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I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk. We acknowledge most banks don’t want to touch st

I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk. We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .” Also consider the past 10 years have probably been the friendliest 10 years to startups ever.

bigbillheck 4y ago
Wasn't the risk 'betting hard that interest rates wouldn't rise for a decade' in 2021?
senttoschool 4y ago
I don’t think startups will have a harder time banking in the future. This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. Buying 10 year low yield securities and not hedging them against rising rates. Plenty of banks would love to have the deposits of startups and VCs. I bet a bank like Mercury or some other ones will grow to take SVB’s place.
- awill 4y ago
  This is exactly right. This has nothing to do with the startups using the bank
  - JumpCrisscross 4y ago
    > has nothing to do with the startups using the bank The proximate cause is short-term funding from risky depositors, i.e. start-ups. The ultimate cause was insolvency. (Yes, not illiquidity, simple illiquidity is solved by the Fed’s discount window.)
- metalspot 4y ago
  no. the problem with long term AAA securities was only 100B of their 200B book. the dead loans to startups are a much bigger problem and why nobody would buy them.
  - deleted 4y ago
    [deleted]
- rvz 4y ago
  > This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. And those startups should have diversified their millions of VC cash to reduce their exposure and over-centralization on a single bank. In fact, they should not have been over-relying on VC cash in the first place. Now they will be getting $250k out of the millions of VC cash they chose to place in SVB. The FDIC system working as intended once a bank goes under. No bailouts and no exceptions. > I bet a bank like Mercury or some other ones will grow to take SVB’s place. Mercury is not a bank. [0] It just works with other FDIC banks like Evolve Bank & Trust and CFG (Choice Financial Group). [0] https://mercury.com/how-mercury-works https://mercury.com/how-mercury-works
  - rvba 4y ago
    In other thread someone wrote that VC made a contractual requirement that "their" startups use a particular bank. Perhaps due to lower fees for companies with same owners.
- hirako2000 4y ago
  I think the attention is put on some, likely, bonds backfiring. Not going into questioning how a 20y old bank would buy very long bonds as historically lowest returns. There is even more likely some bad lending in there in the order of billions that either have or are going going to materialise as defaults. And that's plain'n simple having to wipe numbers from the books, and those books aren't going to look good. Banks take deposits but also loan with a 10x or even more ratio. Not difficult to imagine a SV bank would have lended a lot of cash, with marginal interests that aren't covering the actual risk. Only speculation on my part there but needs to see further unwinding to bring some clarity or where the hole mostly comes from. Until then, the narrative sounds far better than pointing out a widespread bad credit issue that other banks are also going to face in the coming months. Edit: typos
- deleted 4y ago
  [deleted]
api 4y ago
Banks assume a lot of risk if they are overweight in any single sector. Having some startups is fine if it’s not a giant portion of your depositor base to the point that you have major sector risk. I’m really glad ZeroTier used a boring old mainstream bank that didn’t specialize in any one sector. We looked at SVB. Bullet dodged.
lbotos 4y ago
I mean their risk here wasn’t exposure to startups but too many MBS in an env where the fed’s “risk free money” is better investment than the MBSes. It wasn’t because of “Startups”.
ChrisMarshallNY 4y ago
The last ten years have been a wild, Bacchanalian orgy of loose money. It is now time for Bilious[0] to appear. [0] https://discworld.fandom.com/wiki/Bilious https://discworld.fandom.com/wiki/Bilious
- hirako2000 4y ago
  Good ref, I had no clue of bilious existence. Yes, reality eventually back fires. It's not like the fed figured they should turn around because "inflation". It may simply be that they can't keep printing since it has become much harder to dump it anymore on (global) producers. See the geopolitics, Finance101 isn't enough to grasp the magnitude and seriousness of what's been going on lately.
  - candiodari 4y ago
    The problem is, this is not true. Look at the history of the stock market. There's a whole science about "Valuation". Like all sciences it has a long history and it evolves. It has evolved, a lot over the years. And with it, the prevalent valuation of companies has changed, likewise by a LOT (generally going up, by a lot). So you'll have to be more precise? There are many valuation philosophies, from Nprofit, to value of the physical assets of a company, Nrevenue, Discounted cash flow analysis, Growth stock ... which "reality", exactly, do you mean? Some people even see the "in the end, we're all dead", as the "reality" at the end of the stock market. Eventually, they're probably right.
    - hirako2000 4y ago
      I'm sorry I didn't use the word "reality" as to define some alternative interpretation or a better philosophical approach to valuation, but trying to see what you mean. We can even consider WeWork and a few other valuations on the edge, or of some obsolete past. By reality here I meant that SVB caught itself having to liquidate positions to get, what I suppose is, enough liquidity to operate. Realised a significant loss, and the cashflow got aggravated when investors and depositors reacted to that information. Reality that some (chief?) executive, based on perhaps unrelared reasons, sold a big bag of shares, and that information spread and caused further market pressure, followed later on by more run on the bank. Reality that entering 2023 the fed continued to raise the interest rate and the tech sector saw further negative prospects, at least from the point of view of investors, aggravating SVB's situation. In particular when Moody was about to downgrade the bank rating. I don't have a crystal ball, neither did SVB, and its CFO surely is many folds better at strategic/tactical financing than I, but this series of events is although summarised the way it unfolded for them and I refer to reality calling back because, it doesn't matter how the books looked like or what philosophy was used in 2021, in September last year, or at the latest financial disclosure. Wires couldn't be honored and.. reality call happens. Not my reality. The reality, which i would call accountinglessly obvious. About "the end" I don't see it that way at all. We certainly aren't dead. Death though already owns most of life and keeps growing relatively to the living. It doesn't imply we will necessarily all end up dead. Lastly, back to the market and the demise of some major bank, or all of them if needs be, it matters very little to life. Not all that serious if you want my take on it. Let's see what Monday morning got to say, reality is what it is.
m00dy 4y ago
We just need tokenised tbills. We will be building a better financial system for sure.
- s1artibartfast 4y ago
  What does this mean? T-bills are already readily exchangeable. The problem arises when treasury bills are only worth 60 cents after you paid a dollar
belter 4y ago
What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's?
- s1artibartfast 4y ago
  Venture capitalists usually don't come to startups with gold and startups don't pay their employees with gold so they need a bank.
  - belter 4y ago
    That was not my argument. I tried to explain for the purposes of banking many alternatives were available. If it's credit they were looking for, banks only lend what you can offer as collateral. Funds come from the VCs.
    - s1artibartfast 4y ago
      I feel like there is some disconnect. Maybe I don't understand your question I was answering why startups need a bank, and it isn't just for loans. The most basic needs for an account is so that you can 1) store the money you get from VCs, 2) pay your employees, 3) receive payments from customers. Do you see why a company needs a bank account? Without a bank you need to operate in cash and have a room somewhere full of physical cash with guards, ect.
      - belter 4y ago
        > What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's? I do not think I said a company does not need a bank? My comment was in response to the statements trying to imply SVB, was the only option for Startups or that other banks would not accept Startups as clients.
        s1artibartfast 4y ago
runeks 4y ago
> [...] SVB was actually assuming quite a bit of risk. Honest question: compared to what? Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan? Or is the case that JP Morgan is as insolvent as SVB, but JPM's depositors are less likely to withdraw their funds (because it's a big bank and it has primarily retail customers)? These are honest questions; I'm not suggesting JPM is in the same situation. However, I'd like to see some numbers.
- JumpCrisscross 4y ago
  > Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan? Yes. JPMorgan is subject to the Fed’s stress tests and Basel III, both of which test duration. (SVB successfully lobbied to be exempt from both.)
  - nephanth 4y ago
    > SVB successfully lobbied to be exempt from both Ow the irony
  - everybodyknows 4y ago
    Further to regulatory exemptions: >For systemically important banks, no adjustment for AFS is needed because all AFS unrealized gains and losses are already reflected in their reported capital ratios. As a result, only gains and losses in the HTM portfolio need to be included in our adjustment. For these four banks ... So, regulations turn a blind eye to HTM losses for any bank under $1T in assets: https://banks.data.fdic.gov/bankfind-suite/financialreporting?establishedEndRange=3%2F12%2F2023&establishedStartRange=01%2F01%2F1792&inactiveEndRange=3%2F12%2F2023&inactiveStartRange=01%2F01%2F1970&incomeBasis=YTD&institutionType=banks&limitEstablishedDate=false&limitInactiveDate=false&pageNumber=1&reportPeriod=20221231&resultLimit=25&sortField=ASSET&sortOrder=DESC&unitType=%24 https://banks.data.fdic.gov/bankfind-suite/financialreportin...
- tel 4y ago
  I'm not sure I completely follow the linked PDF, but it seems to be suggesting exactly that: So, the big question for investors and depositors is this: how much duration risk did each bank take in its investment portfolio during the deposit surge, and how much was invested at the lows in Treasury and Agency yields? As a proxy for these questions now that rates have risen, we can examine the impact on capital ratios from an assumed immediate realization of unrealized securities losses (see next page for a full explanation of our methodology). That’s what is shown in the first chart: again, SIVB was in investment duration world of its own as of the end of 2022, which is remarkable given its funding profile shown earlier. The argument seems to be exactly that SVB both had highly interest rate sensitive depositors and significant unhedged duration risk. Both led to correlated interest rate risk at SVB and both were unique in the US banking world. Another key comment by Cembalest As shown below, being flooded with deposits from fast-money VC firms and other corporate accounts at a time of historically low interest rates might have been more of a curse than a blessing. The chart shows that SVB's balance sheet expanded by 250% from 2019 to 2022 (compare JPM at ~40%, one of the lower banks listed and the next closest, Western Alliance at ~180% and Truist at ~150%).

bigbillheck 4y ago

Wasn't the risk 'betting hard that interest rates wouldn't rise for a decade' in 2021?

senttoschool 4y ago

I don’t think startups will have a harder time banking in the future. This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. Buying 10 year low yield securities and not hedging them against rising rates. Plenty of banks would love to have the deposits of startups and VCs. I bet a bank like Mercury or some other ones will grow to take SVB’s place.

awill 4y ago
This is exactly right. This has nothing to do with the startups using the bank
- JumpCrisscross 4y ago
  > has nothing to do with the startups using the bank The proximate cause is short-term funding from risky depositors, i.e. start-ups. The ultimate cause was insolvency. (Yes, not illiquidity, simple illiquidity is solved by the Fed’s discount window.)
metalspot 4y ago
no. the problem with long term AAA securities was only 100B of their 200B book. the dead loans to startups are a much bigger problem and why nobody would buy them.
- deleted 4y ago
  [deleted]
rvz 4y ago
> This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. And those startups should have diversified their millions of VC cash to reduce their exposure and over-centralization on a single bank. In fact, they should not have been over-relying on VC cash in the first place. Now they will be getting $250k out of the millions of VC cash they chose to place in SVB. The FDIC system working as intended once a bank goes under. No bailouts and no exceptions. > I bet a bank like Mercury or some other ones will grow to take SVB’s place. Mercury is not a bank. [0] It just works with other FDIC banks like Evolve Bank & Trust and CFG (Choice Financial Group). [0] https://mercury.com/how-mercury-works https://mercury.com/how-mercury-works
- rvba 4y ago
  In other thread someone wrote that VC made a contractual requirement that "their" startups use a particular bank. Perhaps due to lower fees for companies with same owners.
hirako2000 4y ago
I think the attention is put on some, likely, bonds backfiring. Not going into questioning how a 20y old bank would buy very long bonds as historically lowest returns. There is even more likely some bad lending in there in the order of billions that either have or are going going to materialise as defaults. And that's plain'n simple having to wipe numbers from the books, and those books aren't going to look good. Banks take deposits but also loan with a 10x or even more ratio. Not difficult to imagine a SV bank would have lended a lot of cash, with marginal interests that aren't covering the actual risk. Only speculation on my part there but needs to see further unwinding to bring some clarity or where the hole mostly comes from. Until then, the narrative sounds far better than pointing out a widespread bad credit issue that other banks are also going to face in the coming months. Edit: typos
deleted 4y ago
[deleted]

api 4y ago

Banks assume a lot of risk if they are overweight in any single sector. Having some startups is fine if it’s not a giant portion of your depositor base to the point that you have major sector risk. I’m really glad ZeroTier used a boring old mainstream bank that didn’t specialize in any one sector. We looked at SVB. Bullet dodged.

lbotos 4y ago

I mean their risk here wasn’t exposure to startups but too many MBS in an env where the fed’s “risk free money” is better investment than the MBSes. It wasn’t because of “Startups”.

ChrisMarshallNY 4y ago

The last ten years have been a wild, Bacchanalian orgy of loose money. It is now time for Bilious[0] to appear. [0] https://discworld.fandom.com/wiki/Bilious https://discworld.fandom.com/wiki/Bilious

hirako2000 4y ago
Good ref, I had no clue of bilious existence. Yes, reality eventually back fires. It's not like the fed figured they should turn around because "inflation". It may simply be that they can't keep printing since it has become much harder to dump it anymore on (global) producers. See the geopolitics, Finance101 isn't enough to grasp the magnitude and seriousness of what's been going on lately.
- candiodari 4y ago
  The problem is, this is not true. Look at the history of the stock market. There's a whole science about "Valuation". Like all sciences it has a long history and it evolves. It has evolved, a lot over the years. And with it, the prevalent valuation of companies has changed, likewise by a LOT (generally going up, by a lot). So you'll have to be more precise? There are many valuation philosophies, from Nprofit, to value of the physical assets of a company, Nrevenue, Discounted cash flow analysis, Growth stock ... which "reality", exactly, do you mean? Some people even see the "in the end, we're all dead", as the "reality" at the end of the stock market. Eventually, they're probably right.
  - hirako2000 4y ago
    I'm sorry I didn't use the word "reality" as to define some alternative interpretation or a better philosophical approach to valuation, but trying to see what you mean. We can even consider WeWork and a few other valuations on the edge, or of some obsolete past. By reality here I meant that SVB caught itself having to liquidate positions to get, what I suppose is, enough liquidity to operate. Realised a significant loss, and the cashflow got aggravated when investors and depositors reacted to that information. Reality that some (chief?) executive, based on perhaps unrelared reasons, sold a big bag of shares, and that information spread and caused further market pressure, followed later on by more run on the bank. Reality that entering 2023 the fed continued to raise the interest rate and the tech sector saw further negative prospects, at least from the point of view of investors, aggravating SVB's situation. In particular when Moody was about to downgrade the bank rating. I don't have a crystal ball, neither did SVB, and its CFO surely is many folds better at strategic/tactical financing than I, but this series of events is although summarised the way it unfolded for them and I refer to reality calling back because, it doesn't matter how the books looked like or what philosophy was used in 2021, in September last year, or at the latest financial disclosure. Wires couldn't be honored and.. reality call happens. Not my reality. The reality, which i would call accountinglessly obvious. About "the end" I don't see it that way at all. We certainly aren't dead. Death though already owns most of life and keeps growing relatively to the living. It doesn't imply we will necessarily all end up dead. Lastly, back to the market and the demise of some major bank, or all of them if needs be, it matters very little to life. Not all that serious if you want my take on it. Let's see what Monday morning got to say, reality is what it is.

m00dy 4y ago

We just need tokenised tbills. We will be building a better financial system for sure.

s1artibartfast 4y ago
What does this mean? T-bills are already readily exchangeable. The problem arises when treasury bills are only worth 60 cents after you paid a dollar

belter 4y ago

What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's?

s1artibartfast 4y ago
Venture capitalists usually don't come to startups with gold and startups don't pay their employees with gold so they need a bank.
- belter 4y ago
  That was not my argument. I tried to explain for the purposes of banking many alternatives were available. If it's credit they were looking for, banks only lend what you can offer as collateral. Funds come from the VCs.
  - s1artibartfast 4y ago
    I feel like there is some disconnect. Maybe I don't understand your question I was answering why startups need a bank, and it isn't just for loans. The most basic needs for an account is so that you can 1) store the money you get from VCs, 2) pay your employees, 3) receive payments from customers. Do you see why a company needs a bank account? Without a bank you need to operate in cash and have a room somewhere full of physical cash with guards, ect.
    - belter 4y ago
      > What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's? I do not think I said a company does not need a bank? My comment was in response to the statements trying to imply SVB, was the only option for Startups or that other banks would not accept Startups as clients.
      - s1artibartfast 4y ago

runeks 4y ago

> [...] SVB was actually assuming quite a bit of risk. Honest question: compared to what? Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan? Or is the case that JP Morgan is as insolvent as SVB, but JPM's depositors are less likely to withdraw their funds (because it's a big bank and it has primarily retail customers)? These are honest questions; I'm not suggesting JPM is in the same situation. However, I'd like to see some numbers.

JumpCrisscross 4y ago
> Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan? Yes. JPMorgan is subject to the Fed’s stress tests and Basel III, both of which test duration. (SVB successfully lobbied to be exempt from both.)
- nephanth 4y ago
  > SVB successfully lobbied to be exempt from both Ow the irony
- everybodyknows 4y ago
  Further to regulatory exemptions: >For systemically important banks, no adjustment for AFS is needed because all AFS unrealized gains and losses are already reflected in their reported capital ratios. As a result, only gains and losses in the HTM portfolio need to be included in our adjustment. For these four banks ... So, regulations turn a blind eye to HTM losses for any bank under $1T in assets: https://banks.data.fdic.gov/bankfind-suite/financialreporting?establishedEndRange=3%2F12%2F2023&establishedStartRange=01%2F01%2F1792&inactiveEndRange=3%2F12%2F2023&inactiveStartRange=01%2F01%2F1970&incomeBasis=YTD&institutionType=banks&limitEstablishedDate=false&limitInactiveDate=false&pageNumber=1&reportPeriod=20221231&resultLimit=25&sortField=ASSET&sortOrder=DESC&unitType=%24 https://banks.data.fdic.gov/bankfind-suite/financialreportin...
tel 4y ago
I'm not sure I completely follow the linked PDF, but it seems to be suggesting exactly that: So, the big question for investors and depositors is this: how much duration risk did each bank take in its investment portfolio during the deposit surge, and how much was invested at the lows in Treasury and Agency yields? As a proxy for these questions now that rates have risen, we can examine the impact on capital ratios from an assumed immediate realization of unrealized securities losses (see next page for a full explanation of our methodology). That’s what is shown in the first chart: again, SIVB was in investment duration world of its own as of the end of 2022, which is remarkable given its funding profile shown earlier. The argument seems to be exactly that SVB both had highly interest rate sensitive depositors and significant unhedged duration risk. Both led to correlated interest rate risk at SVB and both were unique in the US banking world. Another key comment by Cembalest As shown below, being flooded with deposits from fast-money VC firms and other corporate accounts at a time of historically low interest rates might have been more of a curse than a blessing. The chart shows that SVB's balance sheet expanded by 250% from 2019 to 2022 (compare JPM at ~40%, one of the lower banks listed and the next closest, Western Alliance at ~180% and Truist at ~150%).