21 ms·

How deep is the rot in America’s banking industry?

146 points by throwaway12245 4y ago

jgeada 4y ago
Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.
- toomuchtodo 4y ago
  My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway. The bond market already is built to handle this, and we should stop treating demand deposits as this Schrödinger collateral. If you want to insure lending, insure the lending directly, not with consumer and business cash. I know there are no simple solutions to complex problems, but this all seems very unnecessary when you pull the system apart conceptually. > codexb
  - deleted 4y ago
    [deleted]
  - rolobio 4y ago
    [flagged]
  - lostsoil 4y ago
    If that happens start preparing to pay money(instead of receiving interest) for your demand deposits.
    - toomuchtodo 4y ago
      Most people do not receive interest in their deposit accounts (or its minimal) because banks keep the spread between paying depositors nothing and the interest the Fed pays on reserves held at the central bank. A Narrow Bank (which the Fed won't approve [1]) would cover their costs with that same spread. Failing that, one can invest in short dated government securities (US treasuries) directly. "All Roads Lead To Treasuries" if you will. If someone is going to gamble your money, might as well be the US government (treasuries are considered "risk free") vs your rando bank executive leadership team (the CEO of SVB collected ~$9.9 million in 2022 total comp for overseeing and approving suboptimal duration risk mgmt decisions). If banking is to be boring and minimally profitable, that leads us to the idea that it should be a utility, not a risk taking venture, no? And if the Fed interest is covering the costs of banking, aren't we already all paying that cost as taxes? [1] https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
    - soperj 4y ago
      that already happens for many.
  - codexb 4y ago
    By all accounts, most of their demand deposits were invested in US treasuries. Those treasuries are just worth less now because of interest rate hikes and so even if they didn't have to do a fire sale on billions in treasuries, it still wouldn't be enough to cover deposits. There are no completely safe investments.
  - opportune 4y ago
    IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments. Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself. The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.
    - toomuchtodo 4y ago
      I think there is some nuance around CBDC vs simple "accounts" but I agree with your thesis, as do others, on issuing deposit accounts directly from the Fed. https://rooseveltinstitute.org/wp-content/uploads/2021/08/GDI_Central-Banking-For-All_201806.pdf https://rooseveltinstitute.org/wp-content/uploads/2021/08/GD... (Central Banking for All: A Public Option for Bank Accounts By Morgan Ricks, John Crawford, and Lev Menand* | June 2018)
- globalreset 4y ago
  Current global dollar-based financial system can only be sustained by an ever-increasing leverage, that allows rolling over the ever-increasing pile of dollar-denominated debt. Since 1971 everything (all relevant policies) were geared towards increasing the amount of debt in the system. It's no surprise that student debt, mortgage debt, credit card, auto loans and whatever else were ballooning. Regular banks not making risky bets would go against it, so it will not be done.
- andrewmutz 4y ago
  Would Glass-Steagall have prevented the SVB failure?
  - tptacek 4y ago
    I don't think so. SVB wasn't an investment bank, was it?
  - NovemberWhiskey 4y ago
    No; Glass-Steagall allowed commercial banks to own investment-grade bonds.
- giantg2 4y ago
  Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?
  - rolobio 4y ago
    SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?
    - giantg2 4y ago
      I assume most banks should be going after shorter term bonds to adjust with those changes. Wasn't the problem with SVB that they had too much money in long term bonds and MBS? So they were locked into really low rates (based on today's srandards), which is fine if they held to maturity, but they couldn't hold due to the withdrawals and then nobody wants to buy those low rate securities for them to exit without losing too much.
    - GabeIsko 4y ago
      It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments. I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.
      - matwood 4y ago
        And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine. With that said, it's good they got punished for poor decisions given their depositor profile.
- tptacek 4y ago
  By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. The problem wasn't that they too exciting bets; its that they played the standard playbook incompetently.
  - kurthr 4y ago
    They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence. The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.
    - toomuchtodo 4y ago
      If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk. https://news.ycombinator.com/item?id=35130813 https://news.ycombinator.com/item?id=35130813
      - kurthr 4y ago
        Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning. Edit: I went looking and PWC has a nice overview... 6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge. ... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
      - kragen 4y ago
        i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal
- SilasX 4y ago
  Buying long-term Treasurys and booking them as high-grade capital (whatever they call it) was legal under GS too, and was the cause of SVB's failure. SVB was killed by the boring part, not the startup banking risk.
  - GabeIsko 4y ago
    Large venture capitalist depositors demanding to pull out billions of dollars because of relatively minor liquidity risk definitely contributed to the bank run though.
    - SilasX 4y ago
      That's irrelevant to the topic of this subthread, about Glass-Steagall and the regulations that would have prevented this.
deweywsu 4y ago
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ajkjk 4y ago
I was pleased to read Nathan Tankus' take[1] on all this, although I wish I understood it better, which was that a lot of policy ideas that have been somewhat fringe are becoming mainstream in the last week: > The prospect of unlimited deposit insurance, whether de facto or de jure, is leading to a large-scale reconsideration of views among even “moderate” banking scholars. I imagine that's usually how real policy progress happens: interesting ideas are always getting thought up and proliferated, but it takes a big upheaval to move them over to being really possible. [1]: https://www.crisesnotes.com/every-complex-banking-issue-all-at-once-the-failure-of-silicon-valley-bank-in-one-brief-summary-and-five-quick-implications/?ref=notes-on-the-crises-newsletter https://www.crisesnotes.com/every-complex-banking-issue-all-...
- rcme 4y ago
  It depends on your view of "progress." Early in the pandemic, people thought you really could print money indefinitely and MMT was right. Now people see that classical notions of inflation are still valid.
  - ajkjk 4y ago
    Which people thought those things? I feel like at the time I was only hearing criticism.
    - christophilus 4y ago
      There were plenty of financial podcasts that were saying, “why don’t we just keep doing this?” Animal Spirits, for example.
  - christophilus 4y ago
    Yeah. There were still plenty of people who predicted how foolish the early pandemic money printer was. I’d bet those same people view this new regulation with equal displeasure. I’m certainly in that camp.
jollyllama 4y ago
How deep is the ocean?
tptacek 4y ago
People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there. Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves. It is remarkable how badly SVB managed to fuck this whole situation up. But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.
- stefan_ 4y ago
  The system worked when we declared a bank not system relevant, then, on a weekend, declared a systemic exception to save it's depositors? I mean, this comment almost wrote itself.
- colpabar 4y ago
  Every few months the mainstream media jumps on some new thing about how big tech is finally collapsing because of X or we should be mad at big tech for doing Y and it's usually blown way out of proportion. Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage. What I am confused about is - if everything went "according to plan", then what did happen? Is it really all peter thiel's fault? Surely someone as smart as him saw something that made him do what he did, given that it was a pretty massive thing to do.
  - chongli 4y ago
    Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage Of course they don't! Look at some charts of newspaper advertising revenue over the past few decades. There's one word that best describes it: apocalyptic. Where did all that advertising revenue go? Google and Facebook!
bwb 4y ago
lol, the media frenzy is hilarious to watch. This was a badly run bank facing some headwinds. I forget how much people like writing about things in a flurry instead of taking a step back and providing real analytics oversight.
jhallenworld 4y ago
So what should SVB have done instead? It's well known.. https://www.proshares.com/browse-all-insights/insights/bond-strategies-for-rising-ratesshorten-float-or-hedge https://www.proshares.com/browse-all-insights/insights/bond-... But even then: Some professor was on Bloomberg today wondering about the hedge strategy. The hedge providers may be at risk if all of the sudden there are a huge amount of sales there. But this only happens during heavy withdrawals...
- heisenbit 4y ago
  SVB should have decided not to grow so much so fast. More companies have gone kaput for fast growth than for any other reason.
vajrabum 4y ago
Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year, or the 2018 increase in interest the size of bank required to have a resolution plan thereby exempting SVB or Peter Thiel’s call to withdraw $ I would have labeled the raising of the size required for a resolution plan as greed by SVB but the fed had no problems resolving SVB so it clearly wasn’t too big to fail. If the fed continues to raise I’d guess we will see more bank failures
- d23 4y ago
  > Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year I'm not an expert in this area, but in what way is this true? Interest rates are still quite low by historical standards. The 80s saw massive increases to a much higher level (approaching 20%) in a shorter amount of time. There were large jumps in the late 60s and early 70s as well.
rcme 4y ago
All banks are suffering, buy some are suffering more than others. It's also unclear how the Fed's actions are going to impact the situation going forward. Here are my unanswered questions: 1. What's going to happen to risk management at banks now that the government has shown themselves willing to backstop all deposits. Is there really any reason to spend money hedging risk? 2. What's going to happen to the bond market? Bonds are generally understood to change in price in a way that keeps yield equal to currently available fixed-income securities. However, with the Fed's new BTFP, the value of bonds is always par, apparently. 3. What are the banks going to do with their new liquidity? The Fed is essentially giving banks a fully collateralized $1 in exchange for $0.80. That's a lot of free money.
- omginternets 4y ago
  >Is there really any reason to spend money hedging risk? Shareholder money is still on the line?
- qqqwerty 4y ago
  If BTFP can only be used by banks with hold to market bonds purchased before March 12th, then wouldn't the impact on bond prices be negligible? I suppose we could hypothesize what the bond market would like in the absence of BTFP and the much higher likely hood of contagion. Feels like yields would drop on the expectation that the Fed would be forced to lower rates due the crashing economy. So I guess one could argue that BTFP might cause yields to go down a little bit, but probably a lot less than they would have otherwise. As to question 3, BTFP feels like a small dash of QE after pushing QT a little too hard and too fast. Banks will probably just put that extra cash into short term treasuries to shore up their balance sheet to protect against declining deposits. So I guess we should expect that extra cash to push short term yields down. Short term yields have already dropped a bit though, so maybe that is already priced in.
  - rcme 4y ago
    The bond market is massive. A large majority of bonds were purchased before March 12th. As for the QE/QT performed by the Fed. The Fed's balance sheet has already increased by 300 billion, which undoes like half a year of QT. JPMC estimates a total of 2T in liquidity. Not only will that undo all QT, it will bring the Fed balance sheet to new all time highs.
462436347 4y ago
Today the big banks collectively agreed to inject $30bn of deposits into First Republic to sure it up: https://www.bloomberg.com/news/articles/2023-03-16/first-republic-to-get-30-billion-of-bank-deposits-in-rescue?srnd=markets-vp&leadSource=uverify%20wall https://www.bloomberg.com/news/articles/2023-03-16/first-rep... Meanwhile, all the benevolent VC techbros had to do was collectively agree to just not withdraw all of their deposits from SVB en masse, and they couldn't even muster that. How deep is the rot in SV?
- jahewson 4y ago
  That would be irrational. It’s a Prisoner’s Dilemma and no matter what any individual would prefer to do the only rational move is to assume others will betray you. I don’t think it’s fair to ask SV to behave irrationally.
  - 462436347 4y ago
    These hand-wavy appeals to rationality and game theory to justify sociopathic foot-gunning by VCs is really getting tiring. First, it's not a Prisoner's Dilemma if the parties can communicate with each other: https://en.wikipedia.org/wiki/Prisoner%27s_dilemma https://en.wikipedia.org/wiki/Prisoner%27s_dilemma > Two members of a criminal gang, A and B, are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communication with their partner. Second, the traditional framing of the Prisoner's Dilemma disregards the aftermath, and the lasting reputational and trust consequences of betrayal, which would be substantial for any VC that failed to cooperate, or outright backstabbed the others.
  - stefan_ 4y ago
    You know the most important part in "prisoners dilemma" is the prison.
  - everybodyknows 4y ago
    Byzantine General's Problem might be the better analogy: https://www.microsoft.com/en-us/research/publication/byzantine-generals-problem/ https://www.microsoft.com/en-us/research/publication/byzanti...
upsidesinclude 4y ago
Steeped. Americas banks are still investment firms. Until we categorically prevent banks from attempting to "satisfy shareholders" with returns, these occurances will continue in one form or another. Banks dont need to be sexy or shake up the industry. We need boring people in banking making okay-ish money.
- landemva 4y ago
  Boring banking for the people: member-owned credit unions.
tenacious_tuna 4y ago
I'm seeing a lot of comments along the lines of "What should SVB have done? They bought the best bonds they could have for the time, and then the Fed screwed them over." Maybe I'm just naive when it comes to how these systems work, but couldn't SVB have just... done nothing? Nobody was compelling them to purchase any bonds at the time. Sure they have pressure from stockholders to make money, but if the deck was so stacked against them as everyone seems to think it was, it seems like a financially-literate management (which I would expect out of a bank) would have had the idea to merely wait a bit to see what the Fed was going to do. (Everyone and their mother was predicting a crash from 2020 to 2022, so it seems reasonable that a bank of all institutions could have made the call to be patient and see which way the wind blows...) Again, maybe this is me just being naive, but "They should have just been patient" seems like a mantra applicable to a lot of companies lately. Car companies cancelling all their chip orders at the start of the pandemic, only to scramble and re-place them as demand surged; tech companies hiring like crazy in the face of a supposed talent crunch, only to have massive layoffs a year later. It seems like companies keep making "impulsive" decisions to try and capitalize on short-term trends without any eye for the long term strategic view. Yes, "being patient" might mean they don't make as much money as they could have if they jumped at the first sign of a change, but... Do they have to? SVB could have continued making money hand over fist in the long run, but now they no longer exist. Google and Microsoft and all these corps could have saved a lot of corporate face and internal morale, had they just waited out the supposed hiring crisis that never quite seemed to materialize: now they have a pile of irritated employees and everyone I know at a major brand seems to be holding their breath for the next round of layoffs. There's a trend of hyper-efficiency in the name of maximum profit that I feel like I've been seeing kind of everywhere, and that seems fine until the moment the music stops. Maybe I'm just the kind of person who naturally hedges their bets, but I'm constantly blown away by how rickety entire companies appear to be sometimes. What am I missing? Are there just insufficient incentives to be conservative with resources and decision making?
- cableshaft 4y ago
  As the saying goes, 'Make hay while the sun shines'. If you don't take advantage of a good opportunity while it's there, it'll eventually go away and you won't have benefitted from it, while others have. Not saying that to justify SVB or anything, as they're in the business of securing people's money long-term, and they made bad decisions that they had plenty of time to course correct for (rates have been continuously rising for well over a year, with a clear goal of lowering inflation to around 2%, and you can see how slowly that was lowering and predict roughly how high that would get). Car companies also had a big faceplant moment with cancelling chip orders, but we were in the midst of a novel global pandemic that no one really knew how people were going to react to, or how big or how long it would last. Health officials were predicting around 100k total deaths in the US, and we blew way past that. But for tech hiring I can clearly see why they were like 'let's take all this zero interest cash, get a bunch of people, use them to get a competitive advantage, and then when everything starts to unwind we'll just lay people off'. It's a shitty thing to do to people, but I get the reasoning. I know they all claim they didn't see this coming and 'take full responsibility' or whatever in their layoff announcement/apology letters, but behind closed doors I bet they knew exactly what they were doing, at least the vast majority of them. I've had quite a few opportunities in my life that I didn't really leap on 100% like I should have, and as a result those opportunities slipped by, and I didn't end up making that hay at all as a result, the opportunities passed and I'll have to find some other way to make that hay.
deleted 4y ago
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stonemetal12 4y ago
Is FDIC the only game in town? If you have ten million in the bank wouldn't you get private insurance for gap coverage?
- NovemberWhiskey 4y ago
  This is known as "Massachusetts".
  - O__________O 4y ago
    Specifically DIF: https://www.difxs.com/ https://www.difxs.com/ Though DIF has only $500 million in assets and only services member banks in US state of Massachusetts.
- deleted 4y ago
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alecco 4y ago
SVB executives knew exactly what they were doing. The Greg Becker of the article (SVB CEO & president) was in SF Fed board of directors until Friday [1] and successfully lobbied for lax rules for banks like SVB. The current risk officer worked at NY Fed [2] and at Fitch Ratings (!) and Deutsche Bank [7]. Previous risk officer was director of Freddie Mac [3]. Yellen was the 11th President of the SF Fed [5] and the current president is her protégé [6]. They knew exactly what they were doing. The Fed looked the other way. They sold a lot of stock in the past month [8]. They are very well connected into the Fed and Treasury. I doubt anybody will get any kind of serious legal troubles. [1] https://www.reuters.com/markets/us/ceo-failed-silicon-valley-bank-no-longer-director-sf-fed-2023-03-10/ https://www.reuters.com/markets/us/ceo-failed-silicon-valley... [2] https://www.svb.com/news/company-news/svb-hires-kim-olson-as-chief-risk-officer https://www.svb.com/news/company-news/svb-hires-kim-olson-as... [3] https://www.linkedin.com/in/laura-izurieta-1370144 https://www.linkedin.com/in/laura-izurieta-1370144 [4] https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/ https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris... [5] https://en.wikipedia.org/wiki/Janet_Yellen https://en.wikipedia.org/wiki/Janet_Yellen [6] https://en.wikipedia.org/wiki/Mary_C._Daly https://en.wikipedia.org/wiki/Mary_C._Daly [7] https://nypost.com/2023/03/13/silicon-valley-bank-execs-worked-at-lehman-brothers-deutsche-bank/ https://nypost.com/2023/03/13/silicon-valley-bank-execs-work... [8] https://twitter.com/unusual_whales/status/163455502148748083 https://twitter.com/unusual_whales/status/163455502148748083 And this is just scratching the surface.
alecco 4y ago
Silicon Valley Bank was giving executives easy 50 y mortgages for mansions and commercial real estate. This is the garbage now in SVB's balance sheet. It's not just 10y treasuries. Read the actual reports. In turn, VCs/founders/executives promoted SVB. And now they don't want to be their own counterparties on a bet gone wrong. https://twitter.com/one4thecashbag/status/1635337106376769538 https://twitter.com/one4thecashbag/status/163533710637676953...
macinjosh 4y ago
Why haven’t FDIC rates paved with inflation? $250k is not much for a business these days.
karsinkk 4y ago
Does anyone know of a way to check the amount of lending done through Bank Term Funding Programme so far?
black_13 4y ago
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mikewarot 4y ago
Minority?? Opinion follows: The rot is at the core, the Federal Reserve. My parents saved money in a savings account for their eventual retirement. It was a prudent and accepted way to do things. Over time, with Reagan and deregulation of everything that followed, their savings rate effectively dropped from 5-8% to zero. That income was expected to fund part of their retirement, and it was stolen from them in order to prop up wall-street. Those zero and near-zero rates distorted fiscal reality in the US and elsewhere they've effectively broken the system. At some point, we'll be bailing out whole countries to keep kicking the can down the road, and that's when things will be too big to save and we get to The Great Simplification. I only hope we've got alternatives to fossil fuels figured out at scale and somewhat in place, otherwise civilization could collapse in World Depression II.
- CatWChainsaw 4y ago
  Hate to break it to you!

Bring back Glass Steagall and stop all this madness. Regular banking should be boring, not all that profitable and separated from speculation.

toomuchtodo 4y ago
My hot take is that demand deposits should be only invested in (EDIT: short dated, thx codexb) US treasuries (a la Narrow Bank), backed by the Federal Reserve and if a bank (or anyone) wants to lend, they can issue bonds to borrow versus the Rube Goldberg mechanism we currently have of deposits, FDIC, and then the Fed still providing an unlimited guarantee anyway. The bond market already is built to handle this, and we should stop treating demand deposits as this Schrödinger collateral. If you want to insure lending, insure the lending directly, not with consumer and business cash. I know there are no simple solutions to complex problems, but this all seems very unnecessary when you pull the system apart conceptually. > codexb
- deleted 4y ago
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- rolobio 4y ago
  [flagged]
- lostsoil 4y ago
  If that happens start preparing to pay money(instead of receiving interest) for your demand deposits.
  - toomuchtodo 4y ago
    Most people do not receive interest in their deposit accounts (or its minimal) because banks keep the spread between paying depositors nothing and the interest the Fed pays on reserves held at the central bank. A Narrow Bank (which the Fed won't approve [1]) would cover their costs with that same spread. Failing that, one can invest in short dated government securities (US treasuries) directly. "All Roads Lead To Treasuries" if you will. If someone is going to gamble your money, might as well be the US government (treasuries are considered "risk free") vs your rando bank executive leadership team (the CEO of SVB collected ~$9.9 million in 2022 total comp for overseeing and approving suboptimal duration risk mgmt decisions). If banking is to be boring and minimally profitable, that leads us to the idea that it should be a utility, not a risk taking venture, no? And if the Fed interest is covering the costs of banking, aren't we already all paying that cost as taxes? [1] https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
  - soperj 4y ago
    that already happens for many.
- codexb 4y ago
  By all accounts, most of their demand deposits were invested in US treasuries. Those treasuries are just worth less now because of interest rate hikes and so even if they didn't have to do a fire sale on billions in treasuries, it still wouldn't be enough to cover deposits. There are no completely safe investments.
- opportune 4y ago
  IMO the Fed should provide publicly available CBDC banking (implemented as a narrow bank with no ROI and no risk, just a balance in a fed table) and make it easy to move that money into treasuries or to integrate with eg visa/banks for payments. Then commercial banking becomes a competition of who can best manage risk/return on deposits, provide a good UX, integrate with other value add financial services, have the best risk models for lending, etc. I just don’t see a point in a banking system where my deposits are going to be stored in something dead-simple like treasuries with the interest skimmed off, when I could easily do that myself. The current system where I as a normal (not off-grid or doing some fringe thing like going all cash) consumer have to trust at least one bank with my money, only to get 0% interest in my checking and be exposed to risk, does not seem fair.
  - toomuchtodo 4y ago
    I think there is some nuance around CBDC vs simple "accounts" but I agree with your thesis, as do others, on issuing deposit accounts directly from the Fed. https://rooseveltinstitute.org/wp-content/uploads/2021/08/GDI_Central-Banking-For-All_201806.pdf https://rooseveltinstitute.org/wp-content/uploads/2021/08/GD... (Central Banking for All: A Public Option for Bank Accounts By Morgan Ricks, John Crawford, and Lev Menand* | June 2018)
globalreset 4y ago
Current global dollar-based financial system can only be sustained by an ever-increasing leverage, that allows rolling over the ever-increasing pile of dollar-denominated debt. Since 1971 everything (all relevant policies) were geared towards increasing the amount of debt in the system. It's no surprise that student debt, mortgage debt, credit card, auto loans and whatever else were ballooning. Regular banks not making risky bets would go against it, so it will not be done.
andrewmutz 4y ago
Would Glass-Steagall have prevented the SVB failure?
- tptacek 4y ago
  I don't think so. SVB wasn't an investment bank, was it?
- NovemberWhiskey 4y ago
  No; Glass-Steagall allowed commercial banks to own investment-grade bonds.
giantg2 4y ago
Would that have made the difference? I thought that restricted banks to "safe" investments, which SVB's likely were. It's simply that they couldn't extract enough liquidity from that position to cover the run. Or were there other restrictions?
- rolobio 4y ago
  SVB failed because they bought government bonds, typically the most secure thing. The problem is the Federal Reserve raised interest rates, which made the bonds pointless. They Fed will supposedly keep raising rates, which I expect will make more banks fail. After all, if the most-secure thing (bonds) is not secure, what is?
  - giantg2 4y ago
    I assume most banks should be going after shorter term bonds to adjust with those changes. Wasn't the problem with SVB that they had too much money in long term bonds and MBS? So they were locked into really low rates (based on today's srandards), which is fine if they held to maturity, but they couldn't hold due to the withdrawals and then nobody wants to buy those low rate securities for them to exit without losing too much.
  - GabeIsko 4y ago
    It's really important to make this distinction: those bonds were, and still are safe investments, guaranteed by the full faith and credit of the United States Government. The issue is that you have to wait for them to mature. So SVB had too much of their depositor's money tied up in long term investments. I don't want to turn this into another tutorial about pricing works on the bond market, but the issue isn't that they invested in bonds, it's that they made a bet about the Federal reserve reversing course and not hiking interest rates. This is really stupid - the federal reserve has been saying over and over again that they will not be lowering rates any time soon.
    - matwood 4y ago
      And they also had a bank run. I think it was Stratechery that mentioned everyone knew the issue SVB was in for months. Had there been no bank run, SVB would possibly have been fine. With that said, it's good they got punished for poor decisions given their depositor profile.
tptacek 4y ago
By all accounts, SVB's banking was boring. They borrowed short and lent long, and their long bets were very safe. The problem wasn't that they too exciting bets; its that they played the standard playbook incompetently.
- kurthr 4y ago
  They actually let their interest rate hedges expire in '22 (while they had no CRO). That was insane. Every banker knows about duration/rate risk so this is really next level incompetence. The best spin I can think of is that they assumed HTM was sufficient to prevent a bank run, but it wasn't.
  - toomuchtodo 4y ago
    If the comment below is accurate, HTM assets can not legally be hedged against interest rate risk. https://news.ycombinator.com/item?id=35130813 https://news.ycombinator.com/item?id=35130813
    - kurthr 4y ago
      Maybe remarking them that way let them get rid of the expensive hedges? That would be even more damning. Edit: I went looking and PWC has a nice overview... 6.4.3.4 Hedging held-to-maturity debt securities ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge. ... The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities. https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.html https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/der...
    - kragen 4y ago
      i saw that, but then i also saw matt levine saying they should have hedged their htm assets against interest rate risk, which presumably he wouldn't have said if it were illegal
SilasX 4y ago
Buying long-term Treasurys and booking them as high-grade capital (whatever they call it) was legal under GS too, and was the cause of SVB's failure. SVB was killed by the boring part, not the startup banking risk.
- GabeIsko 4y ago
  Large venture capitalist depositors demanding to pull out billions of dollars because of relatively minor liquidity risk definitely contributed to the bank run though.
  - SilasX 4y ago
    That's irrelevant to the topic of this subthread, about Glass-Steagall and the regulations that would have prevented this.

deweywsu 4y ago

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ajkjk 4y ago

I was pleased to read Nathan Tankus' take[1] on all this, although I wish I understood it better, which was that a lot of policy ideas that have been somewhat fringe are becoming mainstream in the last week: > The prospect of unlimited deposit insurance, whether de facto or de jure, is leading to a large-scale reconsideration of views among even “moderate” banking scholars. I imagine that's usually how real policy progress happens: interesting ideas are always getting thought up and proliferated, but it takes a big upheaval to move them over to being really possible. [1]: https://www.crisesnotes.com/every-complex-banking-issue-all-at-once-the-failure-of-silicon-valley-bank-in-one-brief-summary-and-five-quick-implications/?ref=notes-on-the-crises-newsletter https://www.crisesnotes.com/every-complex-banking-issue-all-...

rcme 4y ago
It depends on your view of "progress." Early in the pandemic, people thought you really could print money indefinitely and MMT was right. Now people see that classical notions of inflation are still valid.
- ajkjk 4y ago
  Which people thought those things? I feel like at the time I was only hearing criticism.
  - christophilus 4y ago
    There were plenty of financial podcasts that were saying, “why don’t we just keep doing this?” Animal Spirits, for example.
- christophilus 4y ago
  Yeah. There were still plenty of people who predicted how foolish the early pandemic money printer was. I’d bet those same people view this new regulation with equal displeasure. I’m certainly in that camp.

jollyllama 4y ago

How deep is the ocean?

tptacek 4y ago

People seem to have a really hard time with the idea that, in the SVB debacle, the system worked effectively and pretty much the way it was planned to. It's not even clear what people are upset about. There's an article on the front page of The Atlantic today about how angry we should be about SVB, and if you read it, it's hard to figure out who those angry people should be. Equity is getting zeroed out. Management was fired. Depositors were made whole almost immediately. SVB's assets are apparently not impaired; SVB would have held them to maturity had the bank run not happened, and now somebody else will instead. A bank made bad risk management decisions and got zeroed out; all the right incentives not to do that again are there. Meanwhile: the point of the FDIC system is for customers not to have to do this kind of risk assessment themselves. It is remarkable how badly SVB managed to fuck this whole situation up. But SVB is gone, so it's not much fun calling them out. I feel like people are flailing looking for someone else to blame.

stefan_ 4y ago
The system worked when we declared a bank not system relevant, then, on a weekend, declared a systemic exception to save it's depositors? I mean, this comment almost wrote itself.
colpabar 4y ago
Every few months the mainstream media jumps on some new thing about how big tech is finally collapsing because of X or we should be mad at big tech for doing Y and it's usually blown way out of proportion. Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage. What I am confused about is - if everything went "according to plan", then what did happen? Is it really all peter thiel's fault? Surely someone as smart as him saw something that made him do what he did, given that it was a pretty massive thing to do.
- chongli 4y ago
  Traditional media doesn't seem to like big tech, and this is a great opportunity to stir up some outrage Of course they don't! Look at some charts of newspaper advertising revenue over the past few decades. There's one word that best describes it: apocalyptic. Where did all that advertising revenue go? Google and Facebook!

bwb 4y ago

lol, the media frenzy is hilarious to watch. This was a badly run bank facing some headwinds. I forget how much people like writing about things in a flurry instead of taking a step back and providing real analytics oversight.

jhallenworld 4y ago

So what should SVB have done instead? It's well known.. https://www.proshares.com/browse-all-insights/insights/bond-strategies-for-rising-ratesshorten-float-or-hedge https://www.proshares.com/browse-all-insights/insights/bond-... But even then: Some professor was on Bloomberg today wondering about the hedge strategy. The hedge providers may be at risk if all of the sudden there are a huge amount of sales there. But this only happens during heavy withdrawals...

heisenbit 4y ago
SVB should have decided not to grow so much so fast. More companies have gone kaput for fast growth than for any other reason.

vajrabum 4y ago

Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year, or the 2018 increase in interest the size of bank required to have a resolution plan thereby exempting SVB or Peter Thiel’s call to withdraw $ I would have labeled the raising of the size required for a resolution plan as greed by SVB but the fed had no problems resolving SVB so it clearly wasn’t too big to fail. If the fed continues to raise I’d guess we will see more bank failures

d23 4y ago
> Let’s not forget the nearly unprecedented interest rate hikes by the fed almost 5 points in a year I'm not an expert in this area, but in what way is this true? Interest rates are still quite low by historical standards. The 80s saw massive increases to a much higher level (approaching 20%) in a shorter amount of time. There were large jumps in the late 60s and early 70s as well.

rcme 4y ago

All banks are suffering, buy some are suffering more than others. It's also unclear how the Fed's actions are going to impact the situation going forward. Here are my unanswered questions: 1. What's going to happen to risk management at banks now that the government has shown themselves willing to backstop all deposits. Is there really any reason to spend money hedging risk? 2. What's going to happen to the bond market? Bonds are generally understood to change in price in a way that keeps yield equal to currently available fixed-income securities. However, with the Fed's new BTFP, the value of bonds is always par, apparently. 3. What are the banks going to do with their new liquidity? The Fed is essentially giving banks a fully collateralized $1 in exchange for $0.80. That's a lot of free money.

omginternets 4y ago
>Is there really any reason to spend money hedging risk? Shareholder money is still on the line?
qqqwerty 4y ago
If BTFP can only be used by banks with hold to market bonds purchased before March 12th, then wouldn't the impact on bond prices be negligible? I suppose we could hypothesize what the bond market would like in the absence of BTFP and the much higher likely hood of contagion. Feels like yields would drop on the expectation that the Fed would be forced to lower rates due the crashing economy. So I guess one could argue that BTFP might cause yields to go down a little bit, but probably a lot less than they would have otherwise. As to question 3, BTFP feels like a small dash of QE after pushing QT a little too hard and too fast. Banks will probably just put that extra cash into short term treasuries to shore up their balance sheet to protect against declining deposits. So I guess we should expect that extra cash to push short term yields down. Short term yields have already dropped a bit though, so maybe that is already priced in.
- rcme 4y ago
  The bond market is massive. A large majority of bonds were purchased before March 12th. As for the QE/QT performed by the Fed. The Fed's balance sheet has already increased by 300 billion, which undoes like half a year of QT. JPMC estimates a total of 2T in liquidity. Not only will that undo all QT, it will bring the Fed balance sheet to new all time highs.

462436347 4y ago

Today the big banks collectively agreed to inject $30bn of deposits into First Republic to sure it up: https://www.bloomberg.com/news/articles/2023-03-16/first-republic-to-get-30-billion-of-bank-deposits-in-rescue?srnd=markets-vp&leadSource=uverify%20wall https://www.bloomberg.com/news/articles/2023-03-16/first-rep... Meanwhile, all the benevolent VC techbros had to do was collectively agree to just not withdraw all of their deposits from SVB en masse, and they couldn't even muster that. How deep is the rot in SV?

jahewson 4y ago
That would be irrational. It’s a Prisoner’s Dilemma and no matter what any individual would prefer to do the only rational move is to assume others will betray you. I don’t think it’s fair to ask SV to behave irrationally.
- 462436347 4y ago
  These hand-wavy appeals to rationality and game theory to justify sociopathic foot-gunning by VCs is really getting tiring. First, it's not a Prisoner's Dilemma if the parties can communicate with each other: https://en.wikipedia.org/wiki/Prisoner%27s_dilemma https://en.wikipedia.org/wiki/Prisoner%27s_dilemma > Two members of a criminal gang, A and B, are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communication with their partner. Second, the traditional framing of the Prisoner's Dilemma disregards the aftermath, and the lasting reputational and trust consequences of betrayal, which would be substantial for any VC that failed to cooperate, or outright backstabbed the others.
- stefan_ 4y ago
  You know the most important part in "prisoners dilemma" is the prison.
- everybodyknows 4y ago
  Byzantine General's Problem might be the better analogy: https://www.microsoft.com/en-us/research/publication/byzantine-generals-problem/ https://www.microsoft.com/en-us/research/publication/byzanti...

upsidesinclude 4y ago

Steeped. Americas banks are still investment firms. Until we categorically prevent banks from attempting to "satisfy shareholders" with returns, these occurances will continue in one form or another. Banks dont need to be sexy or shake up the industry. We need boring people in banking making okay-ish money.

landemva 4y ago
Boring banking for the people: member-owned credit unions.

tenacious_tuna 4y ago

I'm seeing a lot of comments along the lines of "What should SVB have done? They bought the best bonds they could have for the time, and then the Fed screwed them over." Maybe I'm just naive when it comes to how these systems work, but couldn't SVB have just... done nothing? Nobody was compelling them to purchase any bonds at the time. Sure they have pressure from stockholders to make money, but if the deck was so stacked against them as everyone seems to think it was, it seems like a financially-literate management (which I would expect out of a bank) would have had the idea to merely wait a bit to see what the Fed was going to do. (Everyone and their mother was predicting a crash from 2020 to 2022, so it seems reasonable that a bank of all institutions could have made the call to be patient and see which way the wind blows...) Again, maybe this is me just being naive, but "They should have just been patient" seems like a mantra applicable to a lot of companies lately. Car companies cancelling all their chip orders at the start of the pandemic, only to scramble and re-place them as demand surged; tech companies hiring like crazy in the face of a supposed talent crunch, only to have massive layoffs a year later. It seems like companies keep making "impulsive" decisions to try and capitalize on short-term trends without any eye for the long term strategic view. Yes, "being patient" might mean they don't make as much money as they could have if they jumped at the first sign of a change, but... Do they have to? SVB could have continued making money hand over fist in the long run, but now they no longer exist. Google and Microsoft and all these corps could have saved a lot of corporate face and internal morale, had they just waited out the supposed hiring crisis that never quite seemed to materialize: now they have a pile of irritated employees and everyone I know at a major brand seems to be holding their breath for the next round of layoffs. There's a trend of hyper-efficiency in the name of maximum profit that I feel like I've been seeing kind of everywhere, and that seems fine until the moment the music stops. Maybe I'm just the kind of person who naturally hedges their bets, but I'm constantly blown away by how rickety entire companies appear to be sometimes. What am I missing? Are there just insufficient incentives to be conservative with resources and decision making?

cableshaft 4y ago
As the saying goes, 'Make hay while the sun shines'. If you don't take advantage of a good opportunity while it's there, it'll eventually go away and you won't have benefitted from it, while others have. Not saying that to justify SVB or anything, as they're in the business of securing people's money long-term, and they made bad decisions that they had plenty of time to course correct for (rates have been continuously rising for well over a year, with a clear goal of lowering inflation to around 2%, and you can see how slowly that was lowering and predict roughly how high that would get). Car companies also had a big faceplant moment with cancelling chip orders, but we were in the midst of a novel global pandemic that no one really knew how people were going to react to, or how big or how long it would last. Health officials were predicting around 100k total deaths in the US, and we blew way past that. But for tech hiring I can clearly see why they were like 'let's take all this zero interest cash, get a bunch of people, use them to get a competitive advantage, and then when everything starts to unwind we'll just lay people off'. It's a shitty thing to do to people, but I get the reasoning. I know they all claim they didn't see this coming and 'take full responsibility' or whatever in their layoff announcement/apology letters, but behind closed doors I bet they knew exactly what they were doing, at least the vast majority of them. I've had quite a few opportunities in my life that I didn't really leap on 100% like I should have, and as a result those opportunities slipped by, and I didn't end up making that hay at all as a result, the opportunities passed and I'll have to find some other way to make that hay.

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stonemetal12 4y ago

Is FDIC the only game in town? If you have ten million in the bank wouldn't you get private insurance for gap coverage?

NovemberWhiskey 4y ago
This is known as "Massachusetts".
- O__________O 4y ago
  Specifically DIF: https://www.difxs.com/ https://www.difxs.com/ Though DIF has only $500 million in assets and only services member banks in US state of Massachusetts.
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alecco 4y ago

SVB executives knew exactly what they were doing. The Greg Becker of the article (SVB CEO & president) was in SF Fed board of directors until Friday [1] and successfully lobbied for lax rules for banks like SVB. The current risk officer worked at NY Fed [2] and at Fitch Ratings (!) and Deutsche Bank [7]. Previous risk officer was director of Freddie Mac [3]. Yellen was the 11th President of the SF Fed [5] and the current president is her protégé [6]. They knew exactly what they were doing. The Fed looked the other way. They sold a lot of stock in the past month [8]. They are very well connected into the Fed and Treasury. I doubt anybody will get any kind of serious legal troubles. [1] https://www.reuters.com/markets/us/ceo-failed-silicon-valley-bank-no-longer-director-sf-fed-2023-03-10/ https://www.reuters.com/markets/us/ceo-failed-silicon-valley... [2] https://www.svb.com/news/company-news/svb-hires-kim-olson-as-chief-risk-officer https://www.svb.com/news/company-news/svb-hires-kim-olson-as... [3] https://www.linkedin.com/in/laura-izurieta-1370144 https://www.linkedin.com/in/laura-izurieta-1370144 [4] https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/ https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris... [5] https://en.wikipedia.org/wiki/Janet_Yellen https://en.wikipedia.org/wiki/Janet_Yellen [6] https://en.wikipedia.org/wiki/Mary_C._Daly https://en.wikipedia.org/wiki/Mary_C._Daly [7] https://nypost.com/2023/03/13/silicon-valley-bank-execs-worked-at-lehman-brothers-deutsche-bank/ https://nypost.com/2023/03/13/silicon-valley-bank-execs-work... [8] https://twitter.com/unusual_whales/status/163455502148748083 https://twitter.com/unusual_whales/status/163455502148748083 And this is just scratching the surface.

alecco 4y ago

Silicon Valley Bank was giving executives easy 50 y mortgages for mansions and commercial real estate. This is the garbage now in SVB's balance sheet. It's not just 10y treasuries. Read the actual reports. In turn, VCs/founders/executives promoted SVB. And now they don't want to be their own counterparties on a bet gone wrong. https://twitter.com/one4thecashbag/status/1635337106376769538 https://twitter.com/one4thecashbag/status/163533710637676953...

macinjosh 4y ago

Why haven’t FDIC rates paved with inflation? $250k is not much for a business these days.

karsinkk 4y ago

Does anyone know of a way to check the amount of lending done through Bank Term Funding Programme so far?

black_13 4y ago

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mikewarot 4y ago

Minority?? Opinion follows: The rot is at the core, the Federal Reserve. My parents saved money in a savings account for their eventual retirement. It was a prudent and accepted way to do things. Over time, with Reagan and deregulation of everything that followed, their savings rate effectively dropped from 5-8% to zero. That income was expected to fund part of their retirement, and it was stolen from them in order to prop up wall-street. Those zero and near-zero rates distorted fiscal reality in the US and elsewhere they've effectively broken the system. At some point, we'll be bailing out whole countries to keep kicking the can down the road, and that's when things will be too big to save and we get to The Great Simplification. I only hope we've got alternatives to fossil fuels figured out at scale and somewhat in place, otherwise civilization could collapse in World Depression II.

CatWChainsaw 4y ago
Hate to break it to you!