5 ms·

Would a stress test have mattered here? The loans weren't the problem. > The stress test is a forward-looking quantitative evaluation of bank capital that dem

Would a stress test have mattered here? The loans weren't the problem. > The stress test is a forward-looking quantitative evaluation of bank capital that demonstrates how a hypothetical macroeconomic recession scenario would affect firm capital ratios There was no recession and no loan loss. The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases) until it got $40 billion in withdrawals in a day. This headline implies that being labeled as systemically important would have flagged what went wrong here, and it's not clear that this is true.

beebmam 4y ago
Who exactly withdrew $40 billion in a day? Is this public info, or will it be?
- gruez 4y ago
  A few days ago a VC warned all the companies in its portfolio that SVB was in trouble and they should withdraw all their funds. That's probably what OP was talking about.
- loeg 4y ago
  A bunch of customers. I don't know if a list will ever be published or why. https://fortune.com/2023/03/11/silicon-valley-bank-run-42-billion-attempted-withdrawals-in-one-day/ https://fortune.com/2023/03/11/silicon-valley-bank-run-42-bi... > Customers immediately tried to pull their money, including many of the venture-capital firms the bank had cultivated over decades. Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective all advised their startups to pull their cash from the bank, people familiar with the matter said.
- consumer451 4y ago
  Our (my) favorite villain for one: > Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective all advised their startups to pull their cash from the bank, people familiar with the matter said. https://fortune.com/2023/03/11/silicon-valley-bank-run-42-billion-attempted-withdrawals-in-one-day/ https://fortune.com/2023/03/11/silicon-valley-bank-run-42-bi...
  - bcrosby95 4y ago
    It's funny that the very same people that caused a run on the bank are likely lobbying the government to make the companies they invested in whole.
    - AlchemistCamp 4y ago
      That’s not how bank runs work. The people who run first get their money out. It’s the ones who didn’t start the bank run that lose their money.
    - deleted 4y ago
      [deleted]
  - FireBeyond 4y ago
    Yeah, I'm sure Thiel has some friends at the executive/C-level of SVB, if not the board, given all the business he pushes their way...
amluto 4y ago
> The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases) That’s an “albeit” you could drive the second largest bank failure ever though. If I have $100k of net assets and I lose $10k due to interest rate increases, I’m fine. If I have $100k but I lose $150k due to interest rate increases, then I’m only fine if I have some other source of income before whatever debt I have comes due. SVB was only capitalized fine in a universe in which they could maintain a large non-interest-bearing deposit volume, and make adequate profit on it, for long enough to erase the hole in their balance sheet before their bonds matured and they would inevitably be forced to realize their loss. Or if their implicit gamble that rates would go back down would pay off. (Of course, the latter also reduces the income from said non-interest-bearing deposits.) I don’t know how bank stress tests work, but I sure hope they would notice that the bank’s liabilities exceeded their assets even assuming said assets could be sold calmly and at favorable prices. And no, “I’ll hold them to maturity so they’re worth 20% more than they are actually worth” should not be part of that calculation.
- stbede 4y ago
  > I don’t know how bank stress tests work, but... SVB would have passed stress tests because they did what all banks were supposed to do. They invested in "safe" long term treasuries. The only economic environment hypothetical they would fail is, "what happens if there is a bank run and you are forced to realize losses". But what bank can survive a bank run? The Dodd-Frank stress tests don't try to ensure banks can survive bank runs, do they? When banks invest in the long run, your assets can depreciate in value temporarily to get through short term business cycles. By investing long, a bank's balance sheet will be the average of both assets that aged poorly and assets that aged well. The average should reflect the long term growth of the economy. The treasuries purchased in the last 2 years depreciated a lot in value and most of SVB's growth happened in the last two years, so there current balances are skewed heavily towards assets purchased right before the interest rate hikes began. If SVB were able to continue operating for say another 10 years, they would be fine even if interest rates never returned to near 0 levels. Additional treasuries would be purchased and the fraction of the balance sheet that consisted of 2020-2022 treasuries would shrink. The rest of the portfolio would probably increase in value. Treasuries purchased today are cheap and have a large upside as rates start coming down, even if rates don't fall all the way to 0. The gains from cheap treasuries purchased towards the end of 2022 and after have potential to dramatically grow in value. There really isn't any evidence that SVB behaved irresponsibly nor that stricter regulation under Dodd-Frank would have made a difference. If SVB had been inclined to invest in riskier types of investments, Dodd-Frank would have pressured SVB to buy treasuries.
zhte415 4y ago
Perhaps, perhaps not. A stress test tests more than general recession but sector or segment concentrated losses. One that included maturity exposure may have failed, depends on the test.
scheme271 4y ago
If the hold to maturity holdings were marked to market, it would have been apparent that there were problems. At the very least, SVB would have had to acknowledge that their holdings were not worth nearly as much as they used to be. I think the larger banks in the US are required to do this with their holdings. The FT indicated that if the US required all it's banks to adhere to the Basel III regulations instead of just the large ones, SVB would not have had the same issues either.
cowl 4y ago
> The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases) until it got $40 billion in withdrawals in a day. You, like many others, are counfounding the trigger (Panic Withdrawls) with the cause (Lack of Diversification and bad risk-management in general). And the withdrawls come after their sale of assets at a loss of 2Billion+ "following a larger-than-expected decline in deposits" (This was their declaration for the fire sale, so no it was not capitalised so fine). Ofcourse this type of operation would cause panic and 40Billion in withdrawls after this type of declaration was to be expected and accounted for.

beebmam 4y ago

Who exactly withdrew $40 billion in a day? Is this public info, or will it be?

gruez 4y ago
A few days ago a VC warned all the companies in its portfolio that SVB was in trouble and they should withdraw all their funds. That's probably what OP was talking about.
loeg 4y ago
A bunch of customers. I don't know if a list will ever be published or why. https://fortune.com/2023/03/11/silicon-valley-bank-run-42-billion-attempted-withdrawals-in-one-day/ https://fortune.com/2023/03/11/silicon-valley-bank-run-42-bi... > Customers immediately tried to pull their money, including many of the venture-capital firms the bank had cultivated over decades. Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective all advised their startups to pull their cash from the bank, people familiar with the matter said.
consumer451 4y ago
Our (my) favorite villain for one: > Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective all advised their startups to pull their cash from the bank, people familiar with the matter said. https://fortune.com/2023/03/11/silicon-valley-bank-run-42-billion-attempted-withdrawals-in-one-day/ https://fortune.com/2023/03/11/silicon-valley-bank-run-42-bi...
- bcrosby95 4y ago
  It's funny that the very same people that caused a run on the bank are likely lobbying the government to make the companies they invested in whole.
  - AlchemistCamp 4y ago
    That’s not how bank runs work. The people who run first get their money out. It’s the ones who didn’t start the bank run that lose their money.
  - deleted 4y ago
    [deleted]
- FireBeyond 4y ago
  Yeah, I'm sure Thiel has some friends at the executive/C-level of SVB, if not the board, given all the business he pushes their way...

amluto 4y ago

> The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases) That’s an “albeit” you could drive the second largest bank failure ever though. If I have $100k of net assets and I lose $10k due to interest rate increases, I’m fine. If I have $100k but I lose $150k due to interest rate increases, then I’m only fine if I have some other source of income before whatever debt I have comes due. SVB was only capitalized fine in a universe in which they could maintain a large non-interest-bearing deposit volume, and make adequate profit on it, for long enough to erase the hole in their balance sheet before their bonds matured and they would inevitably be forced to realize their loss. Or if their implicit gamble that rates would go back down would pay off. (Of course, the latter also reduces the income from said non-interest-bearing deposits.) I don’t know how bank stress tests work, but I sure hope they would notice that the bank’s liabilities exceeded their assets even assuming said assets could be sold calmly and at favorable prices. And no, “I’ll hold them to maturity so they’re worth 20% more than they are actually worth” should not be part of that calculation.

stbede 4y ago
> I don’t know how bank stress tests work, but... SVB would have passed stress tests because they did what all banks were supposed to do. They invested in "safe" long term treasuries. The only economic environment hypothetical they would fail is, "what happens if there is a bank run and you are forced to realize losses". But what bank can survive a bank run? The Dodd-Frank stress tests don't try to ensure banks can survive bank runs, do they? When banks invest in the long run, your assets can depreciate in value temporarily to get through short term business cycles. By investing long, a bank's balance sheet will be the average of both assets that aged poorly and assets that aged well. The average should reflect the long term growth of the economy. The treasuries purchased in the last 2 years depreciated a lot in value and most of SVB's growth happened in the last two years, so there current balances are skewed heavily towards assets purchased right before the interest rate hikes began. If SVB were able to continue operating for say another 10 years, they would be fine even if interest rates never returned to near 0 levels. Additional treasuries would be purchased and the fraction of the balance sheet that consisted of 2020-2022 treasuries would shrink. The rest of the portfolio would probably increase in value. Treasuries purchased today are cheap and have a large upside as rates start coming down, even if rates don't fall all the way to 0. The gains from cheap treasuries purchased towards the end of 2022 and after have potential to dramatically grow in value. There really isn't any evidence that SVB behaved irresponsibly nor that stricter regulation under Dodd-Frank would have made a difference. If SVB had been inclined to invest in riskier types of investments, Dodd-Frank would have pressured SVB to buy treasuries.

zhte415 4y ago

Perhaps, perhaps not. A stress test tests more than general recession but sector or segment concentrated losses. One that included maturity exposure may have failed, depends on the test.

scheme271 4y ago

If the hold to maturity holdings were marked to market, it would have been apparent that there were problems. At the very least, SVB would have had to acknowledge that their holdings were not worth nearly as much as they used to be. I think the larger banks in the US are required to do this with their holdings. The FT indicated that if the US required all it's banks to adhere to the Basel III regulations instead of just the large ones, SVB would not have had the same issues either.

cowl 4y ago

> The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases) until it got $40 billion in withdrawals in a day. You, like many others, are counfounding the trigger (Panic Withdrawls) with the cause (Lack of Diversification and bad risk-management in general). And the withdrawls come after their sale of assets at a loss of 2Billion+ "following a larger-than-expected decline in deposits" (This was their declaration for the fire sale, so no it was not capitalised so fine). Ofcourse this type of operation would cause panic and 40Billion in withdrawls after this type of declaration was to be expected and accounted for.