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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

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
      The other good news is that it will probably net out to costing little to nothing in the long term as they had enough assets to cover liabilities -- it was a liquidity crunch. Seems very much relevant to what the FDIC was created for -- to make depositors whole and stop contagion. It would be different if the bank was not properly asset backed.
      - yunwal 4y ago
        > The other good news is that it will probably net out to costing little to nothing in the long term If it cost nothing with no risk, surely a larger banking institution would have been willing to step in to solve it. > Seems very much relevant to what the FDIC was created for The FDIC was created to be an insurance corporation, not to bail out banks at their discretion.
        fisherjeff 4y ago
        The only risk for other banks is opportunity cost: right now, there are much more productive uses of their money than buying old agencies at par. If you had $200b or whatever laying around, you could buy their portfolio and make about the lowest risk $10b there is. But if you just bought new agencies at the same durations instead, you could easily double that. EDIT: To clarify, this is the primary risk at large banks, where they could absorb a chunk of the bonds without significantly affecting their average maturity. Smaller banks obviously risk replaying the SVB run.
        yunwal 4y ago
        > The only risk for other banks is opportunity cost To be clear, if banks can improve their risk profile for free, they will do that (because it frees them to invest in other risky stuff). A no-risk 5% return while the fed is giving out sub-5% interest rates is a no-brainer. The reason no banks are coming in to help is because it would be a bad investment.
        4y ago
- fisherjeff 4y ago
  Exactly right. I do think the speed of deposit growth in a low rate environment made that challenging though. Like if it were me, I'd grudgingly buy long-dated assets to keep the doors open, but also look toward reducing maturity as rates increase and start acquiring customers. Problem is that, very roughly speaking, those things only work if rates increase more slowly than you can acquire new customers.
  - pas 4y ago
    but ... they could have charged customers to hold their money. or put it into money market funds. sure, less glamorous, but also less risky. of course they were also a startup, so making money was a bit more important than safety. it's just valley things.
- enaaem 4y ago
  Compared to other banks they also have relatively few customers with very high deposit each.
JumpCrisscross 4y ago
> your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway Plenty of banks compete on benefits other than yield.
- fisherjeff 4y ago
  My point was more that if the bank’s yield on assets is zero-ish, their net interest income will be <= 0 and they will run out of money

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
    The other good news is that it will probably net out to costing little to nothing in the long term as they had enough assets to cover liabilities -- it was a liquidity crunch. Seems very much relevant to what the FDIC was created for -- to make depositors whole and stop contagion. It would be different if the bank was not properly asset backed.
    - yunwal 4y ago
      > The other good news is that it will probably net out to costing little to nothing in the long term If it cost nothing with no risk, surely a larger banking institution would have been willing to step in to solve it. > Seems very much relevant to what the FDIC was created for The FDIC was created to be an insurance corporation, not to bail out banks at their discretion.
      - fisherjeff 4y ago
        The only risk for other banks is opportunity cost: right now, there are much more productive uses of their money than buying old agencies at par. If you had $200b or whatever laying around, you could buy their portfolio and make about the lowest risk $10b there is. But if you just bought new agencies at the same durations instead, you could easily double that. EDIT: To clarify, this is the primary risk at large banks, where they could absorb a chunk of the bonds without significantly affecting their average maturity. Smaller banks obviously risk replaying the SVB run.
        yunwal 4y ago
        > The only risk for other banks is opportunity cost To be clear, if banks can improve their risk profile for free, they will do that (because it frees them to invest in other risky stuff). A no-risk 5% return while the fed is giving out sub-5% interest rates is a no-brainer. The reason no banks are coming in to help is because it would be a bad investment.
        4y ago
fisherjeff 4y ago
Exactly right. I do think the speed of deposit growth in a low rate environment made that challenging though. Like if it were me, I'd grudgingly buy long-dated assets to keep the doors open, but also look toward reducing maturity as rates increase and start acquiring customers. Problem is that, very roughly speaking, those things only work if rates increase more slowly than you can acquire new customers.
- pas 4y ago
  but ... they could have charged customers to hold their money. or put it into money market funds. sure, less glamorous, but also less risky. of course they were also a startup, so making money was a bit more important than safety. it's just valley things.
enaaem 4y ago
Compared to other banks they also have relatively few customers with very high deposit each.

JumpCrisscross 4y ago

> your yield, even when rates are high, is going to be roughly zero and you’re going out of business anyway Plenty of banks compete on benefits other than yield.

fisherjeff 4y ago
My point was more that if the bank’s yield on assets is zero-ish, their net interest income will be <= 0 and they will run out of money