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SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion. Basel III was introduced to force banks
by TooSmugToFail 4y ago
SVB used an exemption from Basel III, which allowed it to run a riskier business, and eventually led to its implosion.
Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable.
European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leveraged this loophole.
For those interested, FT Alphaville describes this in ample detail:
Silicon Valley Bank is a very American mess
https://on.ft.com/3ywMURD https://on.ft.com/3ywMURD
- xwdv 4y agoThe exemption should still be allowed, as it led to great banking innovations for startups. The exemptees just need to be fucking careful with this advanced mode of operation.
- rco8786 4y ago> The exemptees just need to be fucking careful with this advanced mode of operation. How many times will we get burned until we learned that banks will not be careful if they are given an opportunity to not be.
- illiarian 4y agoOr that any business will not be careful given the opportunity.
- deleted 4y ago[deleted]
- talideon 4y agoSo, you're essentially proposing a weaker, informal version of Basel III. In which case, why have such an exemption in the first place? What innovations does it lead to? Restrictions on banking typically exist for a _really_ good reason. After all, we saw what happened when retail and investment banking were allowed to mingle because it 'lead to [...] innovations'. If you're going to advocate for something beyond saying 'but look, innovation!', you need to be more explicit about what those innovations are, because European banking is plenty innovative within the constraints of Basel III.
- worik 4y agoYes. And the pace of innovation in US banking was very slow, essentially stalled, for a generation from the consumer's POV Here in Aotearoa we have ATMs on every street corner since the 1980s. All but the tiniest traders have had pos electronic transactions for nearly thirty years Other countries are even more advanced (our banks are all like yous now, consumers now viewed as pests) I want innovation in customer services, but what we get is innovations in financial engineering. May they all rot...
- layer8 4y ago> The exemptees just need to be fucking careful You mean “need to have sheer luck in their gambling”.
- bequanna 4y agoHead, we get bonuses Tails, taxpayers bail us out
- bequanna 4y agoPlease name one “banking innovation” the banking industry has implemented in the last decade which has benefitted consumers.
- morelisp 4y agoVCs and founders must believe SVB offers at least one, or why not go with a normal bank?
- gesticulator 4y agoThis has to do with a web of relationships and risk tolerance, not some product set…
- morelisp 4y agoWhatever you mean by "relationships" is in fact an "innovation" in the banking sense.
- saurik 4y agoAnd how did that work out for them? Are many of the people who were using SVB yesterday happy about their decision today? If they could go back in time and give up whatever that innovation was, and not be praying that they still have their money next week, are you saying most of them would be happy where they are? The problem here is that the system just isn't transparent enough: you put your money in a bank and I guess you just have to assume that they are really really smart or you lose your money... people make fun of crypto here constantly, but at least there everything is an open book. At the end of the day, the situation with SVB is actually worse than some scary DeFi protocol.
- nradov 4y agoThe system is sufficient transparent. SVB was a publicly traded company. Customers who cared about risk could just read the reports. In the end any bank can fail. https://ir.svb.com/financials/sec-filings/default.aspx https://ir.svb.com/financials/sec-filings/default.aspx The depositors will get their money back, with perhaps a small delay. Which is more than you can say for scams like cryptocurrency.
- MrMan 4y agononsense - what banking innovations do startups need? is there really any such thing as a startup? or are we just talking about small businesses some of which grow into larger still unprofitable businesses? hopefully this mythologizing stops
- chasd00 4y agoI was wondering the same. You put money in a bank so no one robs you and steals it. Money goes in and money comes out when you need it. What innovation is there?
- Forgeties79 4y ago“The exemption for dumping hazardous materials should still be allowed, as it led to great manufacturing innovations for startups. The exemptees just need to be f**ing careful with this advanced mode of operation.” This sounds tongue in cheek I know, but SVB’s situation has created real world consequences even for me, someone who has no money tied up with them. My go-to for bonded cellular networks (so i can run a livestream for my employer, a small tech start up) had to tell all of us who use them to pause payments immediately today as this unfolded and are not taking new rentals in the meantime. They’re literally not getting paid right now. This is not a holding pattern that can last long and is highly disruptive for them and, consequentially, me. A video content guy at a small start up on nearly the other side of the country.
- Jensson 4y ago> Downside: this also means bank is going to be less profitable. What are the downsides to society if banks are less profitable? They invested in T-Bills, I don't see how that investment served society in any way.
- PKop 4y agoLiterally funds the government lol
- phkahler 4y agoTaxes fund the government. Bonds are just a way to avoid managing a budget.
- PKop 4y agoOk so you're saying it's bad that they fund the government. But given the large budget deficit we have, the statement is true.
- arez 4y agogovernment doesn't need taxes to fund anything, it can just create money and sell bonds. Taxes are just for steering money flows
- nostromo 4y agoInflation would like a word.
- majewsky 4y agoSpeaking from my German perspective. Our (European) central bank printed central bank money like crazy the last 10 years, and apparently it was not a problem. Prices only shot up once there were supply shocks due to Covid and Putin. And sure enough, the supply shocks are slowly waning, and hence YoY inflation rates are also rapidly declining. Yet everyone keeps talking about how the money supply is causing inflation, even though there is no plausible direct connection [1] between the amount of money in some bank account somewhere and consumer prices. The bakery down the street does not look at federal reserve rates when figuring out their bread prices. [1] I'm guessing that someone will be able to explain this to me. But keep in mind that your explanation should cover how we could have over a decade of near-zero interest rates and the respective money supply inflation without seeing any significant consumer price inflation.
- talideon 4y agoYour username is both very ironic and apt in this particular case. Also, your analysis is spot on.
- nayuki 4y agoOn Reddit they call this phenomenon beetlejuicing. (Subreddit, Know Your Meme, Urban Dictionary)
- worik 4y ago> SVB used an exemption from Basel III, Really? That is interesting. Why? How? Who else?
- toomuchtodo 4y agohttps://archive.is/Fx1is https://archive.is/Fx1is
- white_dragon88 4y ago[dead]
- rr808 4y agoAre you sure that is the problem? I see lots of comment today they lost a lot of money on long dated treasuries. Which is "safest" asset.
- dragontamer 4y agoNo. My money market fund (VMFXX) is composed of Fed Repo notes with 13 _DAYS_ of maturity average (https://investor.vanguard.com/investment-products/mutual-funds/profile/vmfxx#price https://investor.vanguard.com/investment-products/mutual-fun...) A bank holding customer deposits in lol 30 _Year_ or 10 _YEAR_ treasuries is anything but safe. That's called duration risk, and congrats, they just got burned by duration risk.
- rr808 4y agoSure, what I meant was Basel rules mark treasuries as level 1 capital. So Basel doesn't have much to do with it, as the OP suggested.
- wpietri 4y agoAre you sure? The article says, "short-term Treasury bills get 100-per-cent weightings", implying that longer term ones would get something else.
- twelve40 4y agoso it looks like the bank run was not the root cause but a consequence of this mess, and all these people moralizing about not panicking were essentially advising small companies to keep funding wild practices of one adventurous bank CEO out of their pocket - how could it have ended in anything else?
- cm2187 4y agoYes and no. LCR is basically requiring you to keep in cash and liquid assets the equivalent of a 30 day bank run. And it should work. A european bank had very large bank run last year and survived without even breaching its regulatory minimums. But that still leaves the bank in a weak position after the bank run, and you can't predict the exact magnitude of a run.
- aqme28 4y agoWhat is a "30 day" bank run? How is a bank run measured in time?
- Our_Benefactors 4y agoUndoubtedly it is a dry bureaucratic definition like “A 30 day period where on each day capital outflows were greater than inflows by a factor of 10”, of course in the definition failing to capture what an _actual_ bank run is.
- andreareina 4y agoSeems to just mean 30 days of average outflows, i.e. a bank should be ok for that long without any money coming in via new deposits, loan repayments, etc. Of course the issue is when you have larger-than-average withdrawals... https://www.investopedia.com/terms/l/liquidity-coverage-ratio.asp https://www.investopedia.com/terms/l/liquidity-coverage-rati...
- Scoundreller 4y agoProbably doesn’t help that this is very a niche bank. Lots of orgs running their payroll from this bank, but few retail account holders. At a typical community/regional bank, payday is just a bunch of bill entries: debit the corp account and credit the employees accounts. Meanwhile a business-focussed bank will just have huge debits every Friday without corresponding credits: those are happening at other banks. And with a small number of account holders, it doesn’t take many actors to cause an a bank run. Payday sealed the fate here.
- npunt 4y agoWhat other banks that startups use have an exemption to Basel III? Would love to understand broader risk to startup ecosystem.
- ta1243 4y agoWhy would a startup use a risky bank?
- Scoundreller 4y agoGiven how popular this bank was with startups/tech orgs, it suggests that they were otherwise unbankable by the usual players. I’m unsure what special services a startup needs from their bank that any other bank serving businesses couldn’t offer.
- JackFr 4y agoAgree. SVB was not small, but an order of magnitude smaller than the large money center banks (Citi, BofA, JPMChase). That being said, nearly every other bank of that size submitted Dodd Frank Stress Test results to the Fed in 2022. https://www.federalreserve.gov/publications/files/2022-dfast-results-20220623.pdf https://www.federalreserve.gov/publications/files/2022-dfast... Somehow SVB avoided this. I don’t see this as systemic at all. The FDIC will make depositors whole and the owners and managers did a bad job and they lose. The worst possible response would be a bailout of any sort beyond ordinary FDIC receivership.
- boppo1 4y ago97% of depositors exceeded the FDIC limit.
- phone8675309 4y agoThat stinks, and I feel for them. Let's hope people will learn a lesson from this - never keep all your eggs in one basket.
- fbdab103 4y agoAren't we talking about hundreds of millions/billions of dollars? At that scale, not a lot of baskets available.
- throwing_away 4y agoCould a tech company have split their accounts into separate $250k accounts? I'm not sure if the bank would offer that.
- x3n0ph3n3 4y agoNo, FDIC insurance applies to account owners, not accounts. Fun fact, if you're married, you can actually turn that into 3 * FDIC insurance limit. - Account 1: You - Account 2: Your spouse - Account 3: Jointly you and your spouse
- steve76 4y ago[dead]
- MrBuddyCasino 4y agoThis btw is Jay Ersapah, Head of Financial Risk at SVB. Apparently DEI & LGBTQ issues were more important than making sure their assets & obligations are balanced: https://twitter.com/the_real_fly/status/1634035956188688385 https://twitter.com/the_real_fly/status/1634035956188688385
- throwayyy479087 4y agoSVB UK has now been sold to HSBC for 1 pound.
- fidgewidge 4y agoAt SVB UK, which is isolated apparently. Not that it reduces the impact of the image ...
- throwayyy479087 4y agoSVB UK also failed this week.
- fidgewidge 4y agoIsolated ... or not. Damn this situation moves fast.
- djfobbz 4y agoWe are living in a REAL CLOWN WORLD!
- Longtermvalue1 4y agoIt’s reported that SVB paid executives bonuses to grab cash right before they were shit down. Each of these executives names should be published & exposed as the grifters they are.
- 1980phipsi 4y agoCome back when you have the entire risk mgmt org chart and show she is at the top. Then I would be interested.
- HyperSane 4y agoGlass-Steagall needs to be brought back. It was incredibly effective at preventing situations like this.
- fshbbdssbbgdd 4y agoGlass-Steagal separated commercial banks from investment banks. As far as I can tell, SVB was just a commercial bank and the way it went bust has nothing to do with conduct that would have been prohibited under Glass-Steagal.
- DeathArrow 4y agoWhat are other banks that exploited that loophole? Maybe it's time to short them for some easy money.