5% of total assets of SV bank) you would need a million wall street bets subscribers to withdraw 10k each. Not a million to deposit it first and then retract it, a million retail subscribers who already had at least 10k deposited in this bank that mainly serves startups. I don't think it's very likely. Also, it would still be extremely illegal to arrange this with the express purpose of causing a bank run. The excuse of "yes but it was on r/wallstreetbets" is not probably very impressive to the SEC.
jldugger 4y ago
> UST prices fall as interest rates rise Just to underscore the point here, in the past year, the fed has raised rates a ton, and counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years[1]. You might naively assume a bond fund values would reflect interest rates but there is a lag as you wait to roll over old bonds into new debt at the new high interest rate, and until that happens you don't collect any of the extra interest. Even if you sold the old bonds to buy new good ones, nobody will buy them without a discount to make up for the low interest rate. This is why you have the weird mark to market rules. A US bond _will_ mature at 100 dollars, but can rationally sell on the market below 100 dollars. [1]: https://yhoo.it/3Js4bl6 https://yhoo.it/3Js4bl6
- hn_throwaway_99 4y ago
  > counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years. Is that counterintuitive? "Existing bond prices fall when interest rates rise" is pretty common knowledge I thought, and it seems quite intuitive to me. If I have a bond that matures in 2 years that only pays 5%, and I can buy a new bond, with the exact same characteristics, but which pays 10%, then if I sold my bond now I'd have to do it at a discount in order to give it an effective 10% yield.
  - jldugger 4y ago
    For financiers no, for random engineers on HN, maybe. Anyways, I intended my main point to be that bonds are down 15 percent, but maybe obscured that in my haste to press send before bouncing for a meeting.
- CPLX 4y ago
  There's absolutely nothing counterintuitive about that at all. It's one of the most core principals of finance that as interest rates go up bonds go down. In fact it's so direct that they are quite literally the same thing. The difference between the face value of the bond and the actual amount you have to pay to buy the bond is how you define what the interest rate is.* * Yes I know subject to time to maturity and coupon and all that.
JumpCrisscross 4y ago
> Banks are required by law to buy US Treasuries (UST) Yes. But they’re not required to buy long-dated, high-yielding, high-duration Treasuries (or MBS). Silvergate and SVB, out of incompetence or greed, optimised for yield, not liquidity, despite banking flighty depositors.
- beezle 4y ago
  Nor are they required to leave those same positions unhedged.
nostrademons 4y ago
Unpopular and pretty far-out opinion: 2023-2024 is going to be a bigger financial crisis than 2008-2009, and is potentially a civilization-ending event. The brewing crisis is that the Fed needs to trigger a recession (with job loss) to bring down inflation, because the root cause of the inflation is that there are too few workers for the available roles in the current structure of the economy, and so the economy needs to be refactored to drop non-critical industries and inefficient firms. But that's going to cause a cash crunch, since laid-off workers start pulling cash out of banks instead of making it at their jobs. Plus many consumers are drawing down on their savings and going into debt now because of inflation. And it's going to happen right at the greatest velocity of interest rate increases, when Treasuries are at their lowest. So we're going to see bank failures on top of job losses, right as interest rates hit their highest. IMHO we're already off the cliff, we just haven't realized it yet. It was going to hit in ~2024-2025 anyway as demographics started creating a labor shortage, but COVID accelerated it with a bunch of early retirements and supply chain snags.
- patch_cable 4y ago
  > pulling cash out of banks In practice, the cash still probably ends up at a bank, just in a different account. I don't think anyone is going to pull it out and start burying it in their back yard.
  - nostrademons 4y ago
    It still can trigger bank failures like the article is describing, though. Consumer pulls it out of one bank, creating a cash crunch there, and forces them to liquidate treasuries and realize large losses that had previously only been on paper. That bank is now insolvent. The bank that the recipient deposits them into now has more cash in hand, but they weren't facing a cash crunch in the first place. Some (bigger and more conservative) banks are going to end up doing great, but the financially weaker ones are going to get flushed out. Think of it like a pot of superheated water. As long as it remains undisturbed it continues to be un-boiled, even though the temperature is above the boiling point. As soon as you jostle it, though, everything erupts. The movement was just a catalyst - the problem was that the underlying state existed in an unstable equilibrium.
airstrike 4y ago
Reading the tea leaves in comments and general reaction elsewhere, I think this tale will have the unfortunate side-effect of people jumping to the wrong conclusion that SVB is getting slaughtered because of defaults in VC debt when in reality this appears to be attributable to poor asset management on the bank's fault by buying into mortgage-backed securities and being long duration in a rising interest rate environment It's like everyone reads "tech layoffs" in one news article an then "VC bank default", conclude everything one is directly causing the other and there's a new dotcom crash

tikkun 4y ago

Can you send me an email? Email in profile. I have more thoughts on the UST situation

WJW 4y ago
Why not just post them here in the comments?
deleted 4y ago
[deleted]

hn_throwaway_99 4y ago

Excellent summary. The interesting thing to me comparing Silvergate and SVB is that they both got hit by a fall in value of their long-duration bonds, but they had pretty different reasons for the "run on the bank". That is, in Silvergate's case, depositors wanted their money out because people were so fearful after FTX for anything with even a hint of crypto exposure (and Silvergate had more than a hint), and in SVB's case it's because a lot of their tech startups that hold deposits at the bank actually need their money out to spend.

pphysch 4y ago

> Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC. Can you expand on this? What is this regulation titled?

nostromo 4y ago
Banks are required to have reserves. Reserves are mostly held as US Treasuries.
- pphysch 4y ago
  Gotcha.
  - mikeyouse 4y ago
    Post GFC, regulators started assigning risk weightings to bank assets — cash and treasury bills are “riskless” by this metric, most other things aren’t. So if you need $100 of reserves, that can be $100 of treasuries or $200 of car loans or $400 of mortgage backed securities. For obvious reasons, their balance sheets are heavily invested in treasuries now. https://www.investopedia.com/terms/t/tier-1-capital-ratio.asp https://www.investopedia.com/terms/t/tier-1-capital-ratio.as...
- lxgr 4y ago
  Aren't bank reserves normally cash (or equivalently central bank deposits)?

londons_explore 4y ago

This means that anyone who has a lot of deposits at a US bank can potentially: * Withdraw all their holdings, forcing the bank to realise losses in their holdings * Buy shorts in the stock of the bank * When the losses are announced, make lots of money from their short position.

deleted 4y ago
[deleted]
hef19898 4y ago
When someone holds as much cash deposits in a bank to single handily cause that, that party doesn't need that level of petty market manipulation to make a profit so.
WJW 4y ago
Step 4: receive your complementary court summons for market manipulation. As a more practical matter, you would need a very large sum to do this for even mid-sized banks. SV bank alone had over 200 billion in assets, so you would need at least ~10 in cash to make a significant dent in that. If you have that much cash in any bank, there are probably many options you could go for that promise bigger profits at less risk.
- xur17 4y ago
  So a new target for /r/wallstreetbets?
  - WJW 4y ago
    Perhaps, but probably not. Just doing some napkin math, to get to ten billion in withdrawals (ie only 5% of total assets of SV bank) you would need a million wall street bets subscribers to withdraw 10k each. Not a million to deposit it first and then retract it, a million retail subscribers who already had at least 10k deposited in this bank that mainly serves startups. I don't think it's very likely. Also, it would still be extremely illegal to arrange this with the express purpose of causing a bank run. The excuse of "yes but it was on r/wallstreetbets" is not probably very impressive to the SEC.

jldugger 4y ago

> UST prices fall as interest rates rise Just to underscore the point here, in the past year, the fed has raised rates a ton, and counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years[1]. You might naively assume a bond fund values would reflect interest rates but there is a lag as you wait to roll over old bonds into new debt at the new high interest rate, and until that happens you don't collect any of the extra interest. Even if you sold the old bonds to buy new good ones, nobody will buy them without a discount to make up for the low interest rate. This is why you have the weird mark to market rules. A US bond _will_ mature at 100 dollars, but can rationally sell on the market below 100 dollars. [1]: https://yhoo.it/3Js4bl6 https://yhoo.it/3Js4bl6

hn_throwaway_99 4y ago
> counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years. Is that counterintuitive? "Existing bond prices fall when interest rates rise" is pretty common knowledge I thought, and it seems quite intuitive to me. If I have a bond that matures in 2 years that only pays 5%, and I can buy a new bond, with the exact same characteristics, but which pays 10%, then if I sold my bond now I'd have to do it at a discount in order to give it an effective 10% yield.
- jldugger 4y ago
  For financiers no, for random engineers on HN, maybe. Anyways, I intended my main point to be that bonds are down 15 percent, but maybe obscured that in my haste to press send before bouncing for a meeting.
CPLX 4y ago
There's absolutely nothing counterintuitive about that at all. It's one of the most core principals of finance that as interest rates go up bonds go down. In fact it's so direct that they are quite literally the same thing. The difference between the face value of the bond and the actual amount you have to pay to buy the bond is how you define what the interest rate is.* * Yes I know subject to time to maturity and coupon and all that.

JumpCrisscross 4y ago

> Banks are required by law to buy US Treasuries (UST) Yes. But they’re not required to buy long-dated, high-yielding, high-duration Treasuries (or MBS). Silvergate and SVB, out of incompetence or greed, optimised for yield, not liquidity, despite banking flighty depositors.

beezle 4y ago
Nor are they required to leave those same positions unhedged.

nostrademons 4y ago

Unpopular and pretty far-out opinion: 2023-2024 is going to be a bigger financial crisis than 2008-2009, and is potentially a civilization-ending event. The brewing crisis is that the Fed needs to trigger a recession (with job loss) to bring down inflation, because the root cause of the inflation is that there are too few workers for the available roles in the current structure of the economy, and so the economy needs to be refactored to drop non-critical industries and inefficient firms. But that's going to cause a cash crunch, since laid-off workers start pulling cash out of banks instead of making it at their jobs. Plus many consumers are drawing down on their savings and going into debt now because of inflation. And it's going to happen right at the greatest velocity of interest rate increases, when Treasuries are at their lowest. So we're going to see bank failures on top of job losses, right as interest rates hit their highest. IMHO we're already off the cliff, we just haven't realized it yet. It was going to hit in ~2024-2025 anyway as demographics started creating a labor shortage, but COVID accelerated it with a bunch of early retirements and supply chain snags.

patch_cable 4y ago
> pulling cash out of banks In practice, the cash still probably ends up at a bank, just in a different account. I don't think anyone is going to pull it out and start burying it in their back yard.
- nostrademons 4y ago
  It still can trigger bank failures like the article is describing, though. Consumer pulls it out of one bank, creating a cash crunch there, and forces them to liquidate treasuries and realize large losses that had previously only been on paper. That bank is now insolvent. The bank that the recipient deposits them into now has more cash in hand, but they weren't facing a cash crunch in the first place. Some (bigger and more conservative) banks are going to end up doing great, but the financially weaker ones are going to get flushed out. Think of it like a pot of superheated water. As long as it remains undisturbed it continues to be un-boiled, even though the temperature is above the boiling point. As soon as you jostle it, though, everything erupts. The movement was just a catalyst - the problem was that the underlying state existed in an unstable equilibrium.

airstrike 4y ago

Reading the tea leaves in comments and general reaction elsewhere, I think this tale will have the unfortunate side-effect of people jumping to the wrong conclusion that SVB is getting slaughtered because of defaults in VC debt when in reality this appears to be attributable to poor asset management on the bank's fault by buying into mortgage-backed securities and being long duration in a rising interest rate environment It's like everyone reads "tech layoffs" in one news article an then "VC bank default", conclude everything one is directly causing the other and there's a new dotcom crash