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SVB has an extremely low loan to deposit ratio (~.45). Most of their assets are in the form of treasuries, bonds, etc. Depositor concentration is definitely hi

SVB has an extremely low loan to deposit ratio (~.45). Most of their assets are in the form of treasuries, bonds, etc. Depositor concentration is definitely high but that’s not particularly uncommon in banks (though for one of this size it is). But that concentration is what fueled their growth as well.

lolinder 4y ago
> Most of their assets are in the form of treasuries, bonds, etc. I believe you know what you're talking about, but if that's the case why are they struggling to raise capital to pay depositors? (I'm asking as an ignorant outsider to banking in general and SVB in particular.)
- lokar 4y ago
  Interest rates went up. That would be fine if they could hold the bonds until maturity, but to honor withdrawals now they are forced to sell at a loss.
  - lolinder 4y ago
    Right! Okay, that makes sense. So the failure on the assets end of the balance sheet was relying on bonds that were purchased at times of historically low interest.
    - lokar 4y ago
      Also, in more normal time they could have put more deposits into shorter term debt that would not have had this problem. But rates were so low that would have been very unattractive.
- lordnacho 4y ago
  What doesn't seem to be so explicitly stated is that due to rates going up, the bonds are worth less than they were when rates were high. So they wouldn't have enough money if they turned the bonds into money. Guy lends you 100 at 3%, you buy 100 of bonds than pay you 5%. Guy asks for his money back, your bonds are worth only 80, big problem.
  - orangepurple 4y ago
    One of the biggest banks in the world failed to account for a capital management risk scenario where interest rates go up? Insane
    - lotsofpulp 4y ago
      Silicon Valley Bank was nowhere near one of the biggest banks in the world. https://en.wikipedia.org/wiki/List_of_largest_banks https://en.wikipedia.org/wiki/List_of_largest_banks Not even amongst the largest banks in the US: https://en.wikipedia.org/wiki/List_of_largest_banks_in_the_United_States https://en.wikipedia.org/wiki/List_of_largest_banks_in_the_U...
      - bgentry 4y ago
        They're #18 on the US list you linked, I saw other articles saying they were #16 so it probably just depends on the date assets were measured.
        morelisp 4y ago
        The falloff is extremely rapid. They're closer in both an absolute and relative sense to the 40th than even the 10th.
    - blitzar 4y ago
      Practically every single bond - which banks effectively have to buy and hold for regulatory reasons - has reduced in mark-to-market value every single day the last 2 years. Personally I think they are nuts for having (reportedly) such a long average duration of bonds in their portfolio, but they were also paying a pretty decent interest rate on savings to their customers - that money has to come from somewhere.
  - lordnacho 4y ago
    Looks I said high when I meant low. For people who aren't in finance, if rates go up, bond prices go down: an instrument that pays 10% a year on 100 is worth less when there are new instruments paying 15% a year on 100. For the rates to match the original 100 is now lower, because that's the only way you get the same amount of interest per dollar spent buying the bond.
- deleted 4y ago
  [deleted]
- KerryJones 4y ago
  They factually lost 1.8B on 21B worth of investments, this is an 8.5% loss. Unclear why there's conjecture like previous comments saying its a 25% loss. They did the right thing by selling out now -- likely because they see more rates raising in the future which would decrease it, so they took the liquidity and then raised a bit of money to cover up that loss (raising 2.25B)
  - user_named 4y ago
    No, they did the wrong thing by selling so late.
    - KerryJones 4y ago
      Agreed -- but are you saying they shouldn't have sold at all? I don't think you can say it was a "wrong decision" at the moment, I agree that it was too late. But you could also go back and say they shouldn't have invested in the long term assets in the first place. Or you could go back and say they shouldn't have accepted the deposits without having short-term gain solutions in the first place.
      - user_named 4y ago
        I'm saying they shouldn't have bought what they sold in the first place.
- rocqua 4y ago
  Treasuries and bonds drop in price when interest rates go up. in 2021 (when interest rates were low) you might pay 100 cents on the dollar for a treasury that payed 2.5% interest. In 2023, with interest rates much higher, you can no longer sell that treasury for 100 cents on the dollar. People can get much better returns by just buying recent treasury. So you need to sell your bonds lower, at say 95 cents on the dollar. That is an immediate 5% loss. This is known as 'interest risk' and is really the only risk you have when buying safe bonds like treasuries. The risk is completely avoidable if you can hold your bonds to maturity, so it only matters in a liquidity crunch.
  - user_named 4y ago
    It's more like 50 cents on the dollar.
meltyness 4y ago
The eye-opening number was 70% equity to deposit ratio. They were apparently betting the farm on the "there is no alternative" narrative.

lolinder 4y ago

> Most of their assets are in the form of treasuries, bonds, etc. I believe you know what you're talking about, but if that's the case why are they struggling to raise capital to pay depositors? (I'm asking as an ignorant outsider to banking in general and SVB in particular.)

lokar 4y ago
Interest rates went up. That would be fine if they could hold the bonds until maturity, but to honor withdrawals now they are forced to sell at a loss.
- lolinder 4y ago
  Right! Okay, that makes sense. So the failure on the assets end of the balance sheet was relying on bonds that were purchased at times of historically low interest.
  - lokar 4y ago
    Also, in more normal time they could have put more deposits into shorter term debt that would not have had this problem. But rates were so low that would have been very unattractive.
lordnacho 4y ago
What doesn't seem to be so explicitly stated is that due to rates going up, the bonds are worth less than they were when rates were high. So they wouldn't have enough money if they turned the bonds into money. Guy lends you 100 at 3%, you buy 100 of bonds than pay you 5%. Guy asks for his money back, your bonds are worth only 80, big problem.
- orangepurple 4y ago
  One of the biggest banks in the world failed to account for a capital management risk scenario where interest rates go up? Insane
  - lotsofpulp 4y ago
    Silicon Valley Bank was nowhere near one of the biggest banks in the world. https://en.wikipedia.org/wiki/List_of_largest_banks https://en.wikipedia.org/wiki/List_of_largest_banks Not even amongst the largest banks in the US: https://en.wikipedia.org/wiki/List_of_largest_banks_in_the_United_States https://en.wikipedia.org/wiki/List_of_largest_banks_in_the_U...
    - bgentry 4y ago
      They're #18 on the US list you linked, I saw other articles saying they were #16 so it probably just depends on the date assets were measured.
      - morelisp 4y ago
        The falloff is extremely rapid. They're closer in both an absolute and relative sense to the 40th than even the 10th.
  - blitzar 4y ago
    Practically every single bond - which banks effectively have to buy and hold for regulatory reasons - has reduced in mark-to-market value every single day the last 2 years. Personally I think they are nuts for having (reportedly) such a long average duration of bonds in their portfolio, but they were also paying a pretty decent interest rate on savings to their customers - that money has to come from somewhere.
- lordnacho 4y ago
  Looks I said high when I meant low. For people who aren't in finance, if rates go up, bond prices go down: an instrument that pays 10% a year on 100 is worth less when there are new instruments paying 15% a year on 100. For the rates to match the original 100 is now lower, because that's the only way you get the same amount of interest per dollar spent buying the bond.
deleted 4y ago
[deleted]
KerryJones 4y ago
They factually lost 1.8B on 21B worth of investments, this is an 8.5% loss. Unclear why there's conjecture like previous comments saying its a 25% loss. They did the right thing by selling out now -- likely because they see more rates raising in the future which would decrease it, so they took the liquidity and then raised a bit of money to cover up that loss (raising 2.25B)
- user_named 4y ago
  No, they did the wrong thing by selling so late.
  - KerryJones 4y ago
    Agreed -- but are you saying they shouldn't have sold at all? I don't think you can say it was a "wrong decision" at the moment, I agree that it was too late. But you could also go back and say they shouldn't have invested in the long term assets in the first place. Or you could go back and say they shouldn't have accepted the deposits without having short-term gain solutions in the first place.
    - user_named 4y ago
      I'm saying they shouldn't have bought what they sold in the first place.
rocqua 4y ago
Treasuries and bonds drop in price when interest rates go up. in 2021 (when interest rates were low) you might pay 100 cents on the dollar for a treasury that payed 2.5% interest. In 2023, with interest rates much higher, you can no longer sell that treasury for 100 cents on the dollar. People can get much better returns by just buying recent treasury. So you need to sell your bonds lower, at say 95 cents on the dollar. That is an immediate 5% loss. This is known as 'interest risk' and is really the only risk you have when buying safe bonds like treasuries. The risk is completely avoidable if you can hold your bonds to maturity, so it only matters in a liquidity crunch.
- user_named 4y ago
  It's more like 50 cents on the dollar.

meltyness 4y ago

The eye-opening number was 70% equity to deposit ratio. They were apparently betting the farm on the "there is no alternative" narrative.