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One thing to bear in mind is that "failing" is not binary. The story seems to be that SV put all their deposits into 10 y bonds in 2021. I'll use that as an ap
by rich_sasha 4y ago
One thing to bear in mind is that "failing" is not binary.
The story seems to be that SV put all their deposits into 10 y bonds in 2021. I'll use that as an approximation.
A 10Y bond will usually move about 8x as much as the underlying interest rate (it's called "duration"). So if SVB did nothing but buy these bonds and sit on them, then they would have lost about 36% on these (8 x 4.5% rate movement). That's a lot but also better than losing everything. And you'd hope the bank wasn't idiotic enough to take no precautions: no hedging of IR changes, putting all assets into just that.
My finger in the air haircut would thus be maybe 15-20% loss of deposits, if this simplified model has anything to do with reality. That's a lot but also means depositors get 80-85% of their money back.
It's possibly pushing the limits of my toy model here but a 10Y bond bought in 2021 is now only an 8Y bond, because time has passed. So instead of 8x you get more like 6x and the pessimistic haircut number is thus 29%.
- rcme 4y agoNo, failing is failing. It means the bank is insolvent. That doesn't mean the bank is worthless, but it doesn't have enough cash to meet its obligations. And yes, depositors will likely get some of their money back, but only after a long battle. Also, the bonds held by the bank are likely off the run. The market for these is not large.
- rich_sasha 4y agoYes, insolvent, but the money doesn't go poof. I never traded cash bonds but would struggle to imagine it would be hard to liquidate. Sure, over a week, but surely SVB can't be a major bondholder.
- Ekaros 4y agoThey are easy to liquidate. But not at the face value. For that you need to wait until maturity. Principle is simple. Why would you buy from someone a piece of paper saying someone else(even government) will pay you 1,5% a year. When you could directly buy from then similar paper paying 4%.
- rcme 4y agoThese types of bonds are what caused the pound's dramatic fall a few months ago. There isn't a large market for these. If you need to sell a lot at once, you're in trouble. The treasury recently explored stepping in to provide liquidity for off-the-run bonds: https://www.reuters.com/markets/us/yellen-says-taking-steps-enhance-treasury-market-funds-resilience-2022-10-24/ https://www.reuters.com/markets/us/yellen-says-taking-steps-...
- prottog 4y ago> I never traded cash bonds but would struggle to imagine it would be hard to liquidate Bonds are actually well known for having terrible liquidity. It's common for corps and munis even with good credit ratings to be no-bid, and even Treasuries, once they're off-the-run, aren't easy to move without moving markets.
- nonethewiser 4y agoYou're disagreeing but I dont see the conflict between your claims and his.
- rcme 4y agoHe's making it sound like depositors are going to get 80% of their money back tomorrow. It's going to be a years-long legal battle while affected companies are going to potentially shutter due to an inability to meet obligations. Also, his number of 80-85 is based on the yield of the treasuries, but old treasuries like this are hard to move.
- late2part 4y agoWhy won't the FDIC resolve this quickly for depositors?
- jccooper 4y agoFor customers who are startups, investors, and large tech concerns, FDIC insurance of $250k may not cover the balance. Sure don't want the $2M you have left from your last funding round to evaporate, or even be frozen.
- cwkoss 4y agoCan the bank be sold and continue operating under new ownership without making all depositors whole?
- tbruckner 4y agoThe issue is that a startup needs that capital right now. They cannot wait for bankruptcy courts to redistribute.
- rich_sasha 4y agoYeah, well, indeed, that is an issue. I'd imagine it would be possible to get a fraction of it now via some third party, but that could be quite a haircut too.
- floatinglotus 4y agoThis is the big issue. If they can’t get their money lots of startups will fold very quickly.
- rvz 4y agoExactly. These startups know that they don't have a lot of runway to wait so they rushing to the exit.
- kgwgk 4y ago> My finger in the air haircut would thus be maybe 15-20% loss of deposits, if this simplified model has anything to do with reality. That's a lot but also means depositors get 80-85% of their money back. Depositors have been getting 100% of their money back. [and will still do if they are quick (or has the bankruptcy been declared already?) - edited: too late!] The loss - that is an amount measured in dollars, not an abstract percentage - is going to be supported by a smaller number of depositors.
- bequanna 4y agoBingo! If 70% of depositors exit (which actually seems possible) the bank does not have adequate assets for the remaining depositors and the bank fails.
- hnfong 4y ago> That's a lot but also means depositors get 80-85% of their money back That's not what happens. Let's say 100 clients each deposited $1 in the bank, and the bank loses $20, so only has $80 to pay out when liquidated. Let's say half (50) depositors withdraw their funds early, they each get $1 back. So now the bank has $30 in assets and has to pay 50 people. Suppose 20 people demand withdrawals, and the bank pays $20 to them. Now the bank has $10 and has to pay 30 people. I admit that I don't know when/whether a bank can actually refuse withdrawals in such situations, or when bankruptcy proceedings are triggered, but the earlier you withdraw the less likely you're going to lose money, and the later you withdraw the more likely you'll lose a significant part of your deposits. Sure your calculus still works out on average, but I'm not sure that means anything and it's no consolation for the ones that reacted last.
- ProjectArcturis 4y agoThis is precisely why we have the FDIC -- if deposits are federally insured, there is much smaller incentive for depositors to withdraw their money out of fear of a bank run.
- brianwawok 4y ago250k per account. Imagine all the big businesses with millions in the bank. FDIC will not help them.
- rixrax 4y ago"As of December 31, 2022, the amount of estimated uninsured deposits in [SVB] U.S. offices that exceed the FDIC insurance limit was $151.5 billion. [from total deposits of $173,11B]." [0] [0] https://ir.svb.com/financials/sec-filings/sec-filings-details/default.aspx?FilingId=16435322 https://ir.svb.com/financials/sec-filings/sec-filings-detail...
- the_mar 4y ago2.7% of SVB deposits were FDIC insured
- 4y ago
- rurp 4y agoA bank that can't pay back 100% of deposits has failed. This isn't equity where haircuts can be expected at times; depositors absolutely expect to be able to get back all of their money when requested.
- axlee 4y ago> A bank that can't pay back 100% of deposits has failed. Well, not at the same time. No bank can do that.
- samstave 4y agoThe fed seems to have never had a problem when all their customers [i.e. banks/hedgies/wallstreet] come asking.
- mhluongo 4y agoIt's easier when you can print money :)
- brian_cloutier 4y agoI believe the implication is: why aren't we using the fed for our banking, this kind of bank run would be impossible. The fed provides guarantees to banks but not to retail and that's a policy decision we could change, if we wanted to.
- nebulousthree 4y agoTry selling socialism to Americans...that's why.
- whitemary 4y ago> The fed provides guarantees to banks but not to retail and that's a policy decision we could change, if we wanted to. Who is "we?" The US is not a democracy. Nothing could stop US elites from overturning the Bretton Woods system, passing NAFTA, and bailing out the banks in the mortgage crisis, so what makes you think "we" could change this policy decision? Karl Marx showed us how capitalism works 150 years ago. The ruling class rules and the working class works. If you don't like it, you need to move beyond capitalism.
- chollida1 4y ago> The story seems to be that SV put all their deposits into 10 y bonds in 2021. Not sure who told you that, its incorrect. https://twitter.com/jamiequint/status/1633956163565002752?s=20 https://twitter.com/jamiequint/status/1633956163565002752?s=...
- hnfong 4y agoSeems a bit pedantic, MBS are basically bonds. The important part is the 10 year term.
- berberous 4y agoIt says 10+. I wonder what the average duration is.
- prottog 4y agoAccording to their filing[0], the securities they were forced to sell at a loss had durations of 3-6 years. [0]: https://www.sec.gov/Archives/edgar/data/719739/000119312523064978/d438977d424b2.htm https://www.sec.gov/Archives/edgar/data/719739/0001193125230...
- chollida1 4y agoPerhaps but I’d argue it makes a huge difference. Svb had to sell at a huge loss for two reasons. - the duration risk, this applies to both assets. Though shortened dates treasuries would have far less loss due to duration than MBS would. - the size of the trade compared to the market. Treasuries are treasuries but each MBS has specific terms that make the market for them much smaller. This only affects their MBS If the held treasuries they’d be in far better shape due to the much smaller haircut they’d take. Sadly this wasn’t th care.
- vishnugupta 4y agoSVB situation is made worse 'coz it seems about 93% of bank's $160B deposits are uninsured as they are above FDIC's $250K limit. So all the more reason for depositors to pull out their money.
- dh2022 4y agoWell, treasurers looking to park their cash and use US Gov debt guarantees usually buy shorter dated treasury bills - around 3-6 months. This matches their duration - chances are they will need the money quickly. In general treasurers match the duration of liabilities (when they will need the money) with the duration of assets (bonds). If SVB really parked most of the cash in 10-year old treasury bonds that sounds.... questionable...