5 ms·

Wait a minute. Why would more (large) banks fail? I am guessing small banks and companies fail periodically. By any measure, SVB seems to be a one-off, gigantic

Wait a minute. Why would more (large) banks fail? I am guessing small banks and companies fail periodically. By any measure, SVB seems to be a one-off, gigantic risk management blunder. Why would there be an expectation of more of this to come?

dragontamer 4y ago
Its the FDIC's job to wargame the "what if" scenario, if things get worse. (Even if there's no evidence in that direction yet).
- twelve40 4y ago
  yes, and i wonder if they were preparing for the SVB thing in advance, too. The run that everyone is blaming happened in about 24 hr window and ended up in them taking over, is it even possible to prepare for a bank takeover in such a short time?
  - Godel_unicode 4y ago
    Institutions have long memories, especially government ones. I suspect there are a decent number of people who still work there and cut their teeth during the financial crisis. It would also be mind blowing to me for someone whose job is to handle bank failures to not have a playbook for them. I know that FEMA has a truly impressive library of disaster playbooks in their analogous role.
  - upon_drumhead 4y ago
    There was an episode of "The G Word" on Netflix that followed a FDIC bank takeover game-day. They're always preparing for the worst and know when they're called, if they handle things smoothly, it protects the entire system. I have huge respect for the FDIC. I feel they're the perfect example of a government agency that works.
delfinom 4y ago
There are other banks with similar long term treasury holding problems vs liabilities and assets on hand. Not the real big guys like Chase and co, but banks in size to SVB. First Republic and Signature Bank are going to be clenching their buttholes next week as they are set to experience a bit of a bankrun too. Basically, look at the stock market, any bank that is now hit with a >50% decline in share price like those 2 named above is because people noticed the problem.
- g42gregory 4y ago
  Wow. I did not realized that. What SVB did, basically having a gigantic unhedged position on the interest rate through mismatched duration, is just plain crazy. It should have never happened in any bank with the basic risk controls. Not a rocket science at all. But if there are more banks out there with such unhedged positions, this is scary. I am guessing this is what the "Moral Hazard" looks like, that people were talking about during 2007-2008 financial crisis. Everybody is expecting a bailout and people are incentivized to take crazy risks.
  - simple-thoughts 4y ago
    It’s a bit different from 2007-2008 because these assets that are causing problems are required by law to be held by these banks, in part from the regulations that came out of the previous crisis. Banks do have freedom with respect to duration but when small banks need funds for operations, are required to hold low yielding assets, and the short durations are at 0%, they really don’t have much of a choice.
  - chenliw 4y ago
    Actually, most banks have mismatched duration. Accepting short term deposits in checking accounts and giving out longer term mortgage and business loans. SVB undertook a strategy that had a similar duration as issuing loans, and via a portfolio of govt treasuries - as safe and liquid as it gets (outside of interest risk). The broader concern, with hindsight, is they had an extremely correlated/flighty deposit base compared to most banks, and that meant they should NOT have copied what other banks did. They needed to keep duration on the loan book much shorter and have much more liquidity/equity cushion.
VagueMag 4y ago
Some of the other large regional banks also have a very large proportion of deposits above the FDIC insurance limits, and are also sitting on hold-to-maturity portfolios which can't be liquidated to satisfy a large deposit outflow without incurring losses which would wipe out the banks' equity.
- impulser_ 4y ago
  Most banks are fine. They aren't gambling like SVB did. Ofc it's a VC bank gambling like a VC. SVB had ~40b in short term liquid assets. They had ~100b HTM securities. 210b in total assets. Nearly half of their assets were in HTM securities. You aren't going to find many banks with half their assets in HTM securities even banks holding a lot of HTM securities. SVB had 170b in deposits which is a short term liability. So they only had 40b in short term assets to cover 170b in short term liabilities. That's the problem. The problem isn't HTM securities. The problem is diversification.
  - deleted 4y ago
    [deleted]
mproud 4y ago
My understanding is that rising interest rates means people and businesses are less likely to get loans and do additional business with the banks. Along with bad investments and holdings, if banks aren’t well diversified, and they’re taking too many risks, they can bleed money.
techdragon 4y ago
Based on past examples… bank runs can be kind of contagious. “What if my bank collapsed?” may be a fleeting thought, but it’s also pretty easy to withdraw some cash “just in case”… if the situation escalated and there’s any genuine fear, the example set by anyone not getting all their money out of a collapsing bank incentives anyone who succumbs to the fear of loss with respect to the idea their bank may too collapse, to go and try to withdraw most of their money… and it becomes a bit like a snowball down a hill as more people have trouble… The FDIC are nominally to protect against this but the statutory deposit protection limits aren’t worth as much as they used to be… thanks to inflation and changes in housing market values.
- busterarm 4y ago
  This is why I recommend to people to park your money with entities like NFCU, PenFed or NASA FCU if they are available to you (and at least one of those likely is for most Americans). If things start to go south, government employees and the military are still going to get their money.
  - HWR_14 4y ago
    Government employees and the military are specifically the people who don't get paid in certain cases, for instance in a government shutdown. I don't think they are as protected a class as you think.
    - busterarm 4y ago
      That's their paychecks, not their savings. There's a big difference between the two and the attitudes around them. The paychecks always come eventually...or else.
paulddraper 4y ago
SVB had some unique aspects, but it wasn't dissimilar from a lot of others.
pgwhalen 4y ago
> Why would there be an expectation of more of this to come? As a general approximation, all banks would fail if there were a run on them. It's merely a question of how much of a run would be needed. If the panic among VCs that led to the run on SVB were to continue in other parts of the financial system, other banks with shaky risk management could have similar challenges. That being said, JP Morgan is not going to fail next week. Make no mistake that this was a massive risk management failure on the part of SVB. But large depositors of similar banks are panicking right now (just read HN this weekend), and it's up to banking regulators (FDIC, Federal Reserve, etc.) to calm their nerves by Monday morning.
- pbourke 4y ago
  National retail banks are not going to fail. This was a pretty unique circumstance: deposit base had tripled in 3 years, serious failure in risk management, most deposits from business customers well above the deposit insurance limits.
  - pgwhalen 4y ago
    Right. My point in saying "all banks would fail if there were a run on them" is just that if for some reason, every depositor at JP Morgan were to decide to withdraw their deposits on Monday in favor of some other bank, JP Morgan would fail. There are so so many reasons that won't happen, but the statement is true and is useful to keep in mind when thinking about banks and the banking system.
justinzollars 4y ago
In this case SVB bought long duration bonds, and they lost value because of higher interest rates. So this caused their books to become unbalanced. Other banks could have this problem.
- notfromhere 4y ago
  What forced them to realize losses was high withdrawal rates because tech funding went down. But SVB would have been fine if they didn’t inadvertently trigger a mass panic bank run
cavisne 4y ago
SVB saw more than 25 percent of their deposits withdrawn. No bank could handle that. Ultimately the money has to go somewhere (it won’t fit under everyone’s mattress) so a big bank would be unlikely to fail.
gonzo41 4y ago
SVB was in the top 20 banks in the US. It was a big bank.

dragontamer 4y ago

Its the FDIC's job to wargame the "what if" scenario, if things get worse. (Even if there's no evidence in that direction yet).

twelve40 4y ago
yes, and i wonder if they were preparing for the SVB thing in advance, too. The run that everyone is blaming happened in about 24 hr window and ended up in them taking over, is it even possible to prepare for a bank takeover in such a short time?
- Godel_unicode 4y ago
  Institutions have long memories, especially government ones. I suspect there are a decent number of people who still work there and cut their teeth during the financial crisis. It would also be mind blowing to me for someone whose job is to handle bank failures to not have a playbook for them. I know that FEMA has a truly impressive library of disaster playbooks in their analogous role.
- upon_drumhead 4y ago
  There was an episode of "The G Word" on Netflix that followed a FDIC bank takeover game-day. They're always preparing for the worst and know when they're called, if they handle things smoothly, it protects the entire system. I have huge respect for the FDIC. I feel they're the perfect example of a government agency that works.

delfinom 4y ago

There are other banks with similar long term treasury holding problems vs liabilities and assets on hand. Not the real big guys like Chase and co, but banks in size to SVB. First Republic and Signature Bank are going to be clenching their buttholes next week as they are set to experience a bit of a bankrun too. Basically, look at the stock market, any bank that is now hit with a >50% decline in share price like those 2 named above is because people noticed the problem.

g42gregory 4y ago
Wow. I did not realized that. What SVB did, basically having a gigantic unhedged position on the interest rate through mismatched duration, is just plain crazy. It should have never happened in any bank with the basic risk controls. Not a rocket science at all. But if there are more banks out there with such unhedged positions, this is scary. I am guessing this is what the "Moral Hazard" looks like, that people were talking about during 2007-2008 financial crisis. Everybody is expecting a bailout and people are incentivized to take crazy risks.
- simple-thoughts 4y ago
  It’s a bit different from 2007-2008 because these assets that are causing problems are required by law to be held by these banks, in part from the regulations that came out of the previous crisis. Banks do have freedom with respect to duration but when small banks need funds for operations, are required to hold low yielding assets, and the short durations are at 0%, they really don’t have much of a choice.
- chenliw 4y ago
  Actually, most banks have mismatched duration. Accepting short term deposits in checking accounts and giving out longer term mortgage and business loans. SVB undertook a strategy that had a similar duration as issuing loans, and via a portfolio of govt treasuries - as safe and liquid as it gets (outside of interest risk). The broader concern, with hindsight, is they had an extremely correlated/flighty deposit base compared to most banks, and that meant they should NOT have copied what other banks did. They needed to keep duration on the loan book much shorter and have much more liquidity/equity cushion.

VagueMag 4y ago

Some of the other large regional banks also have a very large proportion of deposits above the FDIC insurance limits, and are also sitting on hold-to-maturity portfolios which can't be liquidated to satisfy a large deposit outflow without incurring losses which would wipe out the banks' equity.

impulser_ 4y ago
Most banks are fine. They aren't gambling like SVB did. Ofc it's a VC bank gambling like a VC. SVB had ~40b in short term liquid assets. They had ~100b HTM securities. 210b in total assets. Nearly half of their assets were in HTM securities. You aren't going to find many banks with half their assets in HTM securities even banks holding a lot of HTM securities. SVB had 170b in deposits which is a short term liability. So they only had 40b in short term assets to cover 170b in short term liabilities. That's the problem. The problem isn't HTM securities. The problem is diversification.
- deleted 4y ago
  [deleted]

mproud 4y ago

My understanding is that rising interest rates means people and businesses are less likely to get loans and do additional business with the banks. Along with bad investments and holdings, if banks aren’t well diversified, and they’re taking too many risks, they can bleed money.

techdragon 4y ago

Based on past examples… bank runs can be kind of contagious. “What if my bank collapsed?” may be a fleeting thought, but it’s also pretty easy to withdraw some cash “just in case”… if the situation escalated and there’s any genuine fear, the example set by anyone not getting all their money out of a collapsing bank incentives anyone who succumbs to the fear of loss with respect to the idea their bank may too collapse, to go and try to withdraw most of their money… and it becomes a bit like a snowball down a hill as more people have trouble… The FDIC are nominally to protect against this but the statutory deposit protection limits aren’t worth as much as they used to be… thanks to inflation and changes in housing market values.

busterarm 4y ago
This is why I recommend to people to park your money with entities like NFCU, PenFed or NASA FCU if they are available to you (and at least one of those likely is for most Americans). If things start to go south, government employees and the military are still going to get their money.
- HWR_14 4y ago
  Government employees and the military are specifically the people who don't get paid in certain cases, for instance in a government shutdown. I don't think they are as protected a class as you think.
  - busterarm 4y ago
    That's their paychecks, not their savings. There's a big difference between the two and the attitudes around them. The paychecks always come eventually...or else.

paulddraper 4y ago

SVB had some unique aspects, but it wasn't dissimilar from a lot of others.

pgwhalen 4y ago

> Why would there be an expectation of more of this to come? As a general approximation, all banks would fail if there were a run on them. It's merely a question of how much of a run would be needed. If the panic among VCs that led to the run on SVB were to continue in other parts of the financial system, other banks with shaky risk management could have similar challenges. That being said, JP Morgan is not going to fail next week. Make no mistake that this was a massive risk management failure on the part of SVB. But large depositors of similar banks are panicking right now (just read HN this weekend), and it's up to banking regulators (FDIC, Federal Reserve, etc.) to calm their nerves by Monday morning.

pbourke 4y ago
National retail banks are not going to fail. This was a pretty unique circumstance: deposit base had tripled in 3 years, serious failure in risk management, most deposits from business customers well above the deposit insurance limits.
- pgwhalen 4y ago
  Right. My point in saying "all banks would fail if there were a run on them" is just that if for some reason, every depositor at JP Morgan were to decide to withdraw their deposits on Monday in favor of some other bank, JP Morgan would fail. There are so so many reasons that won't happen, but the statement is true and is useful to keep in mind when thinking about banks and the banking system.

justinzollars 4y ago

In this case SVB bought long duration bonds, and they lost value because of higher interest rates. So this caused their books to become unbalanced. Other banks could have this problem.

notfromhere 4y ago
What forced them to realize losses was high withdrawal rates because tech funding went down. But SVB would have been fine if they didn’t inadvertently trigger a mass panic bank run

cavisne 4y ago

SVB saw more than 25 percent of their deposits withdrawn. No bank could handle that. Ultimately the money has to go somewhere (it won’t fit under everyone’s mattress) so a big bank would be unlikely to fail.

gonzo41 4y ago

SVB was in the top 20 banks in the US. It was a big bank.