8 ms·

How the last-ditch effort to save Silicon Valley Bank failed

109 points by marban 4y ago

dang 4y ago
Related: Matt Levine: Silicon Valley Bank Ran Out of Money - https://news.ycombinator.com/item?id=35265027 https://news.ycombinator.com/item?id=35265027
krmbzds 4y ago
https://archive.is/Pn6Ky https://archive.is/Pn6Ky
hackly 4y ago
My bank (in Canada) has limits on how much I can withdraw per day, per week, per month. Furthermore, there could be a delay of up to 5 business days before I can get the money to its destination. And that’s for money in the thousands only. How is that money in the billions can be withdrawn so quickly esp. since these were high value accounts each in the millions/billions? Couldn’t they just use one of their terms or conditions to delay the withdrawals and give themselves ample time to react?
- computerex 4y ago
  I don't think it would have meaningfully helped. Once the word was out that the bank was in distress it was game over. Company I work for also pulled out.
- bitdivision 4y ago
  I doubt those limits would apply to business accounts, which I'd guess were the majority of the withdrawals here. Are you sure the limits on your account would apply to e.g. a wire transaction? Of course there are limits on ATM withdrawals and some other transfer methods, but I'm not sure they'd apply if you wanted to send a wire.
  - chii 4y ago
    > I'm not sure they'd apply if you wanted to send a wire. Not many people (at least, people who don't deal with large sums) have experience with doing a wire transfer. Sometimes they're a bitch to deal with - but it's what you'd use if you are doing very large sums (like, in the order of 6 or 7 figures or more).
    - inglor_cz 4y ago
      Interesting. Where? In most of Europe, wire transfers are really easy to do, and where I live, most banks now support instant wire transfers (10 seconds) under some limit (in my case, 15 000 Eur). Doing them using QR codes and smart banking apps is really straightforward and user-friendly, so people do them routinely even for small sums.
      - chii 4y ago
        > support instant wire transfers that's not the wire transfer i am referring to - it's the one where you'd use a SWIFT code to designate the bank.
        inglor_cz 4y ago
        This is something that probably differs in EU and the US. Between EU countries, you need SWIFT, but within a single country, you usually don't (I think the exception is Poland, where SWIFT is the default...?).
- ars 4y ago
  That's very odd. I don't know if it's your bank, or something specific to Canada. In the US the only limits are via the ATM or Debit card. If you write a check, go in person, or send a wire, you can withdraw as much as you want, with no time delay or restriction. > Couldn’t they just use one of their terms or conditions to delay the withdrawals and give themselves ample time to react? That's simply not a thing.
  - pavon 4y ago
    Every bank I have used in the US has limits and time delays for ACH transfers. While you can take out more with a check, practically speaking those take longer to process than an ACH transfer. And you already mentioned the limits with Debit and ATM. So all the methods that average consumers use to interact with their banks have limits and/or delays, and they may not be aware of other options.
    - nullc 4y ago
      The bank will happily tell you that wire transfers have no limits or delays.
      - notch898a 4y ago
        Yes my bank says that, but as soon as I actually do it they suddenly have to "do KYC" aka hold it up for days and give me lots of bullshit reasons why an already thoroughly KYC'd account needs to wait for a wire because reasons. Meanwhile not only can you not access the money in either of your accounts, the bank is drawing sweet sweet overnight IORB interest on it.
        adaml_623 4y ago
        Why are you still banking with them?
        notch898a 4y ago
        Honestly I just thought that was the way banking was done. I don't send a lot of wires (and everybody else I have dealt with were even worse).
- ozi 4y ago
  No business is going to park their working capital with a bank that has those requirements.
  - fsckboy 4y ago
    no bank is going to give carte blanche to large customers to run the bank, they can't, and even if they promise it... As with all businesses, like a restaurant wants you to enjoy your food so you come back, the bank wants to provide the services the customers need. But everybody can't have everything especially all at once, and banks can't provide liquidity that has dried up. sure, customers will periodically get mad and take their business elsewhere, but it's a fever dream to think that elsewhere is any different.
    - quesera 4y ago
      > no bank is going to give carte blanche to large customers to run the bank If the funds are in a DDA (Demand Deposit Account a/k/a standard US checking account), the bank is legally obligated to honor outflow transfers of any size, at any time. (Not physical cash withdrawals, although they have to make timely arrangements to satisfy these too) Banks can make DDAs unattractive for large balances (e.g. no interest), but I'm not aware of any limitation on a customer's right to access their funds held in a DDA. If banks could bend these rules, bank runs would never happen.
      - fsckboy 4y ago
        > the bank is legally obligated to honor outflow transfers of any size, at any time they should have legally obligated SVB to remain solvent!
        quesera 4y ago
        > they should have legally obligated SVB to remain solvent! They did! When SVB failed to meet those regulatory obligations, the bank was seized and the depositors were made whole. So the system worked, right?
- tacostakohashi 4y ago
  Does it, in fact, not permit you to get to the entire balance immediately via, say, cash or a bank check? It sounds like you are referring to something like an ATM withdrawal limit or online transfer limit which is just a risk / fraud limiting measure for those particular channels rather than a limitation on the account itself.
  - timcederman 4y ago
    Live Oak Bank limits business account withdrawals to $250k/day.
    - lazide 4y ago
      That’s a policy thing to limit capital outflows, not a technical limitation.
      - fsckboy 4y ago
        but that's exactly what we're talking about
    - shalmanese 4y ago
      If you have a business which pays fortnightly and the average employee makes $250K, then just payroll for 26 employees will reach your limit.
      - nulbyte 4y ago
        You don't need currency to facilitate payroll; it's a series of transfers, not withdrawals. And the recipients don't usually need that much currency either, even if they do bank at the same place.
- yardie 4y ago
  Is that for a debit card? I understand the liability in draining a checking account with nothing more than a 4-digit PIN. On the other hand, I would never bank at a place that made withdrawal restrictions a condition to access my money.
- loopdoend 4y ago
  This does not reflect the reality of business bank accounts in Canada. When you have treasury access you can wire as much money as you want practically instantly just like with SVB. I bank with one of the big 5. Nothing is stopping you from going into your bank and wiring money away it's just cash that they don't want to give out without multi-day delays.
  - appleiigs 4y ago
    Even in Canadian personal account you can wire as much as you want out - same day value to the destination. Only limitation is if you want it in cash because they'll have to get the paper bills delivered since the branch only holds so much paper bills.
- ant6n 4y ago
  How would you pay for a house? Or a car?
  - PakG1 4y ago
    I presume a withdrawal is different from a wire transfer or cheque.
- aeyes 4y ago
  I'm not sure about the specifics but we had an account at SVB and weren't able to get it all out because of such limitations. I don't know exactly how the limits work because we definitely did ACH transfers in the millions before. Also, it's not a cash withdrawal. We just wired the money to other accounts. Cash would require tons of paperwork.
- trhr 4y ago
  You're confusing real money with fake money. In America, we can only withdraw so much real money every day, too. The banks will tell you things like "We only keep $2000 in real money in the safe." But the fake money never gets printed. It just lives in bits and bytes. You can move it around as much as you want. Fortunately, it's as good as real money. It's just not as good as real wealth. Real wealth is in ammunition. Never goes down in price, skyrockets in price when the world gets more dangerous, and can be used to protect itself. That's where America has you beat, because we can turn fake money into ammunition whenever we want, as fast as we want. Not to mention, it's a consumable resource that keeps well in storage but requires a high level of technology to produce. And even under non-apocalyptic conditions, it's about half as efficient as silver coins by weight and volume. People downvoting this are politically opposed to guns because that's the fashionable thing to be in SV, but hackers have a strong gun culture. Always have, always will. Because we're practically all either anarchists or military.
  - anonymouskimmer 4y ago
    > People downvoting this are politically opposed to guns Are you sure they're not downvoting you for being completely off topic while ranting about a hobbyhorse?
    - trhr 4y ago
      They could be. It's highly possible a bunch of engineers watched their backyard bank collapse and thought, "this is fine, I'm not worried, I'm a millionaire" when they don't even own a fuckin' home.
- deleted 4y ago
  [deleted]
- 8ytecoder 4y ago
  Demand Deposit Accounts also allow you to withdraw without any advance notice. Most companies will have one. They wouldn’t want to sit around and wait for a banker to pay their suppliers or make payroll. Usually, most operational expenses like that are integrated into whatever systems they use and money moves where they want it to.
- exhibitapp 4y ago
  My business has 8 figures in the large canadian banks. I have had no problem sending all of it from institution to institution in single wires. Businesses can definitely move money at once. The banks have corporate customers sign a number of complicated forms to put limits on things like who can wire, who can sign, who can weite cheques etc. There are further controls in the online corporate banking
mjs33 4y ago
[dead]
fsckboy 4y ago
there was an interesting interview on Kudlow the other day (which I guess was a WSJ piece also? https://www.youtube.com/watch?v=D2OELV5vVZU https://www.youtube.com/watch?v=D2OELV5vVZU ) about "how it happened" at SVB. I don't know if "the experts" all agree with "this expert" but he pointed out that in buying all the mortgage backed securities, SVB got to put them in a "hold to maturity" account that is not "marked to market" (the value in the account does not match their decreased market value, so on the books it looks like a lot of value in there, but in reality it's not) at the same time, as the coupons on these bonds pay out and the bank collects them, that money just shows up on the bank's income statement, not landing in the hold to maturity account itself as part of the value of the asset. This rings all the "hey, look we are profitable" and "hey don't I get a bonus" bells, twisting incentives for the bank and its officers (and other banks) to keep do this, lather rinse repeat. recipe for disaster when interest rates go up.
- appleiigs 4y ago
  They're conflating 2 issues. The first issue is liquidity management. The second is accounting. If the accounting auditors are doing their job then the bank managers don't get to cook the books. The accounting rules are set by the accounting industry. If the financial statements don't reflect what's happening, it's the accountants fault. So, it's incorrect to imply that bankers are doing something nefarious. At this point no one has suggested an Enron or FTX type scandal. What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling.
  - fsckboy 4y ago
    > What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling. no, what's more likely (if what has been said between the two of us comports with reality) is that the incentives for the officers of the bank are in conflict with the healthy management of the bank. Bankers running a bank into the ground cannot be blamed on regulators or the accounting profession which only "review" what has happened, they never have their fingers on the levers (although additional accounting and banking regulations may be required to avoid this type of problem in the future)
ouid 4y ago
Without reading the article, I can give you the answer immediately. SVB failed because they were bankrupt. This is what it is called when your liabilities are in excess of your assets.
- hackernewds 4y ago
  They were not insolvent. They had a liquidity crisis. This has been stated hundreds of times in depth now.
  - tripletao 4y ago
    They were mark-to-market insolvent, and those marks look economically rational--they agree with a simple NPV calculation, and there was no indication that the markets were disorderly. The marks were just lower than the SVB's management wished. For regulatory purposes, the SVB was permitted to ignore those losses in bonds that it intended to hold to maturity. Accounting doesn't change reality, though. If the SVB's assets are actually worth more than their liabilities to depositors in any economically meaningful sense, then why do you think the FDIC was unable to find a buyer?
ilyt 4y ago
Oh thank <deity> they didn't manage to do it on time, else that shitshow might've not happened. Banking evidently needs to learn some more hard lessons and this fall is a good one.
bunabhucan 4y ago
"It was a dark and stormy night when the regulators showed up at the {$RecentlyFailedFinancialInstitution} and greeted the ashen faced C suite" is a genre the journal excels at. It's like scary campfire stories for CEOs.
- deleted 4y ago
  [deleted]
- khochesh_kushat 4y ago
  To be fair, it's a good genre. Books like Barbarians at the Gate, The Big Short, Smartest Guys in the Room are all wonderful, and I'm sure some of the journalists started writing after reading them.
stephen_g 4y ago
I don't think it would have mattered. A loan wouldn't have helped their situation much - the extra liquidity might have kicked the can down the road a few days or weeks, but they still would have been basically insolvent. Probably only a big capital injection and the interest rate quickly dropping by a significant amount would have saved them (or being bought by a bigger bank that could absorb the losses and hold the long-term bonds to maturity).
- chmod600 4y ago
  How does holding the bonds to maturity help? Sure, interest rates might go down, but the expectations are already factored into the market price. If they go down more than expected, the bigger bank wins. If they go down less than expected, the bigger bank loses. Overall, should be neutral.
  - anonymouskimmer 4y ago
    My guess is that bond prices drop because there are better yielding things to buy instead. But for a bank the solvency concern is not that the yield will be "better" yielding, but merely sufficient to cover the obligations it owes along with its operating expenses. Having to fire sale bonds (to meet withdrawal obligations) that are selling at a discount because any potential buyers have better yielding instruments to buy results in solvency concerns from the relative excess losses. As long as the bonds yield more at maturity than you paid for them (along with the cost of the money you used to pay for them, which is very cheap for most large banks), then holding them to maturity is guaranteed to pay off. Whereas we have no idea how cheap they could ultimately become on the spot market at any given time that the owner may need to fire sale them.
    - tripletao 4y ago
      > (along with the cost of the money you used to pay for them, which is very cheap for most large banks) Why should depositors leave more money than they need for short-term working capital in the SVB at 0% when a Treasury bill pays 4% with less risk? When all rates were roughly zero, it was easy to just lazily leave everything in the bank; but when rates increased, the reward for leaving and the risk of staying (because the bank is now mark-to-market insolvent, and thus particularly vulnerable to a run) both increased. When interest rates increased, the NPV of the SVB's assets decreased. Someone had to take that loss. Their managers and shareholders presumably hoped that would be the depositors, by leaving their money in a risky bank earning interest below the risk-free rate, slowly accepting the loss over time. The depositors had no economic incentive to do that though, and they didn't. For emphasis, the SVB's problem isn't that their bonds are trading at irrationally low prices due to liquidity problems (i.e., a "fire sale"). The market price for their bonds has behaved exactly like a textbook NPV model, and similar assets trade with normal tight spreads; the price is just lower than they wanted. Hold-to-maturity accounting allowed them to ignore that for regulatory purposes, but accounting doesn't change reality.
yieldcrv 4y ago
That’s such an embarrassing indictment of the US payment system. Banking on the West Coast is hard, even harder in further flung areas like Hawaii. The banks open in normal business hours but cant get a single thing done if its after 4pm in New York City. So the further west you go, the fewer amount of hours you have to get anything moved.
- hackernewds 4y ago
  Not to mention, ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii. Despite all the travelers there that could need cash and services. Often, overregulation by Hawaiian authorities is cited which is a just criticism. So it is for crypto as well, nonzero but very limited
  - thakoppno 4y ago
    > ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii That is truly fascinating and something I hadn’t noticed when visiting. I wonder what implications this has for capital intensive construction projects there. Presumably the builders still finance through major institutions but need to pay out all local labor via bank accounts from institutions on the island? So the local authorities have essentially taxed banking generally?
    - yieldcrv 4y ago
      You can walk into any bank there, sign up with your drivers license, and wire money from your other bank same day. I needed a deposit for a sublet there, and needed lots of cash for that. So when it posted the next business day, I walked to the teller and asked for cash. It wasn’t a problem except for everyone else that didn't imagine and was trying to use fintech apps and learned about arbitrary transaction amount limits.
Seanambers 4y ago
So a bank is in distress, it has collateral, but the FED - THE lender of last resort - chooses to fkem basically. "The Fed needed a test trade to be run before the actual transfer could occur. That took time and the Fed didn’t extend its own daily deadline of 4 p.m. PT for collateral transfers to help SVB. Time ran out on the bankers and SVB couldn’t get the money that day." Though, maybe they should never been in that situation to begin with.
- hackernewds 4y ago
  The kicker is in the last line. The FDIC took over as the bank was conducting itself rashly given its distress.

109 points by marban 4y ago

dang 4y ago

Related: Matt Levine: Silicon Valley Bank Ran Out of Money - https://news.ycombinator.com/item?id=35265027 https://news.ycombinator.com/item?id=35265027

krmbzds 4y ago

https://archive.is/Pn6Ky https://archive.is/Pn6Ky

hackly 4y ago

My bank (in Canada) has limits on how much I can withdraw per day, per week, per month. Furthermore, there could be a delay of up to 5 business days before I can get the money to its destination. And that’s for money in the thousands only. How is that money in the billions can be withdrawn so quickly esp. since these were high value accounts each in the millions/billions? Couldn’t they just use one of their terms or conditions to delay the withdrawals and give themselves ample time to react?

computerex 4y ago
I don't think it would have meaningfully helped. Once the word was out that the bank was in distress it was game over. Company I work for also pulled out.
bitdivision 4y ago
I doubt those limits would apply to business accounts, which I'd guess were the majority of the withdrawals here. Are you sure the limits on your account would apply to e.g. a wire transaction? Of course there are limits on ATM withdrawals and some other transfer methods, but I'm not sure they'd apply if you wanted to send a wire.
- chii 4y ago
  > I'm not sure they'd apply if you wanted to send a wire. Not many people (at least, people who don't deal with large sums) have experience with doing a wire transfer. Sometimes they're a bitch to deal with - but it's what you'd use if you are doing very large sums (like, in the order of 6 or 7 figures or more).
  - inglor_cz 4y ago
    Interesting. Where? In most of Europe, wire transfers are really easy to do, and where I live, most banks now support instant wire transfers (10 seconds) under some limit (in my case, 15 000 Eur). Doing them using QR codes and smart banking apps is really straightforward and user-friendly, so people do them routinely even for small sums.
    - chii 4y ago
      > support instant wire transfers that's not the wire transfer i am referring to - it's the one where you'd use a SWIFT code to designate the bank.
      - inglor_cz 4y ago
        This is something that probably differs in EU and the US. Between EU countries, you need SWIFT, but within a single country, you usually don't (I think the exception is Poland, where SWIFT is the default...?).
ars 4y ago
That's very odd. I don't know if it's your bank, or something specific to Canada. In the US the only limits are via the ATM or Debit card. If you write a check, go in person, or send a wire, you can withdraw as much as you want, with no time delay or restriction. > Couldn’t they just use one of their terms or conditions to delay the withdrawals and give themselves ample time to react? That's simply not a thing.
- pavon 4y ago
  Every bank I have used in the US has limits and time delays for ACH transfers. While you can take out more with a check, practically speaking those take longer to process than an ACH transfer. And you already mentioned the limits with Debit and ATM. So all the methods that average consumers use to interact with their banks have limits and/or delays, and they may not be aware of other options.
  - nullc 4y ago
    The bank will happily tell you that wire transfers have no limits or delays.
    - notch898a 4y ago
      Yes my bank says that, but as soon as I actually do it they suddenly have to "do KYC" aka hold it up for days and give me lots of bullshit reasons why an already thoroughly KYC'd account needs to wait for a wire because reasons. Meanwhile not only can you not access the money in either of your accounts, the bank is drawing sweet sweet overnight IORB interest on it.
      - adaml_623 4y ago
        Why are you still banking with them?
        notch898a 4y ago
        Honestly I just thought that was the way banking was done. I don't send a lot of wires (and everybody else I have dealt with were even worse).
ozi 4y ago
No business is going to park their working capital with a bank that has those requirements.
- fsckboy 4y ago
  no bank is going to give carte blanche to large customers to run the bank, they can't, and even if they promise it... As with all businesses, like a restaurant wants you to enjoy your food so you come back, the bank wants to provide the services the customers need. But everybody can't have everything especially all at once, and banks can't provide liquidity that has dried up. sure, customers will periodically get mad and take their business elsewhere, but it's a fever dream to think that elsewhere is any different.
  - quesera 4y ago
    > no bank is going to give carte blanche to large customers to run the bank If the funds are in a DDA (Demand Deposit Account a/k/a standard US checking account), the bank is legally obligated to honor outflow transfers of any size, at any time. (Not physical cash withdrawals, although they have to make timely arrangements to satisfy these too) Banks can make DDAs unattractive for large balances (e.g. no interest), but I'm not aware of any limitation on a customer's right to access their funds held in a DDA. If banks could bend these rules, bank runs would never happen.
    - fsckboy 4y ago
      > the bank is legally obligated to honor outflow transfers of any size, at any time they should have legally obligated SVB to remain solvent!
      - quesera 4y ago
        > they should have legally obligated SVB to remain solvent! They did! When SVB failed to meet those regulatory obligations, the bank was seized and the depositors were made whole. So the system worked, right?
tacostakohashi 4y ago
Does it, in fact, not permit you to get to the entire balance immediately via, say, cash or a bank check? It sounds like you are referring to something like an ATM withdrawal limit or online transfer limit which is just a risk / fraud limiting measure for those particular channels rather than a limitation on the account itself.
- timcederman 4y ago
  Live Oak Bank limits business account withdrawals to $250k/day.
  - lazide 4y ago
    That’s a policy thing to limit capital outflows, not a technical limitation.
    - fsckboy 4y ago
      but that's exactly what we're talking about
  - shalmanese 4y ago
    If you have a business which pays fortnightly and the average employee makes $250K, then just payroll for 26 employees will reach your limit.
    - nulbyte 4y ago
      You don't need currency to facilitate payroll; it's a series of transfers, not withdrawals. And the recipients don't usually need that much currency either, even if they do bank at the same place.
yardie 4y ago
Is that for a debit card? I understand the liability in draining a checking account with nothing more than a 4-digit PIN. On the other hand, I would never bank at a place that made withdrawal restrictions a condition to access my money.
loopdoend 4y ago
This does not reflect the reality of business bank accounts in Canada. When you have treasury access you can wire as much money as you want practically instantly just like with SVB. I bank with one of the big 5. Nothing is stopping you from going into your bank and wiring money away it's just cash that they don't want to give out without multi-day delays.
- appleiigs 4y ago
  Even in Canadian personal account you can wire as much as you want out - same day value to the destination. Only limitation is if you want it in cash because they'll have to get the paper bills delivered since the branch only holds so much paper bills.
ant6n 4y ago
How would you pay for a house? Or a car?
- PakG1 4y ago
  I presume a withdrawal is different from a wire transfer or cheque.
aeyes 4y ago
I'm not sure about the specifics but we had an account at SVB and weren't able to get it all out because of such limitations. I don't know exactly how the limits work because we definitely did ACH transfers in the millions before. Also, it's not a cash withdrawal. We just wired the money to other accounts. Cash would require tons of paperwork.
trhr 4y ago
You're confusing real money with fake money. In America, we can only withdraw so much real money every day, too. The banks will tell you things like "We only keep $2000 in real money in the safe." But the fake money never gets printed. It just lives in bits and bytes. You can move it around as much as you want. Fortunately, it's as good as real money. It's just not as good as real wealth. Real wealth is in ammunition. Never goes down in price, skyrockets in price when the world gets more dangerous, and can be used to protect itself. That's where America has you beat, because we can turn fake money into ammunition whenever we want, as fast as we want. Not to mention, it's a consumable resource that keeps well in storage but requires a high level of technology to produce. And even under non-apocalyptic conditions, it's about half as efficient as silver coins by weight and volume. People downvoting this are politically opposed to guns because that's the fashionable thing to be in SV, but hackers have a strong gun culture. Always have, always will. Because we're practically all either anarchists or military.
- anonymouskimmer 4y ago
  > People downvoting this are politically opposed to guns Are you sure they're not downvoting you for being completely off topic while ranting about a hobbyhorse?
  - trhr 4y ago
    They could be. It's highly possible a bunch of engineers watched their backyard bank collapse and thought, "this is fine, I'm not worried, I'm a millionaire" when they don't even own a fuckin' home.
deleted 4y ago
[deleted]
8ytecoder 4y ago
Demand Deposit Accounts also allow you to withdraw without any advance notice. Most companies will have one. They wouldn’t want to sit around and wait for a banker to pay their suppliers or make payroll. Usually, most operational expenses like that are integrated into whatever systems they use and money moves where they want it to.
exhibitapp 4y ago
My business has 8 figures in the large canadian banks. I have had no problem sending all of it from institution to institution in single wires. Businesses can definitely move money at once. The banks have corporate customers sign a number of complicated forms to put limits on things like who can wire, who can sign, who can weite cheques etc. There are further controls in the online corporate banking

mjs33 4y ago

[dead]

fsckboy 4y ago

there was an interesting interview on Kudlow the other day (which I guess was a WSJ piece also? https://www.youtube.com/watch?v=D2OELV5vVZU https://www.youtube.com/watch?v=D2OELV5vVZU ) about "how it happened" at SVB. I don't know if "the experts" all agree with "this expert" but he pointed out that in buying all the mortgage backed securities, SVB got to put them in a "hold to maturity" account that is not "marked to market" (the value in the account does not match their decreased market value, so on the books it looks like a lot of value in there, but in reality it's not) at the same time, as the coupons on these bonds pay out and the bank collects them, that money just shows up on the bank's income statement, not landing in the hold to maturity account itself as part of the value of the asset. This rings all the "hey, look we are profitable" and "hey don't I get a bonus" bells, twisting incentives for the bank and its officers (and other banks) to keep do this, lather rinse repeat. recipe for disaster when interest rates go up.

appleiigs 4y ago
They're conflating 2 issues. The first issue is liquidity management. The second is accounting. If the accounting auditors are doing their job then the bank managers don't get to cook the books. The accounting rules are set by the accounting industry. If the financial statements don't reflect what's happening, it's the accountants fault. So, it's incorrect to imply that bankers are doing something nefarious. At this point no one has suggested an Enron or FTX type scandal. What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling.
- fsckboy 4y ago
  > What's more likely is just the incompetence with liquidity management, incompetence with the crisis handling. no, what's more likely (if what has been said between the two of us comports with reality) is that the incentives for the officers of the bank are in conflict with the healthy management of the bank. Bankers running a bank into the ground cannot be blamed on regulators or the accounting profession which only "review" what has happened, they never have their fingers on the levers (although additional accounting and banking regulations may be required to avoid this type of problem in the future)

ouid 4y ago

Without reading the article, I can give you the answer immediately. SVB failed because they were bankrupt. This is what it is called when your liabilities are in excess of your assets.

hackernewds 4y ago
They were not insolvent. They had a liquidity crisis. This has been stated hundreds of times in depth now.
- tripletao 4y ago
  They were mark-to-market insolvent, and those marks look economically rational--they agree with a simple NPV calculation, and there was no indication that the markets were disorderly. The marks were just lower than the SVB's management wished. For regulatory purposes, the SVB was permitted to ignore those losses in bonds that it intended to hold to maturity. Accounting doesn't change reality, though. If the SVB's assets are actually worth more than their liabilities to depositors in any economically meaningful sense, then why do you think the FDIC was unable to find a buyer?

ilyt 4y ago

Oh thank <deity> they didn't manage to do it on time, else that shitshow might've not happened. Banking evidently needs to learn some more hard lessons and this fall is a good one.

bunabhucan 4y ago

"It was a dark and stormy night when the regulators showed up at the {$RecentlyFailedFinancialInstitution} and greeted the ashen faced C suite" is a genre the journal excels at. It's like scary campfire stories for CEOs.

deleted 4y ago
[deleted]
khochesh_kushat 4y ago
To be fair, it's a good genre. Books like Barbarians at the Gate, The Big Short, Smartest Guys in the Room are all wonderful, and I'm sure some of the journalists started writing after reading them.

stephen_g 4y ago

I don't think it would have mattered. A loan wouldn't have helped their situation much - the extra liquidity might have kicked the can down the road a few days or weeks, but they still would have been basically insolvent. Probably only a big capital injection and the interest rate quickly dropping by a significant amount would have saved them (or being bought by a bigger bank that could absorb the losses and hold the long-term bonds to maturity).

chmod600 4y ago
How does holding the bonds to maturity help? Sure, interest rates might go down, but the expectations are already factored into the market price. If they go down more than expected, the bigger bank wins. If they go down less than expected, the bigger bank loses. Overall, should be neutral.
- anonymouskimmer 4y ago
  My guess is that bond prices drop because there are better yielding things to buy instead. But for a bank the solvency concern is not that the yield will be "better" yielding, but merely sufficient to cover the obligations it owes along with its operating expenses. Having to fire sale bonds (to meet withdrawal obligations) that are selling at a discount because any potential buyers have better yielding instruments to buy results in solvency concerns from the relative excess losses. As long as the bonds yield more at maturity than you paid for them (along with the cost of the money you used to pay for them, which is very cheap for most large banks), then holding them to maturity is guaranteed to pay off. Whereas we have no idea how cheap they could ultimately become on the spot market at any given time that the owner may need to fire sale them.
  - tripletao 4y ago
    > (along with the cost of the money you used to pay for them, which is very cheap for most large banks) Why should depositors leave more money than they need for short-term working capital in the SVB at 0% when a Treasury bill pays 4% with less risk? When all rates were roughly zero, it was easy to just lazily leave everything in the bank; but when rates increased, the reward for leaving and the risk of staying (because the bank is now mark-to-market insolvent, and thus particularly vulnerable to a run) both increased. When interest rates increased, the NPV of the SVB's assets decreased. Someone had to take that loss. Their managers and shareholders presumably hoped that would be the depositors, by leaving their money in a risky bank earning interest below the risk-free rate, slowly accepting the loss over time. The depositors had no economic incentive to do that though, and they didn't. For emphasis, the SVB's problem isn't that their bonds are trading at irrationally low prices due to liquidity problems (i.e., a "fire sale"). The market price for their bonds has behaved exactly like a textbook NPV model, and similar assets trade with normal tight spreads; the price is just lower than they wanted. Hold-to-maturity accounting allowed them to ignore that for regulatory purposes, but accounting doesn't change reality.

yieldcrv 4y ago

That’s such an embarrassing indictment of the US payment system. Banking on the West Coast is hard, even harder in further flung areas like Hawaii. The banks open in normal business hours but cant get a single thing done if its after 4pm in New York City. So the further west you go, the fewer amount of hours you have to get anything moved.

hackernewds 4y ago
Not to mention, ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii. Despite all the travelers there that could need cash and services. Often, overregulation by Hawaiian authorities is cited which is a just criticism. So it is for crypto as well, nonzero but very limited
- thakoppno 4y ago
  > ZERO meaningful financial institutions have an ATM or banking branch in all of Hawaii That is truly fascinating and something I hadn’t noticed when visiting. I wonder what implications this has for capital intensive construction projects there. Presumably the builders still finance through major institutions but need to pay out all local labor via bank accounts from institutions on the island? So the local authorities have essentially taxed banking generally?
  - yieldcrv 4y ago
    You can walk into any bank there, sign up with your drivers license, and wire money from your other bank same day. I needed a deposit for a sublet there, and needed lots of cash for that. So when it posted the next business day, I walked to the teller and asked for cash. It wasn’t a problem except for everyone else that didn't imagine and was trying to use fintech apps and learned about arbitrary transaction amount limits.

Seanambers 4y ago

So a bank is in distress, it has collateral, but the FED - THE lender of last resort - chooses to fkem basically. "The Fed needed a test trade to be run before the actual transfer could occur. That took time and the Fed didn’t extend its own daily deadline of 4 p.m. PT for collateral transfers to help SVB. Time ran out on the bankers and SVB couldn’t get the money that day." Though, maybe they should never been in that situation to begin with.

hackernewds 4y ago
The kicker is in the last line. The FDIC took over as the bank was conducting itself rashly given its distress.