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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 t

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buy stock, make loans, etc) and that will always involve a duration mismatch given that those customer funds can all be withdrawn on demand and whatever you deployed those customer funds into will not be able to be withdrawn on demand (and may have a multi year withdrawal limitation).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.
- daveguy 4y ago
  Thank you for this distinction. In all the talk about the SVB failure it didn't occur to me that this would have been an option if it weren't for the fact the mortgage backed securities were underwater.
machina_ex_deus 4y ago
The regulators literally increased the limit required as a response to the lobbying of this specific bank. It's not "dumb regulators". The regulators didn't "screw up". The government isn't coming to save you and you shouldn't expect it to, because it's literally controlled by the same griefters who have learned to perfect the art of milking money from everyone by taking innocent people hostage. Let them blow the hostages. Or get more hostage situations. I'm all in favor of letting them blow the hostages this time. The good startups will be forced to dilute the corrupt VCs who pointed them towards SVB, and raise money elsewhere. The bad startups should just fall.
- gruez 4y ago
  >The bad startups should just fall. The bad startups that... failed to do due diligence on which bank they chose? Do you really think that we should add "financial risk analyst" to one of the competencies required for a startup founder?
  - Out_of_Characte 4y ago
    Although I wouldn't 'blame' startups that are having issues due to the bank run, They could have been in a better position if they understood that deposits are only insured up to 250k. If they had multiple accounts, their insurance would have been better and would also sustain less risk if any bank had permanent or temporary liquidity issues.
  - machina_ex_deus 4y ago
    Startups literally fail all the time and for all sorts of different reasons. It's risky for a reason. This will change nothing, startups are still more likely to fail for the other 100 reasons. It is unfortunate, but it seems like if you allow bad people to take innocent people hostage and reward them for that, you only get more hostage situations. This is coming from a bank who had lobbied for the regulation to be repealed. That had the CFO of Lehman brothers from 2007. These are professional hostage takers. I would say persecute them, but we all know this isn't going to happen, and they aren't the only people acting this way. They are getting away with scamming people because we let the government make up the losses to the people they scam. It's no wonder the VCs fled the ship so fast, many of them knew what was brewing. This is VCs money that is lost. That's where startups get their money. These startups slept with dogs, they shouldn't be surprised they wake up with fleas. It's VC bank using VC playbook of zero or hero. Let them get the zero. Do you honestly think all those VCs had no choice in where their startups deposit their money?
HDThoreaun 4y ago
No, all banks are illiquid by design, not insolvent. Sure the banks don't have cash in the vault to cover all deposits, but the mark to market value of their assets should be greater than liabilities which makes them solvent. SVB was insolvent due to the interest rates increasing since they bought their mbs's.
- GreedClarifies 4y ago
  This is the correct take. There are reports that, on a mark to market basis they were insolvent since September 2022. It is very plausible that sooner or later we remove HTM accounting.
  - tripletao 4y ago
    Yeah. The only justification for HTM accounting is an expectation that depositors will be irrationally "sticky", i.e. that when interest rates increase they won't move their money to a bank (or Treasury bill, etc.) offering a correspondingly increased return. It's a real economic loss no matter what; the HTM accounting just assumes that the depositors' irrational behavior will allow the bank to earn its way out of it. For the SVB it clearly didn't.
    - elecush 4y ago
      Just for the population and myself tomorrow: this "HTM" means Held to Maturity
- KingOfCoders 4y ago
  +1 I wish people would understand cashflow vs. assets.
- snapplebobapple 4y ago
  This is a distinction without a difference for pretty much everyone except finance nerds. It is totally irrelevant whether the mark to market on an illiquid asset is greater than the value of the deposits outstanding when I am trying to make payroll next week. What's the liquidation value of that illiquid asset? What games have been played to "mark to market" said illiquid asset? If you want to mark it at liquidation price (likely 10 cents on the dollar or less for a large portion of this stuff) then you might have a point that is relevant to the average person but at the same time my statement about all banks being insolvent by design would be technically true instead of practically true if you did that.
zainhoda 4y ago
Even for insolvent banks, a bank run is typically rare or if it happens, is a very slow-moving event because of FDIC insurance. The difference here is that SVB’s customers did not understand proper corporate cash management practices and had deposits far in excess of FDIC insurance. So from a game theoretic perspective if you hear a whiff of insolvency then you want to pull your cash as fast as possible. This is on startup CEOs as much as it is on SVB.
- onlypositive 4y ago
  SVB had basically no hedging against rate rises. Every other bank out there did.
- guenthert 4y ago
  Now you have me curious. I have no difficulty spreading my cash across a few accounts on as many institutions to be well within the FDIC insurance's limit; it's not that much ("few" might or might not be one). But how are well funded corporations supposed to do that? Clearly having the funds available as (bookkeeping) cash isn't ideal, but sometimes unavoidable, I suppose.
lamontcg 4y ago
> I think the understanding issue is that all banks are basically insolvent by design Banks are not balance sheet insolvent at all. The problem is that their liabilities are deposits which are very short term and depositors can show up and demand money, while their assets are loan paper which is typically very long term. They can become cash insolvent fairly quickly during a run, that doesn't mean that they are "insolvent by design" though. > 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) Rather the inverse. If they had been able to hold their securities to maturity then they would have been fine. The problem is that the drawdown in deposits forced them to sell securities and inherently mark them to market, which made them balance sheet insolvent. If regulators forced them to market to market that would have just created more panic, that isn't really a solution. What they needed was to stress test their portfolio back in 2021 when they were buying mortgages against a 6% federal funds rate, and avoid buying so much in order to not have so much interest rate exposure. In 2021 that would probably have been considered laughable.

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.

daveguy 4y ago
Thank you for this distinction. In all the talk about the SVB failure it didn't occur to me that this would have been an option if it weren't for the fact the mortgage backed securities were underwater.

machina_ex_deus 4y ago

The regulators literally increased the limit required as a response to the lobbying of this specific bank. It's not "dumb regulators". The regulators didn't "screw up". The government isn't coming to save you and you shouldn't expect it to, because it's literally controlled by the same griefters who have learned to perfect the art of milking money from everyone by taking innocent people hostage. Let them blow the hostages. Or get more hostage situations. I'm all in favor of letting them blow the hostages this time. The good startups will be forced to dilute the corrupt VCs who pointed them towards SVB, and raise money elsewhere. The bad startups should just fall.

gruez 4y ago
>The bad startups should just fall. The bad startups that... failed to do due diligence on which bank they chose? Do you really think that we should add "financial risk analyst" to one of the competencies required for a startup founder?
- Out_of_Characte 4y ago
  Although I wouldn't 'blame' startups that are having issues due to the bank run, They could have been in a better position if they understood that deposits are only insured up to 250k. If they had multiple accounts, their insurance would have been better and would also sustain less risk if any bank had permanent or temporary liquidity issues.
- machina_ex_deus 4y ago
  Startups literally fail all the time and for all sorts of different reasons. It's risky for a reason. This will change nothing, startups are still more likely to fail for the other 100 reasons. It is unfortunate, but it seems like if you allow bad people to take innocent people hostage and reward them for that, you only get more hostage situations. This is coming from a bank who had lobbied for the regulation to be repealed. That had the CFO of Lehman brothers from 2007. These are professional hostage takers. I would say persecute them, but we all know this isn't going to happen, and they aren't the only people acting this way. They are getting away with scamming people because we let the government make up the losses to the people they scam. It's no wonder the VCs fled the ship so fast, many of them knew what was brewing. This is VCs money that is lost. That's where startups get their money. These startups slept with dogs, they shouldn't be surprised they wake up with fleas. It's VC bank using VC playbook of zero or hero. Let them get the zero. Do you honestly think all those VCs had no choice in where their startups deposit their money?

HDThoreaun 4y ago

No, all banks are illiquid by design, not insolvent. Sure the banks don't have cash in the vault to cover all deposits, but the mark to market value of their assets should be greater than liabilities which makes them solvent. SVB was insolvent due to the interest rates increasing since they bought their mbs's.

GreedClarifies 4y ago
This is the correct take. There are reports that, on a mark to market basis they were insolvent since September 2022. It is very plausible that sooner or later we remove HTM accounting.
- tripletao 4y ago
  Yeah. The only justification for HTM accounting is an expectation that depositors will be irrationally "sticky", i.e. that when interest rates increase they won't move their money to a bank (or Treasury bill, etc.) offering a correspondingly increased return. It's a real economic loss no matter what; the HTM accounting just assumes that the depositors' irrational behavior will allow the bank to earn its way out of it. For the SVB it clearly didn't.
  - elecush 4y ago
    Just for the population and myself tomorrow: this "HTM" means Held to Maturity
KingOfCoders 4y ago
+1 I wish people would understand cashflow vs. assets.
snapplebobapple 4y ago
This is a distinction without a difference for pretty much everyone except finance nerds. It is totally irrelevant whether the mark to market on an illiquid asset is greater than the value of the deposits outstanding when I am trying to make payroll next week. What's the liquidation value of that illiquid asset? What games have been played to "mark to market" said illiquid asset? If you want to mark it at liquidation price (likely 10 cents on the dollar or less for a large portion of this stuff) then you might have a point that is relevant to the average person but at the same time my statement about all banks being insolvent by design would be technically true instead of practically true if you did that.

zainhoda 4y ago

Even for insolvent banks, a bank run is typically rare or if it happens, is a very slow-moving event because of FDIC insurance. The difference here is that SVB’s customers did not understand proper corporate cash management practices and had deposits far in excess of FDIC insurance. So from a game theoretic perspective if you hear a whiff of insolvency then you want to pull your cash as fast as possible. This is on startup CEOs as much as it is on SVB.

onlypositive 4y ago
SVB had basically no hedging against rate rises. Every other bank out there did.
guenthert 4y ago
Now you have me curious. I have no difficulty spreading my cash across a few accounts on as many institutions to be well within the FDIC insurance's limit; it's not that much ("few" might or might not be one). But how are well funded corporations supposed to do that? Clearly having the funds available as (bookkeeping) cash isn't ideal, but sometimes unavoidable, I suppose.

lamontcg 4y ago

> I think the understanding issue is that all banks are basically insolvent by design Banks are not balance sheet insolvent at all. The problem is that their liabilities are deposits which are very short term and depositors can show up and demand money, while their assets are loan paper which is typically very long term. They can become cash insolvent fairly quickly during a run, that doesn't mean that they are "insolvent by design" though. > 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) Rather the inverse. If they had been able to hold their securities to maturity then they would have been fine. The problem is that the drawdown in deposits forced them to sell securities and inherently mark them to market, which made them balance sheet insolvent. If regulators forced them to market to market that would have just created more panic, that isn't really a solution. What they needed was to stress test their portfolio back in 2021 when they were buying mortgages against a 6% federal funds rate, and avoid buying so much in order to not have so much interest rate exposure. In 2021 that would probably have been considered laughable.