7 ms·

Close to 190 banks could face Silicon Valley Bank's fate, according to new study

detourdog 4y ago
link to the study https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676
armada651 4y ago
> On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found. Which is something that normally doesn't happen, a bank simply can't function in an environment where such large bank runs are a common occurrence.
- detourdog 4y ago
  The SVB situation exposed such weird kink in the Fed's financial plan. The whole economy would be forced to contract to fill the gap between credit and deposits. I think the Federal Reserve is doing a good job. Wiping out the corporate books and trying to divide the assets among the depositors makes sense. I believe the Banking industry making up depositors shortfall makes sense. The Banking industry should be responsible for failures of their members. The federal reserve being the regulator with some sort of role.
- AnimalMuppet 4y ago
  Not so. There are over 4000 banks. If 186 would fail in that situation, that means that 95% of them would not fail in that situation. So most banks can function in that environment. (Unless the study just looked at 200 banks or something...)
  - detourdog 4y ago
    Yes, everything I have heard so far seems like they handled the situation well and everything seems to be working. I was impressed that the quickly analyzed the problem with 10 year bonds and set-up an appropriate system for the next bank. They did that over the weekend.
nerdjon 4y ago
What worries me, is articles like this could just cause it to happen. I mean under "normal" circumstances what is the real chance of half of their members pulling out all of their money. I feel like that happening on its own is a concerning issue. I know this is some new study but I would be very curious if this is really that much different from more normal times?
- sturza 4y ago
  Future decisions influencing the past?
- petercooper 4y ago
  What worries me, is articles like this could just cause it to happen. Same. Particularly concerning in the linked article is the suggestion that insured deposits could be at risk(!) Such a suggestion seems right up there with SNB's statement last week on Credit Suisse..
mikece 4y ago
And Janet Yellen, before Congress, will NOT commit to backing all account holders to 100% of their account balance unlike the FDIC did with SVB. Community banks are seeing a massive outflow of large accounts to banks which are considered to be "preferred" and will have all accounts fully protected which could cause a cascade of failures of community banks as their assets under management start to disappear.
- overthrow 4y ago
  > Community banks are seeing a massive outflow of large accounts to banks which are considered to be "preferred" I don't doubt this, but do you have a source? I'd love to know the actual numbers behind this.
- armada651 4y ago
  The result of this is going to be everyone putting their funds into "too-big-to-fail" banks and we'll see the largest consolidation of banks in recent history. Which means a few institutions will have all the negotiating power to screw over depositors as much as they'd like. This is all just a big self-inflicted wound, wealthy depositors are cutting off the arm to try and save the hand.
retrocryptid 4y ago
If only there had been legislation preventing financial institutions from engaging in high-risk investment and lower risk deposit operations at the same time.
- blibble 4y ago
  SVB bought the most boring assets possible which is what caused the problem
  - lotsofpulp 4y ago
    Shorter term treasuries would have been more boring.
  - ElevenLathe 4y ago
    I'm not an expert or a bank examiner but have read a number of explanations for SVB over the past week or so. All of them seem to paint the same picture of SVB owning a lot of "safe" but long-dated government bonds, with the long-datedness actually being pretty risky because it exposed them to risk of interest rates rising suddenly, which then happened. Is there some nuance I'm missing where the "safeness" of the bonds caused the problem rather than the "long-datedness?"
    - eloff 4y ago
      No, it was the long dated part that was the issue. It magnifies the losses when interest rates go up.
      - retrocryptid 4y ago
        I think they bought the "boring" investments as a risk hedge against the corporate paper they were buying. If they weren't so heavy in channeling cheap QE-esqe fed cash to small caps that were selling paper to buy back stock, the down-side of mid-term fed notes wouldn't have been as large a percentage of their risk budget. Other institutions bought the exact same fed securities and are not going insolvent. Either that means they have better risk management strategies or the corporate paper bubble hasn't caught up with them yet. I've been hearing about a corporate paper bubble for at least a decade, yet it never seems to pop. What do you call a bubble that doesn't pop?
bell-cot 4y ago
No mention of the years-long (and finally "successful") lobbying effort by big banks, to get Congress to let them do far riskier stuff. No mention of SVB's high-risk bets that the shape of the (interest) rate curve wouldn't change much. No mention of the American financial sector's long, long history of suffering big losses, after high-risk bets on that curve's shape went sour. And (sadly, once again) there seem to be no chance of those responsible facing any serious consequences.
- gruez 4y ago
  >No mention of the American financial sector's long, long history of suffering big losses, after high-risk bets on that curve's shape went sour. Can you provide some examples? For instance, the GFC was caused by bad loans, not interest rate risk.
  - Asparagirl 4y ago
    The Savings and Loan crisis of the early 1980s was kicked off by rising interest rates that simultaneously made the assets (mainly mortgages) they already held not as profitable and also made their depositors want to pull their money to get a better rate on their savings accounts. This also led to some of the S&L’s betting more on riskier loans and assets, hoping to make it all back later. https://www.federalreservehistory.org/essays/savings-and-loan-crisis https://www.federalreservehistory.org/essays/savings-and-loa...
- detourdog 4y ago
  I think the Banking industry should bear the responsibility for the shortfall in depositors funds. I think they should be free to figure out among themselves and when things go so wrong that the Banking industry can't figure out we need Congress to regulate. I have no problem looser regulation but I believe it comes with greater responsibility.
  - MrMan 4y ago
    [dead]
dathinab 4y ago
> even if only half of their depositors withdraw their funds yes, obvious consider which business wouldn't be at risk of closing down when half of their customers run away _at nearly the same time_. similar consider which liquidity focused/dominated business would be at risk of they randomly lose half their liquidity the only reason why it's "only" nearly 180 banks is because many banks are as much or more focused on "other" money business then things like deposits (e.g. land)
- detourdog 4y ago
  We have a local community bank. The bank served the needs of a single small New England town and small liberal arts college. Starting with 80's and 90's the banking deregulation caused the bank to start working the college's endowment to the point where the Financial Services part of the bank felt compelled to buy the banking services arm. Needless to say banking services became unusable. The best example is an 8 year old child had their birthday account become a deficit for not maintaining a minimum balance. Plenty of tears were shed as the mother tried to explain to child the bank didn't take all your money...
  - timcavel 4y ago
    [dead]
- coliveira 4y ago
  For banks, this scenario is much more probable than you think. The US treasuries is paying much more than banks can pay, so people just need to move their bank balances to treasury bonds and their deposits will go puff!
  - xiphias2 4y ago
    This is the point when banks are starting offering higher rates themselves to depositors.
    - nathanaldensr 4y ago
pjc50 4y ago
People are very disappointed that they didn't get some depositors blown up in a bank run and are now going to push for it again, huh. On the other hand, FDIC covers something like 4,000 banks, and I think it might be time for a little consolidation in the US market.
gtirloni 4y ago
Short sellers pushing their agenda in the media?
- newaccount2023 4y ago
  Not just shorts Other than the "run" scenario (which has existed since the days of Venetian banking), there is no material evidence of a special risk that has emerged in the last two weeks. Look at how SCHW was driven down 20% for nothing...talk about easy money...thank you for selling me SCHW at a 20% discount Now its FRC...please show me tangible material evidence that it is going to collapse This feels like a contrived sell off to give some traders a new entrypoint
jmyeet 4y ago
Let's not forget that SVB was solvent at the time of its collapse. That may sound like a contradiction but it isn't. SVB had more assets than liabilities. On the Friday 25% of deposits were withdrawn. There is literally no bank that could sustain that. I'm fine with the solution too: the FDIC seizes the banks and sells it for parts. Great. This isn't 2008. Interestingly the risks posed to these banks may be the one thing that calls off the Fed from further raising interest rates. Maybe then we can get to the actual good solution to inflation: taxation. Specifically of windfall corporate profits. But probably not.
- shawabawa3 4y ago
  I don't think we know yet if SVG was solvent until FDIC realises the sales on their assets. I don't think FDIC would have seized it if there was 0% chance it was insolvent In fact, i think it's clear creditors and shareholds are going to be wiped out, so that means they _were_ insolvent, even if their assets are able to cover their deposits (deposits are not their only liabilities) Also I hope you aren't using the definition of solvency that ignores the time value of money, because that's nonsense
  - jmyeet 4y ago
    I mean solvent as having a positive book value based on the market value of their assets. The government requires banks to maintain various ratios. A certain percentage in liquid assets to cover withdrawls, etc. The big problem was in 1 day 25% of their deposits were withdrawn. Literally no bank can sustain that, from JP Morgan down to your local community bank. The Feds seized SVB because it fell out of compliance with its required ratios but it still had a positive book value for the assets it had.
- Rapzid 4y ago
  Seems like the system working well to me; government moved swiftly and is protecting depositors. Not sure if we need more regulations or we don't. It's a balancing act because we want a certain amount of risk taking along with security and public confidence. I am sure though that there seems to be a concerted effort through rhetoric to convince people a "bail out" is occuring and "rules are being broken"(re 250k deposit insurance) and this seems to be working it's magic.
coliveira 4y ago
This is just the expected outcome of too-big-to-fail banks. The small and medium size banks cannot compete with the big ones, and in stress situations people will run from these smaller banks.
- detourdog 4y ago
  If banks want to be too big to fail that have to prove by not hurting depositors. I think the corporate assets of banks and the banking industry as whole should be fungible that depositors can always be made whole on cash accounts. This may help contain a bank run.
rqtwteye 4y ago
I don’t understand how we keep allowing this industry having such a huge impact on people’s lives. They makes tons of money when things are good and when they blow up, the whole economic policy needs to be adjusted for years and decades to come as we have seen after 2008. The idea of a “financial system” should be rethought so there is a stable banking system that actually serves the economy instead of dominating it. Let the gamblers blow themselves up but they need to be contained. It’s really insane what is going on.
- nine_zeros 4y ago
  I agree. I don't understand why the entire population of the world should be a slave to a clearly broken fractional reserve system. What is stopping someone from creating banks that take ZERO risk but just let people park money for a fee?
  - lotsofpulp 4y ago
    Because bank operations cost money, and given that the federal government guarantees deposits of $250k per bank per account holder, it makes no sense to patronize a bank that will charge depositors to use the bank, plus offer less interest compared to a bank that offers free services and more interest.
  - temptemptemp111 4y ago
    [dead]
  - armada651 4y ago
    There's nothing stopping anyone from creating such a bank, but in economic times with high interest no one would put their money into a bank that doesn't pay interest as they would have no hope of keeping pace with inflation. Also, if every bank operated in this way then no one would be able to get a loan and debt drives the modern economic systems. Meaning no one would be able to make investments based on debt anymore, at least not with a loan from a bank.
  - cykros 4y ago
    Banks can hardly get people to park their money in them right now because of the fact that they don't pay ENOUGH interest -- everyone's been pulling money out to jump into money market mutual funds with their liquid cash, or short term fixed income products where they can afford to tie it up for a few months. I suspect the short answer is "lack of demand."
DueDilligence 4y ago
[dead]
deleted 4y ago
[deleted]

link to the study https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676

armada651 4y ago

> On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found. Which is something that normally doesn't happen, a bank simply can't function in an environment where such large bank runs are a common occurrence.

detourdog 4y ago
The SVB situation exposed such weird kink in the Fed's financial plan. The whole economy would be forced to contract to fill the gap between credit and deposits. I think the Federal Reserve is doing a good job. Wiping out the corporate books and trying to divide the assets among the depositors makes sense. I believe the Banking industry making up depositors shortfall makes sense. The Banking industry should be responsible for failures of their members. The federal reserve being the regulator with some sort of role.
AnimalMuppet 4y ago
Not so. There are over 4000 banks. If 186 would fail in that situation, that means that 95% of them would not fail in that situation. So most banks can function in that environment. (Unless the study just looked at 200 banks or something...)
- detourdog 4y ago
  Yes, everything I have heard so far seems like they handled the situation well and everything seems to be working. I was impressed that the quickly analyzed the problem with 10 year bonds and set-up an appropriate system for the next bank. They did that over the weekend.

nerdjon 4y ago

What worries me, is articles like this could just cause it to happen. I mean under "normal" circumstances what is the real chance of half of their members pulling out all of their money. I feel like that happening on its own is a concerning issue. I know this is some new study but I would be very curious if this is really that much different from more normal times?

sturza 4y ago
Future decisions influencing the past?
petercooper 4y ago
What worries me, is articles like this could just cause it to happen. Same. Particularly concerning in the linked article is the suggestion that insured deposits could be at risk(!) Such a suggestion seems right up there with SNB's statement last week on Credit Suisse..

mikece 4y ago

And Janet Yellen, before Congress, will NOT commit to backing all account holders to 100% of their account balance unlike the FDIC did with SVB. Community banks are seeing a massive outflow of large accounts to banks which are considered to be "preferred" and will have all accounts fully protected which could cause a cascade of failures of community banks as their assets under management start to disappear.

overthrow 4y ago
> Community banks are seeing a massive outflow of large accounts to banks which are considered to be "preferred" I don't doubt this, but do you have a source? I'd love to know the actual numbers behind this.
armada651 4y ago
The result of this is going to be everyone putting their funds into "too-big-to-fail" banks and we'll see the largest consolidation of banks in recent history. Which means a few institutions will have all the negotiating power to screw over depositors as much as they'd like. This is all just a big self-inflicted wound, wealthy depositors are cutting off the arm to try and save the hand.

retrocryptid 4y ago

If only there had been legislation preventing financial institutions from engaging in high-risk investment and lower risk deposit operations at the same time.

blibble 4y ago
SVB bought the most boring assets possible which is what caused the problem
- lotsofpulp 4y ago
  Shorter term treasuries would have been more boring.
- ElevenLathe 4y ago
  I'm not an expert or a bank examiner but have read a number of explanations for SVB over the past week or so. All of them seem to paint the same picture of SVB owning a lot of "safe" but long-dated government bonds, with the long-datedness actually being pretty risky because it exposed them to risk of interest rates rising suddenly, which then happened. Is there some nuance I'm missing where the "safeness" of the bonds caused the problem rather than the "long-datedness?"
  - eloff 4y ago
    No, it was the long dated part that was the issue. It magnifies the losses when interest rates go up.
    - retrocryptid 4y ago
      I think they bought the "boring" investments as a risk hedge against the corporate paper they were buying. If they weren't so heavy in channeling cheap QE-esqe fed cash to small caps that were selling paper to buy back stock, the down-side of mid-term fed notes wouldn't have been as large a percentage of their risk budget. Other institutions bought the exact same fed securities and are not going insolvent. Either that means they have better risk management strategies or the corporate paper bubble hasn't caught up with them yet. I've been hearing about a corporate paper bubble for at least a decade, yet it never seems to pop. What do you call a bubble that doesn't pop?

bell-cot 4y ago

No mention of the years-long (and finally "successful") lobbying effort by big banks, to get Congress to let them do far riskier stuff. No mention of SVB's high-risk bets that the shape of the (interest) rate curve wouldn't change much. No mention of the American financial sector's long, long history of suffering big losses, after high-risk bets on that curve's shape went sour. And (sadly, once again) there seem to be no chance of those responsible facing any serious consequences.

gruez 4y ago
>No mention of the American financial sector's long, long history of suffering big losses, after high-risk bets on that curve's shape went sour. Can you provide some examples? For instance, the GFC was caused by bad loans, not interest rate risk.
- Asparagirl 4y ago
  The Savings and Loan crisis of the early 1980s was kicked off by rising interest rates that simultaneously made the assets (mainly mortgages) they already held not as profitable and also made their depositors want to pull their money to get a better rate on their savings accounts. This also led to some of the S&L’s betting more on riskier loans and assets, hoping to make it all back later. https://www.federalreservehistory.org/essays/savings-and-loan-crisis https://www.federalreservehistory.org/essays/savings-and-loa...
detourdog 4y ago
I think the Banking industry should bear the responsibility for the shortfall in depositors funds. I think they should be free to figure out among themselves and when things go so wrong that the Banking industry can't figure out we need Congress to regulate. I have no problem looser regulation but I believe it comes with greater responsibility.
- MrMan 4y ago
  [dead]

dathinab 4y ago

> even if only half of their depositors withdraw their funds yes, obvious consider which business wouldn't be at risk of closing down when half of their customers run away _at nearly the same time_. similar consider which liquidity focused/dominated business would be at risk of they randomly lose half their liquidity the only reason why it's "only" nearly 180 banks is because many banks are as much or more focused on "other" money business then things like deposits (e.g. land)

detourdog 4y ago
We have a local community bank. The bank served the needs of a single small New England town and small liberal arts college. Starting with 80's and 90's the banking deregulation caused the bank to start working the college's endowment to the point where the Financial Services part of the bank felt compelled to buy the banking services arm. Needless to say banking services became unusable. The best example is an 8 year old child had their birthday account become a deficit for not maintaining a minimum balance. Plenty of tears were shed as the mother tried to explain to child the bank didn't take all your money...
- timcavel 4y ago
  [dead]
coliveira 4y ago
For banks, this scenario is much more probable than you think. The US treasuries is paying much more than banks can pay, so people just need to move their bank balances to treasury bonds and their deposits will go puff!
- xiphias2 4y ago
  This is the point when banks are starting offering higher rates themselves to depositors.
  - nathanaldensr 4y ago

pjc50 4y ago

People are very disappointed that they didn't get some depositors blown up in a bank run and are now going to push for it again, huh. On the other hand, FDIC covers something like 4,000 banks, and I think it might be time for a little consolidation in the US market.

gtirloni 4y ago

Short sellers pushing their agenda in the media?

newaccount2023 4y ago
Not just shorts Other than the "run" scenario (which has existed since the days of Venetian banking), there is no material evidence of a special risk that has emerged in the last two weeks. Look at how SCHW was driven down 20% for nothing...talk about easy money...thank you for selling me SCHW at a 20% discount Now its FRC...please show me tangible material evidence that it is going to collapse This feels like a contrived sell off to give some traders a new entrypoint

jmyeet 4y ago

Let's not forget that SVB was solvent at the time of its collapse. That may sound like a contradiction but it isn't. SVB had more assets than liabilities. On the Friday 25% of deposits were withdrawn. There is literally no bank that could sustain that. I'm fine with the solution too: the FDIC seizes the banks and sells it for parts. Great. This isn't 2008. Interestingly the risks posed to these banks may be the one thing that calls off the Fed from further raising interest rates. Maybe then we can get to the actual good solution to inflation: taxation. Specifically of windfall corporate profits. But probably not.

shawabawa3 4y ago
I don't think we know yet if SVG was solvent until FDIC realises the sales on their assets. I don't think FDIC would have seized it if there was 0% chance it was insolvent In fact, i think it's clear creditors and shareholds are going to be wiped out, so that means they _were_ insolvent, even if their assets are able to cover their deposits (deposits are not their only liabilities) Also I hope you aren't using the definition of solvency that ignores the time value of money, because that's nonsense
- jmyeet 4y ago
  I mean solvent as having a positive book value based on the market value of their assets. The government requires banks to maintain various ratios. A certain percentage in liquid assets to cover withdrawls, etc. The big problem was in 1 day 25% of their deposits were withdrawn. Literally no bank can sustain that, from JP Morgan down to your local community bank. The Feds seized SVB because it fell out of compliance with its required ratios but it still had a positive book value for the assets it had.
Rapzid 4y ago
Seems like the system working well to me; government moved swiftly and is protecting depositors. Not sure if we need more regulations or we don't. It's a balancing act because we want a certain amount of risk taking along with security and public confidence. I am sure though that there seems to be a concerted effort through rhetoric to convince people a "bail out" is occuring and "rules are being broken"(re 250k deposit insurance) and this seems to be working it's magic.

coliveira 4y ago

This is just the expected outcome of too-big-to-fail banks. The small and medium size banks cannot compete with the big ones, and in stress situations people will run from these smaller banks.

detourdog 4y ago
If banks want to be too big to fail that have to prove by not hurting depositors. I think the corporate assets of banks and the banking industry as whole should be fungible that depositors can always be made whole on cash accounts. This may help contain a bank run.

rqtwteye 4y ago

I don’t understand how we keep allowing this industry having such a huge impact on people’s lives. They makes tons of money when things are good and when they blow up, the whole economic policy needs to be adjusted for years and decades to come as we have seen after 2008. The idea of a “financial system” should be rethought so there is a stable banking system that actually serves the economy instead of dominating it. Let the gamblers blow themselves up but they need to be contained. It’s really insane what is going on.

nine_zeros 4y ago
I agree. I don't understand why the entire population of the world should be a slave to a clearly broken fractional reserve system. What is stopping someone from creating banks that take ZERO risk but just let people park money for a fee?
- lotsofpulp 4y ago
  Because bank operations cost money, and given that the federal government guarantees deposits of $250k per bank per account holder, it makes no sense to patronize a bank that will charge depositors to use the bank, plus offer less interest compared to a bank that offers free services and more interest.
- temptemptemp111 4y ago
  [dead]
- armada651 4y ago
  There's nothing stopping anyone from creating such a bank, but in economic times with high interest no one would put their money into a bank that doesn't pay interest as they would have no hope of keeping pace with inflation. Also, if every bank operated in this way then no one would be able to get a loan and debt drives the modern economic systems. Meaning no one would be able to make investments based on debt anymore, at least not with a loan from a bank.
- cykros 4y ago
  Banks can hardly get people to park their money in them right now because of the fact that they don't pay ENOUGH interest -- everyone's been pulling money out to jump into money market mutual funds with their liquid cash, or short term fixed income products where they can afford to tie it up for a few months. I suspect the short answer is "lack of demand."

DueDilligence 4y ago

[dead]

deleted 4y ago

[deleted]