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I’m not super well informed about this space, but my understanding was that SVB’s issue wasn’t that its depositors were from the tech sector, but rather that it
by JshWright 4y ago
I’m not super well informed about this space, but my understanding was that SVB’s issue wasn’t that its depositors were from the tech sector, but rather that it had put a ton of capital into investments that are significantly less valuable (on the open market today) now than they were a year ago due to increasing interest rates.
I’m curious how the tech sector matters here specifically?
- Dr_Birdbrain 4y agoMatt Levine reports that the reason they had to buy those low-yield investments that plummeted is because it’s tech-sector customers had too much money in the boom times. Too much deposits means they need to buy a lot of something, and in the boom times that was low-yield stuff.
- bsder 4y agoI'd also like to point out that VCs were telling all their portfolio companies "Pack it in and conserve cash as you're not getting another round." That caused a lot of companies that would otherwise have put their cash into an investment vehicle to instead hold it in their accounts. It will also be interesting to see if someone is going to wind up in jail for initiating the bank run. Someone shared confidential info that started this whole thing.
- Dr_Birdbrain 4y agoWas it confidential info? The public earnings call was three days ago, investors didn’t like what they saw and the stock went into free fall, then the run started yesterday. I think insiders might not even have realized how bad their balance sheet looked. On the earnings call the CEO was talking about how much he likes cycling to de stress, etc
- gonehome 4y agoSort of the other way to handle it would be to say “we can’t find risk-free yield for the volume of cash we just had deposited, so deposits now get 0.8% instead of 1.0%” Which is kinda fine? Means you might lose some business as others chase yield. But I feel like most startups don’t actually have that much cash in the bank so they shouldn’t really be chasing yield anyway. It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
- khuey 4y agoYeah I don't see why SVB couldn't have just rolled billions in short term T-bills instead.
- cormacrelf 4y agoBack in 2021 short term T-bills gave you less than 0.1% yield, hitting an all time low of 0.04% for some timeframes. The bonds they bought gave them 1.5% annual return. The banking regulations didn’t prevent them buying the ones they did. So yeah. That’s why.
- sroussey 4y agoYeah, I would not have done it. You always go short maturity at low rates. Unless you are borrowing, then the opposite. Depositors weren’t getting anything. I’m guessing SVB wanted yield for shareholders.
- stephen_g 4y agoThat’s a sign of mismanagement if true. Commercial/retail banks (as opposed to investment banks) usually make basically all their money on lending. Deposits (as liabilities) need to be so low risk that they basically don’t do much more than break even.
- asimpletune 4y agoI think they were paying interest on accounts, and it was actually becoming substantial especially as deposits increased so much.
- hackernewds 4y agoI'd rather have a bank do that, than go and invest in subprime packaged mortgage loans. Except SVB got punished for investing in long-term maturation US Treasury
- csomar 4y ago> It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid? Everyone is a genius in hindsight. You could have made millions out of a few thousands if you were able to predict an interest rate regime change. But where are your millions?
- dannyw 4y agoThe investments were long term treasuries and mortgage backed securities, yielding about 1.6%? As rates have increased, long duration treasuries and MBSes are now worth 20-30% less.
- JshWright 4y agoRight, that bit all makes sense. What was less clear to me (though sibling comments have since clarified) is why the depositor sector matters.
- deleted 4y ago[deleted]
- zenmacro 4y ago[dead]
- NovemberWhiskey 4y agoIt matters because recent underperformance in the sector led to the initial deposit outflows in the first place. If you’re concentrated heavily in a single sector, you’re likely to see higher correlations in the behavior of your depositors.
- cormacrelf 4y agoRead Matt Levine’s column from today. https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run https://www.bloomberg.com/opinion/articles/2023-03-10/startu... The tech sector isn’t an issue in itself, it’s that (1) all their deposits all came in at once because it’s one sector, so there was a huge demand surge for deposit interest, leading to a supply shortfall of loans they could issue and hence kinda desperately parking the money somewhere, which ended up putting their risk balance off kilter (bonds with interest rate risk); (2) all of their depositors (aka creditors) talk to each other and listen to the same people, so bank runs happen really fast. Compare this to First Republic bank: demand for deposit interest does not surge dramatically because there is finite liquid cash needing to be deposited and so one sector getting a cash infusion comes at the cost of another. It smoothes out. Plus their customers don’t all talk to each other and behave like worst-case bank runners. All sectors are pretty highly correlated in the cash they have on hand and how they behave with it. It would be equally risky to be a bank that only deals with oil companies. Nevertheless it offers efficiencies for acquiring new customers and new business, so banks do it.
- somsak2 4y agohttps://archive.is/Ger2q https://archive.is/Ger2q
- ummonk 4y agoThe tech sector has been withdrawing money in aggregate (because they continue paying payroll and rent but haven't been raising as much money recently) which increases liquidity pressure, and furthermore tech depositors are more skittish due to experience with FTX and thus prone to panic bank runs. They also have larger average account sizes, way beyond FDIC limits, which makes them more likely to need to withdraw money to protect their cash. SVB did have some issues with losses but they likely were still solvent; the bigger issue was just a lack of liquidity and a sudden bank run - 45 billion (out of ~175 billion in deposits) was withdrawn in a single day before they ran out of liquidity.
- cjbgkagh 4y agoHuh, so at least one quarter of depositors will get 100% on the dollar.
- karmicthreat 4y agoProbably not if the assets are short. The FDIC can claw back withdrawals from what I understand.
- pishpash 4y agoHow can they claw back withdrawals?
- digitaltrees 4y agoThe bankruptcy code provides guidance for a 90 day look back period from the date of insolvency where transactions can be clawed back or must be repaid. The FDIC will talk to the recipient bank and get a court order to deposit the funds in to a trustee account so that all available assets can be distributed evenly and fairly.
- twblalock 4y agoThey are very unlikely to do that to normal individual account holders. It would undermine the purpose of providing the deposit insurance in the first place.
- deleted 4y ago[deleted]
- scotty79 4y agoWhy are banks even allowed to buy assets? Every asset is a risk. Banks should have right to do exactly two things. Keep their customers saving and issue loans. There's plenty of risks even in that activity. Every other thing bank does is just piling up risk to unreasonable levels.
- nemo44x 4y agoI think this was a weird thing where deposit demand was so much greater than loan demand. They had too much money and thought they were doing a safe thing. But failed to consider the time aspect and how rapid interest rate increases nuke them. Banks do provide a valuable service and having them reject deposits isn’t a solution.
- NovemberWhiskey 4y agoI have literally no idea what the treasury people at SVB could have been thinking.
- nemo44x 4y agoProbably about their bonus.
- scotty79 4y agoInvesting money is never a safe thing. They should just sit on it.
- Mimlitsch 4y agohttps://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legislation https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...
- NovemberWhiskey 4y agoGlass-Steagall only prevented commercial banks from owning non-investment-grade securities - from what I have read, SVB’s portfolio (of Treasuries and MBS) would’ve been entirely consistent with pre-repeal Glass-Steagall.
- gerad 4y agoThe big concern is the contagion spreading. All banks are vulnerable to failure if deposits are taken out quickly, especially in this market where assets have taken a huge hit over the last 12 months. FRB wants people to believe the contagion is limited to tech and that they have limited exposure to it, so that folks don’t take deposits out en masse. If people start to think that it’s unstable, then they’ll take money out and it’ll be a death spiral like SVB.
- sroussey 4y agoIf people don’t get their access to their cash by Monday (or a week later at latest), then any rumor of liquidity issues at any bank will lead to a bank run. Once you know / experience it, bank runs feel like a legit thing to do.
- ptero 4y agoFDIC insures $250k per account, so most retail clients have no reason to bolt, which provides a lot of stability for traditional banks.
- bombcar 4y agoThese issues are all going to be at business banks (and even larger banks that do both business and normal are often actually separate entities).
- vineyardmike 4y agoTrue, but can you imagine having rent money in your account when the bank collapses... edit: apparently getting your money is fast and easy
- Caligatio 4y agoFDIC takes almost no time. From their website (https://www.fdic.gov/consumers/consumer/news/cnfall14/misconceptions.html https://www.fdic.gov/consumers/consumer/news/cnfall14/miscon...): The FDIC almost always pays insured depositors within a few business days of a closing, usually the next business day. Payment is made either by providing each depositor a new account at another insured institution or by issuing a check to each depositor.
- metacritic12 4y agoIf First Republic could say they could meet all depositor demands, they would have. But instead this is the most they can say to stave off a run. And to their credit, the fact that they're not tech heavy means the tech firms pulling from SVB aren't likely as scarred and pulling from First Republic. But First Republic has a ton of HNWIs too who are not insured. This isn't Bank of America serving mom and pops, it's rich people who will pull and are uninsured by FDIC.