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I'm a bit confused by some of the discussion here. Many people talk as if there was factually no underlying issue with the bank, and the run was caused purely b

I'm a bit confused by some of the discussion here. Many people talk as if there was factually no underlying issue with the bank, and the run was caused purely by panic. For that to be true though, I think the rationale presented alongside the urging to pull out would need to have been fabricated, or "mistaken". But I haven't seen anyone explicitly claim that. Am I missing something? Is there just a lack of general understanding of the prisoner's dilemma?

metalspot 4y ago
there is a very concerted pr effort to spin it that way, and people regurgitate pr memes. the underlying issue was that SVB knew they were f'd and so they were begging VCs to stop taking money out because they knew they couldnt cover and those VCs turned around and pulled money faster, because that is what smart money does. SVBs bargaining chip was that the VCs wouldnt want the books being opened, which is what happens when the fed takes over, but the VCs called their bluff, because they figured they were well enough insulated from any potential fall out. this is america, so we have the keating S&L scandal, ltcm, enron, worldcom, countrywide financial, 2008. the game never stops.
- dataangel 4y ago
  This is the only place I've read the idea of SVB hoping VCs wouldn't want their books opened. Is it common when the FDIC comes in for them to be auditing for criminal behavior and not just looking at what balances are so they know how much money to give each account? Is there precedent?
  - metalspot 4y ago
    it doesnt have to be criminal behavior. if a startup had X cash balance with SVB because they got a loan from SVB, then that startup is looking very f'd right now, because their runway just got bombed. nothing criminal, but it changes market perception a lot.
  - akiselev 4y ago
    It's not a question of criminal behavior but the bank's interpretation of the law versus the government's. As long as banks don't draw attention to themselves and don't get sued, they can operate largely in gray areas of the law to get and keep clients, make a little extra profit, take a little extra risk, etc. Once they are getting audited with a fined toothed comb, anything that comes up where the bank's interpretation is at odds with the government's can be easily found out and people can get punished. This can be anything from how the bank values its assets (which... who cares, they're going bankrupt anyway, right?) to director malfeasance or negligence which can result in jail time. In normal circumstances almost all businesses operate this way at least a little bit, but in banking there's a paper trail and when it's under a regulator's microscope, it's much more likely to get noticed and punished.
toss1 4y ago
There are many situations where a bank is literally solvent, but cannot survive the liquidity crunch of a bank run. In fact, it's probably true of pretty much every bank every day, since this is partial-reserve banking. If everyone wants their money back, NOW, the bank doesn't have it, but in normal banking, the institutions can be stable for centuries. SVB put themselves in a somewhat bad situation by heavily concentrating the high levels of deposits in 2019-2021 in long-term treasury bonds (which would not have been permitted had not the previous administration not rolled back Dodd-Frank regulations, in no small part due to the lobbying of SVB's CEO). So to service the net withdrawals that started earlier this year (lower levels of VC investment and higher expenses in the concentrated startup community SVB served), after the big interest rate increases, they had to start cashing out their T-Bonds at ~80% of face value. This lead to need to raise new capital, which reduced confidence in the bank... Had everyone, including Thiel, stayed calm instead of Thiel yelling "FIRE!!", it is entirely likely that it could have been at least calmly wound down or sold. It's kind of like crossing thin ice. If you can keep your weight spread over enough surface area with no mis-steps, you can get across just fine. But if you take one wrong step focusing the pressure at one spot, you are now in the freezing water with a life expectancy of minutes if you are helped.
- oarabbus_ 4y ago
  >SVB put themselves in a somewhat bad situation by heavily concentrating the high levels of deposits in 2019-2021 in long-term treasury bonds (which would not have been permitted had not the previous administration not rolled back Dodd-Frank regulations, in no small part due to the lobbying of SVB's CEO). And they put even more into 30-year mortgage backed securities. Bonds are normally purchased across a mix of maturities by banks. It's strange how everyone is absolving them for the mistake of holding almost no 1-2 year bonds and instead blaming VCs for pulling out. To be explicitly clear: it's the responsibility of the bank to maintain their own liquidity (just like the borrower needs to do the same with their loan repayments), and putting $100B (33%+) of assets into 10-30Y securities was highly irresponsible and poor risk management.
  - fisherjeff 4y ago
reb 4y ago
Is that how people are talking about it? At this point the thread of most conversations here seems to follow this pattern: lots of deposits > overallocated to interest-rate-sensitive long-term bonds > short-term withdrawal pressure forces SVB to sell assets at a loss and then attempt to sell itself > Thiel urges pawns to pull based on that knowledge (and possibly more) > word gets out, wider bank run > FDIC takeover. A potential issue become a concrete issue through panic. The rationale presented alongside the urging to pull out doesn’t have to be fabricated, just hypothetical. That the risk become real as a consequence of being suggested is potentially interesting, but ya know.
- zhte415 4y ago
  Another way of dealing with a run would have been to simply replace the funding through interbank lending: Take a deposit from another bank to offset the deposits being withdrawn. Through funds or repo. If it was a short term funding issue, this is normal (at a system level, interbank lending always balances, just an accounting identity). But that wasn't done. Whether that's because other banks were unwilling to step in may be interesting to see.
  - startupsfail 4y ago
    And another way was for VCs to step in and help saving their piggy bank. There was an easy mechanism for that - simply purchase the shares SVB was offering. But no, community that claims they are going to save the world couldn’t exercise enough long-term thinking to even save their piggy bank. There should be no bailout by the Fed. This community has enough resources. If they can think long term and act together, they’ll reorganize themselves in a responsible way. If they can’t, then they deserve to fail financially and they’ll have less resources to control.
  - gruez 4y ago
    >. If it was a short term funding issue, this is normal (at a system level, interbank lending always balances, just an accounting identity). But that wasn't done. Whether that's because other banks were unwilling to step in may be interesting to see. It wasn't done because the assets SVB had at current market values was worth less than their liabilities. You'd be crazy to lend money to SVB.
snapplebobapple 4y ago
I think the understanding issue is that all banks are basically insolvent by design under any situation that differs from normal because the business model is to take in customer funds and then deploy them (lend them for mortgages, but mortgage backed securities and other bonds, buy stock, make loans, etc) and that will always involve a duration mismatch given that those customer funds can all be withdrawn on demand and whatever you deployed those customer funds into will not be able to be withdrawn on demand (and may have a multi year withdrawal limitation). How this is managed is by making sure you have enough capital on hand or in assets you can liquidate immediately to cover customer withdrawals, which wasn't possible for SVB because 20-30% of their total customer deposits were leaving each day by the end. In that regard it is true that the bank run caused the failure. However, what caused the desire to get out is bad management at the bank and unrealized losses because the bank had a large portfolio of mortgage backed securities they weren't required to mark to market (thanks dumb regulators) and the loss on them from the sudden increase in interest rates was large. In addition they had a very large portfolio of loans to startups that were questionable given the massive shift in that market so there really is a big question mark on how many billions that portfolio would be down which makes it really questionable whether the bank was actually solvent or not and that drove the panic to get out. So the correct answer here is the regulators screwed up allowing losses to not be marked to market, the bank management screwed up exposing themselves to a very risky duration mismatch and very risk asset mix and when the bank customers figured it out they caused the bank to officially fail by trying to protect their assets by moving them elsewhere.
- ericpauley 4y ago
  This isn’t true at an individual bank level. See the related post on JPM’s report. Systemically important banks need to mark to market regularly, and are still well capitalized after accounting for unrealized losses.
- JumpCrisscross 4y ago
  > by making sure you have enough capital on hand or in assets you can liquidate immediately to cover customer withdrawals Also by using the Fed’s discount window. If you’re illiquid, and not insolvent, you borrow from the Fed. If your assets are worth less than your liabilities, you’re insolvent, and the FDIC takes charge.
rewgs 4y ago
> Is there just a lack of general understanding of the prisoner's dilemma? The answer to this question is a resounding "yes." As far as I can tell, the prisoner's dilemma, as well as a wide-spread ignorance of it, can pretty much explain the totality of human behavior.
bobleeswagger 4y ago
> Many people talk as if there was factually no underlying issue with the bank These people are led by propaganda. Modern banking is evil and the fact we put up with "losing lotteries" like this is so despicable.
stephen_g 4y ago
There were definitely issues with SVB. They reportedly didn’t hedge at all against interest rate rises. That didn’t present a big issue until this year… Also apparently they had an unusually huge amount of deposits backed by mortgage-backed securities. This is potentially going to be a problem for other banks (although SVB seems to have been unusually susceptible), as when interest rates are so high but banks can’t afford to pay anything like that on deposits (because all their loan book and much of their bonds is at lower rates), there will be a lot of cash flowing out of banks into treasuries…
jalapenos 4y ago
Unfortunately, this is a universal phenomenon. Bank runs are always blamed on the runners, not on those that precipitated the runs. It's part of a general sliminess that is and always will be a part of corporate finance, and that sounds quite reminiscent of narcissism: when we're doing good, it's because we're super smart, innovative, good, and hard working (oh and that means we should keep all the rewards); and when we're doing bad, it's because other bad and silly people have done it to us, we did nothing wrong and are blameless, and we're the victims (oh and that means we should be bailed out at everyone else's expense). Never forget 2008. None of them have paid for it yet. And by the way, without commenting either way on their politics, a handy trick anyone can use to determine if a behaviour is narcissistic, is to ask "if this position came from the mouth of Trump or Trudeau, would it sound like them?".
tempsy 4y ago
if you’re an influential figure your words alone can trigger a bank run that wouldn’t have happened if you said nothing Imo the question isn’t whether Thiel privately emailed founders advising them to pull money but whether they made a decision to leak their advice to the press to incite broader panic (eg how did Thiel’s advice make it into the headlines to begin with? who tipped off reporters?) There is plenty of evidence that Founders Fund wanted to fan the flames: a Founders Fund partner literally published a “some VCs are saying to pull money out” the night before. Not sure how anyone can read this and think there was no intent to broadcast panic. https://www.piratewires.com/p/some-vcs-advising-founders-to-take https://www.piratewires.com/p/some-vcs-advising-founders-to-...
- ars 4y ago
  A bank run is basically impossible in a solvent bank. They could borrow as much funds as they need from the Fed or other banks as long as they have assets to cover it. The issue here is not a bank run it was simply that they were insolvent.
  - tempsy 4y ago
    not the point at all
tripletao 4y ago
It has aspects of a prisoner's dilemma either way, but what happened to the SVB is indeed different from the classic "It's a Wonderful Life" style bank run. In "It's a Wonderful Life", the bank has the money, but not right now. If the depositors all wait, then they'll all get their money. If they do a bank run, then the first movers get their money, and the rest get left with nothing, as good assets get liquidated at heavy discounts in a fire sale. So compared to waiting, the bank run is negative-sum to the depositors in aggregate, and zero-sum to the first movers. (It's positive-sum to Potter, who wants to buy the bank's assets at a discount.) In either a mark-to-market or a net-present-value sense, the SVB doesn't have the money. When interest rates increased, their long-term bonds lost value. The hold-to-maturity accounting treatment saved them from reporting that, but that accounting is a fiction; it's a real economic loss, same as if they'd lent to a bankrupt startup. If the depositors all wait, then they'll get the right number of dollars in ~ten years, but those dollars will be worth less by then. So a bank run is positive-sum to the first movers, who can get their dollars now and buy Treasury bills at five percent (or put them in a better bank, or wherever else). It's roughly zero-sum to the depositors in aggregate. That makes a bank run relatively more attractive. I think there's confusion because in both cases, "if you wait then you'll get your money". They're completely different reasons to wait though, the first economically rational, the second not.

metalspot 4y ago

there is a very concerted pr effort to spin it that way, and people regurgitate pr memes. the underlying issue was that SVB knew they were f'd and so they were begging VCs to stop taking money out because they knew they couldnt cover and those VCs turned around and pulled money faster, because that is what smart money does. SVBs bargaining chip was that the VCs wouldnt want the books being opened, which is what happens when the fed takes over, but the VCs called their bluff, because they figured they were well enough insulated from any potential fall out. this is america, so we have the keating S&L scandal, ltcm, enron, worldcom, countrywide financial, 2008. the game never stops.

dataangel 4y ago
This is the only place I've read the idea of SVB hoping VCs wouldn't want their books opened. Is it common when the FDIC comes in for them to be auditing for criminal behavior and not just looking at what balances are so they know how much money to give each account? Is there precedent?
- metalspot 4y ago
  it doesnt have to be criminal behavior. if a startup had X cash balance with SVB because they got a loan from SVB, then that startup is looking very f'd right now, because their runway just got bombed. nothing criminal, but it changes market perception a lot.
- akiselev 4y ago
  It's not a question of criminal behavior but the bank's interpretation of the law versus the government's. As long as banks don't draw attention to themselves and don't get sued, they can operate largely in gray areas of the law to get and keep clients, make a little extra profit, take a little extra risk, etc. Once they are getting audited with a fined toothed comb, anything that comes up where the bank's interpretation is at odds with the government's can be easily found out and people can get punished. This can be anything from how the bank values its assets (which... who cares, they're going bankrupt anyway, right?) to director malfeasance or negligence which can result in jail time. In normal circumstances almost all businesses operate this way at least a little bit, but in banking there's a paper trail and when it's under a regulator's microscope, it's much more likely to get noticed and punished.

toss1 4y ago

There are many situations where a bank is literally solvent, but cannot survive the liquidity crunch of a bank run. In fact, it's probably true of pretty much every bank every day, since this is partial-reserve banking. If everyone wants their money back, NOW, the bank doesn't have it, but in normal banking, the institutions can be stable for centuries. SVB put themselves in a somewhat bad situation by heavily concentrating the high levels of deposits in 2019-2021 in long-term treasury bonds (which would not have been permitted had not the previous administration not rolled back Dodd-Frank regulations, in no small part due to the lobbying of SVB's CEO). So to service the net withdrawals that started earlier this year (lower levels of VC investment and higher expenses in the concentrated startup community SVB served), after the big interest rate increases, they had to start cashing out their T-Bonds at ~80% of face value. This lead to need to raise new capital, which reduced confidence in the bank... Had everyone, including Thiel, stayed calm instead of Thiel yelling "FIRE!!", it is entirely likely that it could have been at least calmly wound down or sold. It's kind of like crossing thin ice. If you can keep your weight spread over enough surface area with no mis-steps, you can get across just fine. But if you take one wrong step focusing the pressure at one spot, you are now in the freezing water with a life expectancy of minutes if you are helped.

oarabbus_ 4y ago
>SVB put themselves in a somewhat bad situation by heavily concentrating the high levels of deposits in 2019-2021 in long-term treasury bonds (which would not have been permitted had not the previous administration not rolled back Dodd-Frank regulations, in no small part due to the lobbying of SVB's CEO). And they put even more into 30-year mortgage backed securities. Bonds are normally purchased across a mix of maturities by banks. It's strange how everyone is absolving them for the mistake of holding almost no 1-2 year bonds and instead blaming VCs for pulling out. To be explicitly clear: it's the responsibility of the bank to maintain their own liquidity (just like the borrower needs to do the same with their loan repayments), and putting $100B (33%+) of assets into 10-30Y securities was highly irresponsible and poor risk management.
- fisherjeff 4y ago

reb 4y ago

Is that how people are talking about it? At this point the thread of most conversations here seems to follow this pattern: lots of deposits > overallocated to interest-rate-sensitive long-term bonds > short-term withdrawal pressure forces SVB to sell assets at a loss and then attempt to sell itself > Thiel urges pawns to pull based on that knowledge (and possibly more) > word gets out, wider bank run > FDIC takeover. A potential issue become a concrete issue through panic. The rationale presented alongside the urging to pull out doesn’t have to be fabricated, just hypothetical. That the risk become real as a consequence of being suggested is potentially interesting, but ya know.

zhte415 4y ago
Another way of dealing with a run would have been to simply replace the funding through interbank lending: Take a deposit from another bank to offset the deposits being withdrawn. Through funds or repo. If it was a short term funding issue, this is normal (at a system level, interbank lending always balances, just an accounting identity). But that wasn't done. Whether that's because other banks were unwilling to step in may be interesting to see.
- startupsfail 4y ago
  And another way was for VCs to step in and help saving their piggy bank. There was an easy mechanism for that - simply purchase the shares SVB was offering. But no, community that claims they are going to save the world couldn’t exercise enough long-term thinking to even save their piggy bank. There should be no bailout by the Fed. This community has enough resources. If they can think long term and act together, they’ll reorganize themselves in a responsible way. If they can’t, then they deserve to fail financially and they’ll have less resources to control.
- gruez 4y ago
  >. If it was a short term funding issue, this is normal (at a system level, interbank lending always balances, just an accounting identity). But that wasn't done. Whether that's because other banks were unwilling to step in may be interesting to see. It wasn't done because the assets SVB had at current market values was worth less than their liabilities. You'd be crazy to lend money to SVB.

snapplebobapple 4y ago

I think the understanding issue is that all banks are basically insolvent by design under any situation that differs from normal because the business model is to take in customer funds and then deploy them (lend them for mortgages, but mortgage backed securities and other bonds, buy stock, make loans, etc) and that will always involve a duration mismatch given that those customer funds can all be withdrawn on demand and whatever you deployed those customer funds into will not be able to be withdrawn on demand (and may have a multi year withdrawal limitation). How this is managed is by making sure you have enough capital on hand or in assets you can liquidate immediately to cover customer withdrawals, which wasn't possible for SVB because 20-30% of their total customer deposits were leaving each day by the end. In that regard it is true that the bank run caused the failure. However, what caused the desire to get out is bad management at the bank and unrealized losses because the bank had a large portfolio of mortgage backed securities they weren't required to mark to market (thanks dumb regulators) and the loss on them from the sudden increase in interest rates was large. In addition they had a very large portfolio of loans to startups that were questionable given the massive shift in that market so there really is a big question mark on how many billions that portfolio would be down which makes it really questionable whether the bank was actually solvent or not and that drove the panic to get out. So the correct answer here is the regulators screwed up allowing losses to not be marked to market, the bank management screwed up exposing themselves to a very risky duration mismatch and very risk asset mix and when the bank customers figured it out they caused the bank to officially fail by trying to protect their assets by moving them elsewhere.

ericpauley 4y ago
This isn’t true at an individual bank level. See the related post on JPM’s report. Systemically important banks need to mark to market regularly, and are still well capitalized after accounting for unrealized losses.
JumpCrisscross 4y ago
> by making sure you have enough capital on hand or in assets you can liquidate immediately to cover customer withdrawals Also by using the Fed’s discount window. If you’re illiquid, and not insolvent, you borrow from the Fed. If your assets are worth less than your liabilities, you’re insolvent, and the FDIC takes charge.

rewgs 4y ago

> Is there just a lack of general understanding of the prisoner's dilemma? The answer to this question is a resounding "yes." As far as I can tell, the prisoner's dilemma, as well as a wide-spread ignorance of it, can pretty much explain the totality of human behavior.

bobleeswagger 4y ago

> Many people talk as if there was factually no underlying issue with the bank These people are led by propaganda. Modern banking is evil and the fact we put up with "losing lotteries" like this is so despicable.

stephen_g 4y ago

There were definitely issues with SVB. They reportedly didn’t hedge at all against interest rate rises. That didn’t present a big issue until this year… Also apparently they had an unusually huge amount of deposits backed by mortgage-backed securities. This is potentially going to be a problem for other banks (although SVB seems to have been unusually susceptible), as when interest rates are so high but banks can’t afford to pay anything like that on deposits (because all their loan book and much of their bonds is at lower rates), there will be a lot of cash flowing out of banks into treasuries…

jalapenos 4y ago

Unfortunately, this is a universal phenomenon. Bank runs are always blamed on the runners, not on those that precipitated the runs. It's part of a general sliminess that is and always will be a part of corporate finance, and that sounds quite reminiscent of narcissism: when we're doing good, it's because we're super smart, innovative, good, and hard working (oh and that means we should keep all the rewards); and when we're doing bad, it's because other bad and silly people have done it to us, we did nothing wrong and are blameless, and we're the victims (oh and that means we should be bailed out at everyone else's expense). Never forget 2008. None of them have paid for it yet. And by the way, without commenting either way on their politics, a handy trick anyone can use to determine if a behaviour is narcissistic, is to ask "if this position came from the mouth of Trump or Trudeau, would it sound like them?".

tempsy 4y ago

if you’re an influential figure your words alone can trigger a bank run that wouldn’t have happened if you said nothing Imo the question isn’t whether Thiel privately emailed founders advising them to pull money but whether they made a decision to leak their advice to the press to incite broader panic (eg how did Thiel’s advice make it into the headlines to begin with? who tipped off reporters?) There is plenty of evidence that Founders Fund wanted to fan the flames: a Founders Fund partner literally published a “some VCs are saying to pull money out” the night before. Not sure how anyone can read this and think there was no intent to broadcast panic. https://www.piratewires.com/p/some-vcs-advising-founders-to-take https://www.piratewires.com/p/some-vcs-advising-founders-to-...

ars 4y ago
A bank run is basically impossible in a solvent bank. They could borrow as much funds as they need from the Fed or other banks as long as they have assets to cover it. The issue here is not a bank run it was simply that they were insolvent.
- tempsy 4y ago
  not the point at all

tripletao 4y ago

It has aspects of a prisoner's dilemma either way, but what happened to the SVB is indeed different from the classic "It's a Wonderful Life" style bank run. In "It's a Wonderful Life", the bank has the money, but not right now. If the depositors all wait, then they'll all get their money. If they do a bank run, then the first movers get their money, and the rest get left with nothing, as good assets get liquidated at heavy discounts in a fire sale. So compared to waiting, the bank run is negative-sum to the depositors in aggregate, and zero-sum to the first movers. (It's positive-sum to Potter, who wants to buy the bank's assets at a discount.) In either a mark-to-market or a net-present-value sense, the SVB doesn't have the money. When interest rates increased, their long-term bonds lost value. The hold-to-maturity accounting treatment saved them from reporting that, but that accounting is a fiction; it's a real economic loss, same as if they'd lent to a bankrupt startup. If the depositors all wait, then they'll get the right number of dollars in ~ten years, but those dollars will be worth less by then. So a bank run is positive-sum to the first movers, who can get their dollars now and buy Treasury bills at five percent (or put them in a better bank, or wherever else). It's roughly zero-sum to the depositors in aggregate. That makes a bank run relatively more attractive. I think there's confusion because in both cases, "if you wait then you'll get your money". They're completely different reasons to wait though, the first economically rational, the second not.