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After reading this article my take on the situation substantially changed from the typical (here) "idiot bankers put all their assets in HTM instruments". iana
by dboreham 4y ago
After reading this article my take on the situation substantially changed from the typical (here) "idiot bankers put all their assets in HTM instruments".
ianab but I get the impression that when you're operating a bank you think of depositors and loans like a SaaS service would view subscribers. You want more deposits same as we want more subscribers. Having got more deposits you set about lending the money in order to make a profit.
Most businesses that don't go broke take on "steady state" characteristics -- month to month the money coming in and going out is much the same. Hopefully rising a bit each month, but mostly tomorrow is the same thing as yesterday.
That would be the case with a typical big bank. e.g. my businesses bank with WF. We have some amount of cash on deposit there that varies through the month and the year but long term averages to some near constant. Once the bank has thousands of businesses as clients all those deposits' noise will smooth out and as someone running that bank it looks like you can rely on having some $$$ of deposits, always. In this situation you don't actually care whether you put the money in liquid or HTM instruments because net nobody is going to withdraw it anyway.
Here's where I think SVB went off the rails : their customers were not normal businesses. This meant that the assumption that deposits would remain roughly static was not valid. That's because a large proportion of the deposits represented startup burn fuel.
Deposited funds that starts ups are burning through will only remain static if there is a constant flow of new start ups. That wasn't the case in the last couple of years as the free money environment dried up.
So now you have big net outflows from SVB because no new start ups are being funded, but the existing ones are still burning their money.
And then it gets worse because all the depositors are part of the same close social network and therefore can organize a run quickly and easily.
- darkerside 4y agoSurprising similarity to the 2008 crash in that there was systemic risk that wasn't detected or fully understood based on there being events that were entirely predictable (housing prices drop, or Fed rate increases) but happening at unpredictable rates of speed.
- eastbound 4y agoNo bank can bet the deposits will stay the same: Through the short-term economic cycles, people will accumulate for 6 months, 2 years, 10 years, then deplete. Covid hits? Everyone needs 3 grand at the same time. Government gibs money? Everyone has 3 grand extra for a few weeks. Everyone gets paid on the 1st of the month. You can average, but everyone will hit the low at the same time.
- IrnBru 4y agoNot true. Imagine there was only ONE bank.
- spacebanana7 4y agoI see what you’re getting at but people could still withdraw paper money or do international transfers. A single global bank in a world without paper money/gold/etc might be different.
- IrnBru 4y agoOf course I am being simplistic and a run can occur precisely because there is more than one bank... But on the international transfer thing... you selling USD and buying EUR doesn't result in the creation or destruction of any USD or EUR deposits overall, unless the central bank/government is intervening.
- IrnBru 4y agoBorrowing short term and lending long is what all banks do. The problem here is a lack of diversification.
- thevagrant 4y agoI think you're right. They did not understand the needs of their customers (companies) that contributed the bulk of their deposits. They were not assessing the risks and changes occurring in the market that could affect the behavior of their primary customer base. I read they went 8 months without someone in charge of risk management, so it appears this is completely an own goal.
- personomas 4y agoEspecially with more and more companies leaving (and start-ups not staring in) Silicon Valley.