7 ms·

Report from the California Department of Financial Protection on SVB [pdf]

57 points by shuckles 4y ago

olliej 4y ago
This isn't really a report in the sense I was expecting (albeit surprised at the speed), it's just a high level overview: * Bank announced it was selling assets to ensure liquidity * This caused a run * The bank became illiquid * The bank can no longer pay things when they become due * Therefore the bank is insolvent * The commission was ordered to take possession of the bank * The commission has taken possession of the bank Seems very much like a boilerplate "well that happened" form
- dannyw 4y ago
  it's to justify a takeover.
  - olliej 4y ago
    you mean "this bank has failed and it's now the job of the regulator to clean up the mess"? that's how law works.
  - deleted 4y ago
    [deleted]
- therealcamino 4y ago
  It doesn't claim to be a report. It's an ORDER TAKING POSSESSION OF PROPERTY AND BUSINESS. Only the HN headline says it's a report, incorrectly.
nico 4y ago
If a “healthy” bank had a run, would it still survive? In other words, are any banks solvent if a run happens to them? If not, then at what point are banks considered solvent. Also, if no bank can survive a bank run, would the CEO be at fault here for kind of inciting one (by essentially saying in the call “we’ll be alright, as long as you guys don’t run”)?
- timy2shoes 4y ago
  Even a healthy bank had a run they would not survive, because fundamentally banks borrow short (deposits) to lend long (loans, bonds, etc). The old Bagehot quote comes to mind: "Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone..." Anything that would cause depositors to worry and demand their money back quicker than the banks' investments mature would run into this problem.
- ncallaway 4y ago
  > are any banks solvent if a run happens You're asking more about liquidity, than solvency. All banks in the US that are following regulations should be solvent. But, most banks in the US would not be liquid enough to survive a run. > If not, then at what point are banks considered solvent. Solvency is basically: "does the long-term value of your assets exceed your liabilities". Liquidity is: "can you sell assets right now to meet your outgoing liabilities right now". The problem for banks is, in almost all cases some loans will have longer-term time-frames, while almost all depositors can theoretically ask for their money back at any given time. So, for almost any bank a strong enough run will cause them to fail a liquidity test (even if they are solvent).
  - verteu 4y ago
    Genuine question: If a bank invests all customer deposits in 10y treasury bonds, and then interest rates rise, is it solvent? It seems this is essentially what made SVB insolvent.
    - loopdoend 4y ago
      They are solvent unless they have to suddenly sell the bonds, in which case they are worth less now than at maturity.
- lend000 4y ago
  At least in the modern economy, people aren't running to withdraw cash. They just transfer it to another bank. So the strongest major banks are probably impervious to runs, because if there is a general panic (rather than a panic at a specific bank), it will result in a dilution of funds between a number of major banks, rather than a net exodus of funds from the banking system.
shuckles 4y ago
The major new information is that almost 25% of deposits were withdrawn in the last day. How many banks could survive that?
- eek2121 4y ago
  If fully funded? all of them. If partially funded? part of them. Under current rules? none of them.
  - OnlineGladiator 4y ago
    I don't think most people realize the current required reserve ratio is literally zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
    - dannyw 4y ago
      Honour system for the financial industry. What could go wrong.
    - pbourke 4y ago
      I was trying to find out more about this. The reserve ratio was replaced by an “ample reserves” policy, wherein the Federal Reserve pays an increased interest rate on reserves (a slight discount from the federal funds rate). I wonder how this has played out in reality - do banks have more or less reserves than before this policy change?
    - dantheman 4y ago
      It's just fraud, demand deposits shouldn't be lent out.
    - NovemberWhiskey 4y ago
      And what do you think the relevance of that is, exactly?
  - olliej 4y ago
barumrho 4y ago
Withdrawal of $42B in one day. Wow. It does seem like SVB would be uniquely vulnerable to this type of run. (Relatively small # of customers holding large sums of deposit.) Is that incorrect?
- timy2shoes 4y ago
  A big issue is that the customer base is highly correlated/undiversified, in the sense that they're all funded by a small set of VC's telling them to withdraw their money. SVB was uniquely exposed to the whims of a small set of individuals in this manner.
  - dehrmann 4y ago
    Also that all these customers knew their funds weren't insured.
    - hackernewds 4y ago
      That is true for every bank. Know that in such a scenario NO bank can virtually back $45B in withdrawals.
      - dehrmann 4y ago
        What's different is how many large accounts SVB had. Most banks have a higher share of funds in smaller accounts. For people with less than $250k at the bank, there's less incentive to withdraw all your funds.
- rich_sasha 4y ago
  JP Morgan retained a very healthy position throughout the Financial Crisis of 2008-09 largely because they had a large, diffuse base of retail accounts, likely well below insurance limits. I suppose people were happy to keep their cash in. Since then all major investment banks are salivating over the idea of setting up retail arms for this very reason. Goldman Sachs tried launching "Marcus" for example. All for the very reason you describe.
anonu 4y ago
This is hearsay, but as i understand it Goldman had closed the books on their fundraise yesterday... Meaning the fundraise was complete. Some VCs including ycombinator raised the alarm and created the catalyst to get to where we are today. Pretty impressive turn of events but wholly avoidable.
djfobbz 4y ago
Prior to joining SVB, CEO Gentile was CFO for Lehman Brothers GIB - https://news.ycombinator.com/item?id=35110431 https://news.ycombinator.com/item?id=35110431

57 points by shuckles 4y ago

This isn't really a report in the sense I was expecting (albeit surprised at the speed), it's just a high level overview: * Bank announced it was selling assets to ensure liquidity * This caused a run * The bank became illiquid * The bank can no longer pay things when they become due * Therefore the bank is insolvent * The commission was ordered to take possession of the bank * The commission has taken possession of the bank Seems very much like a boilerplate "well that happened" form

dannyw 4y ago
it's to justify a takeover.
- olliej 4y ago
  you mean "this bank has failed and it's now the job of the regulator to clean up the mess"? that's how law works.
- deleted 4y ago
  [deleted]
therealcamino 4y ago
It doesn't claim to be a report. It's an ORDER TAKING POSSESSION OF PROPERTY AND BUSINESS. Only the HN headline says it's a report, incorrectly.

nico 4y ago

If a “healthy” bank had a run, would it still survive? In other words, are any banks solvent if a run happens to them? If not, then at what point are banks considered solvent. Also, if no bank can survive a bank run, would the CEO be at fault here for kind of inciting one (by essentially saying in the call “we’ll be alright, as long as you guys don’t run”)?

timy2shoes 4y ago
Even a healthy bank had a run they would not survive, because fundamentally banks borrow short (deposits) to lend long (loans, bonds, etc). The old Bagehot quote comes to mind: "Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone..." Anything that would cause depositors to worry and demand their money back quicker than the banks' investments mature would run into this problem.
ncallaway 4y ago
> are any banks solvent if a run happens You're asking more about liquidity, than solvency. All banks in the US that are following regulations should be solvent. But, most banks in the US would not be liquid enough to survive a run. > If not, then at what point are banks considered solvent. Solvency is basically: "does the long-term value of your assets exceed your liabilities". Liquidity is: "can you sell assets right now to meet your outgoing liabilities right now". The problem for banks is, in almost all cases some loans will have longer-term time-frames, while almost all depositors can theoretically ask for their money back at any given time. So, for almost any bank a strong enough run will cause them to fail a liquidity test (even if they are solvent).
- verteu 4y ago
  Genuine question: If a bank invests all customer deposits in 10y treasury bonds, and then interest rates rise, is it solvent? It seems this is essentially what made SVB insolvent.
  - loopdoend 4y ago
    They are solvent unless they have to suddenly sell the bonds, in which case they are worth less now than at maturity.
lend000 4y ago
At least in the modern economy, people aren't running to withdraw cash. They just transfer it to another bank. So the strongest major banks are probably impervious to runs, because if there is a general panic (rather than a panic at a specific bank), it will result in a dilution of funds between a number of major banks, rather than a net exodus of funds from the banking system.

shuckles 4y ago

The major new information is that almost 25% of deposits were withdrawn in the last day. How many banks could survive that?

eek2121 4y ago
If fully funded? all of them. If partially funded? part of them. Under current rules? none of them.
- OnlineGladiator 4y ago
  I don't think most people realize the current required reserve ratio is literally zero. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  - dannyw 4y ago
    Honour system for the financial industry. What could go wrong.
  - pbourke 4y ago
    I was trying to find out more about this. The reserve ratio was replaced by an “ample reserves” policy, wherein the Federal Reserve pays an increased interest rate on reserves (a slight discount from the federal funds rate). I wonder how this has played out in reality - do banks have more or less reserves than before this policy change?
  - dantheman 4y ago
    It's just fraud, demand deposits shouldn't be lent out.
  - NovemberWhiskey 4y ago
    And what do you think the relevance of that is, exactly?
- olliej 4y ago

barumrho 4y ago

Withdrawal of $42B in one day. Wow. It does seem like SVB would be uniquely vulnerable to this type of run. (Relatively small # of customers holding large sums of deposit.) Is that incorrect?

timy2shoes 4y ago
A big issue is that the customer base is highly correlated/undiversified, in the sense that they're all funded by a small set of VC's telling them to withdraw their money. SVB was uniquely exposed to the whims of a small set of individuals in this manner.
- dehrmann 4y ago
  Also that all these customers knew their funds weren't insured.
  - hackernewds 4y ago
    That is true for every bank. Know that in such a scenario NO bank can virtually back $45B in withdrawals.
    - dehrmann 4y ago
      What's different is how many large accounts SVB had. Most banks have a higher share of funds in smaller accounts. For people with less than $250k at the bank, there's less incentive to withdraw all your funds.
rich_sasha 4y ago
JP Morgan retained a very healthy position throughout the Financial Crisis of 2008-09 largely because they had a large, diffuse base of retail accounts, likely well below insurance limits. I suppose people were happy to keep their cash in. Since then all major investment banks are salivating over the idea of setting up retail arms for this very reason. Goldman Sachs tried launching "Marcus" for example. All for the very reason you describe.

anonu 4y ago

This is hearsay, but as i understand it Goldman had closed the books on their fundraise yesterday... Meaning the fundraise was complete. Some VCs including ycombinator raised the alarm and created the catalyst to get to where we are today. Pretty impressive turn of events but wholly avoidable.

djfobbz 4y ago

Prior to joining SVB, CEO Gentile was CFO for Lehman Brothers GIB - https://news.ycombinator.com/item?id=35110431 https://news.ycombinator.com/item?id=35110431