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> (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 f

> (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.

barrkel 4y ago
Exactly. Low yielding long maturity assets are worth a lot less in a higher interest rate environment. The assets the bank held declined in value. This would have been a solvency issue, if not today, then someday very soon.
- anonymouskimmer 4y ago
  Only if the depositors cash out en masse. Which SVB was at greater risk of than most banks, because of its particular clientele.
anonymouskimmer 4y ago
> Why should depositors leave more money than they need for short-term working capital in the SVB > 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. That's why the grandparent comment mentioned a large bank buying SVB out. Large banks have diverse, non-business deposits, many of which tend to sit, and not chase yields. People in more precarious positions keep emergency funds in the bank, not in CDs or bonds that they can't easily cash out on a moment's notice, or stocks that are risky. People in even more precarious positions are constantly paying money to the bank at a steep interest to cover their credit card payments. This is really cheap money to the bank (and more easily liquidatable at par than low-yielding bonds), though it has to cover those in the most precarious positions who default.
- tripletao 4y ago
  But interest rates went up. A different bank with less flighty depositors might indeed still have lots of cheap deposits, due to the stickiness that you note. But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? They'd happily buy the SVB's assets at the right discounted price; but that's the mark-to-market price, and the SVB had been mark-to-market insolvent since September. I guess a lot of people hoped that a different large bank would buy the SVB or its assets at a price that would have maintained the accounting fiction that it was solvent. Such banks had no economic incentive to do that though, and once again they didn't.
  - anonymouskimmer 4y ago
    > But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? Hypothetically because they are martyrs who also want whatever goodwill SVB created in its clients (which now become the clients of the other bank). But yeah, it's a stretch.
    - disgruntledphd2 4y ago
      I mean, if you think that you can grow your business by getting in early with tech founders, then it makes sense. But that's pretty risky for a bank.
    - tripletao 4y ago
      I do think that's a fair point in general, and one that I'd neglected above--lots of marginally insolvent banks have been rescued in exactly that way, with an acquirer paying a premium for the value of the business, not just the financial assets. The mark-to-market hole at the SVB was pretty deep though, and their depositor base had just made itself look particularly unattractive. So maybe the FDIC will eventually manage to find a buyer, but it indeed looks pretty hard.
      - anonymouskimmer 4y ago

barrkel 4y ago

Exactly. Low yielding long maturity assets are worth a lot less in a higher interest rate environment. The assets the bank held declined in value. This would have been a solvency issue, if not today, then someday very soon.

anonymouskimmer 4y ago
Only if the depositors cash out en masse. Which SVB was at greater risk of than most banks, because of its particular clientele.

anonymouskimmer 4y ago

> Why should depositors leave more money than they need for short-term working capital in the SVB > 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. That's why the grandparent comment mentioned a large bank buying SVB out. Large banks have diverse, non-business deposits, many of which tend to sit, and not chase yields. People in more precarious positions keep emergency funds in the bank, not in CDs or bonds that they can't easily cash out on a moment's notice, or stocks that are risky. People in even more precarious positions are constantly paying money to the bank at a steep interest to cover their credit card payments. This is really cheap money to the bank (and more easily liquidatable at par than low-yielding bonds), though it has to cover those in the most precarious positions who default.

tripletao 4y ago
But interest rates went up. A different bank with less flighty depositors might indeed still have lots of cheap deposits, due to the stickiness that you note. But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? They'd happily buy the SVB's assets at the right discounted price; but that's the mark-to-market price, and the SVB had been mark-to-market insolvent since September. I guess a lot of people hoped that a different large bank would buy the SVB or its assets at a price that would have maintained the accounting fiction that it was solvent. Such banks had no economic incentive to do that though, and once again they didn't.
- anonymouskimmer 4y ago
  > But why would they buy the SVB's assets at 1.5%, when they can buy similar assets on the open market yielding 4%? Hypothetically because they are martyrs who also want whatever goodwill SVB created in its clients (which now become the clients of the other bank). But yeah, it's a stretch.
  - disgruntledphd2 4y ago
    I mean, if you think that you can grow your business by getting in early with tech founders, then it makes sense. But that's pretty risky for a bank.
  - tripletao 4y ago
    I do think that's a fair point in general, and one that I'd neglected above--lots of marginally insolvent banks have been rescued in exactly that way, with an acquirer paying a premium for the value of the business, not just the financial assets. The mark-to-market hole at the SVB was pretty deep though, and their depositor base had just made itself look particularly unattractive. So maybe the FDIC will eventually manage to find a buyer, but it indeed looks pretty hard.
    - anonymouskimmer 4y ago