4 ms·

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

by 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
  Average maturity was like 6y though, which means ~15% annual turnover. Not great (and certainly not nearly enough to redeem 20% in like a month) but far from locked up forever.
- getoffmycase 4y ago
  I keep screaming into the void that the real issue is the poor risk management of the bank, but nobody in the echo chambers wants to listen to anything other than VC conspiracy points
- toss1 4y ago
  Absolutely! The root cause is in this headline: >>SVB CEO Greg Becker lobbied the government to relax some Dodd-Frank provisions on regional lenders in 2015. Trump did in 2018. [0] All to chase a couple extra basis points (1/100 of a percent) of yield to increase the bank's profits. Both Glass-Stengal from the 1930s and Dodd-Frank from 2010 segregated the investment (read market gambling) activities of banks from the deposit activities. After a period of no crashes, they always lobby to gut such laws to increase their profits (of course privatizing the profits, but socializing the risk, which will fall on society whether or not the taxpayers bail out anyone). Politicians who are fools comply with these requests because the voters will not notice right away. In this case, it wasn't until the next administration that we have the 2nd largest bank failure in history. Or when Clinton rolled back Glass-Stengal in 1999, it was nearly two full terms later before the banking system came to a new near-collapse crisis. So, yes, root cause vs proximal cause. [0] https://fortune.com/2023/03/11/silicon-valley-bank-svb-ceo-greg-becker-dodd-frank-trump-rollback-systemically-important-fdic/ https://fortune.com/2023/03/11/silicon-valley-bank-svb-ceo-g...
  - egberts1 4y ago
    Fortune is washing the exclusionary rules for non-bank by saying the executive administration imposed this rule when it is actually the Board of the Federal Reserve that imposed the rule: "Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule." https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-05699.htm https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-...
pfannkuchen 4y ago
> Had everyone, including Thiel, stayed calm This is the prisoner's dilemma, though. Unless there is sufficient, government-esque coordination across VCs (and founders, etc) to force everyone to remain calm, no individual can rely on the others remaining calm, and they are all in a position to individually lose if they remain calm while others do not. If anything I think it would be extremely spooky if that level of coordination did exist across VCs. The lack of strong coordination this has demonstrated is almost heart warming, in a way (if you like free markets).
- arach 4y ago
  I think the point is that a precipitous pull of deposits actually diminishes ability to maximize the underlying asset disposition required to cover the whole of deposits. You are correct that there is a bit of prisoner's dilemma here. I'm sure Thiel's portfolio companies that successful transferred funds had an awesome maybe even productive weekend while the rest had to scramble to figure out what this all means for them. I think there's also tragedy of the commons at play here and this is where some level of orchestration would have been beneficial to optimize the common good or at least prevent unnecessary depreciation for the overall ecosystem.
gruez 4y ago
>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. But in this case the assets (at present market value) are literally worth less than the deposits. Yelling "FIRE" seems totally justified in this case.
- toss1 4y ago
  The same situation applies at nearly EVERY bank at nearly EVERY time. This is Fractional Reserve Banking [0]. There are almost NEVER enough immediately available liquid assets to survive a bank run. Deposits are the inventory of a bank. They then hold a small fraction in reserve, while loaning out many times that value. They can also have other assets. The TOTAL VALUE of all the assets is usually greater than the liabilities, which is the deposits, i.e., the bank is solvent. That does NOT mean that the same fully solvent bank could immediately cash out those assets at full value to meet a surge in withdrawal demands. Take any bank, both most solvent and with greatest liquidity. If we had enough clout to start enough insolvency rumors that we can precipitate a big run on Monday, they'll be shut down by Tuesday. All you need is a big enough "megaphone". Once it starts, it is self-reinforcing, because only those who pull their deposits early get anything. Thiel had exactly such a megaphone, on a bank with assets and deposits highly concentrated in his industry. It is entirely possible, even likely that SVB would be open right now if Thiel had not openly made that call. We do not have anything near enough information to claim that it was "totally justified", and it may in fact turn out that it was entirely unjustified and created a rapidly self-fulling prophecy. You can have a huge pile of tinder with gasoline on it, but without anyone actually lighting a match to it, it could be disassembled and made safe. But as soon at that lit match is tossed, it's done. [0] https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin...
  - gruez 4y ago
    >We do not have anything near enough information to claim that it was "totally justified", and it may in fact turn out that it was entirely unjustified and created a rapidly self-fulling prophecy. Are you suggesting that SVB's assets at present market value might actually be worth more than their liabilities and/or that we don't know for certain? My impression is that the fact that they were insolvent was well known. See for instance matt levine's writeup: >Basically SVB ended up with a large portfolio of held-to-maturity bonds with an average duration of 6.2 years at the end of 2022, “and unrealised losses snowballed, from nothing in June 2021, to $16 billion by September 2022.” These losses “completely subsumed the $11.8 billion of tangible common equity that supported the bank’s balance sheet,” meaning that SVB was technically insolvent https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run https://www.bloomberg.com/opinion/articles/2023-03-10/startu...
ars 4y ago
> There are many situations where a bank is literally solvent, but cannot survive the liquidity crunch of a bank run. That simply isn't true. One of the functions of the Fed is to lend money in situations like that. If the bank has illiquid assets they can borrow whatever they need.
- toss1 4y ago
  Time matters It looks like at the end of the day, the total shortfall was something like 2-3 billion dollars, and that is at literal fire sale prices. In a few hours on Thursday, over $42 billion was pulled. The loan facilities simply could not react that fast, and if there was full knowledge instead of "the fog of war", they certainly would have been able to cover the full amount and make a bridge loan to keep SVB solvent. But it all collapsed too fast. I'd be astonished if this wasn't the fastest bank run of such a scale in history (2nd largest bank to fail). Having effectively ALL of your customers concentrated in the same industry, and all connected by the fastest comms network on the planet, and electronic transfers, just made for a run of unprecedented speed. All of Theil's companies were surely transferring funds within seconds of his text msgs to them. Everyone else is only 1-3 hops away by text message, and then the public tweet t pull funds - it's over... Time matters.

by toss1 4y ago

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
Average maturity was like 6y though, which means ~15% annual turnover. Not great (and certainly not nearly enough to redeem 20% in like a month) but far from locked up forever.
getoffmycase 4y ago
I keep screaming into the void that the real issue is the poor risk management of the bank, but nobody in the echo chambers wants to listen to anything other than VC conspiracy points
toss1 4y ago
Absolutely! The root cause is in this headline: >>SVB CEO Greg Becker lobbied the government to relax some Dodd-Frank provisions on regional lenders in 2015. Trump did in 2018. [0] All to chase a couple extra basis points (1/100 of a percent) of yield to increase the bank's profits. Both Glass-Stengal from the 1930s and Dodd-Frank from 2010 segregated the investment (read market gambling) activities of banks from the deposit activities. After a period of no crashes, they always lobby to gut such laws to increase their profits (of course privatizing the profits, but socializing the risk, which will fall on society whether or not the taxpayers bail out anyone). Politicians who are fools comply with these requests because the voters will not notice right away. In this case, it wasn't until the next administration that we have the 2nd largest bank failure in history. Or when Clinton rolled back Glass-Stengal in 1999, it was nearly two full terms later before the banking system came to a new near-collapse crisis. So, yes, root cause vs proximal cause. [0] https://fortune.com/2023/03/11/silicon-valley-bank-svb-ceo-greg-becker-dodd-frank-trump-rollback-systemically-important-fdic/ https://fortune.com/2023/03/11/silicon-valley-bank-svb-ceo-g...
- egberts1 4y ago
  Fortune is washing the exclusionary rules for non-bank by saying the executive administration imposed this rule when it is actually the Board of the Federal Reserve that imposed the rule: "Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule." https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-05699.htm https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-...

pfannkuchen 4y ago

> Had everyone, including Thiel, stayed calm This is the prisoner's dilemma, though. Unless there is sufficient, government-esque coordination across VCs (and founders, etc) to force everyone to remain calm, no individual can rely on the others remaining calm, and they are all in a position to individually lose if they remain calm while others do not. If anything I think it would be extremely spooky if that level of coordination did exist across VCs. The lack of strong coordination this has demonstrated is almost heart warming, in a way (if you like free markets).

arach 4y ago
I think the point is that a precipitous pull of deposits actually diminishes ability to maximize the underlying asset disposition required to cover the whole of deposits. You are correct that there is a bit of prisoner's dilemma here. I'm sure Thiel's portfolio companies that successful transferred funds had an awesome maybe even productive weekend while the rest had to scramble to figure out what this all means for them. I think there's also tragedy of the commons at play here and this is where some level of orchestration would have been beneficial to optimize the common good or at least prevent unnecessary depreciation for the overall ecosystem.

gruez 4y ago

>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. But in this case the assets (at present market value) are literally worth less than the deposits. Yelling "FIRE" seems totally justified in this case.

toss1 4y ago
The same situation applies at nearly EVERY bank at nearly EVERY time. This is Fractional Reserve Banking [0]. There are almost NEVER enough immediately available liquid assets to survive a bank run. Deposits are the inventory of a bank. They then hold a small fraction in reserve, while loaning out many times that value. They can also have other assets. The TOTAL VALUE of all the assets is usually greater than the liabilities, which is the deposits, i.e., the bank is solvent. That does NOT mean that the same fully solvent bank could immediately cash out those assets at full value to meet a surge in withdrawal demands. Take any bank, both most solvent and with greatest liquidity. If we had enough clout to start enough insolvency rumors that we can precipitate a big run on Monday, they'll be shut down by Tuesday. All you need is a big enough "megaphone". Once it starts, it is self-reinforcing, because only those who pull their deposits early get anything. Thiel had exactly such a megaphone, on a bank with assets and deposits highly concentrated in his industry. It is entirely possible, even likely that SVB would be open right now if Thiel had not openly made that call. We do not have anything near enough information to claim that it was "totally justified", and it may in fact turn out that it was entirely unjustified and created a rapidly self-fulling prophecy. You can have a huge pile of tinder with gasoline on it, but without anyone actually lighting a match to it, it could be disassembled and made safe. But as soon at that lit match is tossed, it's done. [0] https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin...
- gruez 4y ago
  >We do not have anything near enough information to claim that it was "totally justified", and it may in fact turn out that it was entirely unjustified and created a rapidly self-fulling prophecy. Are you suggesting that SVB's assets at present market value might actually be worth more than their liabilities and/or that we don't know for certain? My impression is that the fact that they were insolvent was well known. See for instance matt levine's writeup: >Basically SVB ended up with a large portfolio of held-to-maturity bonds with an average duration of 6.2 years at the end of 2022, “and unrealised losses snowballed, from nothing in June 2021, to $16 billion by September 2022.” These losses “completely subsumed the $11.8 billion of tangible common equity that supported the bank’s balance sheet,” meaning that SVB was technically insolvent https://www.bloomberg.com/opinion/articles/2023-03-10/startup-bank-had-a-startup-bank-run https://www.bloomberg.com/opinion/articles/2023-03-10/startu...

ars 4y ago

> There are many situations where a bank is literally solvent, but cannot survive the liquidity crunch of a bank run. That simply isn't true. One of the functions of the Fed is to lend money in situations like that. If the bank has illiquid assets they can borrow whatever they need.

toss1 4y ago
Time matters It looks like at the end of the day, the total shortfall was something like 2-3 billion dollars, and that is at literal fire sale prices. In a few hours on Thursday, over $42 billion was pulled. The loan facilities simply could not react that fast, and if there was full knowledge instead of "the fog of war", they certainly would have been able to cover the full amount and make a bridge loan to keep SVB solvent. But it all collapsed too fast. I'd be astonished if this wasn't the fastest bank run of such a scale in history (2nd largest bank to fail). Having effectively ALL of your customers concentrated in the same industry, and all connected by the fastest comms network on the planet, and electronic transfers, just made for a run of unprecedented speed. All of Theil's companies were surely transferring funds within seconds of his text msgs to them. Everyone else is only 1-3 hops away by text message, and then the public tweet t pull funds - it's over... Time matters.