10 ms·

> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the governm

> But in the end, even if we could argue that SVB should have been more prescient, it is clear that the root cause of the problems is the actions of the government and the FED. No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. Sure excess liquidity was necessary for this behavior to be possible, but it wasn't the cause. That's like saying the person who leaves their car unlocked is the root cause of the theft. No, the thief is. "Your honour... I plead not guilty, the car was unlocked."

fnordpiglet 4y ago
I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. The mark to market only comes relevant if you’re experiencing a run, which they were holding sufficient regulatory liquidity for. They should have hedged their rates risk a bit better, especially as inflation became even a whisper, but if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit.
- sdfghswe 4y ago
  > I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?
  - beezle 4y ago
    Not all of the capital was in a HTM portfolio. SVB I'm sure had a good handle on the typical flow of funds and based off of that with some margin of error (that was obviously not everyone wants everything today).
  - fnordpiglet 4y ago
    That’s literally the purpose of a bank my friend. Welcome, yes, the emperor has no clothes and never has.
    - sdfghswe 4y ago
      No you didn't answer my question. You made the case that how you value it depends on the plan. So what was the plan? The answer, of course, was that these people didn't have a plan because they're incompetent, and that has nothing to do with the "purpose of a bank". It's just incompetence, nothing more.
      - fnordpiglet 4y ago
        The plan in a normal bank operations is to hold a mixture of long, medium, short, and liquid assets proportionate to a normal heavy withdrawal of funds. No bank stays liquid enough to survive the drawdowns they saw, because they’re not required to by law. They operate within the regulatory construct they exist in. The way they pay interest on deposits is by investing them to begin with, and if they’re invested in anything other than cash or treasuries, they face liquidity risk. That risk is not zero. It’s actually not even insubstantial. And risks are what the word implies, a risk. In an unlikely situation, they are insolvent while they liquidate assets - and often their long terms assets must be liquidated at a loss. This is literally how every bank operates. This is also why the government was able to step in and restore bank operations in a few days. They know how banks work too, they wrote the rules. So they know exactly what to do in this situation - because since it’s a risk of banking business, it can and will happen. You seem to understand the concepts enough, where is the disconnect? It’s genuinely confusing. This isn’t a novel take on how a bank works.
  - nomay 4y ago
    You just explained the businness model of banking.
    - sdfghswe 4y ago
      Wrong. The business model of banking is managing the money to an appropriate duration. Locking it up isn't a business model.
      - notch898a 4y ago
        Demand deposits can be immediately be recalled, so where exactly do you suggest they park it? In the central bank -- no bueno they've denied banking license for narrow banking. Margin lending that allows recall at any moment? I can think of some options but frankly I'd rather have my money in a bank that over-extends themselves on treasuries than most the alternatives. At least I'd most likely get 90+% of my money back eventually. Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit.
        sdfghswe 4y ago
        > Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit. Exactly, so don't lock it up. Glad you agree with me.
        notch898a 4y ago
        So put it where? Narrow banking is illegal by virtue of denying the banking license. You're basically left with what, something like recallable loans/margin? What are the other options?
        tripletao 4y ago
        Put it in bonds of whatever duration the bank chooses, but require sufficient equity that the shareholders will bear the loss and not the depositors? Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine. In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.
  - jmvoodoo 4y ago
    So, your plan is to do away with fractional reserve banking entirely ? How do you think that would impact GDP and the overall functioning of the economy?
    - scott00 4y ago
      Not who you're responding to, but I actually don't think getting rid of fractional reserve banking is as crazy as it may sound at first. Maybe people who need to borrow money for 10 years shouldn't be borrowing it from people who will freak out if the loan isn't paid back in a week. On the investor side you'd put cash you really need in a non-interest bearing account, and the rest invested at a duration and risk level appropriate for your situation. For most people/organizations the details would be outsourced to a fund manager. On the borrower side, small stuff would get bundled and securitized, big stuff could trade on its own. The industry's already moving in that direction. Modern communication technology has so drastically changed the physical scale over which a marketplace can function I think it's reasonable to ask if we still need the banking smoke and mirrors sitting between borrowers and lenders.
  - hypothesis 4y ago
    Sounds exactly like “held-to-mortality” plan! It does appear to work in at least some cases. The rest is getting bailed out. [0] https://news.ycombinator.com/item?id=35130979 https://news.ycombinator.com/item?id=35130979
  - fisherjeff 4y ago
    I mean, it’s a balancing act, right? If you plan to be able to accommodate 20% redemption in a single day, you’re left with a portfolio maturity of 5 days. You will be almost unavoidably marked to market but your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway.
    - benlivengood 4y ago
      You offer customers CDs if they want higher interest rates. Isn't that how it's been done for decades?
      - fisherjeff 4y ago
        Yes, that would narrow the maturity gap and pass some rate risk on to customers. In SVB’s case, though, they would’ve needed to sell a lot of CDs relatively quickly, which means their rates (i.e., borrowing cost) would have to be high.
    - yunwal 4y ago
      If your customers actions are all highly correlated, you need to be planning for things like this. The fact that having your whole customer base in a single group chat is a bad business model for a bank should not be the taxpayers’ problem.
      - wstuartcl 4y ago
        it's good then that the funds to support the deposits are coming from the bank funded fdic fund not taxes then.
        yunwal 4y ago
        The whole argument is whether uninsured deposits should be provided by the FDIC. I have no problems with the insured amount being returned to customers. The FDIC is a government owned business and shouldn’t be acting outside of it’s financial interests and obligations.
  - wstuartcl 4y ago
    They had 13b in cash going into this year and other highly liquid assets, those evaporated as the draw downs happened. Its not like they tucked away all assets into 10 year lockups (or higher risk loans). Even the bonds they did lock up -- in what would be considered 99% "normal" markets given the last few decades a sell off of those bonds would not have been highly problematic. It became problematic when they were so low return needing to be sold to reblalance the 10/90 rule when market rates were much better and they needed to be discounted due to the huge rate hikes. SVB was pretty much considered the "boyscouts" of the industry and in normal circumstances they took a super conservative placement of the deposits. The only thing they could have done better was to (what would have normally been considered) overly hedge the bonds reducing their return even more. I personally think they were too transparent with the liquidity crunch, and the investors and their companies that pulled out 20-30b before they even could execute the sell probably saw the ability to crash the bank and offer shark hooked bridge funding to the competitive companies left in the lurch. Its not like these folks were naive clients -- imho they were looking to do damage and get blood returns/equity on those bridge funding after the fall.
    - matthewdgreen 4y ago
      They had a customer base that would knife them at the first hint of a liquidity issue, then they had a liquidity issue. Of course a different approach would have reduced their returns, but then they’d still be in business.
      - cm2187 4y ago
        Deposits from financials are treated as disappearing at the first opportunity from a regulatory point of view. Corporate deposits are considered volatile but less volatile. So the behaviour we have seen isn’t entirely unexpected. It seems SVB has VC deposits and corporate deposits from startups that were effectively controlled by VC and behaved like financials in term of deposit outflows.
        pas 4y ago
        what does financials mean in this? can you explain this term, please?
  - cowuser666 4y ago
    this is inherent to fractional reserve banks and maturity transformation. any bank would be vulnerable if there's a bank run. this is a basic thing to understand before making claims on this issue imho.
- swatcoder 4y ago
  You say it takes a run, but all it really takes is an aggregate change in deposit behavior. Like, for instance, your disproportionate share of startup clients easing off the cheap loans you had been offering them, because they’re no longer so cheap, and instead drawing down on (or moving) the balances that you had insisted they keep with you as collateral. Trouble was brewing on both sides of the business, not just on the asset position.
  - fnordpiglet 4y ago
    That’s what led up to the need to create more liquidity. The run happened after that when depositors spooked and drew down faster than the bank could liquidate assets. They were never, even MTM, under water. They just couldn’t raise enough cash in a single day to pay out all the withdrawals. But the cause of the run is the suspicious part to my mind. It feels orchestrated, and I have heard rumblings that Theils founders fund was spreading a whisper campaign against SVB while shorting.
    - at-fates-hands 4y ago
      >> But the cause of the run is the suspicious part to my mind. I've heard multiple reports that one of their large investors got wind of their attempts to get a $2B loan so they wouldn't lose that money in their bond investments and thought it was a huge red flag and was the first to take out all of their money. The theory goes it was a large SV company, and news travelled on social media and the SV financial circles about they did and their belief that the bank was about to implode. This created a long line forming on Friday morning of companies wanting to get their money out as well. I agree, I'm not sure if the rumor was enough to spook people, or an orchestrated move by several companies, once one company found out what they were doing - but its very suspicious. Add in the founders were busy taking money at the same time they were liquidating their positions, which I'm sure the SEC will have something to say about as well. Add in all the people who may have found out early and took out short positions as well who are now poised to possibly make a good chunk of money in all this chaos.
    - tripletao 4y ago
      > They were never, even MTM, under water. This is completely false. If the SVB (or any other bank) had been adequately capitalized on a MTM basis, then they could have borrowed from the Fed to withstand any bank run. The SVB was not: https://www.bloomberg.com/news/articles/2023-03-10/the-balance-sheet-time-bomb-at-svb-was-sitting-in-plain-sight https://www.bloomberg.com/news/articles/2023-03-10/the-balan... The hold-to-maturity accounting allowed them to pretend otherwise, disregarding losses on long-term bonds when interest rates increased. They--and their regulators, since such accounting is perfectly legal--hoped this would let them ignore the problem until they could earn their way out of the hole. Instead interest rates increased further, the hole got deeper, and the SVB blew up. It's not impossible that Thiel somehow benefitted from the collapse, though I'm not aware of any evidence for that yet. It's also possible that he simply didn't want his money in an insolvent bank.
- fach 4y ago
  Aren’t the order of operations here incorrect? They were experiencing a lack of deposits due to VC pullback due to the interest rate rise, while depositors did not cut spending. This led to a liquidity crunch where they needed to sell discounted bonds to fill the gap. When the gap was conveyed to shareholders, the run began. If this is true, isn’t marking to market providing feedback about a potential liquidity crunch much earlier, ideally before the crunch even begins?
  - fnordpiglet 4y ago
    The “when the gap” bit is the piece that’s suspect to me. This isn’t an irregular occurrence in the world. The events are a little fishy to me because this isn’t crisis material. Banks go public precisely for the purpose of having access to additional liquidity in situations like this. The balance sheet hole was tiny compared to their assets. Liquidity calculations for banks definitely include mark to market for HTM portfolios. But even then they were legally deemed sufficiently liquid. The run on the bank wasn’t expected or normal behavior.
    - wstuartcl 4y ago
      this is why imho I see the pull out of the clients especially those that happened before the sale offer even came to term as an orchestrated ploy to tank the bank and then be in a position to offer shark bridge loans to those impacted. These were not naive clients making the move early -- and to me it seems less to do about the actual bank asset state and more to do with wanting blood in the water for wringing out equity and loan shark rates on those bridge offers.
- pg314 4y ago
  > If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market The NPV calculation should use the market intrest rate. If you use that, it should be pretty much the same thing: an efficient market should value a bond at its NPV. However, they were allowed to value HTM (hold to maturity) bonds at face value. That is just non-sensical from an economics perspective and just hides losses.
  - lordnacho 4y ago
    This is the right answer. Everything that has a market should be marked to market. This should be the default decision until some kind of good reason it's given to do otherwise.
  - fnordpiglet 4y ago
    This is only true for treasuries which are risk free. Any other bond includes other confounding risk factors impacting price which come out in MTM. These were agency bonds so would include duration/prepayment risks. But you also can face substantial liquidity risks in a fire sale, if you mark your assets to the full liquidation value, you need to mark against an order book to the depth of your holdings. Simple HTM NPV assumes you don’t face these pricing risks because you are holding for par+interest, discounted at risk free rates.
- toast0 4y ago
  > If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. If you hold a bond to maturity, you get it's Net Present Value at maturity which is actually Net Future Value. Mark to market of treasury bonds is essentially the NPV of the bond, considering current interest rates. When interest rates are near zero, sure, a dollar today and a dollar tomorrow are the same, with significant interest rates, they aren't. And there's the problem. You can't give a depositor a $100 treasury bond, due in 2028, when they want $100 now. That's only worth $85 today (or whatever the value is, I dunno).
- beezle 4y ago
  If you hold a bond to maturity you get the par value of the bond, typically "100" They were not holding sufficient tier 1 capital against a run or they would still be here today. The did, on the other hand, have enough to exceed regulatory requirements. They apparently did not hedge at all and additionally, they invested heavily in mortgages which are well known to decline more in value in rising rate environments due to extension risk. As an earlier poster noted, the primary reason to have a HTM portfolio is to avoid wild swings in reported earnings each quarter from a mark to market as their is no counter on the balance sheet that rises/falls in a similar manner. You are probably correct in that if there was not a run it likely would be rear view. They would have done their capital raise and probably taken additional measures to improve their ability to withstand such an event. Of course, this all was trigger by a ratings agency and a few bloggers calling into question the unrealized losses in the HTM portfolio. Then again, had the stress tests still be in place it is unlikely to have even gotten to the capital raise point.
- amluto 4y ago
  > If you hold a bond to maturity you get it’s NPV. Which, if you are being at all honest, means you calculate its present value by applying a discount rate in line with current risk free returns over the relevant time horizon, which will be a number suspiciously similar to the Treasury yield curve, and you will end up with something quite close to the mark-to-market value. (And it has to be this way. Otherwise you could go buy two-year-old long dated bonds at a discount on the secondary market and make a killing, because the transaction would have an immediate NPV gain of 30% or more.) Banks are a bit unique in that they can generally borrow at a cost much lower than the risk free rate due to the existence of non-interest-bearing and low-interest accounts, but IMO those should be thought of as a variable source of future profits, not as a reduction in the risk-free rate to be used for financial projections.
- listenallyall 4y ago
  > If you hold a bond to maturity you get it’s NPV This is flawed logic. The NPV is not a real, tangible dollar amount. It is a calculation, based on the presumed yield of a theoretical set of alternative investment opportunities, of the Net PRESENT (today, right now) Value of the bond. This number is less than the sum of the bond's future payments, because the NPV is attempting to determine the current value of payments scheduled for receipt in the future. In other words, if you are owed $1000 to be paid on Christmas Day of this year, the Net Present Value is less than $1000.
- trgn 4y ago
  > if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit. This is it. People are quick to point out mismanagement at svb, but it's only because of the run and the following collapse. After the fact, it's easy find data points to explain away anything. Holdkng on to low yield treasuries, really now, this is the telltale sign of a failing bank? History still needs to be written on this one, don't discount the human factor, debtor's panic because of gossip run wild is not too far fetched.
- shapefrog 4y ago
  Valuing it at NPV == Valuing it at mark to market
ren_engineer 4y ago
at the time they bought them the Fed was saying they had no plans to increase rates. You can blame SVB somewhat for not hedging but they took the Fed at their word and got burned for it, not exactly something that builds confidence in the financial system. The Fed bowed to political pressure related to high inflation rather than following the plan they laid out
- sdfghswe 4y ago
  > The Fed bowed to political pressure related to high inflation rather than following the plan they laid out When circumstances changed, they changed their plan. What do you normally do?
- reducesuffering 4y ago
  The Fed never said they wouldn't raise rates for 10 years, which is the duration that SVB bought mortgage-backed securities for. The Fed didn't bow to political pressure, they are following the plan which is their dual-mandate for 2% inflation and maximum employment. They had rates at 0 while employment numbers were bad, now that employment #'s are good and inflation is bad, it was time to raise rates. It's a balancing act.
- beezle 4y ago
  They did not buy everything in one day long before the Fed moved. The moves by the Fed were well telegraphed in advance and once the initial hike was done it was off to the races so to speak. SVB had many opportunities to do hedge and honestly, why on earth should bank or anyone else "take the Fed at their word". People make mistakes, institutions make mistakes, people misunderstand and on and on.
- watwut 4y ago
  They had no plans, things changed, plans changed. It is completely valid to blame SVB for not hedging. It is valid to blame them for lobbying to loose up regulation over how much risk they can take too. If anything is damaging trust, it is banks and investors lobbying to loosen up regulations, claiming the banks are too small to pose systemic risks and then ask for special exceptions the moment it does not work out.
tfehring 4y ago
> No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. All major US banks - and all or virtually all US banks in general - have assets that are designated as held to maturity. Continuously marking all assets to market would create massive swings in banks' income and obscure the real gains and losses from their operations. SVB probably had a somewhat longer asset duration and somewhat lower book yield than US banks on average, since its deposit base grew so quickly in a low interest rate environment in 2020-2021. It also had a higher share of uninsured deposits. But nothing that SVB did was categorically different than other banks, and in the absence of a government backstop, I'm not convinced that any US bank would fare much better if faced with a similar volume of deposit outflows. "Magically" transforming long-dated assets into short-dated liabilities wasn't any kind of malfeasance on SVB's part - it's just how banking works.
- beezle 4y ago
  Well, I'll take issue with your post as you captured the problem with the others. Where SVB was different than other banks is the absence of hedging. SVB's tier 1 capital was basically wiped out by a mark of the HTM portfolio, unlike other banks who suffered hits but far, far smaller.
- trilobyte 4y ago
  Any investment strategy will require addressing various forms of risk and making tradeoffs, but it is a choice. SVB did not properly hedge against this risk which, as soon as interest rates started rising, should have been a priority for their leadership to have a plan to address.
  - norswap 4y ago
    Could they have done better? Sure. Hindsight is 20/20. Would it have been a reasonable assumption? No. As pointed out in the parent, every bank pretty much works like this, they're all liable to go under in the presence of a big enough run. Also if it must have been so obvious to them, it probably should have been obvious to the regulatory agencies in charge of monitoring banks and avoiding exactly these situations, as well as the Fed who set the policies leading to this in the first place. It just wasn't part of anyone's threat model.
pookha 4y ago
Here's another source of the problem...Pumping trillions of active currency into the economy, over heating the CPI, and ignoring demand-side inflation (hey it's "transitory") for ideological reasons.
tyre 4y ago
> No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". It did not hide them. This was in their financial statements (https://s201.q4cdn.com/589201576/files/doc_financials/2022/q4/4Q22-SIVB-Earnings-Release-Final.pdf https://s201.q4cdn.com/589201576/files/doc_financials/2022/q... at page 15): > Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $6, $6 and $7 (fair value of $76,169, $77,370 and $97,227), respectively > December 31, 2022 | September 30, 2022 | December 31, 2021 > 91,321 93,286 98,195 This shows that they had assets on 12/31/22 with an amortized value of $91bn and a fair value of $76bn
kurthr 4y ago
And they wouldn't have been able to do that, if not for the regulations being rolled back (from $50B to $250B by a friend of Thiel and lobbying by SVB). Lots of sowing and reaping going on. https://www.reuters.com/article/us-usa-trump-dodd-frank/trump-signs-bill-easing-u-s-bank-rules-into-law-idUSKCN1IP2WX https://www.reuters.com/article/us-usa-trump-dodd-frank/trum...
jiscariot 4y ago
> That's like saying the person who leaves their car unlocked is the root cause of the theft. Funny that should come up. Minnesota Attorney General Kieth Ellison is blaming Kia and Hyundai for our rash of auto theft and associated crime. https://www.startribune.com/minnesota-minneapolis-keith-ellison-kia-hyundai-tiktok-jacob-frey-theft-melvin-carter-investigation/600256918/ https://www.startribune.com/minnesota-minneapolis-keith-elli...
youngtaff 4y ago
SVB told the world about it’s potential losses back in Nov > It’s true that investors had been aware at the latest since its 10-Q filing on Nov. 7 that it had sustained unrealized losses among its held-to-maturity (HTM) portfolio large enough to wipe out its entire $15.8 billion in shareholder equity. While this would theoretically render it insolvent were they to materialize in full, SVB Financial was dismissive of the risks. "SVB collapse highlights $620 billion hole lurking in banks’ balance sheets" -https://archive.is/qnwYh https://archive.is/qnwYh Also short sellers worked it out a while back too "A Silicon Valley Bank short seller explains how he knew the bank was in trouble months ago" - https://archive.is/XaKkt https://archive.is/XaKkt

fnordpiglet 4y ago

I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. The mark to market only comes relevant if you’re experiencing a run, which they were holding sufficient regulatory liquidity for. They should have hedged their rates risk a bit better, especially as inflation became even a whisper, but if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit.

sdfghswe 4y ago
> I don’t understand. If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. Correct. So, if you have customers and you put THEIR money into a bond and say you're holding it to maturity, but then your customers want their money, what exactly was the plan?
- beezle 4y ago
  Not all of the capital was in a HTM portfolio. SVB I'm sure had a good handle on the typical flow of funds and based off of that with some margin of error (that was obviously not everyone wants everything today).
- fnordpiglet 4y ago
  That’s literally the purpose of a bank my friend. Welcome, yes, the emperor has no clothes and never has.
  - sdfghswe 4y ago
    No you didn't answer my question. You made the case that how you value it depends on the plan. So what was the plan? The answer, of course, was that these people didn't have a plan because they're incompetent, and that has nothing to do with the "purpose of a bank". It's just incompetence, nothing more.
    - fnordpiglet 4y ago
      The plan in a normal bank operations is to hold a mixture of long, medium, short, and liquid assets proportionate to a normal heavy withdrawal of funds. No bank stays liquid enough to survive the drawdowns they saw, because they’re not required to by law. They operate within the regulatory construct they exist in. The way they pay interest on deposits is by investing them to begin with, and if they’re invested in anything other than cash or treasuries, they face liquidity risk. That risk is not zero. It’s actually not even insubstantial. And risks are what the word implies, a risk. In an unlikely situation, they are insolvent while they liquidate assets - and often their long terms assets must be liquidated at a loss. This is literally how every bank operates. This is also why the government was able to step in and restore bank operations in a few days. They know how banks work too, they wrote the rules. So they know exactly what to do in this situation - because since it’s a risk of banking business, it can and will happen. You seem to understand the concepts enough, where is the disconnect? It’s genuinely confusing. This isn’t a novel take on how a bank works.
- nomay 4y ago
  You just explained the businness model of banking.
  - sdfghswe 4y ago
    Wrong. The business model of banking is managing the money to an appropriate duration. Locking it up isn't a business model.
    - notch898a 4y ago
      Demand deposits can be immediately be recalled, so where exactly do you suggest they park it? In the central bank -- no bueno they've denied banking license for narrow banking. Margin lending that allows recall at any moment? I can think of some options but frankly I'd rather have my money in a bank that over-extends themselves on treasuries than most the alternatives. At least I'd most likely get 90+% of my money back eventually. Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit.
      - sdfghswe 4y ago
        > Only retroactively in a bank run are you really able to see just what duration and what amounts were the limit. Exactly, so don't lock it up. Glad you agree with me.
        notch898a 4y ago
        So put it where? Narrow banking is illegal by virtue of denying the banking license. You're basically left with what, something like recallable loans/margin? What are the other options?
        tripletao 4y ago
        Put it in bonds of whatever duration the bank chooses, but require sufficient equity that the shareholders will bear the loss and not the depositors? Interest rates didn't increase in a single step. If the SVB had been forced to recognize their losses on a continuous MTM basis, then they'd have been forced to raise capital (or liquidate if they couldn't) by late 2022, when they were undercapitalized but not insolvent. The shareholders might still have been zeroed, but the depositors would have been fine. In fact, the SVB designated those bonds as held-to-maturity, which allowed them to avoid reporting the loss, leaving them adequately capitalized for regulatory purposes despite being MTM insolvent. That accounting treatment doesn't change the actual economics though, so they still blew up.
- jmvoodoo 4y ago
  So, your plan is to do away with fractional reserve banking entirely ? How do you think that would impact GDP and the overall functioning of the economy?
  - scott00 4y ago
    Not who you're responding to, but I actually don't think getting rid of fractional reserve banking is as crazy as it may sound at first. Maybe people who need to borrow money for 10 years shouldn't be borrowing it from people who will freak out if the loan isn't paid back in a week. On the investor side you'd put cash you really need in a non-interest bearing account, and the rest invested at a duration and risk level appropriate for your situation. For most people/organizations the details would be outsourced to a fund manager. On the borrower side, small stuff would get bundled and securitized, big stuff could trade on its own. The industry's already moving in that direction. Modern communication technology has so drastically changed the physical scale over which a marketplace can function I think it's reasonable to ask if we still need the banking smoke and mirrors sitting between borrowers and lenders.
- hypothesis 4y ago
  Sounds exactly like “held-to-mortality” plan! It does appear to work in at least some cases. The rest is getting bailed out. [0] https://news.ycombinator.com/item?id=35130979 https://news.ycombinator.com/item?id=35130979
- fisherjeff 4y ago
  I mean, it’s a balancing act, right? If you plan to be able to accommodate 20% redemption in a single day, you’re left with a portfolio maturity of 5 days. You will be almost unavoidably marked to market but your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway.
  - benlivengood 4y ago
    You offer customers CDs if they want higher interest rates. Isn't that how it's been done for decades?
    - fisherjeff 4y ago
      Yes, that would narrow the maturity gap and pass some rate risk on to customers. In SVB’s case, though, they would’ve needed to sell a lot of CDs relatively quickly, which means their rates (i.e., borrowing cost) would have to be high.
  - yunwal 4y ago
    If your customers actions are all highly correlated, you need to be planning for things like this. The fact that having your whole customer base in a single group chat is a bad business model for a bank should not be the taxpayers’ problem.
    - wstuartcl 4y ago
      it's good then that the funds to support the deposits are coming from the bank funded fdic fund not taxes then.
      - yunwal 4y ago
        The whole argument is whether uninsured deposits should be provided by the FDIC. I have no problems with the insured amount being returned to customers. The FDIC is a government owned business and shouldn’t be acting outside of it’s financial interests and obligations.
- wstuartcl 4y ago
  They had 13b in cash going into this year and other highly liquid assets, those evaporated as the draw downs happened. Its not like they tucked away all assets into 10 year lockups (or higher risk loans). Even the bonds they did lock up -- in what would be considered 99% "normal" markets given the last few decades a sell off of those bonds would not have been highly problematic. It became problematic when they were so low return needing to be sold to reblalance the 10/90 rule when market rates were much better and they needed to be discounted due to the huge rate hikes. SVB was pretty much considered the "boyscouts" of the industry and in normal circumstances they took a super conservative placement of the deposits. The only thing they could have done better was to (what would have normally been considered) overly hedge the bonds reducing their return even more. I personally think they were too transparent with the liquidity crunch, and the investors and their companies that pulled out 20-30b before they even could execute the sell probably saw the ability to crash the bank and offer shark hooked bridge funding to the competitive companies left in the lurch. Its not like these folks were naive clients -- imho they were looking to do damage and get blood returns/equity on those bridge funding after the fall.
  - matthewdgreen 4y ago
    They had a customer base that would knife them at the first hint of a liquidity issue, then they had a liquidity issue. Of course a different approach would have reduced their returns, but then they’d still be in business.
    - cm2187 4y ago
      Deposits from financials are treated as disappearing at the first opportunity from a regulatory point of view. Corporate deposits are considered volatile but less volatile. So the behaviour we have seen isn’t entirely unexpected. It seems SVB has VC deposits and corporate deposits from startups that were effectively controlled by VC and behaved like financials in term of deposit outflows.
      - pas 4y ago
        what does financials mean in this? can you explain this term, please?
- cowuser666 4y ago
  this is inherent to fractional reserve banks and maturity transformation. any bank would be vulnerable if there's a bank run. this is a basic thing to understand before making claims on this issue imho.
swatcoder 4y ago
You say it takes a run, but all it really takes is an aggregate change in deposit behavior. Like, for instance, your disproportionate share of startup clients easing off the cheap loans you had been offering them, because they’re no longer so cheap, and instead drawing down on (or moving) the balances that you had insisted they keep with you as collateral. Trouble was brewing on both sides of the business, not just on the asset position.
- fnordpiglet 4y ago
  That’s what led up to the need to create more liquidity. The run happened after that when depositors spooked and drew down faster than the bank could liquidate assets. They were never, even MTM, under water. They just couldn’t raise enough cash in a single day to pay out all the withdrawals. But the cause of the run is the suspicious part to my mind. It feels orchestrated, and I have heard rumblings that Theils founders fund was spreading a whisper campaign against SVB while shorting.
  - at-fates-hands 4y ago
    >> But the cause of the run is the suspicious part to my mind. I've heard multiple reports that one of their large investors got wind of their attempts to get a $2B loan so they wouldn't lose that money in their bond investments and thought it was a huge red flag and was the first to take out all of their money. The theory goes it was a large SV company, and news travelled on social media and the SV financial circles about they did and their belief that the bank was about to implode. This created a long line forming on Friday morning of companies wanting to get their money out as well. I agree, I'm not sure if the rumor was enough to spook people, or an orchestrated move by several companies, once one company found out what they were doing - but its very suspicious. Add in the founders were busy taking money at the same time they were liquidating their positions, which I'm sure the SEC will have something to say about as well. Add in all the people who may have found out early and took out short positions as well who are now poised to possibly make a good chunk of money in all this chaos.
  - tripletao 4y ago
    > They were never, even MTM, under water. This is completely false. If the SVB (or any other bank) had been adequately capitalized on a MTM basis, then they could have borrowed from the Fed to withstand any bank run. The SVB was not: https://www.bloomberg.com/news/articles/2023-03-10/the-balance-sheet-time-bomb-at-svb-was-sitting-in-plain-sight https://www.bloomberg.com/news/articles/2023-03-10/the-balan... The hold-to-maturity accounting allowed them to pretend otherwise, disregarding losses on long-term bonds when interest rates increased. They--and their regulators, since such accounting is perfectly legal--hoped this would let them ignore the problem until they could earn their way out of the hole. Instead interest rates increased further, the hole got deeper, and the SVB blew up. It's not impossible that Thiel somehow benefitted from the collapse, though I'm not aware of any evidence for that yet. It's also possible that he simply didn't want his money in an insolvent bank.
fach 4y ago
Aren’t the order of operations here incorrect? They were experiencing a lack of deposits due to VC pullback due to the interest rate rise, while depositors did not cut spending. This led to a liquidity crunch where they needed to sell discounted bonds to fill the gap. When the gap was conveyed to shareholders, the run began. If this is true, isn’t marking to market providing feedback about a potential liquidity crunch much earlier, ideally before the crunch even begins?
- fnordpiglet 4y ago
  The “when the gap” bit is the piece that’s suspect to me. This isn’t an irregular occurrence in the world. The events are a little fishy to me because this isn’t crisis material. Banks go public precisely for the purpose of having access to additional liquidity in situations like this. The balance sheet hole was tiny compared to their assets. Liquidity calculations for banks definitely include mark to market for HTM portfolios. But even then they were legally deemed sufficiently liquid. The run on the bank wasn’t expected or normal behavior.
  - wstuartcl 4y ago
    this is why imho I see the pull out of the clients especially those that happened before the sale offer even came to term as an orchestrated ploy to tank the bank and then be in a position to offer shark bridge loans to those impacted. These were not naive clients making the move early -- and to me it seems less to do about the actual bank asset state and more to do with wanting blood in the water for wringing out equity and loan shark rates on those bridge offers.
pg314 4y ago
> If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market The NPV calculation should use the market intrest rate. If you use that, it should be pretty much the same thing: an efficient market should value a bond at its NPV. However, they were allowed to value HTM (hold to maturity) bonds at face value. That is just non-sensical from an economics perspective and just hides losses.
- lordnacho 4y ago
  This is the right answer. Everything that has a market should be marked to market. This should be the default decision until some kind of good reason it's given to do otherwise.
- fnordpiglet 4y ago
  This is only true for treasuries which are risk free. Any other bond includes other confounding risk factors impacting price which come out in MTM. These were agency bonds so would include duration/prepayment risks. But you also can face substantial liquidity risks in a fire sale, if you mark your assets to the full liquidation value, you need to mark against an order book to the depth of your holdings. Simple HTM NPV assumes you don’t face these pricing risks because you are holding for par+interest, discounted at risk free rates.
toast0 4y ago
> If you hold a bond to maturity you get it’s NPV. Valuing it at NPV vs mark to market has more to do with your plan than any sort of fundamental truth - they’re both legitimate ways of valuing it. If you hold a bond to maturity, you get it's Net Present Value at maturity which is actually Net Future Value. Mark to market of treasury bonds is essentially the NPV of the bond, considering current interest rates. When interest rates are near zero, sure, a dollar today and a dollar tomorrow are the same, with significant interest rates, they aren't. And there's the problem. You can't give a depositor a $100 treasury bond, due in 2028, when they want $100 now. That's only worth $85 today (or whatever the value is, I dunno).
beezle 4y ago
If you hold a bond to maturity you get the par value of the bond, typically "100" They were not holding sufficient tier 1 capital against a run or they would still be here today. The did, on the other hand, have enough to exceed regulatory requirements. They apparently did not hedge at all and additionally, they invested heavily in mortgages which are well known to decline more in value in rising rate environments due to extension risk. As an earlier poster noted, the primary reason to have a HTM portfolio is to avoid wild swings in reported earnings each quarter from a mark to market as their is no counter on the balance sheet that rises/falls in a similar manner. You are probably correct in that if there was not a run it likely would be rear view. They would have done their capital raise and probably taken additional measures to improve their ability to withstand such an event. Of course, this all was trigger by a ratings agency and a few bloggers calling into question the unrealized losses in the HTM portfolio. Then again, had the stress tests still be in place it is unlikely to have even gotten to the capital raise point.
amluto 4y ago
> If you hold a bond to maturity you get it’s NPV. Which, if you are being at all honest, means you calculate its present value by applying a discount rate in line with current risk free returns over the relevant time horizon, which will be a number suspiciously similar to the Treasury yield curve, and you will end up with something quite close to the mark-to-market value. (And it has to be this way. Otherwise you could go buy two-year-old long dated bonds at a discount on the secondary market and make a killing, because the transaction would have an immediate NPV gain of 30% or more.) Banks are a bit unique in that they can generally borrow at a cost much lower than the risk free rate due to the existence of non-interest-bearing and low-interest accounts, but IMO those should be thought of as a variable source of future profits, not as a reduction in the risk-free rate to be used for financial projections.
listenallyall 4y ago
> If you hold a bond to maturity you get it’s NPV This is flawed logic. The NPV is not a real, tangible dollar amount. It is a calculation, based on the presumed yield of a theoretical set of alternative investment opportunities, of the Net PRESENT (today, right now) Value of the bond. This number is less than the sum of the bond's future payments, because the NPV is attempting to determine the current value of payments scheduled for receipt in the future. In other words, if you are owed $1000 to be paid on Christmas Day of this year, the Net Present Value is less than $1000.
trgn 4y ago
> if it hadn’t devolved into a run this whole story would be a foot note in a quarterly filing. Rather I suspect there was a bit of market manipulation by some wealthy valley insiders that took a relatively routine asset management event and turned it into a crisis. For profit. This is it. People are quick to point out mismanagement at svb, but it's only because of the run and the following collapse. After the fact, it's easy find data points to explain away anything. Holdkng on to low yield treasuries, really now, this is the telltale sign of a failing bank? History still needs to be written on this one, don't discount the human factor, debtor's panic because of gossip run wild is not too far fetched.
shapefrog 4y ago
Valuing it at NPV == Valuing it at mark to market

ren_engineer 4y ago

at the time they bought them the Fed was saying they had no plans to increase rates. You can blame SVB somewhat for not hedging but they took the Fed at their word and got burned for it, not exactly something that builds confidence in the financial system. The Fed bowed to political pressure related to high inflation rather than following the plan they laid out

sdfghswe 4y ago
> The Fed bowed to political pressure related to high inflation rather than following the plan they laid out When circumstances changed, they changed their plan. What do you normally do?
reducesuffering 4y ago
The Fed never said they wouldn't raise rates for 10 years, which is the duration that SVB bought mortgage-backed securities for. The Fed didn't bow to political pressure, they are following the plan which is their dual-mandate for 2% inflation and maximum employment. They had rates at 0 while employment numbers were bad, now that employment #'s are good and inflation is bad, it was time to raise rates. It's a balancing act.
beezle 4y ago
They did not buy everything in one day long before the Fed moved. The moves by the Fed were well telegraphed in advance and once the initial hike was done it was off to the races so to speak. SVB had many opportunities to do hedge and honestly, why on earth should bank or anyone else "take the Fed at their word". People make mistakes, institutions make mistakes, people misunderstand and on and on.
watwut 4y ago
They had no plans, things changed, plans changed. It is completely valid to blame SVB for not hedging. It is valid to blame them for lobbying to loose up regulation over how much risk they can take too. If anything is damaging trust, it is banks and investors lobbying to loosen up regulations, claiming the banks are too small to pose systemic risks and then ask for special exceptions the moment it does not work out.

tfehring 4y ago

> No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". THAT is the source of the problem. Not all banks did this. All major US banks - and all or virtually all US banks in general - have assets that are designated as held to maturity. Continuously marking all assets to market would create massive swings in banks' income and obscure the real gains and losses from their operations. SVB probably had a somewhat longer asset duration and somewhat lower book yield than US banks on average, since its deposit base grew so quickly in a low interest rate environment in 2020-2021. It also had a higher share of uninsured deposits. But nothing that SVB did was categorically different than other banks, and in the absence of a government backstop, I'm not convinced that any US bank would fare much better if faced with a similar volume of deposit outflows. "Magically" transforming long-dated assets into short-dated liabilities wasn't any kind of malfeasance on SVB's part - it's just how banking works.

beezle 4y ago
Well, I'll take issue with your post as you captured the problem with the others. Where SVB was different than other banks is the absence of hedging. SVB's tier 1 capital was basically wiped out by a mark of the HTM portfolio, unlike other banks who suffered hits but far, far smaller.
trilobyte 4y ago
Any investment strategy will require addressing various forms of risk and making tradeoffs, but it is a choice. SVB did not properly hedge against this risk which, as soon as interest rates started rising, should have been a priority for their leadership to have a plan to address.
- norswap 4y ago
  Could they have done better? Sure. Hindsight is 20/20. Would it have been a reasonable assumption? No. As pointed out in the parent, every bank pretty much works like this, they're all liable to go under in the presence of a big enough run. Also if it must have been so obvious to them, it probably should have been obvious to the regulatory agencies in charge of monitoring banks and avoiding exactly these situations, as well as the Fed who set the policies leading to this in the first place. It just wasn't part of anyone's threat model.

pookha 4y ago

Here's another source of the problem...Pumping trillions of active currency into the economy, over heating the CPI, and ignoring demand-side inflation (hey it's "transitory") for ideological reasons.

tyre 4y ago

> No. SVB hid market to market losses by saying "these securities are held to maturity so I don't have to realize losses". It did not hide them. This was in their financial statements (https://s201.q4cdn.com/589201576/files/doc_financials/2022/q4/4Q22-SIVB-Earnings-Release-Final.pdf https://s201.q4cdn.com/589201576/files/doc_financials/2022/q... at page 15): > Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $6, $6 and $7 (fair value of $76,169, $77,370 and $97,227), respectively > December 31, 2022 | September 30, 2022 | December 31, 2021 > 91,321 93,286 98,195 This shows that they had assets on 12/31/22 with an amortized value of $91bn and a fair value of $76bn

kurthr 4y ago

And they wouldn't have been able to do that, if not for the regulations being rolled back (from $50B to $250B by a friend of Thiel and lobbying by SVB). Lots of sowing and reaping going on. https://www.reuters.com/article/us-usa-trump-dodd-frank/trump-signs-bill-easing-u-s-bank-rules-into-law-idUSKCN1IP2WX https://www.reuters.com/article/us-usa-trump-dodd-frank/trum...

jiscariot 4y ago

> That's like saying the person who leaves their car unlocked is the root cause of the theft. Funny that should come up. Minnesota Attorney General Kieth Ellison is blaming Kia and Hyundai for our rash of auto theft and associated crime. https://www.startribune.com/minnesota-minneapolis-keith-ellison-kia-hyundai-tiktok-jacob-frey-theft-melvin-carter-investigation/600256918/ https://www.startribune.com/minnesota-minneapolis-keith-elli...

youngtaff 4y ago

SVB told the world about it’s potential losses back in Nov > It’s true that investors had been aware at the latest since its 10-Q filing on Nov. 7 that it had sustained unrealized losses among its held-to-maturity (HTM) portfolio large enough to wipe out its entire $15.8 billion in shareholder equity. While this would theoretically render it insolvent were they to materialize in full, SVB Financial was dismissive of the risks. "SVB collapse highlights $620 billion hole lurking in banks’ balance sheets" -https://archive.is/qnwYh https://archive.is/qnwYh Also short sellers worked it out a while back too "A Silicon Valley Bank short seller explains how he knew the bank was in trouble months ago" - https://archive.is/XaKkt https://archive.is/XaKkt