Becker said the bank has “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”
Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.
Matt Levine is fond of this highly relevant quote by Bagehot: “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”
It seems that CEOs of banks haven't learned anything since 1873 when this was observed.
You do know that that video is from the TV COMEDY show Servant of the People, where he plays the role of a Ukrainian president BEFORE he was actually elected president?
I appreciate all the flags, but why is wrong to ask for sources? What isn't choreographed about that president? He has multiple US based PR consultants, there's a behind the scenes for his AR addresses[1], they had a vogue photo shoot[2] all in the middle of a war.
They played air raid sirens for Biden[3], after Biden got assurances from the Kremlin for his visit[4], all the while even CNN reporters said that there were no signs of any strikes.
Why not just providing sources instead of slandering people that ask for them? Even if the person above is right, asking for sources and providing is the correct behaviour in an adult conversation on a platform that prides itself to be full of scientists.
It's really amazing that both Thatcher and Reagan came to power at around the same time, delivered such fabulous witticisms, and caused very similar societal harm.
Not really. They delivered exactly what the biggest demographic group at the time wanted. Which is... Exactly what you expect in a democracy with a particularly large voter bloc...
Fabulous witticisms is usually take down of someone or something that is hard to argue against, but rarely actually factually correct. People who deploy it are arguing by emotion and insult, which would explain why they are also people capable to cause a lot of societal harm.
"Fabulous witticisms" feels good to listener and is funny, because it validates what people want to hear. It is rarely actually correct or actually correctly describes world.
UK before Tatcher was a depressed society with stagflation, rising crimes, crumbling infrastructure; that couldn't even clean its own streets. It was a society completely hamstrung by old unions that would happily collapse the economy in face of global competition, as long as their jobs gave the same pay - nominally.
Thatcher won two landslide re-elections for a reason.
Honestly, I'm not an economist, even worse I was not a fully functioning and critical thinking adult before the Thatcher era, you could well be right but I find it really hard to believe.
For example the UK has also had subsequent Conservative victories for the last 12 years or so but every single argument made in 2010 about their approach has been proven true. To the detriment of every person in the UK.
So it doesn't necessarily follow in my eyes that an election win means that what you're doing is the right thing, only that you are popular and you can convince people you will do something to help them.
I can't argue with you on the recent Conservative track record, they're a pale shadow of the party they once were. The only thing that's saved them is that Labour under Corbyn was plainly, obviously such an utter catastrophe in the making the Cons couldn't help looking good.
There certainly was an aspect of that back in the 80s. In the early years Labour was lead by Michael Foot, basically a likeable version of Corbyn but just as unelectable. But then, the Labour Party back then was properly Marxist and had actually pushed forward a programme of nationalisation and unionisation that worked out about as well as you'd expect.
The most egregious example of waste was the coal industry, hence the strikes. The tax payer was subsidizing coal to the tune of £1.3 billion a year which was real money back then, just under 1% of total national GDP, not including the increased costs to power and steel industries that were prevented from using cheaper alternatives. When the mining union leader Arthur Scargill appeared before a Parliamentary committee and was asked at what level of loss it was acceptable to close a pit he answered “As far as I can see, the loss is without limits.” That's what we were dealing with. That's just coal, but swathes of industry had been nationalised and was a horrible rotting carcass of waste and losses dragging the country down. Reforming that lot was incredibly painful but it had to be done.
Maggie is generally portrayed as being incredibly unpopular, and the way she was lampooned by a generation of up coming British comics was cruel though frankly hilarious, but she won resounding election victory after victory. The economy she built transformed the country into the modern nation it is today. Notably when Blair and Brown brought in a Labour government in 1997 they changed essentially nothing substantive because her reforms palpably worked. All the proposed changes reverting Britain towards a statist socialist economic agenda were quietly shelved and never talked about agin until Corbyn came along.
Since then Conservatism on both sides of the pond has suffered an appalling moral and intellectual collapse. The conservative and republican parties are mocking parodies of their former selves. Back in the 80s there were serious, major economic and social problems that desperately needed fixing and economic liberalism had the answers. Nowadays that's just not even vaguely controversial, instead the focus of the right has shifted towards damaging reactionary dog whistle issues like culture wars and blind nationalism. That tendency has always been there, but now it's all they have.
Thatcher is what I like to call a "Marmite politician": either you absolutely loved her, or absolutely hated her. She was a politician of her time, by which I mean she was exactly the politician we needed at the time that we needed it. I doubt that any other politician could have achieved what she did in the UK. Everybody else would be too willing to compromise.
As someone who was born at the start of the 70's, I think you really had to live through the 70's and early 80's to realise how bleak it was. And I say this as someone who grew up on mostly free school meals, had their phone cut off for non-payment etc.
>"The conservative and republican parties are mocking parodies of their former selves. Back in the 80s there were serious, major economic and social problems that desperately needed fixing and economic liberalism had the answers. Nowadays that's just not even vaguely controversial, instead the focus of the right has shifted towards damaging reactionary dog whistle issues like culture wars and blind nationalism. "
The conservatives of the 80's had a problem to solve, stagflation, inefficient socialism, big state. Neo-liberalism solved those problems, but created new ones.
The conservatives today have another problem to solve, mass immigration, rampant crime, loss of sovereignty and ability to reform to foreign bureaucracy, dependency on foreign manufacturing, etc.
Part of these problems are residues of the same economic neo-liberalism that was enacted in the 80s. Reagans and Thatcher's neo-liberalism saved society from the socialist dystopia, but over time it has thrown society in a neo-liberalist dystopian path that few people like, beside the corporate elites.
The conservatives have moved on to new, real problems. You seem stuck in the past.
Where we differ is I just don’t see any of the problems you list as actual problems. I’m in favour of immigration, it does us a lot of good which is why conservative policies actually encourage it, and illegal immigration is a tiny fraction of it overall. Crime rates are down significantly from the 80s. Even in the EU we had all the sovereignty we could ever need, and negotiated opt outs of huge swathes of regulation we decided wasn’t for us.
A friend of mine tried that line about manufacturing on me a few years ago and I asked him what kind of factory he wanted his so. To work in when he grew up. He looked at me as though I’d just shot his dog. We don’t need factory jobs, we’ve git near full employment anyway. That’s why we need immigration to solve our demographic issues with our ageing population. We’ve got plenty of jobs much higher up the value chain, the main problems are around training and education.
If you can't see that immigration is having a negative impact, which so many voters perceive, then yes you have a minority perspective. Crime in the UK is so bad in some areas that Ukrainian refugees were shocked.
They perceive what the media tell them, not what’s actually happening, because fear and xenophobia sells newspapers. On average immigrants are younger, more law abiding, more likely to be employed, consume fewer benefits and make less use of health care than native born Britons. Also Britons who live in areas with large immigrant populations are the least concerned about immigration.
As for the crime rate the perception is divorced from reality, I’ll quote from Wikipedia: “The United Kingdom's crime rate remains relatively low when compared to the rest of the world, especially among first world countries.” Our crime rate is a fraction of that in Ukraine before the war. Their murder rate was three times ours.
> Also Britons who live in areas with large immigrant populations are the least concerned about immigration.
Maybe if you define immigrants with passports as Britons. There's a reason why the BNP, British National Party, won the two seats they ever won in counties most affected by immigration. This effect would also be exact opposite of that in Sweden, which is intriguing, because here the sub-urb ghettos are split between social democrats, which the immigrants vote for, and the nationalists, which the few non-immigrants left vote for.
The fact that you are trying to argue that areas affected are the least concerned, when the case is exactly the opposite across Europe; says a lot about your "reality". Modern leftists are a scourge.
Modern leftism has certainly lost it's way, and frankly so has a lot of the right. I say that as a life long conservative voter. I'm that odd combination, both an economic and a cultural liberal.
You're downvoted but I don't think you're wrong. In general it seems to be the case that if you're waging a war and you're not getting completely crushed the electorate (or at least the "undecided" voters") tends to rally around whoever happens to be in charge. And indeed I think it's fairly safe to say that most agree that Thatcher benefitted electorally from a strong response to the invasion.
I should add that as a Scot I'm definitely not a fan of hers (you just grow up there knowing "Thatcher Bad") but I'm not quite at "put a stake through her heart and garlic round her neck"[0] :)
They are. That war was also unusual in that it was an attack on a country far away that wasn’t a threat to the US or UK, and there was little to be gained.
I think that was the reason for one of them, certainly. But then she and our armed forces did a tremendous job in reclaiming the Falklands from a fascist dictatorship.
> UK before Tatcher was a depressed society with stagflation
Hardly a problem local to Britain, and hardly something Thatcher solved. It was a crisis that also passed in countries that did not elect viciously anti-state, anti-working class governments.
> crumbling infrastructure; that couldn't even clean its own streets
Bit of an exaggeration, and I'm not sure how Maggie "Minimal State" Thatcher has supposedly helped with that.
> Thatcher won two landslide re-elections for a reason
If it weren't for the Falklands she would have been a one term president.
It's not over yet, we're yet to see the how the opposite of mass immigration multiculturalism affects a european nation too. Jusging by Sweden and Germany who has applied it the most, it is and ending that goes "no more please"
Encouraging Solidarity in Poland was the right call, but it's not likely that different leaders would have opposed it.
"Neither the strong nor the weak version of the proposition that American defense spending bankrupted the Soviet economy and forced an end to the Cold War is sustained by the evidence."
It is funny that all the Experts (TM) have been talking for years how the USSR was an unbeatable giant with colossal strength that can not be defeated and Americans need to seek friendship with them and learn to live alongside them and learn to respect the choice of people in all the communist countries. In fact, the Democrats went the further along this road, actually requesting help from Andropov to fight Reagan (yes, that happened, look it up). Until Reagan came and... the mighty USSR is no more. The Eastern Europe is free. Then The Experts shrugged and proclaimed that it collapsed by itself, through forces of nature that any learned man would easily predict and that they can easily explain, and nothing Reagan did has anything to do with it. Of course.
One thing I noticed is that political thinking tends to come in waves. Not just for countries individually, but globally. Sure, there are plenty of exceptions, but each age seems to have its own zeitgeist in the world's collective consciousness.
Currently, for example, there is Wokeism in general, with particular emphasis on transgenderism. Transgenderism only "affects" a very small percentage of the population, nobody paid it any mind a decade ago, and yet today it's a thing.
Isn’t this just evidence of the Overton Window? The amount of promotion needed to push any particular cause is significantly lower than people intuit. And following on from this, once that cause has hit the mainstream, the amount of coverage it gets leads to people further overestimating its true significance. After that point it just snowballs
I think what we’ve discovered is that, thanks to the Internet, that’s a strategy that’s significantly easier to employ than ever before. In the past ups at least need to have mainstream media outlets onboard. Nowadays you can do that with a hashtag
TBH I wasn't sure what the commenter was trying to communicate. That she had been cancelled? That she should be cancelled? I definitely wouldn't have flagged such a comment, but I would agree that it wasn't exactly adding to the discourse.
It seemed like a tongue in cheek joke about people projecting that women are strong(like south park style joke I guess) and if you say they are not..you are cancelled? I dunno, I appreciate humor, but yeah that was swift admin action on that.
I think the vast majority of flagging is by regular HNers (with some karma threshold), not admins.
I try not to make too many jokes on HN. They have to be very clearly funny and/or very spot-on to survive HN's this-isn't-reddit ethos, which seems to be pretty strictly enforced.
> They have to be very clearly funny and/or very spot-on to survive HN's this-isn't-reddit ethos
I downvote jokes even if they are funny, and it is (partly) the "HN-isn't-reddit" methos. Reddit has so much noise-to-signal that it's not particularly valuable. It's like junkfood.
HN is better because every comment (per the official rules) is supposed to be substantial. Jokes that are funny but not satirical or insightful aren't substantial in my opinion.
(I should also say that I often find reddit to be hilarious, but that's not what I'm looking for when I come here.)
My anecdotal experience is jokes/poorly supported takes get downvotes.
If you want to get flagged, the best way to do that is to make an irrefutable strong argument that ruffles political or economic feathers of a popular ideology on HN. There's nothing that enrages people here more than an unpopular but sound argumen they don't like, so they flag it to make it go away. If they can quickly disprove you or make you to look an idiot, they'll downvote rather than flag so that everyone can see their moral or intellectual superiority in the full thread.
I found various examples of notch making "ancap" arguments and getting flagged. They're examples of comments getting flagged due to their expression of unpopular viewpoints, although frankly they were lacking in quality argumentation so they're not the greatest examples of his point.
Nope. This is the line of thinking that gets people into hot water. He could have said nothing and he would be better off. When in doubt, just say nothing. Nobody asked him about a run on his bank - he just blurted that out in a public call with shareholders on the line.
Any bank would be in a bad position if all of its customers withdrew at once. Everyone knows this, but banks that are doing well don't think about this. The fact that it is clearly top of mind does not inspire confidence.
What is there to learn? That's not an actionable statement.
A bank can follow a lower risk strategy and accept lower profits, but that's not necessarily what shareholders want. Some risk of failure is acceptable.
The point is that a bank run is a liquidity event (i.e. we still own more than what we owe, it’s just hard to turn it into cash fast enough).
SVB has a fine balance sheet for now, they’re just running out of easy things to sell.
The quote is referencing liquidity events, where the problem is everyone wants their money because they’re nervous about the bank, but the only thing that can hurt the bank is them taking out their money (because then the bank is in fire sale mode).
A CEOs job in this time (something SVB CEO did not do) is to project confidence. That’s literally all they can do.
> SVB has a fine balance sheet for now, they’re just running out of easy things to sell.
Do they?
If SVB is sitting on a pile of Treasury bonds that mature in 20 years, they can “hold to maturity” and get their principal plus some very low interest rate. But this is useless! In a fantasy world in which all their depositors leave and they keep those bonds for 20 years, they are indeed worth that amount in 20 years, which has a rather lower net present value today, and maybe their investors care and maybe they don’t.
But this is, of course, a fantasy. Those bonds are collateral for deposits, SVB pays 4.5% APY on savings, and that 4.5% doesn’t materialize from the ether. In 20 years, 4.5% multiplies money by 2.4, those T-bonds will not multiply by 2.4, and SVB will slowly but surely end up in the hole. Unless they convince a very large fraction of their depositors to forego interest.
It boggles my mind that banks are apparently permitted to do accounting on a hold-to-maturity basis. Holding a bond to maturity avoids paying a spread and maybe has some tax effects. And that’s it. Otherwise you might as well sell it and buy a new one with the same present value.
(I am not an expert, and I’m going off HN comments for how these rules work. But if the banks really do get to say they plan to hold a fixed-income instrument to maturity and they can value it as something like face value, then I think the system is broken.)
HTM accounting isn't the problem, it's one tool among many and has its uses. SVB's mistake was buying long term paper just as the country was heading into a rising rate environment. This has already put them in a hole they probably can never dig themselves out of (selling stock is clearly not gonna work). I think the only non-disastrous path forward here is an acquisition by another bank big enough to just absorb that paper into its balance sheet. If SVB is smart they'll try to get this done while there's still some value left to sell--if they wait too long it'll turn into another WaMu.
Borrowing short and lending long has been the traditional function of banks for hundreds of years. They profit from the interest rate spread between what they pay on short-term liabilities (mainly deposits) and what they receive on long-term assets (usually business or housing loans).
It's hilarious that banks serving crypto and startup ecosystems aren't failing because their crypto and startup loans went bad, they're failing because of the duration risk from holding long-term Treasurys on their balance sheet.
>they're failing because of the duration risk from holding long-term Treasurys on their balance sheet.
That is the number one reason why banks go bankrupt...
It's not hilarious, duration risk is the biggest risk a bank has to deal with and it gets worse the more and more people keep their money as demand deposits. This is why the Fed does QE, the duration of deposits has shrunk so low, that the banks can't buy treasuries as the duration of the treasuries has become too long in relation to instantaneous demand deposits that can switch from bank to bank. The only solution that the Fed came up with, is to do the duration transformation themselves by buying long duration treasuries and giving instantly transferrable central bank reserves with no duration risk. This works because the system as a whole cannot go bankrupt, but individual banks can. If you take your money out of the bank, the CB reserves just get turned into cash. If you transfer between banks, the recipient bank now holds the reserves.
Also, plenty of crypto specific banks did fail because their loans went bad.
There’s duration in the sense of borrowing short and lending long, and there’s duration in the sense of taking on the corresponding interest rate risk. The US model of fixed-rate mortgages is a bit of an oddity — banks will often lend long with adjustable-rate instruments.
If a bank has $100 of deposits and has lent out $90 on a 30-year adjustable rate basis, the bank is exposed to potentially liquidity issues, default risk, and second-order effects like changes in the yield curve. But if the bank lends that $90 as a fixed rate mortgage or buys a 30-year T bond, they are directly exposed to interest rate changes.
(Also, as I understand it, and this is far outside my expertise: banks usually try repackage their debt and sell it to investors. The banks presumably can’t carry those 30 year fixed mortgages on their books without accounting for interest rate risk. Why are T bonds special?)
> If SVB is sitting on a pile of Treasury bonds that mature in 20 years, they can “hold to maturity” and get their principal plus some very low interest rate. But this is useless!
No it isn't. Any other bank would be happy to write a loan backed by US treasury holdings, at no more than a moderate profit. If you're sitting on that, it has value. But it doesn't have value in literal dollars by tomorrow morning to pay out a withdrawal. That's what "liquidity" is all about.
I’m not saying the T bond is useless. I’m saying that the fact that it’s nominally worth a specific amount in the future if I hold it is useless.
This has nothing to do with liquidity. If I had a 0 interest, $100 T bond maturing in 30 years, I cannot sell it today for $100. But anyone who lent me $90, nonrecourse, using it as collateral and asking for only a moderate profit is nuts because this bond is not worth $90 — not even close. Maybe I can get a loan that is based on my own credit-worthiness, but that’s a different story entirely.
If I have this $100 T bond, and I’m a bank, and that T bond is collateral for a $100 savings account paying 4.5% APY, I am in the hole. If my depositor sticks around, I can gamble and hope I can make up my losses (e.g. by interest rates going way down), or I can try to be such an awesome bank going forward that my profits can make up for my losses, and maybe I’ll get away with it, but I don’t really deserve to get away with it.
Not to a retail investor looking at short term returns (and irrationally obsessed with Inflation! due to media consumption), but to a bank with regulatory deposit requirements and a longer term outlook? Seems not unreasonable.
Anyway it doesn't have to be worth the full face value. It just needs to be worth enough to back a short term loan big enough to honor current withdrawal demands.
> to a bank with regulatory deposit requirements and a longer term outlook?
Maybe with some generally accepted accounting principle, but not by any sensible business standard.
If that bond trades for $80, no one would buy it for $90. It’s worth $80. Similarly, if you already own it, it’s not magically worth more.
And if you are a bank with a long term outlook, you expect interest rates to hold near current levels, and you pay 4.5% APY to depositors, your long term outlook of paying 4.5% to deposits where that deposit money is locked up in a very safe bond earning 1.8% APY, you are losing a lot of money, very safely, in the long term. Almost exactly as much as you would lose by booking the loss right away and investing in something else.
Other than tax or regulatory arbitrage, complex accounting is no substitute for actual profits and losses :)
For most banks, it is fine to assume a 20 year deposit window because deposits are fungible and for most of recent history deposit bases have gone up.
SVB was wrong for not assuming that the 2021 deposit spike was (in hindsight obviously) a short term blip, but you can look at their loan book on page 19 of [0].
It's not immediately clear to me that there's some sort of systemic risk in VCs/PE firms not paying back their loans, but given how circular the tech ecosystem is, maybe we get there.
> For most banks, it is fine to assume a 20 year deposit window
Let me try again. You're still thinking about liquidity -- assuming a 20 year deposit window seems okay to me.
But the problem is solvency. It's not that the assets are illiquid -- it's that they insufficient. If you run a bank, assume a 20 year deposit window, and invest those deposits in safe assets that carry similar interest rate risk to the deposits themselves, then you are solvent. If depositors leave faster than expected, you may be forced to pay a spread or other haircut to sell your long term assets early, but that's a small effect and can be managed gradually as long as you stay on top of it.
This isn't SVB's problem AFAICT. SVB bought assets that were perfectly liquid (T bonds!) and (if I read the filings right) assets that are still fairly liquid (MBSes), but they had interest rate exposure that did not match the deposits. Savings account interest rates (at SVB!) were up to 4.5%, and those T bonds had much lower fixed interest rates. [0]
If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative.
[0] Whether you think about them as paying low interest for a long time or as being marked to market at a loss and then paying current interest rates at maturity is immaterial. You end up with the same number of actual dollars at the same times.
>It's not that the assets are illiquid -- it's that they insufficient.
You are confusing price today with the actual characteristics of the instrument.
A T-bill pays back it's face value always, it just trades below face when interest rates are higher than when it was purchased.
That is the definition of a liquidity problem. You'll get the face value back eventually (it is sufficient), but not if you sell today.
A liquid market is not the only characteristic of liquidity. There's a liquid market for anything at a low enough price...
>If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative.
This is a true statement people are making that has nothing to do with what happened here. The point of a bank is interest rate arbitrage, so I agree SVB would have to do their job better over those 20 years, but this thing that happened over 3 months is a liquidity crisis. They weren't running out of money to pay interest on deposits, they were running out of money to give those deposits back and were veering into the problem discussed above - selling things below value to create liquidity.
> In 20 years, 4.5% multiplies money by 2.4, those T-bonds will not multiply by 2.4, and SVB will slowly but surely end up in the hole.
But they wouldn't continue to pay 4.5% interest for 20 years would they? This is just a brief moment of high interest rates, so I think that's the main detractor from this argument. In other words, it's not like 4.5% APY on savings is anywhere close to the norm.
> This is just a brief moment of high interest rates
You are welcome to make that bet for your personal finances or on behalf of your company. You should not make that bet with someone else’s money unless they have signed up for
it.
SVB has taken a major impairment due to rising rates already. They might not have to mark the remaining assets to market, but if they have to sell they will take losses, even if these are liquid.
His statement didn't project confidence. My "we are adequately capitalized" shirt is raising questions answered by my shirt is the meme way of expressing it. The right move would be to find a recapitalization transaction and complete it, which they tried to do but issued the press release right after a crypto-focused bank went into receivership due to falling account levels. That did not help matters.
No, you missed the point and that's not what I'm assuming. What you're stating is still not really actionable. Like what else specifically should he have said?
It was 1873. People spoke and wrote differently - usually more verbosely. It also depends what context the quote has been lifted from. I think your version is excellent if you're 'trying' to write a new aphorism or idiom. But perhaps this formed part of a longer passage where its clauses felt more 'necessary'.
Comes quite naturally if you're familiar with German word construction.
That said, it doesn't seem to have emerged into widespread use until well after the 1950s, so would have been a peculiar choice for a 19th century author:
The very earliest banks didn't do fractional reserve banking so it isn't true to say it is how every bank worked since banks were invented. The first known instance of fractional reserve lending was with an medieval Italy but banks have been around since 2000BCE.
You are right that it definitely explains 99.99% of banks in history. But there are a handful of historical examples -- even after "modern banking" began in medieval Italy -- that don't fit. A recent example is The Narrow Bank which was shutdown by the Federal Reserve. But in the past you had things like the Bank of England in 1844 which went to 100% reserves for a period. Or banks under the Louisiana Banking Act of 1842 -- which was why banks in Louisiana were unaffected by the financial crisis of 1857.
Yes, they still issued loans. Louisiana banks weren't true "narrow banks" but were much tighter regulated with much higher reserve requirements than other states at the time (or today). This was a reaction to the financial crisis of 1837.
How could they issue loans? 10 x 10$ deposits means you can loan 100$?
Where as the modern way is more like 100$ in deposits means you can lend out 1000$ because chances are everyone won’t not pay it back? And then can’t you say that since you’ve lent out 1000$ and chances are you’ll get paid back, you’ve basically got 1104.56$ and so can lend out 10k$? And then you bundle those together and sell them to each other depending on what ratio of income to cash you want?
Especially in contemporary times banks make money in an immense amount of ways that don't involve touching customer funds: debit transaction fees, international exchange rate "adjustments", ATM fees, the million 'special processing fee' type fees, and so on. In other countries I've even had to pay a fee when depositing, which was quite odd.
Of course this all is going to pale in comparison to the amount that banks make by d̶u̶m̶p̶i̶n̶g̶ ̶c̶o̶n̶s̶u̶m̶e̶r̶ ̶f̶u̶n̶d̶s̶,̶ ̶h̶e̶a̶v̶i̶l̶y̶ ̶l̶e̶v̶e̶r̶a̶g̶e̶d̶,̶ ̶i̶n̶t̶o̶ ̶h̶i̶g̶h̶ ̶r̶i̶s̶k̶ ̶a̶s̶s̶e̶t̶s̶
responsibly investing deposits. But of course banks under '100% deposits maintained' type systems could then engage in more typical behavior with their own funds above and beyond what's made from deposits. Under such a regime no bank would ever be "too big to fail", customer deposits would be 100% guaranteed at all times, and more. In exchange you'd see substantially slower overall economic growth and monetary multiplication, but I'm increasingly convinced that would not have been a bad thing.
The Medicis couldn’t loan money at interest— that was usury—so they made money by charging a fee for allowing customers to deposit at one place and have the money available in other locations. That was not considered usury
I don't believe the claim that non-fractional reserve banking would actually slow economic growth.
Is real economic growth even determined by anything but technological development?
Of course, the economy can be made to "grow" by some slight of hand, like having a high inflation rate while pretending that we don't. Or by depleting natural resources. But that's not the kind of growth we want.
Some loans go to businesses so they can buy a new widget-making machine, employ more operators, and profitably sell widgets. Economic growth in action!
Other loans go to people who were going to buy a doodad after saving up for 12 months, who instead get the doodad immediately and pay for it for 14 months. That looks like economic growth, because in month 1 doodad sales have risen. But if the sale would have happened anyway, the 'growth' is lot more debatable IMHO.
So if no one got those loans, what would have happened to the resources they bought? What would've happened to the resources that went into building the widget making machine? What would have happened to the operator employees? Would they've disappeared? Most likely they would've become available to another investor who did not get the loan but also wanted to build a widget making machine.
Did the loan actually increase economic growth? I think the only reasonable answer is: Yes, if the bank issuing the loan had a better idea than the market about the future profitability of the investment. However, that doesn't seem very likely to me.
Depends. If they take it out electrically, send it to another bank then it just shows up as debt in a database from bank A to bank B. Cash is dirty and boring nowadays.
They’re selling equity to get capital. That’s pretty dire straits, FTX was doing that before they went under (I’m not saying this is FTX, I’m just saying it can be akin to the nuclear option)
Because in this case it’s a bank and they aren’t selling equity to invest in new business/products.
SVB had to liquidate good assets quickly, so it sold them at a loss. That means its capitalization compared to liabilities (deposits) could be in “uh oh” territory.
So it sells capital on the open market to shore up its liquid capital. Yes, most every capital raise works mostly like this. But it’s notable here because of what it portends.
> For what reason besides raising cash does a company ever sell shares in itself?
A healthy company doesn't generally sell shares in itself (except perhaps to fund a major expansion). Selling equity is a last resort when you don't have better funding options (retained earnings, debt, ...).
Regulators have been putting immense pressure on big banks to hold adequate capital reserves since 2008 and they have been especially turning up the heat for the last 5 years. Moreover, it is clear that regulators will never allow a US bank to hold more than 3% of assets as crypto ever again.
Those government-mandated, ultra-safe capital reserves look like they're actually the big problem that's going to bring down banks right now. Banks have stuck a bunch of their reserves in really safe, predictable, high quality long-term bonds (particularly government issued ones). Because interest rates have gone up, those bonds are now worth substantially less than they were a year or so ago, meaning that the banks' ability to cope with people and businesses withdrawing their deposits has gone down substantially.
Interest on loans should by increase a banks reserves every year barring massive defaults. The ROI for the actual reserves aren’t particularly relevant by comparison.
Similarly from a reserve standpoint they don’t need to worry about inflation as they need to pay back deposits in nominal terms not what the money is worth when withdrawn.
Higher interest rates decrease the value of long-duration bonds even in nominal terms. Think of it this way: because the interest rate on a bond is fixed at issue, and because newer bonds now have higher interest rates, your existing bonds have to be sold for less in order for someone to buy them over a newer higher-interest bond. This means that the banks' reserves have actually shrunk in value. This is made worse by the fact that the combination of low interest rates and requirements to choose safe investments means that the only way for banks to meet their cost of operations is by picking longer-duration bonds which have higher drops in value, and that they haven't been earning enough interest to really grow their reserves either.
That’s only relevant if you need to sell it or use mark to market accounting.
The US banking system has been given a great deal of regulatory leeway due to recent economic turbulence, including setting reserve requirements to 0%. So market value is only relevant if they need to sell before maturity.
Banks generally have liquid reserves to handle significant fluctuations in deposits. If that’s insufficient they have incoming cash flow and the option to borrow money to make up the difference rather than instantly selling assets.
Thus in practice extracting 5% over a week is fine but there’s a threshold that will kill any bank.
> Similarly from a reserve standpoint they don’t need to worry about inflation as they need to pay back deposits in nominal terms not what the money is worth when withdrawn.
The issue is that the sale value of their reserves has dropped below that nominal value. If you take in $1000 of deposits that you're paying 1% interest on and your reserve against that is a 10-year $1000 T-bill with a 2% coupon, you'd think you're fine, right? But if interest rates go up to 3%, you can't sell that T-bill for $1000 any more; if you can hold it to maturity you're fine, but if your customers start pulling their deposits you're in trouble.
Why would customers be pulling deposits unless you are offering lower than market interest rate? If T-bills are 3%, they can pay depositors 2% now and so whatever condition kept the customers there at -1% risk premium would still keep them there. No run on the bank. And given they are T-bills, duration is minimal, so $1000 might be worth $990 even before coupons. Whoop-de-doo!
There would only be a problem if the bank's credit deteriorated in its risky assets, enough to freak depositors out.
This is incorrect, as we learned from Silvergate. Customers pulled their deposits for reasons unrelated to the bank (in Silvergate’s case, the customers of the crypto exchanges wanted all their money back, so the crypto exchanges had to withdraw their deposits from Silvergate).
As Levine put it, it’s not an asset problem, it’s a liability problem.
It is not unrelated to the bank. They took concentrated callable funding that somehow was not matched to the liquidity of their assets. They took a risk.
This doesn't work either. Remember, the reason that the market value of the T-bills in their reserves has dropped is that the interest rate on them is lower than the current interest rate that people can get by buying them now, so the bank likely cannot afford to pay their customers a market interest rate of 1% below that. The only way for the hold-to-maturity value of their reserves to actually be realised is if customers don't withdraw their deposits and they don't have to substantially increase the interest rates they pay in order to achieve that - otherwise they're likely to run out of money, either quickly or slowly.
Right now there will be a lot of chatter if the root cause was industry concentration, mark to market, junior VCs scaring gulible founders, or as you pointed out: duration risk.
I think in five years the common narrative will be about duration risk.
To spell out what you hinted at: SVB will collapse at some point in the next few years. The only scenario they survive is if they survive this bank run, and then soonsih the fed lowers interest rates by a ton.
Otherwise even without this bank run SVB will still slowly be forced to sell off more and more HTM assets. Core reason being they cannot cashflow wise offer market rate interest on deposits. Clients _would_ move their money to better paying banks, not everyone but too many.
Thus this bank run only accelerates the inevitable. The interest broader note is how other bigger banks have or have not managed their exposure to duration. And special eyes towards the Japanese MegaBanks, double so if the bank of Japan does raise rates.
> Why would customers be pulling deposits unless you are offering lower than market interest rate?
Any number of reasons, particularly if all your customers are in the same industry. If you're "Silicon Valley Bank" and there's a downturn in Silicon Valley, well, here you are.
Yeah, this is how it's similar to silvergate. The main issue silvergate had was a lack of diversification of their liabilities, I.e. their depositors were all crypto. So when crypto hit a liquidity crises, it cascaded to silvergate. The same thing could theoretically happen to SVB, although that would look very bad on tech, since tech shouldn't really be an industry unto itself. Ideally, tech is just technology, and its application is across any industry.
The parent commenter is right, and the problem is the mark-to-market rule. This means that the value of the asset must be the current trading value, which goes down as the rates go up. The result is that bank reserves will go down substantially in nominal terms, sometimes faster than they can recoup the value of these investments.
That’s a regulatory rule which can be suspended not the underlying economic reality. “On April 9, 2009, FASB issued an official update to FAS 157[35] that eases the mark-to-market rules when the market is unsteady or inactive.” https://en.wikipedia.org/wiki/Mark-to-market_accounting
We’re currently in some interesting times: “As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.“. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
The key phrase here is "when the market is unsteady or inactive". Apparently this can be used to save banks, but not until there is trouble in the market.
respectfully, I'm not so sure. The decline in bonds applies to all fixed-rate securities. The only alternatives would have been just straight up cash (bad with inflation) or riskier, less-liquid assets (non-tradable loans with floating rates, for example). They are limited on the latter by risk weighting, and I'm not sure having looser risk controls on the asset side would really help confidence in the banking sector.
a depositor isn't going to deposit 1 billion and only expect 1 billion back out months later. that's some poor people shit. Large sums of money like that, banks pay you for the pleasure of holding it. So a bank offering 4.5% APY like SVB offers would owe an extra 3.2 million to the billionaire if they look at their account a month later.
The problem is, the underlying assets that SVB owns will only pay them back at 1% APY, and only in 20 years or whatever, and the billionaire has been promised 4.5%APY and is expecting to have access to one months worth of interest next month. that 3.5 difference is thus a huge problem for SVB.
Short term treasuries are definitely pretty common on the asset side, but if you refuse to honor withdrawals on demand deposits you won't have a bank anymore and the FDIC will step in to wind things down
Pardon my ignorance (not a crypto guy) — what is it that you're referencing when you mention a bank holding 3% of assets as crypto? My uninformed assumption is that this is either about Silvergate, or something related to SBF's debacle.
Just curious. As mentioned, I'm pretty ignorant about this and would like to educate myself.
Poor move by the CEO. It's like he wanted to be honest with everyone but that wasn't a strong signal.
Also out most of the banks - you would expect that the clients of SVB are a little more sophisticated than your retail bank demographic being start-up companies and all (big assumption).
In the immortal words of Andrew Lahde who closed his hedge fund up 800% in 2008, “I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”
Assuming these people have any level of sophistication is what gets us into these messes. It’s good to remember they are betting billions of dollars based on nothing but fomo and don’t know anything special at all.
> you would expect that the clients of SVB are a little more sophisticated than your retail bank demographic being start-up companies and all
Sometimes you can be too smart for your own good: in this case the CEO might have assumed that everyone knows that all banks inherently carry a risk in case of a bank run, but all the market hears is the word “risk” and panics correspondingly.
Im pretty sure this can also be an engineered trade for smart money.
I imagine it like this:
1. Place some money in bank.
2. Wait till bank bought bonds, treasuries and all that jazz.
3. Short the banks stock.
4. Withdraw huge amounts of money and cause liquidity crunch.
5. As the bank needs to keep its capital ratio above 5%, it will close positions at a loss, causing a death spiral (the bank run. As more people want to secure what’s left, the bank needs to unwind more positions at a loss. Which will cause even more people wanting to withdraw, which results in even more selling of the bank.
6. Eventually the bank becomes insolvent.
7. Buy stock back.
There might be more variables to it, such as the price of the treasuries itself (you might want to wait for a rate hike, inflation, credit rating change or whatever before you make the bank sell), but generally this is how imagine such a trade.
Conversely, they’re very sensitive to having their capital liquid compared to bigger companies that may have multiple banking relationships or access to credit markets in case of short term issues.
> Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.
True, but isn't it possible that if he omitted this clarification, his statement about "ample liquidity" could be on shaky ground, from a legal perspective?
This is the classic, textbook dilemma that the CEO of a bank/crypto exchange faces.
You can lie, and say everything is great. If enough people believe you, your bank is safe and you live happily ever after. If they don't believe you and pull their money, then you committed fraud and will go to court.
Or you can tell the truth, and say everything will not be great if everyone pulls their money. Then people will definitely pull their money. You will be sad, because your employer has turned into a smoldering crater and your equity is worth zero, and everyone will blame the bank run on you, but you are probably legally safe.
I think the only real thing you can do is make sure no one with credibility ever asks you if you are solvent. That is hard to avoid though, if you are a bank and you have to raise money by selling equity.
If you read the prospectus for almost any publicly listed equity, it will say something along the lines of "our company is a dumpster fire and could implode at any minute." In slightly nicer terms. They will say the exact opposite in the verbal quarterly conferences, but they put that in writing just so they can say you've been adequately advised.
Perhaps I'm overly skeptical, but everyone should know that all banks have the risk of 'if everyone takes their money out, the bank won't be able to make it work', right?
Sure, and everyone knows that their favourite person in the world could just run them over in a car and kill them in seconds, but if your best friend says to you, “you know, I could drive my car into you and you would die… your life could be snuffed out with a moments notice” you may start to question your friendship.
Well, the big difference is that the bank CEO's statement doesn't suggest that he will or could do something awful himself.
It is indeed quite common to hear aphorisms like "live every day like it's your last" which make the same point as your analogy, but remove the suggestion that the speaker could be a murderer and are thus much more analogous to the bank CEO's statement.
The relevant similarity is the *act of making* the statement is what’s problematic. In both cases the statement is true, but the act of making the true statement raises concerns.
Obviously there are important differences between the scenarios, but that critical aspect is what‘a relevant in this context.
Everyone doesn't need to know or care in many cases. The FDIC insures deposits up to $250k. That covers the vast majority of accounts at most banks. So a run won't occur at most banks. There were hardly any runs in 2008 for this reason - the relatively few "run type things" which happened were where big interbank exposures existed.
SVB's customers are weighted significantly more towards businesses who will have more than $250k in the bank. So, they have to be ready to take action fast, so a bank run on SVB is much more likely.
FDIC insurance is similar in the sense that if the feds ever have to say "don't worry that JP Morgan or <other large consumer facing bank> is going under, most of you will be covered within the FDIC limit", then we're fucked in so many other ways it doesn't matter. That is after all why we invented the term "systemically important".
Your acting as if the FDIC only exists to cover a massive systemic failure. In the event of something like that additional intervention may be need sure.
However, the FDIC covers all banks, and is generally involved with smaller banks fail and they are they to insure whatever balance the bank could not cover with its remaining assets when it failed.
I’m not actually aware though what the last incident they actually had to pay out was though. Looking through their historical data on bank failures every one I’ve seen says the insured accounts were assumed by another bank purchasing up the failing bank.
One of the largest recent FDIC payouts was IndyMac. I'm not sure if this was the most recent one, but certainly one of the most recent big ones. They were so bad that no one wanted to take them over! And the other banks were in such a bad way at the time, the FDIC couldn't force through a shotgun wedding with a semi-willing suitor. So the FDIC got stuck with them.
But worse, thousands of the individual depositors and businesses who banked at IndyMac were over the FDIC limits and they lost, collectively, hundreds of millions of dollars. The FDIC insurance limit at that time was $100k per separately-named account per bank; it is now $250k. And the $250k raise was, in a surprisingly kind move, purposely made retroactive to help cover some of the losses that people had suffered during the GFC under the previous lower limit.
And still, despite all that, lots of people lost lots of money when the bank went under:
> SVB's customers are weighted significantly more towards businesses who will have more than $250k in the bank.
If you have that much money, FDIC is not adequate for you (and isn't intended to be). There are other mechanisms for those sorts of depositors. Surely, those businesses got solid financial advice and are using them, right?
The mechanism is to watch the banks you have money in. A company still has to pay it's bills. To pay bills, you need some money in a bank, it's unavoidable.
So, let's say you are a company with 4 banks accounts. Each has $500k in it. One of them is SVB. You probably just move the $500k into one of the other bank accounts. It's no big deal per se, but you do it. That's a run on the bank if lots of companies do the same thing.
Maybe. Smart people assumed Lehman wouldn't be left to sink. It was. And it caused a lot of problems. And the people who realized afterward that it was a mistake are retiring right about now.
These are logical sounding arguments, and you are going to be right more often than not. But humans make these decisions, they made the decision to let Lehman sink and it was obviously bad in retrospect, and there were many folks who were opposed to the bailouts in 08.
There are better options than playing these odds. Spread across banks, hold short term treasuries etc. Treasury functions at a company exist for a reason.
True, true, but I don't want to take zero risk. I want to take some risk. For example, I do own short term Treasuries, but I want to borrow against them to short some stocks I don't like. And as soon as I have a margin account, my counterparty risk changes drastically due to how brokers work.
Your employees don't accept t-bills as payment. Your suppliers don't accept them either. To do business, you need money in a bank account. Not all your money, but a decent chunk of money needs to be there for day to day.
Sure, you need some, but many small businesses leave it all in a bank. It's easy to just set up recurring buys of 4 week t-bills that you can halt at any time, payroll is predictable, and suppliers are commonly on net 30-90.
I wouldn't want to get paid in equity if the IRS didn't accept it for tax payments either. If you accept 100% of your compensation in equity you are bankrupt because you can't pay your taxes.
... until you find out the FDIC itself has a weak reserve ratio against their insured accounts, meaning they will be as broke as everybody else in a systemic banking failure.
They've been around almost 100 years now... They went through 2008. The reserve ratio seems low, but when you consider the likely asset coverage for the first ranking creditors across the entire industry, the FDIC doesn't need to cover much.
Terrible analogy. The insurance in the case of banking deposits changes human behavior to entice them to leave the money in the bank. History shows it. Fire on the other hand isn't aware of insurance, and if anything it makes humans less careful and your house more likely to burn.
This "don't underestimate the stupidity..." might feel like a clever or wise speech to give, but history suggests the FDIC has been incredibly successful at reducing bank runs. Insert "those who don't learn history...." speech here.
Hm? Plenty of them did back in 2008. They were only insured uptm to $100k back then, it's up to $250k now but anyone who has more than that in the bank, which plenty of companies do, is sitting on a pile of risk. So then you withdraw your money from SVB down to $250k and then everyone else doing that - you have your bank run.
I'd be interested to learn how that insurance fund actually works. Is there a big stockpile of cash somewhere or is that invested in (gulp) "super-safe bonds"?
The FDIC does in fact insure up to 250k per account/bank. You can get more insurance by spreading your deposits between banks, a service some financial institutions will do for you.
The problem isn't insuring the losses, that they can do. The problem is will you even be able to buy anything after the chaos if a systemically important financial institution goes under? The banks that hold the most ordinary customer deposits aren't like Lehman Brothers and the fallout from one of them going under would be catastrophic on a level far beyond something like 2008.
FDIC was invented for the great depression when banks were not as large or concentrated, nor were they as globally connected and intertwined with day to day business. The reality is that FDIC is far from being sufficient insurance to calm down a collapsing market, that's why we had to do bailouts in 2008, because of what was coming down the road in that regard if the contagion were to spread further.
It's true that all banks have that problem, but for most banks it is not necessary for the CEO to remind everyone of that fact in a press release. The fact that they feel the need to make this statement makes it clear that SV bank is having much higher withdrawals than normal right now.
Yes and at that point the boss of the ECB shows up, calmly does a press conference at which he says "whatever it takes" and everyone goes back to sleep knowing the Germans are on the job.
That's why depositor insurance laws were passed. Bank runs for retail-facing institutions are rare in developed countries. Even when they happen, retail deposits are made whole up to the insurance limit, which tends to be well above the national median.
A run might be more likely for investment funds like Questrade and Fidelity if their customers liquidate their holdings en mmasse and move to cash deposits and CDs, which would be covered by depositor insurance.
If the Bank is federally insured, it's not a problem that the bank won't be able to make it work. That's why generally speaking bank runs only happen on uninsured banks in the US. SVB is not, as far as I can see, insured and should definitely be careful in their choice of words.
Although the Assets, Liabilities, and Capital reporting available if you click "create financial reports for this institution" estimates 5.69% of deposits are insured. Is a corporate account limited to $250K of deposit insurance? If so, I imagine many of them may have much more than that, and the reporting does show almost 75% of the deposits are in accounts with greater than $250K, assuming I'm reading the report correctly.
In a bank? If you have that much you really should invest in something better than a bank account. Banks should be petty cash that you spend in a couple months.
no i wasn’t. i said an individual could easily have $250k in cash to show you that it is not a significant amount of money from a business perspective. nothing about what i said referred to keeping $250k in a non interest bearing account as being a smart decision for an individual
i’m not talking about what the savvy thing to do is, just taking issue with the assertion that “it doesn’t matter if a bank fails cause it’s insured” when there’s a limit that the OP either failed to mention or didn’t know about
and not that it matters but this is specifically about a startup or business not talking about personal finances of an individual
It's crazy to me there aren't banks with 100% reserve ratio fully insured for a nominal fee of 0.4% or whatever (gold/silver storage with full insurance is ~0.4% so this probably isn't far off).
I'd much rather lose 0.4% of my money than lend it out at +0.01% to whatever checking accounts pay nowadays while they lend out to some asshole that does business with the bank.
> The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank.
Demand Deposit Account - the kind of account that allows for cleared funds to be withdrawn without advanced notice. Probably 99.999% of accounts such as checking and savings one can write checks/do ACH payments/send wires/transfer money from fall into this category.
>The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category
My understanding is that this might cause an unwelcome surprise to (for example) someone with a personal account at Bank A, and a sweep account at Brokerage P that sends its funds into accounts at Banks A, B, and C.
> Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.
I don't think this is damning in any capacity. It's well known that all banks in the world keep part of their reserves in other vehicles. If a bank run happens, they'll have liquidity issues.
You win but you may get stuck paying the borrow costs still for a while until either the stock is tradable or whatever happens with the resolution of the bankruptcy settles out (the residual shares potentially have _some_ value). In practice, before that, your broker or whomever you borrowed the shares from will probably just declare it a loss and close it out. They'll then get a little something from the bankruptcy, maybe.
That's assuming a traditional short, and not something like selling naked calls. In the latter case they just expire worthless.
Wrong, they are, ... um were, publicly traded under the symbol SIVB. [0]
Trading Halted. They were down 66% on the day before halt
On 08-March-2023, they were trading at $267.90, by the end of the 9th, 106.08. By trading halt today, $39.49. Now, it's worthless. Imagine thinking you got a bargain at $106, or $39...
In the end they're not, because if there isn't outright fraud, some other bank will just buy them. If Silicon Valley bank is in trouble, I'm sure one of the bigger ones would want to buy them. Their customer base is worth something and they'd get it for next to nothing. And for JP Morgan or Citi, a run on Silicon Valley bank hardly touches their cash reserves..
Not exactly - ‘fractional reserve banking’ only happens in textbooks, it doesn’t actually describe how real banks work. But it is true that basically no bank could immediately pay out all their deposits without running into liquidity issues.
To be fair, he is dealing with a slightly more sophisticated clientele than the masses that typically make a run on a bank who would (hopefully) realize that their shared success is contingent upon rational, pareto-optimal behavior; which is to say — if folks make a run on SV Bank, it’s pretty much going to be a shit show as to who comes out on top/who doesn’t.
I agree and said something similar elsewhere but i think whats becoming clear is that a bunch of VCs are so selfish (and clearly not that thoughtful) that this behavior might undermine the collective of the bank.
i wonder if this is the accidental downside we have to pay for the incredible speed of information these days. not just information in the sense of journalistic report, but also information in the sense of acknowledging and processing transactions. the older i began the more i come to be wary of speed, just for the sake of it (i'm looking at all of you performance engineers). latency might as well be an extremely cheap security/life-sustaining feature (i'm looking at its reincarnation in cryptography/security as constant time algorithms).
its the most cynical response ive seen in a long time, to basically reiterate a fundamental limitation of modern central banking in response to the very event thats occurring.
People aren’t keeping their money in Chase accounts for the 0.01% interest, given that the risk-free rate is currently >4.5%. So you may want to rethink that.
Yeah there are precious metals demand deposit vaults that do exactly that. The cost to have that fully insured and also audited to make sure your exact serial numbers are actually stored and not secretly being loaned, etc, it works out to roughly ~0.4%/yr cost to store money in a bank like that. Which compared to ~0% interest rates in a saving account isn't that bad I guess.
Cool ... I guess you could vlog about the precious metals and get 1%/yr from Youtube to make up for it ... Keep saying "my precious" and you'll probably get a few million followers on Tiktok
If it becomes an internet meme/viral story however, which it looks like it’s becoming, they’re especially fucked. He should have never said this, this is very concerning
The Narrow Bank proposed a structure like this, where they would take deposits from customers and just park them at the fed, passing along the fed rate minus a small cut. This is more or less perfectly safe: the Fed basically defines what a US dollar is, and cannot be insolvent.
But the Fed won't let TNB open an account. The basic reason seems to be that they worry that this model is destructive to the US economy, which relies on banks making loans so people can buy houses and cars, and businesses can operate. If everyone banked at a narrow bank, the economy would seize up from lack of capital.
Whether or not you agree with this take, the reality today is that you cannot run a bank like you've described in the US.
Not a finance guy but I think that would literally be the opposite of how banks work. They have to lend out customers money in various forms, including giving that money to other customers in the form of loans, loaning it in huge chunks to companies for larger percentage rates than they give customers who keep their money in said bank, and so forth. Not sure how a bank that kept every customers money on hand all the time would work.
A "narrow bank" could work, but the Fed currently denies them banking licenses, since (presumably) the social function of banks lending out deposits is considered useful.
I just received an email from one of our investors, sent to all portfolio companies, advising everyone to transfer all of their money out of SVB at 8:30am tomorrow morning.
Investment/VC funds are doing the same (we’re talking many, many billions of deposits lost in a span of a few days).
There is a chance SVB will freeze assets while they deal w liquidity crunch which may impact startup ability to pay bills, pay salaries, etc.
If you use SVB, transfer your money out now (as in Friday morning at 8:30am), even if it’s to your personal account while you set up a business account elsewhere.
This is a serious issue and may result in wide ranging damage to the entire tech industry.
SVB is the most commonly used bank by startups and investors. This isn’t media trying to hype a story for clicks, this is a real an major issue.
Maybe you'd say it's worth the risk, but founders should be very careful about making transfers from accounts owned by their business to their personal accounts because this is literally the definition of embezzlement. I'd speak to your accountant and get their blessing first.
I think what the person you responded to was trying to point out is that commingling business funds with personal funds is not a wise strategy, even if you believe the companies assets are at risk. For one thing you immediately open yourself up to personal liability if any issues arise where someone may sue your company. Such a transfer could be considered a disbursement by the IRS, requiring you to pay taxes (or at least hire lawyers to clear up the issue). It may also be outright theft or look damn close to it in the eyes of your board or employees. Not to mention complicating claim issues for your company if the bank does become insolvent.
You should absolutely talk to your CFO, board, accountant, and lawyer before taking such a drastic step.
Yes you should do all those things if you’re comfortable risking all of your company’s money on a bank about to collapse which could happen in a matter of hours.
the legal system is not black and white. You go to court and there’s a judge and possibly a jury that hears your story, and decides if what you did deserves punishment.
Attempting to safeguard your company’s assets hours before a bank’s potential collapse will garner sympathy from just about everyone.
I understand your points; but people banking with SVB may not be able to run this month’s payroll if they don’t move their money. That will cause more problems than anything else we’re talking about right now.
Unfortunately a bank run is very likely due to VCs mass emailing portfolio companies. I hate to be yet another person promoting this, but it’s always best to be the first ones out during a collapse.
Strongly disagree, now that we see SVB clients are currently screwed.
It’s very easy to prove good intent when you didn’t benefit in any way. Besides, it’s the prosecution’s burden to improve intent, not the defendant’s.
Transferring $10 million to a personal account for 1 day then transferring again to a permanent business account a day later has zero legal risk when the bank you’re moving away from is literally collapsing.
Embezzlement is using company funds for your own personal gain. It doesn't have to be transferred to your own account.
If you move company funds in one blob from SVB to Personal account, and then move the same blob from Personal account to Bank XYZ, and document the process, you'll be fine.
Of course, you can use your personal account for a while until you setup another business account (which you should have at least a couple if you are well funded) but while it's technically not illegal, it can massively complicate your accounting later.
I realize you're talking in practical terms. I read about embezzlement because I was curious.[0]
> Embezzlement is using company funds for your own personal gain.
AFAIK, the criteria for embezzlement is much broader than "personal gain." You have to take possession (rightfully), but do something with it (unrightfully).
I can see an argument that the scenario of an employee taking its money from SVB and putting in another bank IS embezzlement if this is done without the CFO/officer's consent. In practical terms, you're probably fine as long as you're trying to act in best interests. [1]
It costs what, a transfer, a bit of explaining to the accountants, and a few days lost interest, to protect your company if SVB pulls through.
If you risk it and SVB goes into receivership: you might fail to make payroll. You might not have money for the taxman. You might default on liabilities.
These are not balanced risks. Any executive which does not pull their company's money to surefire safety is being negligent. Your duty is to your employees, your shareholders, and your suppliers. Not the owners of SVB, or to make the FDIC's job easier.
But at least with my company’s money, there’s no room for “probably” when it comes to my ability to pay our employees.
Our company will be dead if we can’t make payroll or if we can’t pay our credit card bills. That’s not something any CEO wants to risk just to avoid a bank run.
A CEO has a fiduciary responsibility which includes making decisions that are in the best interest of the company. Taking no action at this point is just irresponsible.
Musical chairs for assets currently in SVB or at other banks?
If SVB, it is probably too late to stop it, that game has already started and once a bank run starts only a miracle (or a powerful external actor) can stop it. If other banks I do not see a risk of contagion. And should the contagion spread to major banks feds will certainly step in (to save our core banking system, blah blah). My 2c.
His advice was good though. If you were one of the first to pull out funds you would have escaped with your money. The people who waited and didn't panic lost their money.
Just up to 250k. And even if you have less than that. Would your business be OK if your money got locked up for weeks/months before you get that reimbursed? How you will pay the company bills etc
Tbh, yes - a bank run by definition occurs if "everyone else is doing it", and in this case it sure seems like we're moving in that direction. And it's beneficial to be the first out, with no real benefit to waiting and seeing.
what the bank could do is announce a period of time, where you'd get a much higher interest payment for keeping the deposits in.
So at least a portion of people would prefer getting the interest payments, rather than withdraw, and thus give breathing room. The bank might suffer a loss in the short term from paying out the interest, but would not collapse due to the (now non-existent) run.
Liquidity crunch, probably as startups are drawing down cash to pay bills/payroll/interest payments… Trying to convert eg. long term treasuries held by the bank to cash for satisfying customer withdrawals takes time, and has costs. If too many customers attempt to do this in a short period of time, you start having to delay withdrawals, panic spreads and the process escalates and feeds back on itself.
Lots of speculation right now, but we'll eventually find out. Like Buffet is fond of saying: you find out who is swimming naked when the tide goes out.
I have no clue about the actual internals at SVB, but an example of why: say a bank has $200bn in assets that they put into mortgage backed securities yielding 1.5% for 10 years. Lets say that means they paid $86 per $100 bond. Now rates rise to 6%, so they're worth $60 per bond. They just lost 30% of $200bn. If their net capital had been +$10bn before this, it's now -$50bn. So, if every single person demanded their money back, the bank would only be able to give 75 cents on the dollar. But if you get your money before everyone else, then maybe they give you back the full dollar. On the other hand, if you let $100bn worth of capital flow out before you try to get yours, now there's only 50 cents on the dollar left over.
So, in cases where you think this is a risk, it's best to move swiftly.
But why did they pile into bonds all at once? Wouldn't you normally do the equivalent to Dollar Cost Averaging? Did they have no other choice but to park a huge chunk of money into various government bonds at exactly the wrong time?
They didn't get it all in at exactly the wrong time, but it does appear they lost something like $10-15 bill on around $80-$90 bill or so of securities. That's a lot of money given the entire shareholders equity is around $16 bill.
They are public, you can see their filings at the SEC. I'd guess some hedge fund paying attention noticed this weeks ago and just made a killing.
Telling everyone to withdraw their money at exactly the same time is a great way to cause more damage to those startups by creating an actual bank run.
Do you now if that "investor" is short Silicon Valley Bank's stock, took out long puts, or has other conflicts of interest?
Because if so, they just committed a felony.
That "investor" had better hope one of the recipients doesn't forward the email to the SEC.
The fractional reserve banking system is a perpetual prisoner's dilemma, and VC's are smart enough to know this.
The same VC funds influence all of the startups with deposits at SVB. This happens on the tails of Silvergate, where the major exchanges (who also share investors and have overlapping board control) coordinate a bank run, while Elizabeth Warren did everything she could to rug that bank, by spreading FUD and also by forcing them to pay back their emergency loan.
This entire thing is honestly more than a little fishy. Call me crazy, but it feels like a controlled demolition and open financial warfare on the startup and crypto industries.
It will be interesting to see if there isn't new regulation that gives the government far more power conveniently sitting on the shelf that's about to be pushed through.
It could just be unlucky revenue management at these banks, where they locked up way too much of their deposits in fixed rate bonds before the Fed decided to jack up rates, but that begs the question... why didn't the Fed know that raising rates this aggressively would cause bank failures? The Fed should have been aware of the bank's position with Treasuries. On some level this is a controlled demolition. It's just a matter of who is doing the demolition.
It's a pretty bog standard bank run. Bank takes a stupid risk, blows up. We see less of them now because of the FDIC, but most of SVB's deposits were non-insured so it was almost an 1890's style bank run. There was nothing "controlled" about it.
We wish that's what a crypto exchange blowing up was like! Every exchange crisis is either a liquidity crisis or a solvency crisis, we keep on wishing crypto exchange crises are liquidity crises but they inevitably get revealed as solvency crises where crime or incompetence means the money everyone thought was there is just flat out gone.
"our unprofitable startup that sells to other unprofitable startups which is also coincidentally funded by the same VCs and needs annual cash infusions just to pay the bills is surely built on strong financial foundations, unlike all those pesky crypto companies that sometimes actually make profits".
You're right, but that doesn't necessarily make it a good thing.
As a consumer (or a business client in the case of SVB), how does it benefit you that the bank doesn't simply hold your deposits in a figurative safe somewhere?
At a minimum, I wish I could say it benefits us by banking being free.
Lending could be opt-in. There could exist banks who charge a premium for simply being the custodian of your money. (These must already exist)
Fractional reserve makes money easily available to those seeking money they don't have, at the risk of depositors whose money they're putting on the line.
(For better or worse. I'm not for or against it. I'm certain there are massive benefits to the system. But the reality is the average depositor probably doesn't realize their bank deposits aren't actually theirs - and that's why we have the FDIC)
Loans are what drive the economy. I’ve used loans for cars and my home, as have most people in the country. Many people make decisions based on income, and not on cash they already have, as few people have massive accumulated cash wealth.
"its almost like making bets with money you don't actually have yet is a bad idea"
Banking is supposed to be a very boring business (at least under Glass-Steagal-like regulation). Making "bets" with money they don't have isn't something retail banks are supposed to be doing. Yes, we know that some banks were doing this prior to the '08 GFC, but wasn't that supposed to have been reigned in by the reinstatement of Glass-Steagal-like regulation since then? (of course, there is some distinction between retail banks and investment banks, is SVB the former or the latter?)
Loans are bets. You’re limiting bets to investments, but lending money is a bet that the person you lent it to will be able to pay it back; albeit a properly collateralized bet with solid underwriting, hopefully. But it’s certainly not a 100% guarantee.
Maybe running an economy on interest bearing loans was not a good idea after all, who would have known? We've had checks notes only a few thousand years to know that.
Citation needed. Also, I’m all ears for a viable replacement that doesn’t devolve into autocracy or government-endorsed corruption, and still allows for taking risk and forward progress.
For what it's worth, I agree with you and feel those examples are indeed emblematic of our current economic mode.
The "alternative" you envision is premised on shifting power back to the masses, but I think it's also important to mention guardrails to prevent excessive capital accumulation. There would still be an economy, but it would be driven by a more egalitarian aggregate demand and less likely to suffer the shocks of boom bust cycles associated with financial malarkey.
That there have been downturns is not an indicator that capitalism does not inherently work in the long term. There are always downturns, no matter the system.
SVB is our bank, I got in touch with a member of the senior team there and got the following message to share. (My own interpretation is I'm comfortable and I'm not planning to pursue it further at the moment):
As you know, we are limited in what we can share until the transaction formally closes next week but in the meantime I’m attaching concise information on the strength of our business, based on our recent mid-quarter update and financial announcements.
Our Moody’s Deposit Rating is Prime
Our credit ratings are also investment grade
SVB took action this week designed to:
Strengthen our financial position
Enhance profitability
Improve financial flexibility now and in the future
Our financial position enables us to take these strategic actions
SVB is well-capitalized
Has a high-quality, liquid balance sheet
Peer-leading capital ratios
Even before these actions:
We had ample liquidity and flexibility to manage our liquidity position
SVB has one of the lowest loan-to-deposit ratios of any bank of our size
The improved cash liquidity, profitability and financial flexibility resulting from the actions we announced today will bolster our financial position and our ability to support clients through sustained market pressures.
If the subprime crisis taught us anything it was that ratings go for marginally usefull to utterly useless the second sht gets real and there is actual stress in the system
Why does everyone make these huge generalizations based on one crisis that happened 15 years ago?
The problem in 2008 was that splitting an investment into a senior "low-risk" one and a higher-risk one led to higher ratings overall than the initial investment warranted. Do you have any evidence that something like this is happening here, or that this is a systemic problem?
The mistake they're potentially making today doesn't have to be identical to the one made 15 years ago. The that they were so wrong 15 years ago means that we have to question literally every rating they have, and we can't just assume it's right
That seems like a weak signal. If the only example of egregiously wrong ratings we have is from the subprime crisis, that means they got them right enough a lot more often than not.
Well, most of the ratings are done based on financial statements. The problem we are seeing is that losses in held-to-maturity securities do not show up in these financial statements and might create a liquidity crunch in case of a bank run.
SVB received all the capital it needed to cover the losses on its bond portfolio liquidations.
Cons:
The announcement of bond sale losses made everyone realize ever bank has a bunch of bonds at a loss if they don't hold to maturity, and SVB is going to need to sell any more of its bonds at a greater loss as more customers pull money out.
Pros:
The losses, percentage wise, aren't that great, so far. As long as perhaps greater than 90% of deposits don't leave then everyone can get paid out and its really business as usual.
Cons:
Large institutional investors are the biggest account holders and they're absolutely pulling out, alongside all of their portfolio companies.
Pros:
Other banks that are more liquid could step in and shore up the capital.
Cons:
- The fed [likely] won't be one of those banks (even if it just meant buying the bonds closer to par value) because that would mean a reversal of policy.
- This didn't help Silvergate bank and the new equity investors are at major losses too now, wiped out.
With the massive exodus of deposits though, their ratios change quite drastically. Maybe it wasn't a big issue yesterday, but as of today, they've got a huge problem on their hands.
You can pull up their financials from the SEC. They have gotten themselves into quite a pickle. They dusted between 10 and 15 bill on long term bonds. There is a decent chance that will sink them given everyone is pulling their money.
In theory, a bank can borrow reserves from/via the Fed to fulfill redemption requests, so long as the Fed and other lenders in the financial system think the bank has a sound balance sheet (i.e., its assets, including the loans it has made, are truly worth more than its liabilities, including the deposit balances it owes to depositors). The Fed can never run out of money to lend; it creates it out of thin air to lend them as needed with the push of a button.
If a bank does get in trouble, it's usually because its balance sheet is not sound (i.e., assets are not really worth more than liabilities). In the case of SVB, a big portion of its assets are loans made to startups. Who knows how many of those loans are at risk of default in this environment? Simultaneously, many of SVB's depositors are also startups that at the moment can't raise more capital and thus have been withdrawing money from their bank accounts to fund their cash burn. I suspect SVB can't sell its doubtful loans, or use them as collateral, so it has been forced to sell high-quality long-duration assets purchased when rates were much lower, recognizing large losses.
People downvoting you are clueless. Different assets have different moneyness depending on how they can be used. A credit card limit is more moneylike than bank reserves are.
They're not allowing approval of wires via SMS or their app, and no one is picking up the phone there and most numbers are fast busy. Smells deeply bad. I had an account at a bank that went under a few decades ago and it took a while for ... bofa? to pick up the pieces.
What's bizarre is that this is a particularly big bank to be going under. Most of the ones that die are tiny because banks have a real economy of scale here.
Lehman and Washington Mutual were truly exceptional cases in the 2008 crisis, and SVB may be right there with them in a few weeks.
2008 also had IndyMac and Wachovia[1] and a whole lot of regional banks, which were not small either.
[1] which technically didn't fail but had its retail banking operations forcibly absorbed by Citigroup in an overnight shotgun wedding officiated by the FDIC, but hey who's counting
They're probably already in talks with one of the big guys to take them over.. They still got until Sunday to get regulatory approval and announce it so that they get liquidity on Monday.
SVB CEO to VCs: please don’t tell anyone to withdraw their money or we could be in trouble
VCs: [immediately texting after hearing the above from the CEO] attention all portfolio companies, SVB seems to be in trouble, don’t keep your money with them
I'm really curious why banks like this are popular in the first place. I get why startups would want to lend from them, but what is the advantage of parking cash in a "startup-focused" bank? The rest of the business is exciting/risky enough, wouldn't you want your banking to be as boring as possible?
Banks don't understand startups. Startups have no history and just appear out of thin air with millions of dollars in their bank account. And then they proceed to burn tens if not hundreds of thousands of dollars month on month until they die, or get flooded with more millions.
That's some weird stuff!!
A bank that understands this, knows it's not fraudulent, and makes it easy to withdraw, deposit, get credit cards, give loans/venture debt, has a competitive advantage in this niche but highly lucrative sector—given they can operate with the right risk controls.
+this. We had BoA offer us a $10k credit card limit when we were discussing keeping over $1m on deposit at all times, simply because we're still running a loss. (And they couldn't figure out how to implement two party control for large transfers). Was a headache.
SVB has been a great bank for startups, they're no rookie at this stuff considering they've been around for 4 decades. However it seems like their investor communications and PR has been lacking
I feel like this is unlikely. Startups didn't spring into existence in 2005. Every business was a startup at one point. Even venture capital isn't new. I'd wager every suit and tie wall st old guard firm knows how to handle startups just fine. SVB just had the right branding for young entrepreneurs who assumed JP Morgan wouldn't talk to them.
Having worked with both major banks (BoA, Chase) and startup focused banks (SVB, First Republic, Square1) - you’re incorrect. BoA and Chase are great for personal capital, but for startups they are horrendous. Huge pains to convince them you’re not a drug dealer and aren’t going to die tomorrow. SVB, FRB, etc., understand startups and make it possible to… bank with them.
Indeed: this may portend a very rough few years for small businesses of any type and location being able to access the kind of banking services they have been able to until now.
To add to the other comments, SVB also courts startup founders for their private banking arm, and there, too, the benefit is that they actually understand startup founders.
Example: After our startup went up in flames in 2017 my wife and I (co-founders) got "regular jobs" with nice salaries. Some time later, we tried to refinance our mortgage with Chase. The banker at Chase was very happy to serve us right up until the point where he asked if we had more than 20% ownership stake in any company. I said, well, yes, technically we own 80% of our defunct startup. He then said he had to look at the startup's tax returns for the last two years. I was like... ok, that's weird, but sure. He then informed us that we did not quality for a loan because he had to consider our company's income along with our own, and our company had lost half a million dollars in its last year of operation, therefore he considered us to have lost half a million dollars.
I was like... "Do you even know what a C corp is?"
We ended up switching to SVB, which had no problem refinancing our mortgage.
(Fortunately our balance in that account today is within FDIC-insured limits...)
I was in a similar situation when my startup went up in flames and I went to get a mortgage, but I just showed the bank copies of the dissolution paperwork and they accepted that without any further questions. If a startup really is defunct it usually makes sense to formally dissolve it - otherwise you're on the hook for franchise taxes, registered agent fees, etc, and those can add up after a few years.
The company still existed at the time because we were still operating our paid service in maintenance mode for a while since we didn't want to cut people off. (The cash flow involved was trivial.)
Funnily, we ended up not being able to dissolve for 5 years because some dude decided to sue us (though this actually happened after Chase turned down the refi). I'm not going to get into the details except to say eventually his lawyer withdrew, he was self-representing, and then he didn't show up for court appearances, and so it was dismissed. 5 years later. This also did not bother SVB, when they looked at the details.
How? I'm no banker, but to me their financial picture reads: married couple, both currently have nice salary working at companies X and Y, together have proven ability to raise millions in capital. I would say yes please take our refi loan, and do come back if you need anything else.
Why would a proven ability to raise millions in business capital (and, apparently, to subsequently hemorrhage it) make someone a better credit risk for their home mortgage?
Their financial history includes borrowing lots of money, taking a big risk, and losing a lot of that money. Not necessarily bad, but it’s reality. Just because that activity happened under a different legal entity doesn’t make it irrelevant. The mortgage applicants own nearly all of the company that is losing tons of cash. It is an important part of their financial history.
Raising capital and then burning it all is what most startups do. Investors put in money knowing this was the most likely outcome. The whole point of the C corp is to keep the investor money isolated from personal money.
I'm disappointed that we failed but I think it shouldn't affect our personal credit one way or the other.
Well, just as an example SVB gave my startup a bank account and a no personal recourse credit card days after we'd formed the corporation. No way you'd get that from BofA.
They understand the startup ecosystem in a way that big banks don't. Now there's some competition from startup-focused banks like Brex and Mercury, but a five years ago SVB was one of the only games in town.
I got a BofA checking account, credits cards and a business car loan in the first month after setting up a brand new corp with 0 assets. It's almost kind of funny how it worked exactly as you described, at BofA.
P.S. which makes me wonder how much of SVB friendliness was just smart marketing. If you look up and down this thread, most of the SVB "explanations" here are strictly circular: "they are good for startups because they are good for startups", with little to none useful info.
I'm guessing your corp didn't have a 1 million dollar check to deposit, with expectations that most of that would get sent out to employees and AWS/GCP over the next few years, and that you would be receiving another 10 million dollars shortly thereafter.
Bragging about getting a car loan when (I assume) you have good history and credit? Unless it was a $1.5m Mclaren P1 supercar or something, that's not remotely in the same category.
the person i was replying to said no way a brand new corp can get an account or credit cards, they didn't say anything about millions. That directly contradicted my experience, and despite being "anecdotal", I'm sure i was subject to the same rules and equations as everyone else.
If you want another anecdote - this one has millions in it - my last startup banked with Wells Fargo from pre-seed right up to series A with >10mil in three funding rounds and never had a single problem. Must be my crazy luck here as well!
At any rate, SVB is dead now, so it's pointless to argue whether they were really a startup's best friend or just hyped that up. They are not anyone's friend anymore, they are dead and the only real question here is how to get the damn money back from them.
This is the Wells Fargo that got in trouble for creating 2.1 million fake accounts for customers who never asked for them, got caught by the CFPB, paid $185 million in fines, and has been desperate for customers ever since? Yeah, actually, you did get lucky with them, they really do want your business.
Mercury provides services and a frontend, but their banking services are provided by Choice Financial and Evolve.
Brex is also not bank. The Brex business account is an FDIC Sweep account, which constantly moves your balances across multiple banks to keep you within the FDIC limits.
I totally get why you’d borrow from them, and the card sounds nice, but do you want to be depositing your money with businesses that offer no personal recourse credit cards to brand new businesses?
they provide services/incentivies specifically catered to startups and their needs (eg free checking, aws credits, payment processing APIs/etc)
and not unlike aws/stripe/etc they want to be the bank for small companies that grow into huge companies. startups are a good segment to target (eg like vc) because they might also turn into a large company with much more cash and more banking needs
People care about convenience of locations, ATMs, online experience, customer service, savings rate, (lack of) fees, rewards. The bank's underlying risk profile is irrelevant for the vast majority of customers. If you have <$250K in your account the money is safe either way.
Gives you access to the upside of the start up at a lower risk cost compared to VC. I assume you are talking about people who are supplying the capital for the bank.
Small depositors (under US$250K) can get paid off quickly if the FDIC takes over, but larger ones may have to wait until SVB's loans are sold off to other banks for cash.
The collapse of a solvent but illiquid bank is well worked out in the US. Here's a 60 Minutes episode where they got to cover the process.[1] It's not too bad for the customers, but it is really bad for bank management. The 60 minutes video shows the moment when the FDIC people show up and tell the CEO he's finished.
Shares just fell 60%, not this year, but today, which is the biggest drop I can think of.
This is after a $1.25B common stock offering in an attempt to shore up its cash reserves.
Keep in mind they are raising cash by selling equity with their shares at $100 when they were at $500 a less than a year ago.
That's pawn shop levels of selling. To say they are in trouble is like saying it would be tough to sell a house that is currently on fire.
Rumour was that SIVB got alot of the old SI deposits when it became clear that they were going bankrupt.
It looks like both SI and SIVB will go bankrupt due to the same two causes.
The one two punch of:
- loan duration mismatches(short term deposits bet against long term loans). More specifically to get some interest income you tend to have to either go to riskier assets, not an option for bank, or longer duration. Unfortunately this locks you into rates for a long term.
As everyone knows, rates have really gone up quickly in a short duration. This makes your long duration assets drop alot in value so you can't easily liquidate them to move to new higher paying assets.
Normally this would be fine as you can ride out the duration of your long term bets without losing money, except for the second issue below.
- and a deluge of withdrawals meaning you can't just ride out your long term loans.
The difference here is that while SI will go away, someone will probably buy SIVB. It's just that with FDIC only protecting the first $250,000 in deposits you don't want your corporate money at the bank. And you certainly don't want to wait for FDIC to step in and make you whole.
There is a potential third issue with SIVB in that as the bank of alot of silicon valley startups they hold a lot of warrants for those companies on their balance sheet. And those have really been written down alot lately. Stripe, a great company by most measures had its valuation cut in half according to a post from yesterday so you can imagine what the average startup's valuation is worth if strip is being cut in half.
SIVB got hit by a lot of different issues all at once but they all had the same root cause, large interest rate hikes in a quick timeframe.
The other commonality between SIVB an SI is that both banks heavily concentrated on one sector only, for SI it was crypto and for SIVB it was silicon valley. For each bank they ran into interest rate hikes at the same time that the sectors they relied on took a huge dive in value.
Re: your duration point, these loans can be sold, either on the open market or a private exchange.
Calling it a duration mismatch is a bit misleading. They took on duration risk and their loans lost value is more accurate. Otherwise they would just sell the loans (which they stated they did, but clearly it wasn’t enough thus the equity raise)
1) their duration mismatch their long term assets lost value, this isn't a problem if you can hold to maturity as you'll get all your money back.
2) people flocked to the bank to pull money out as tech went down, their deposits really fell as those companies needed the cash to fund operations and layoffs.
When the demand deposits were required back before the duration of their assets this required them to sell when the assets were already marked down.
Their portfolio only had an unrealized loss, if they held they would have been whole. They were forced to sell long duration assets before they matured.
This is the very definition of a duration mismatch. Short duration money got called back while the long duration money was below par. if they could hold the long duration to maturity they would be whole with no losses.
Is this not a function of awful risk management? They seemingly put an outrageous percentage of depositors money at risk buying long bonds which I’m sure seemed like the best “fail safe” option at the time not thinking that rates would keep climbing.
But if other banks don’t have such enormous amounts of money leveraged it seems possible this is a one off case. When rates get hiked as quickly as they have risks that were always there that nobody considered are made obvious.
When we speak of liquidity in the business its not can you sell your asset, its can you sell your asset without moving the price.
In 2008 you could sell your MBS at any time, it was just for 10 cents on the dollar, that's not liquidity as we use the term.
They sold a chunk of long duration assets for a 1.2B loss because they had to sell them. That's a big loss for the quality of assets they were selling.
That is what is mean by hard to liquidate. Its true you can always sell anything. It's can you get a price that keeps you solvent that is the liquidity issue.
SIVB wasn't selling 2 and 30 year treasuries, they were selling MBS.
As a bank, you can't easily liquidate them without that showing up as a huge loss, thereby affecting your reserve requirements and potentially making you insolvent.
If you don't have to sell them and can keep them to maturity, they don't appear as a loss in your accounting.
It's the difference between mark-to-market versus held-to-maturity accounting. If you have to sell, you are forced to mark-to-market. If you don't have to sell, you don't have to account for losses due to bond prices falling in the market.
This is what a US bank failure looks like.[1] This 2009 picture shows the CEO of a failed bank near Chicago at the moment the 80-person FDIC team has arrived to take over. He's being told that it is no longer his bank.
The bank re-opened for withdrawals the next day under FDIC control, and was later sold off to another bank.
Edit: the video was relatively optimistic given the subject matter, at least for bank customers, not the owner. Assuming there's a market for buyers in such a case.
I'm curious if and how the "secret online bidding process" the FDIC runs to find bidders doesn't leak out to the owners of banks. It's possible the banker in the photo heard about it via word of mouth when it was being shopped.
The end of this video is the juiciest part: Maybe we shouldn't allow mega banks like BoA, Chase, etc. to exist because they pose systematic risk to the economy and have to be bailed out by tax payers if they fail.
The narrative that tax payers essentially gifted money to the big bad banks and evil investors is plain wrong. Most of the bailout money the large financial institutions like BoA or Chase received was ultimately paid back. Also what's often conveniently forgotten by the Occupy Wall Street crowd is that many pension funds also got bailed out.
Ironically the only consequences after 2008 was new banking rules which shuttered hundreds of small banks and reduced the market even further to 5 mega banks, who could much more easily handle the new requirements that were designed for large banks but applied equally to all bank sizes.
These calls for regulations always seem to result in that sort of thing happening.
They didn't really want "too big to fail" laws they wanted "don't ruffle the status quo, even if it harms the market long term".
In the Youtube the FDIC selling a 50yr old small independent bank to a $9 billion dollar megafirm was the real message of the video. Even if that bank was ultimately at fault for engaging in the gov-incentivized mortgage bonanza, in the years following the new rules plenty of other healthy smaller banks got swept up by bigger banks when the rules made them infeasible businesses.
And an FDIC takeover and forced sale seems like a possible outcome here as well... But the entities that have more than $250K in the failed bank will likely lose some money. As I understand it, those who have over $250K will be issued stock in the new bank so they won't likely completely lose the amount over $250K, but it won't be as liquid as the cash they formerly had either.
> But the entities that have more than $250K in the failed bank will likely lose some money
If anyone loses money in the SVB downfall, it is entirely the fault of the CEO/CFO for poor management.
Depending on your monthly cash flow and your balances, anything over $100k should be kept in CDARS. It is explicitly designed to keep your cash spread out across banks limiting risk of default at a single institution and keeping the balance at each bank below FDIC insurance maximums.
Maybe it is common in the US, and is done routinely when starting a business and business account. But if not I would be surprised if many seedround / series A startups with a couple of million in the bank do this.
In the UK I have not heard of an equivalent scheme, but then again I am not dealing with accounts.
Just to be clear for everyone: banks don't keep 100% deposits in a big vault, where a full-customer-withdrawal can and should be expected and permitted.
Banks even at their simplest "Main Street local level", need to keep, say, 15% or 20% of their deposited funds available, as determined centrally e.g. the Fed or the Bank of England.
The rest by design is to be lent out, that's how banks offer loans, mortgages etc.
So "we can't immediately return 40% or 60% or 80% of deposits" really isn't any kind of gotcha or big secret. No bank in the world can handle such a situation.
So: runs can and do happen, and are always a threat, and currently might be happening.
The question is: how to handle it in a grown up manner.
> The rest by design is to be lent out, that's how banks offer loans, mortgages etc.
When banks lend out money, they don't lend out existing deposits, they create new (debt-based) money from nothing and this new money is fractionally backed by deposits.
With 10% fractional reserves, if they have $100 in deposits, they can lend out $1000, thereby creating $900 of new money from nothing.
The second sentence is a bit misleading. Reserves are not a prerequisite for lending in our monetary system. The bank gives out all the loans that it deems profitable and only has to ensure after the fact that its balance with the central bank is sufficient (in your example, if it had loaned out 1700$, it would need to increase the balance by 70$, e.g. by taking out a loan with the central bank).
Quote: "Another common misconception is that the central bank determines the quantity of loans and deposits in the
economy by controlling the quantity of central bank money
— the so-called ‘money multiplier’ approach. In that view,
central banks implement monetary policy by choosing a
quantity of reserves. And, because there is assumed to be a
constant ratio of broad money to base money, these reserves
are then ‘multiplied up’ to a much greater change in bank
loans and deposits. For the theory to hold, the amount of
reserves must be a binding constraint on lending, and the
central bank must directly determine the amount of reserves.
While the money multiplier theory can be a useful way of
introducing money and banking in economic textbooks, it is
not an accurate description of how money is created in reality."
> thereby creating $900 of new money from nothing.
and if all of a sudden, the depositors decide to take out their $100 in deposits, the bank is in trouble, because they'd still have the $1000 in loans, which is now not backed by any reserves.
They, if this were to happen, would be required to obtain the reserves somehow - borrow from another bank, from central bank, or attract new depositors.
so in essence, the idea that the depositor's money is "lent out" is not technically correct, but the idea is not too different.
But isn't this the point of FDIC? Even if SVB becomes insolvent, your account value is insured by the federal government? I'm not very familiar with all of this, so please help me understand what I'm missing.
Funds over the FDIC limit aren’t just surrendered; instead, you become a creditor to the failed institution. The FDIC works to recover those funds - good loans are sold to other institutions, payments due are collected, furniture and real estate is sold, the usual.
So a percentage of your money may be paid to you over several years time. Good luck managing free cash flow in the meantime.
this is definitely happening (context series A founder from t1 VCs)
Every VC is talking to their portfolio companies right now about this. Text/slacks/emails. Half of them screaming panic telling founders to pull money out, the other half holding the line to stay strong
Most founders i know arent taking the risk and moving money...
Come on, fearmongering by a few internet trolls isn't going to change the outcome. If the bank fails, it was going to fail anyway. If it pulls through, it was going to anyway.
Startups have weird financial flows and risk profiles. A company shows up out of nowhere with a bunch of money and then starts screaming towards bankruptcy. Sometimes it crashes and is gone, other times suddenly a huge amount of money shows up out of nowhere and is wired into the account. And then the company starts screaming towards bankruptcy again, and then rinse and repeat. And sometimes they just go away forever and other times they randomly become a profitable business and suddenly mutate into a normal company with net income and stuff and go public. And also the random huge sums of money these companies get seem to be correlated, and you don't know whether you're in 2021 when all of these companies are going to be getting massive cash infusions left and right, or in 2023 when it just suddenly stops for some reason - even though those businesses don't actually look any better or worse. SVB claimed to be the expert in handling that super weird risk profile, and you can see how badly they misjudged that risk with their collapse.
Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time. If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Demand deposits should cost a low service fee, since the money can't be safely lent.
> Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
If we really want to prevent bank runs, shouldn't we just forbid lending?
Snark aside, transforming duration is a big part of the value that banks add. In general, there's a lot of demand for lending short and borrowing long. Banks add value (and risk) by taking the opposite side of those trades. I'd rather have banks that suffer occasional runs (which really aren't that common at this point) than banks that don't transform duration
This pre-supposes a pretty radical (yet normalized nowadays) economic philosophy: that growth per se is good.
A more nuanced approach would be to value and triage lending opportunities according to how much they contribute to the heating up of the economy, and how much opportunity for future sustainability they provide.
The only "natural" organism that grows without attempting a quasi-stable, dynamic equilibrium with its environment is cancer. The exponential processes you refer to are not "natural" in the general sense and only represent the barest, simplest models.
This is kind of like saying we can eliminate most automobile fatalities by eliminating cars and making everyone walk or take the train everywhere.
Yes, it would solve one type of problem. But nobody wants your solution because it’s an unreasonable trade off for everyone to solve an extremely rare edge case.
Single-minded optimization for single edge cases is really easy in fantasy worlds, but in the real world people choose trade offs even if they come with rare edge case risks.
> Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
In other words, no liquid deposits allowed. Banks charge customers to hold their liquid cash because they can’t do anything reasonable with it.
So yes, you could make one type of extremely rare problem go away by removing a desirable feature used by hundreds of millions every day. I don’t think people would actually choose this, though.
> As always, the underlying problem in banking is that the banks are lying, telling two or more people they own the same dollar at the same point in time
Either you don’t understand how banking works, or you’re trying to project a crude misunderstanding onto the general public.
The concepts of assets and liabilities are well understood in the business world. Banks aren’t “lying” and fractional reserve banking does not mean that banks are creating fake dollars. Liabilities have always been part of the equation.
> Yes, it would solve one type of problem. But nobody wants your solution because it’s an unreasonable trade off for everyone to solve an extremely rare edge case.
Can you explain why this is bad? People lived with hard-ish money systems for extremely long periods of time.
> The concepts of assets and liabilities are well understood in the business world. Banks aren’t “lying” and fractional reserve banking does not mean that banks are creating fake dollars. Liabilities have always been part of the equation.
I mean, it's really about how you define words.
Most people believe that they have money in the bank. When in reality, they have unsecured debt to the bank. Although to be fair, for most people that debt is backstopped by FDIC/NCUA.
But, of course, that unsecured debt is often referred to as money, so I can't really blame them too much.
> Can you explain why this is bad? People lived with hard-ish money systems for extremely long periods of time.
The problems those systems caused are the reason we created the Fed and soft money. Hard money ruined many lives, caused many panics, and is an intellectually bankrupt idea that only cranks are still devoted to.
It’s a pretty involved topic. “ The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes” gives a good narrative that exemplifies some of the problems.
> People lived with hard-ish money systems for extremely long periods of time.
True, but most of human history was also pretty awful. If subsistence agriculture is your idea of a good time, nobody's going to stop you. But it's definitely not what most people want.
> True, but most of human history was also pretty awful. If subsistence agriculture is your idea of a good time, nobody's going to stop you. But it's definitely not what most people want.
I can't tell - are you arguing that soft money is a necessary precondition to industrialization?
I'm saying that your argument is bunk. People also lived without effective dental care for long periods of time. People lived without all sorts of things. If you want to show that something is unimportant, you have to do more than wave vaguely at recorded history as if it were all pretty great.
What an odd choice of analogy. Incidents where someone driving a car hurts or kills someone else is in fact an extremely common "edge" case. It happens, like, several hundred thousand times more frequently than bank runs do.
hilarious attempt at a metaphor, traffic deaths from personal automobiles have been in the top 10 causes of death worldwide for the better part of a century lol
While that would obviously solve the (relatively minor, all things considered) problem of bank runs, the demand for long term loans is not nearly as large as the supply of long term money. Maturity transformation provides real value to the economy by consolidating short term deposits into things like mortgages and long term business loans.
Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all.
> Imagine if you could only get 3-year mortgages, after which the entire cost of the house had to be repaid. That would make home ownership unattainable for the vast majority of the population. Alternatively, if you could not access your savings for 10-30 years after depositing I bet a lot of people would not bother at all.
Adding on...
Balloon mortgages exist, although they're usually not very convenient though, because transaction costs are real and the risk of being unable to find acceptable finance terms when the balloon payment is due is also real.
Similarly, lots of people participate in retirement accounts with substantial fees for early access. I guess you could do mortgage lending from retirement funds, but the interest rates aren't compelling (they might be if that was the only source of long term lending though).
Perhaps in a pure market sense, but that's not the world we live in. The government (doesn't really matter where you live) has a vested interest in the status quo and wants people to make long term investments. That is good for both societal stability and for longer term economic growth. Therefore, such a government will support financial institutions in providing long term loans even if that sometimes leads to bank runs. Things like FDIC and related systems in other countries make sure the risk gets smoothed out over all participants in the economy.
My point is that when you take the view from the wider society, the price of long term loans should be (nearly) independent from the chance of bank runs. Those are only a problem for the shareholders of the bank itself, but not to the society it resides in.
I don’t really understand what you mean. Isn’t ‘in the business of borrowing short-term and lending long-term’ like half the definition of a bank? The other half being that they are licensed by the state to do this short-term borrowing, get state guarantees for deposits, and have to follow a bunch of regulations making them almost an instrument of the state.
It feels to me like saying that evictions wouldn’t be a thing if we simply didn’t allow tenancies.
I roughly believe that if you gave people the choice between paying to store money in ‘cash but it’s a number in a database’ (ie the thing you describe) and investing it in some kind of ‘not a bank’ where they can earn interest and withdraw when they please but the big pot of money is loaned out, there might not be runs of the ‘bank’, but there would likely be runs of the ‘not a bank’.
> Daily reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long.
Yes but this is a valuable service for the economy and so society has decided that it's worth the cost of insuring the risk of a bank run in exchange for the economic benefit of banks doing this.
> telling two or more people they own the same dollar at the same point in time.
I don't remember a bank ever telling me this. I was taught how banks work way back in grade school. Surely everyone knows that banks don't literally hold the money you deposit in a vault somewhere.
I honestly don't see where banks are lying about this.
They may not be explicitly stating it but if the bank has $100m in assets most likely they are holing ~10% of that in cash and the rest in loans/real estate/bonds. If 2 members of the bank each cash out $10m at the same time they have a problem - in other words two people were owning the same $ at the same time
> in other words two people were owning the same $ at the same time
But that's not what that means at all. It's not even implied, unless people are just not understanding what it is that banks do or how they work. But I don't see how anyone can fault the bank for that.
Does that provide a better outcome for society than something like FDIC deposit insurance and the occasional run?
Seems like for the vast majority of people it does not. Most banks make enough money to pay their FDIC premiums and some interest on demand accounts and profit for their shareholders, and the few that don't are covered by insurance. That seems way better than having to pay a monthly fee to keep my money safe and liquid.
>there wouldn't need to be a reserve ratio at all.
Wouldn't there? The bank could still end up with bad loans in excess of their models and require some capital to take the loss before depositors. Or are you suggesting that banks are simply a market maker between depositors and those with loans? That seems even less optimal, societally.
Lying is wrong[1]. Therefore, it is bad to base your banking system on it. It's the typical thing where the costs to the system accrete over time and then cause a crisis: the elites are bailed out, the taxpayers eat it.
There wouldn't need to be a reserve ratio. A dollar could, in theory, be lent out an infinite number of times, so long as that dollar were lent (and saved) at increasingly shorter durations. At any given point of time, a single person "owns" that dollar. Of course, the market would signal what dollars were available when. And, also, loan losses would need to be covered out of other profits by banks (who would need to charge service fees for, well, the services they provide, rather than hiding behind long/short duration arbitrage)
(I'm also in favor of a citizens dividend for controlling money growth, and a modern debt jubilee per Steve Keen. So, yes, you can safely ignore anything I say as implausible, almost certainly wrong, and unlikely to ever be realistically considered by the powers that be. This has one advantage, however: I will never be proven wrong :)
[1] - see all moral traditions across all cultures, or ask mom
Nope. I was a gold bug once, but I don't think it's a good way to manage the total money supply: it can't grow as fast as the economy (labor productivity) does. I view money is a public social tool, and so it should be owned by all of us. Hence I am in favor of a citizens dividend for growing the money supply.
I do think you should be able to trade fiat into gold and vice versa tax free, so gold can be used for savings, which it is very good at.
In fairness, nobody agrees with me on this stuff, including myself at times!
Banks are one, if not the most, regulated companies in the US.
What are banks lying about and who are they lying to?
I'd assume the government would come down on them pretty hard if it turns out that all banks are lying to their customers as federal and state regulations on banks are pretty heavy handed to make sure that the vast majority of banks are healthy at any given time.
The bank is telling two or more people they own (or, at least, have access to) the same dollar at the same point in time.
With duration matching you can have loans, but it is clear that depositor A can't get dollar X back until time point T, and that borrower B can have the dollar until then.
> The bank is telling two or more people they own (or, at least, have access to) the same dollar at the same point in time
But they don't do that. Or, I've literally never seen them do that.
What the bank tells me is what my current deposit is. That's the truth. They aren't representing that the amount they're listing is a specific dollar somewhere, they're telling me how much money I've given to them.
They are telling you you can have all that money immediately. And they are telling that to all the depositors. That's the lie. It's a bit abstracted due to aggregation, admittedly, but that's the lie.
I use a single dollar just to make the idea concrete.
> They are telling you you can have all that money immediately.
I don't think they're even telling you that. And that is absolutely not what we were taught about banks in school. I think that banks do assume that everyone basically knows how banking works, though, so they don't engage in an educational program about it when you open an account.
What banks have told me is that my deposits are safe (in the sense that I won't lose my money) up to $250k. That's true enough. And I also remember reading the paperwork I signed when I've opened accounts where they specifically say that my deposits might not be available at the moment I want to withdraw them, for various reasons.
>And, also, loan losses would need to be covered out of other profits by banks
But, like, what if they aren't? Who holds the bag when losses exceed profits? That is of course exactly the case where deposit insurance comes in handy. So I'm pretty sure you still need it.
Your model protects specifically against losses due to time mismatch between deposits and loans, but there are other ways that loans can go bad!
The bank has to make money, otherwise it cannot pay it's staff or keep the lights on.
So that's either loans, or effectively giving people a negative interest account where you lose your money. Citibank does this, they just call it "fees" and it really, really hurts the people who don't have much money.
“Sorry we have to wait for someone else to want a loan”
If you’re trying to solve one extremely rare problem (bank runs) by completely dismantling a much demanded and commonly used banking feature (interest bearing accounts with liquidity) then sure, this would do it.
You are touching on the difference between demand deposits and duration deposits.
If you were charged a small nominal fee for your demand deposits, you would likely say "OK, I'll keep a certain amount in my demand deposit account, and then put the stuff I don't need into longer duration deposits, so I can get some interest."
This would be the right thing, and that money could be safely loaned out at durations shorter than you deposited. You would then be signalling to the market exactly what the demand is for money over time, and it could respond appropriately.
To an extent you do this today: you don't keep all your money in demand deposits, you instead put a lot in the market or whatever. Back in the day, you might have even bought a CD, which is almost exactly what I'm describing, sans the requirement that banks not loan funds they can't guarantee are available for the duration of the loan.
So it's not as crazy as it sounds. It's still crazy, but not as crazy as it sounds.
CDs are duration deposits, but you can still get the money out minus some fees associated with the early withdrawal. That doesn't help the run on the bank situation.
So long as the bank has reserves (out of profits) they can offer to buy people out early, according to their own profit and loss calculations. But they can't be compelled to, and they must have that money available to them at the given moment.
In this make believe banking system that I am making up. :)
Well sure, but one could theoretically imagine banks which are prohibited to lend money from their customers' current accounts and only make loans based on their CDs - and one aspect of that is that they'd have to offer much better terms for CDs since they would be in much higher demand.
CDs are definitely not the same as checking and savings accounts though. Most people don't even have any CDs, and the people who do have them also have accounts where they can withdraw money immediately.
I've never seen a bank that only offers CDs. That's probably because such a bank wouldn't survive.
> telling two or more people they own the same dollar
This is the main issue, and it's called a "reserve requirement", which is a percentage of the deposits that the bank must keep on hand to mitigate risk of issues like this.
In March 2020 the US Federal Reserve lowered it from 8% to 0%, which is where it is today. Just to give you an idea of how the economy works then, let's say you put $100 into your account at Bank A. Company X takes a loan from the bank for $100. Where do they put their money from the loan? Well, they spend most of it but part of it ends up in, let's say, Bank B. Bank B then takes that money and loans it out 100% to Company Y, who spends some of it and also puts some reserve into their bank account in Bank A. Which lends it out 100%.
So this is an over-simplified example but just to give a visual that this is where inflation is coming from. The "government" isn't printing money -- the banks are. It's a deck of cards with no safety net.
Watch the movie "The Big Short" and tell me how this isn't the same situation.
This "money multiplier" model is not an accurate description of how money creation actually works in modern central banking.
Besides a minimum reserve requirement, banks also have liquidity and (risk-weighted) capital adequacy requirements, which are practically much more relevant.
The 2008 financial crisis was effectively caused by "laundering"/structuring the risk weights.
I get what you're saying, but also I'm going to call BS on whatever liquidity testing banks need to do currently to satisfy the Fed. They're obviously not required to cover changing risks.
I think what's happening now is equivalent to 2008, it's just the underlying security was bonds and, in SVB's case, emerging equity. There were risks on all sides of the equation.
It's surprising that QT is occurring, yet there was no change in reserve requirements. It seems like a policy tool that would be part of the monetary tightening toolbelt.
> reminder that bank runs wouldn't be a thing if we did duration matching, forbidding banks from borrowing short and lending long
What is the business then? In order for it to be a business, a bank needs to earn a higher interest rate on what they lend than on what they borrow.
The bank has two choices to achieve this delta in interest rates. It can either 1. mismatch duration or 2. make loans that are riskier than their borrowings. By banning the first, you are implicitly claiming that the second is preferable. Is the second really preferable? Maybe. But not obviously.
I have no special sympathies for Silicon Valley Bank, but the reason its customers still have deposits today is that the bank leaned more toward the duration mismatch than the risk mismatch. What happens if you achieve your interest rate delta by making super risky loans and all those loans turn to goose eggs? Bye bye customer deposits.
That's insanely unrealistic in the near zero interest rate era of the past decade and merely a really terrible idea with more normal rates.
Banks have some set of relatively fixed cost, in terms of systems and staff. In a low rate environment, there's virtually no margin to be made on short term lending. Stretching the duration for higher yield is the only way to get margin to cover expenses.
Even in a high rate environment, most of a bank's reserves tend to be short term - savings accounts, 1 year CDs, etc. The things people want to borrow for (e.g. houses, cars) tend to have a longer time horizon to pay off. So if you want banks to actually make those kinds of loans, duration matching doesn't work.
That's right. Banks would have to charge fees for the services they provide, or become more efficient, or both.
They certainly would become less of a profitable and shrink as a percentage of the economy. Which is good: smart folks would be incentivized to go into things like manufacturing and research, and produce actual value.
You think banks would become less profitable by charging fees?
Retail banking is not some wildly lucrative enterprise, generally speaking - it's the boring, stable-ish segment of finance. They're gonna make roughly the same margin, whether through fees or spread.
No apparently there are still other rules that keep things in check we just got rid of that one. My understanding is that it did crank up the speed money printing quite significantly though.
I mean, yes, that is a problem, but it’s also their only benefit. The entire reason banks came into existence is to multiply the availability of currency (i.e. fractional reserve).
> If they locked deposits for a period of time they could safely (and morally) loan that money out without lying, and, in fact, there wouldn't need to be a reserve ratio at all.
Until the borrower doesn't (or can't) pay back the loan...
"Safe" and "moral" seem like inherently relevant words here and I'm unconvinced that you're proposal would be overall beneficial compared to the increased circulation we enable today.
We used to call that concept matched-funding where I used to work and it was quite an important part of Asset/Liability management within the Risk Management function.
You may be confusing solvability and liquidity. You may be well capitalised but if you run out of cash it's game over. Being well capitalised only protects you against losses (eg bad loans).
There is a product called a Certificate of Deposit[1], but I don’t hear much about them. They seem like quite a bit of hassle for not much more interest.
Not very common. Most consumer and business checking and savings accounts are demand deposit accounts here.
The default path for slightly higher interest on a fixed term in the US tends to be certificates of deposit. They’re similar but functionally more like a bond you purchase than an account you can deposit into regularly.
It was specific at Silvergate too. Unfortunately there are far too many optimists out there managing money who chose not to play it safe. Thus, despite being idiosyncratic, it can still be a systemic problem
Why these companies didn’t issue shares at the outrageous/nosebleed valuations they were at a year ago? Truly a mystery
Okay so every bank faces the same vulnerability, which is that their bond portfolio has suffered major losses
The market was made aware of how deep the losses are, as this is not usually reported in investor disclosures and the bonds are usually held to maturity thereby not being subject to losses in their notional value
ANY bank with volatility in customer deposits is vulnerable to these losses as they have to sell the bond at its current value at a big loss to cover the customer withdrawal
This is systemic and a direct result of the tightening. Money is literally disappearing from pockets right now. This will continue until the fed eases its policy.
Been using Mercury for a couple of years, as a customer I can recommend their excellent support & services. That said, I know aprox zero of their balance sheet or those of their backing banks Choice Financial Group and Evolve Bank & Trust.
Looks like the key info is that Evolve is partnered with MANY other services, including some in crypto land and they are having issues, so some VCs were advising people to move money off of Evolve and onto Mercury's other partner, and a bit of that happened. Here's the quote:
>>"Multiple VCs, including Sequoia and Craft Ventures, have advised their startups to move funds away from Evolve-backed platforms, resulting in about $200 million being moved off Mercury, according to multiple people with knowledge of the matter.
>>Immad Akhund, co-founder and CEO of Mercury, didn’t deny that the funds had been moved and characterized the amount as “not really material,” saying the company has “billions of dollars in deposits across 100K customers and [is] profitable.”
>>Akhund characterized the money movement as “primarily folks diversifying, rather than full churning,” by moving funds to Mercury’s other bank partner, Choice, or into Mercury’s treasury management product."
Don't get me wrong, I like Mercury. They have a sweep program that allows you to 4x the FDIC insurance up to 1mm and moves it across multiple banks including JPM. I think the writeup about Evolve was more compliance than issues with its assets and liabilities.
The higher central bank interest rates is affecting Future discounted cash flow and valuations startups. I wrote a blog entry about it last year where I predicted a lot of non profitable startups would be effected about it.
The king without clothes fairy tale of startup unicorns is starting to hit reality of financing capital at high interest rates.
Many startups have not had sound viable business models which yields black profit numbers but have instead run on red minus numbers year after year. Due to very low interest rates it has been too easy to start new companies. Thus many startups have been started without viable business ideas. The startups have been funded by venture capital, venture capital have calculated on future discounted cash flow when valuing the investments. Now that central banks are raising interest rates to fight inflation the higher interest rate will effect venture capital firms calculations. Venture capital uses future discounted cash flow. Now central banks artifically altered the interest rates by quantive easing which forced interest rates lower than the natural market yield.
“Application
To apply the method, all future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value of the cash flows in question;[[1]](https://en.wikipedia.org/wiki/Discounted_cash_flow#cite_note...) see below.”
I just tried to login to svb.connect.com and it is giving me a popup to scan an QR code from the app. The app now gives me a popup requiring two factor auth (which it hadn’t ever before) with a phone number that I don’t have access to. I luckily don’t have much money in this account. As a bootstrapped founder, what would I need to do to get my money if SVB goes under?
This being a bit different, the most likely scenario will be SVB getting bought on the cheap by a bigger bank. The merger will be pushed by the regulator.
Since SVB's root problem is lack of diversification in client basis, a larger bank beings the perfect solution. In such a scenario SVB will continue as a brand, and their website would start working again.
SVB was historically such a weird bank - it was the most "famous" tech bank, perhaps solely because of its name - but yet it was so utterly behind in the technology it used for _years_.
I like USAA and bank with them but their tech is often worse than other banks. Their website is often slow or pages fail to load. Their app frequently crashes/hangs if you leave it in the background and then try to use it again. They have overly sensitive anti-fraud detection that prevents essentially all (desired) international transactions. They have weird low transfer limits ($5000/day) for outgoing ACH initiated on their end and outgoing Zelle ($1000/24hr). (If you initiate the ACH transfer from the receiving bank, the $5000 limit doesn't apply and they'll process the transfer normally.)
Of course, the reason I bank with them at all is they had mobile check deposit in like 2011 or 2012, which was ahead of the game at that point.
>SVB was historically such a weird bank - it was the most "famous" tech bank
What would you name as its peers? I've heard First Republic. What about Bank of the West?
>perhaps solely because of its name
It is a killer name, after all. I bet the First Republics of the world wish that when they were started however many decades ago, their founders had the foresight to name them "High-Tech Bank" or "Sand Hill Bank" or somesuch.
In retrospect, it seems pretty bad to bank somewhere that is tied to one industry for precisely the reason that when the industry starts facing trouble, the money disappears, and doubly so for our risky industry.
> In retrospect, it seems pretty bad to bank somewhere that is tied to one industry for precisely the reason that when the industry starts facing trouble, the money disappears, and doubly so for our risky industry
It's baffling that banking regulators in the US allow such a racket to exist in the first place. It would be as of "Silicon Valley Insurance Co" were to insure every home in the Bay Area and no other homes anywhere else. The chances of large insurance claims all happening at the same time (the insurance company equivalent of a "bank run") would be unreasonably high if all of the risk were to be concentrated in a single town in an earthquake prone area. Now there are reasonable solutions to diversify that risk away in the insurance industry, such as the reinsurance market.
The US has a strange history of having large numbers of small, independent banks. In other countries (in Canada at least), banking is an oligopoly - the regulator effectively limits the number of banks that exist in the country to only a handful and only a few very large ones. This has the benefit of forcing banks to be large and diversified, thus avoiding the phenomenon of a small bank run or two happening every year like they have in the US. It would appear that the US system is also prone to occasional larger bank runs, like say Lehman Brothers or Silicon Valley Bank... The advantage of the US system is the lack of regulation promotes entrepreneurship and investment, which is something systematically lacking in a country like Canada.
It might also turn out that, in retrospect, it was a bad for the Silicon Valley venture capital industry to be so heavily reliant on a single, non-diversified, local bank. I can't help but wonder how much of a role the VC industry played in this, for example what ever happened to the billions of dollars that the VCs raised for crypto startups? Is Silicon Valley Bank liquidity crisis a domino effect of the cascading bankruptcies and market crashed in the crypto racket?
which is why insurance companies generally don't insure against earthquakes. The gov't doesn't need to come and nanny the company to tell them not to do something.
These specialty banks like SVB are servicing accredited entities, who should have enough sophistication to know what risks they are taking putting enormous amounts of deposits into a single bank.
> which is why insurance companies generally don't insure against earthquakes. The gov't doesn't need to come and nanny the company to tell them not to do something.
I'm not sure where you're getting this information. Natural disasters, including earthquakes, are perils that can definitely be insured. This is possible because the regional insurers can buy catastrophe reinsurance to protect the insurance company from extreme losses that are beyond the company's ability to absorb. I don't know much about earthquakes, but in Florida hurricane / flood insurance is heavily subsidized by the government in order to make home ownership affordable / possible in coastal areas.
Insurance is a highly regulated industry. The government regularly comes to "nanny" insurance companies and tells them what to do on a daily basis. So, again, I'm not sure what you're trying to say. The regulator in the US is called NAIC, it's the insurance equivalent of the Fed for banks in the US.
This thread is why y'all need to focus on engineering and leave finance to professionals. Banks have assets (mostly bonds) and liabilities (mostly deposits).
Both of these items have a duration. They have to match the duration between their assets and their liabilities or they end up insolvent. If enough of the depositors try to pull their money out of the bank, then that reduces the duration of the banks liabilities, and the bank won't be able to move quickly enough to sell their assets to stay solvent.
The tech companies that are complaining about FDIC intervention caused their own problems because they are panicked morons.
Even more ridiculous is any one of these mega tech firms could probably step in and solve this situation with a cash infusion. They would almost certainly come out ahead because they would be buying a claim on the bank's assets for less than they are worth. But they won't. Because they don't know what they're doing.
What happened here is no different than what has happened in every banking crisis pre-08. The economy will be fine, someone like Berkshire Hathaway will make a stupid amount of money and customers will blame a bank for a problem that they created by being stupid.
we're they specifically unsophisticated in the way they bought treasuries/other bonds? One could look at the zero risk weighting of treasuries and buy only those to satisfy capital requirements, but you'd think it would be obvious that you would end up with more exposure to interest rate risk than is prudent. Or is this truly such an improbable swing in interest rates coupled with demand for withdrawals that it is reasonable that they aren't expected to anticipate it ?
Reminder - SVB is small bank - highest market cap was 50B -- trading at 5B. Low level of contagion. If it does fail - definitely will be felt by start ups with cash at the bank.
I don't remember hearing that in 2007. Pretty much the first thing I heard about the financial crisis was that there was gigantic contagion risk throughout the financial system.
The main limitation is that liquidity risk regulation are not adequate. As recent example shows the reality is that risk is underestimated under the fake premise of accounting rules. Asset liability mismatch is the survival risk for a bank. Once you start creating an imbalance that forces to take action by seliing assets it is just creating a negative cycle. Also now people will ralize that treasury is not risk free.
A few years ago, when our startup was just beginning, our bank simply closed our account out of the blue. I guess it wasn't worth it to them, as we had no revenue yet and bootstrapping, so very little money parked. It took several days to get our money out, we couldn't make payroll and pay vendors in the meantime.
We later opened two accounts in two different banks as a backup/failover strategy. One handled incoming invoices and accounts payable, while the other handled payroll, so we'd always have money flowing through both banks at all times. If one of them failed, locked us out etc. we'd have the other to fall back on. It actually happened once: due to an admin error one of the accounts was locked for 10 days. We just routed payments and receivables to the other bank and went on with our day.
Back in the day, the crypto community would all withdraw capital for the same week to verify what exchanges had it. The better they would do, the more deposits they’d get back the next week. People and companies could never do that safely
If you’re reading stories like this, it’s too late. The short interest has already exploded, the stock has already lost 40%, and now we’re in takeover/bailout territory.
You’re a day late. Try again on the next bank failure.
Yes but OP is right. I posted that after hours, which means the earliest you could buy your short was at the open this morning, when the stock would have been down already.
But also, trading on SVB was halted before the market opened. :)
Fed should have mandated bigger reserves and done better stress testing before raising interest rates so fast. Anything long duration tanked like 20% in mark to market value.
SVB is probably not the last shoe to drop in this story.
Ah yes, the solution is more restrictions on banks to hold exactly the types of assets that are underwater! No, sorry you are wrong. The financial crisis that just started this week is due to banks holding securities that they are required to hold by law - the law considers mortgages and government debt to be safe yet it is now proven (and anyone with basic finance knowledge knew ahead of time) to be extremely unsafe due to interest rate risks. Bailouts incoming!
>banks holding securities that they are required to hold by law
Not an expert in this area but when distilling everything I understand about this topic, it seems like big banks (too big to fail?) collude with the federal reserve to rob smaller banks (of clients and value) using interest rate games and these "requirements" every x years.
If anyone has an explanation as to why that's a wrong conclusion, please share.
That's a bit like saying having a door with a lock on your house is a conspiracy to get you to spend money with the door and lock industry. If you squint real hard that kinda sorta looks true, but it ignores the very real protection having a door with a lock on the front of your house actually gets you. Forcing banks to have X amount of reserves in a "safe" investment vehicle should protect them from exactly this kind of problem. The fact that it didn't in this case will be a case study for years to come, and will effect change in FDIC's requirements.
>this case will be a case study for years to come, and will effect change in FDIC's requirements.
I'm only at the position where I see this conspiracy without squinting because I remember the last time this happened, responsible solvent small banks were, thanks to regulation, pushed under or taken over by the larger irresponsible banks.
I have a feeling the environment (requiring malinvestment followed by rapid rate raises) is set so that the next set of regulations will do the same and further kill smaller banks. It doesnt seem like a side effect but rather the intent of the chaos that a few large banks guide or are privy to (through lobbyists, fed insiders, etc...) before it occurs.
So we are a little over a year into this aggressive monetary tightening policy and we are seeing banks begin to appear to fail with base money demand issues like this SVB crisis.
This happened in 1930 a year after the crash started and again in 2009 a year after the events of 2008.
Fed policy will be interesting in the near term. I know they are fighting inflation but they may have to concede this is a battle that will be fought over the next several years and that deliberately destroying the economy through too aggressive rate increases is bad medicine.
I think the problem is that inflation is bad for everyone, whereas if rates rise it hurts only the weakest players in the financial system. It's a bit like a controlled forrest burn.
Still though, it's too early to say. If there was a more widespread contagion and a panic, then I guess it could be bad.
To me though the real culprit is the super lower interest rates we had just a few years ago. Without that, we would not be seeing any of this.
No doubt but my concern is that it spreads and suddenly healthy organisms begin collapsing because whoever they relied on is suddenly insolvent because of who they relied on, etc.
Credit Suisse is facing liquidity issues and tarnished credibility after a rash of scandals and screwups, see https://www.reuters.com/business/finance/spies-lies-chairman... for a summary. From your link it looks like their finance reporting in recent years is now under question as well. It doesn't look related to what happened at SVB or Silvergate.
It could be routine (no more news from banks that are in trouble please), but the SEC does have access to the numbers in the filing since it goes into EDGAR about a month before the announcement.
Credit Suisse has been on the rocks for over a decade. Widely considered to be one of the most mismanaged large bank, and I assume propped up by Switzerland’s government for appearances’ sake.
Compare their numbers to any other investment bank.
Anyone holding long term bonds they bought before the fed raised rates is in liquidity trouble. The question is if those institutions will have a run or not.
Thanks! Since that submission is just a single-sentence tweet, I guess we'll merge those comments hither, so the (slightly) more substantive article remains the basis for discusion.
I am interested and a bit anxious to see whether this was one bank's incompetence or a systemic issue caused by unprecedentedly low rates incentivizing cash holders to seek riskier forms of yield.
Although, why anyone managing billions of dollars thought it was a good idea to lock up tons of money for a long period when interest rates were nil is beyond me. I'll gladly take their job at merely HALF their salary!
Joseph Wang explains what you see in the SVB books, how much did they take from banking rescue lines, how many real assets they have, and so much more.
My surface-level understanding was the federal government started guaranteeing/ensuring customer deposits in order to prevent bank runs from starting. Why is that not happening here? And if it is why wasn't it enough to prevent a bank run?
FDIC isn’t designed to prevent runs entirely. It designed to prevent runs from having a serious financial impact on retail banking customers, and as such is capped at 250k per depositor per bank.
SVB probably has a disproportionate number of its customers being mid to large businesses, for which FDIC protection isn’t as helpful. So they’re probably more vulnerable to runs than a bank that mostly holds retail customer funds.
I don’t think the FDIC intends to stop every possible bank run, but rather dramatically reduce the number of them and reduce the impact when they happen. I think on that front the FDIC has been enormously successful
I don’t think it’s only personal deposits. Corporations, I believe, enjoy FDIC protection up to $250k also. It’s just a much… less impactful amount for the average corporation compared to the average personal depositor
Bum rubs and handsakes. The amount of pressure I see founders get to put the funds in SVB is nuts, I presume a lot of VCs/founders must personally have invested in the bank stock.
Perhaps it is the beginning of the end of the VC jenga pyramid scheme. We'll see how many unprofitable startups are exposed and caught in this contagion.
They took the deposits and bough "safe" bonds (eg treasuries). Which they're allowed to carry on their books at cost, even though their market price drops as interest rates rise.
But in both SVB and silvergates cases the drop in the market value of their assets coincided with an increase in withdrawals. They were forced to sell some of these bonds to fund withdrawals, requiring them to realize the market price. The accounting distorted the value of their assets to an extent, and the withdrawals laid that distortion bare
This whole thing will go down in history as a case study in how not to communicate and lead in a crisis.
The bank’s leadership made some bad financial decisions but then scored a massive “own goal” in how they communicated all that to the market and their customers.
Anecdotally about SVB and crypto; I really wanted to put my funding round assets into Silicon Valley Bank for my last start up. However, when I was speaking to their bankers, I mentioned that there was a possible element of the platform that would be Web3 based. The SVB team immediately paused my application and insisted that they do a deep dive into all of my investors, my bank accounts, and my pitch decks. My pitch deck did not include materials about web3 since it was so tertiary to our core strategy, and this discrepancy between what I had told them and the paper materials was such that it raised enough of an alarm at SVB that the refused to take my deposit.
They were really concerned about anything web3 so I wonder if they limited their exposure. Or maybe it was just us they didn’t like.
Probably they just perform more extensive due diligence because of the market, as cryptocurrencies are more risky. I know of plenty of cryptocurrency companies that use SVB.
I think it's more that the crypto crash and SVB liquidity issues are dominoes from the interest rate environment. SVB wasn’t particularly deep in crypto AFAIK, although if I’m remembering correctly I think I once met someone on a specifically crypto-focused team there. (It stands out in my memory because I consider it a minor red flag when dealing with banks.)
FTX collapsed in 2022, I don't think we should be so quick to dismiss contagion given we're still watching the fall out. The subprime mortgage crisis didn't happen overnight.
Perhaps I should have spelled out the argument more explicitly: taking this thread on the generic flamewar tangent of "lending is evil" is so off-topic and so inflammatory as to be trollish in effect if not in intent. It's exactly the thing the site guidelines ask commenters not to do here - note this from https://news.ycombinator.com/newsguidelines.html:
"Eschew flamebait. Avoid generic tangents."
But you have a good point anyhow: moderation responses are tedious, repetitive, and mostly uninteresting, so in that sense there isn't a lot of substance in what I posted. However, at a meta level they're signals to the community (not just the commenter being replied to) about the kind of culture we want here, and in that way they're important.
In case it helps at all, moderation comments are even more tedious to write than they are to read (https://hn.algolia.com/?dateRange=all&page=0&prefix=false&so...). Unfortunately, I don't know how to preserve this forum for its intended purpose without posting a lot of them. They're neither on topic nor interesting; rather, they're an out-of-band feedback mechanism without which the system would rapidly degrade (https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...). That's the theory, at least.
It's a pity that the system can't self-regulate. If we could get by with just community mechanisms (like upvotes and flagging) plus software, that would be awesome. Then I could just work on the code! Unfortunately, it doesn't work that way—there needs to be humans in the loop to jig the system out of its failure modes. So for better or worse you're stuck with this kind of thing.
This destroys the entire economy, making startups and corporations much harder to run to the point of impossibility. Even in countries run on Sharia law, they still find proxies for interest
Loans by modern banks rely on the issuance of new currency; it's a scheme which relies on diluting the value of citizens' existing currency. It's unethical; it's stealing from the many to enrich the few who will receive the credit once it's spent into the economy (going into friends' businesses).
Kind of like how Carl Icahn sat on the Hertz board, made Hertz take out a huge loan, used the credit to award a huge contract to one of his other businesses and then let Hertz go bankrupt. Citizens footed some of the bill by having their savings and salaries diluted (since Carl kept the proceeds of the loan and spent it into the economy; contributing towards inflation) and of course Hertz shareholders footed most of the bill. It's just theft.
This is so misguided. Just raising interest rates by a few points has resulted in many thousands of people losing their livelihoods in under a year, because companies could no longer justify taking out loans. What you're suggesting is eliminating loans altogether. This is a fun dorm room thought experiment, but it's not even hyperbolic to say that if it were actually pursued, it would result in a huge number of deaths by starvation.
Modern Islamic countries without usury manage to feed their citizens so although I would agree that banning loans would cause a lot of pain in the modern economy, I can't see how it would cause mass starvation.
Your "countries with Sharia law are good" argument might not be as compelling to me as you seem to think it is... Are there any good examples of non-authoritarian non-dictatorships in this space?
Edit to add: You're right, I guess, that our government would probably take over everything and narrowly dodge mass starvation with mere mass poverty, but that doesn't sound great to me either. And mass starvation isn't so far fetched either, there have been multiple such occurrences globally within the last century.
I didn't say they were "good", I'm just pointing out that they generally aren't starving, which means your point was hyperbolic.
I don't understand why the government would need to "take over everything" to avoid starvation. There's no technical reason that capitalism can't exist without usury. Again I'm not saying usury is good or bad, just that it doesn't 'need' to exist. I suspect it is good for society when well regulated (better use of capital), and horrible for society when allowed without limit (indentured servitude, instability e.g. GFC caused by immoral lending).
The question is which world are we living in? I'd argue the West is living in the latter world, the GFC is a symptom that shows that our financial system is causing more harm than good. In this case if the US had used the Islamic system, banks would have owned the assets they were "lending" for, and so would not be incentivized to make risky loans and sell them to unsuspecting investors. A bank isn't going to give a loan on an overvalued property if they know it will sit on their books until the losses are eventually realized.
> I don't understand why the government would need to "take over everything" to avoid starvation.
If the non-starvation examples are all dictatorships, then what's your point here?
I agree that it's possible for capitalism to exist without "usury". Definitions of "usury" tend to define it as "unreasonably high interest rates". Interest rates right now are like 7%, which isn't particularly high and certainly isn't "unreasonably" high.
The GFC isn't relevant to what's going on here. This is an entirely different (indeed in many ways an opposite) set of problems.
you're responding to someone using the traditional definition of "usury", a sense already marked as obsolete in web1913: "The practice of taking interest."
that is what is prohibited in sharia, charging interest at all, not charging unreasonably high interest; at least in medieval interpretations of sharia and modern fundamentalist interpretations
plausibly the other commenter should avoid using such confusing terminology, but i found their meaning reasonably clear from context
My point is that banning debt wouldn't cause starvation.
Apologies for the terminology, the other commenter is right that I was using the original meaning. I don't think the rate of interest is relevant since the mechanisms that make debt dangerous still exist at 7% or 70%. Lending to a "No Income No Asset" person who has 0 chance of paying off the debt is immoral at any interest rate.
I'm interested why you think the GFC is the "opposite" problem. Immoral lending was central in that story.
Lending money is like the grease in the gears of a liberal economy. In countries with such economies, the ability to purchase food is downstream of the economy operating smoothly. If you entirely remove the grease from the gears and the economy siezes up, you do put the ability for people to get food at risk. Agricultural business rely on lending, businesses that transport goods rely on lending, businesses that sell goods rely on lending. Sure, you can potentially avoid mass starvation by having a government step in and direct all that top-down. But that has been far from a universally successful "solution" in fairly recent history.
I agree that lending to individuals without assets or income is immoral. That is a very small sliver of debt activity.
Lending to a business based on an analysis of their future earnings potential is not immoral. It is a risk, but that's the business banks are in.
Honestly in the light of the day I'm not sure what point I was trying to make about the GFC, so I'll give you that one :)
I agree with everything besides “business X relies on lending.”
Businesses _in the west_ rely on lending. Islamic businesses _cannot_ morally or legally rely on lending, so they must have alternatives. And if you look at the alternatives you will realise that debt is not essential.
Sure, if all western governments banned lending tomorrow there would be crisis, but because any major change shocks an economy, not because economies _need_ debt.
Haha I knew you’d come around about the GFC, it’s definitely not a good example of the superiority of Western Financial system LOL
Like I've been saying, businesses either rely on lending, or they rely on a state directing things from the top down. The alternatives are giant sovereign wealth funds. I think lending is much better.
I've actually come back around on the GFC thing :) The way in which it's the opposite is that with the GFC we had low inflation and high unemployment and right now we have high inflation and low unemployment.
You can keep repeating yourself, but it is still false. I've provided an existence proof of why it is false, and you have supplied..."I've been saying"
The GFC was caused by bad lending regardless of the levels of inflation and employment. Of course you are free to keep believing it's the "opposite." Doubling down on preconceived ideas is a pretty good strategy to never learn anything new. I'd prefer if you would provide a reason for your beliefs because I might learn something if your reasons contradict my own. Sorry if I sound harsh but it feels like I'm responding to an echo.
Exactly, and even in those cases, it only serves to enrich certain people who intermediate the loans and to satiate reckless or impatient consumers. It's more like gambling; it appeals to and takes advantage of human nature but doesn't benefit the individual; it only benefits the house. It doesn't actually provide any true value to society.
I disagree, loans can benefit both parties if they are well regulated. In these cases loans provide a lot of value for society. Reckless loans are a symptom of an under regulated system (or in the case of the GFC, a combination of under regulation and no effective enforcement).
I must have missed this one in my Inbox - I look forward to it too haha
But to be serious, I'm not arguing that the Islamic system is "better", just that it removes certain risks that unrestricted lending cause. I don't think the solution is to ban lending but instead to be aware of the risks and make sure your regulation and enforcement is adequate.
I hate knee jerk dismissal of alternative policies, so I felt I needed to point out to the parent commenter that there are places where there is no debt, and no hunger.
I definitely misspoke there: I meant that they have no debt and no mass starvation. I’m aware there’s a lot of poverty in the Islamic world, but it’s not because Usury is illegal.
I’d need to see some statistics to be convinced either way.
When I think of poverty, I think of sub Saharan Africa. I believe debt is legal in most of those countries, so the odds are that banning debt is a small part of the poverty picture.
Different mechanisms, but the most common for financing large purchases is Murabaha, which exists in the West as rent-to-own. Islamic law allows merchants to mark-up prices, to buy low and sell high, and nothing is considered wrong with that. So after a conversation at the bank, the bank buys the desired property at market value, marks up the price in a way that just so happens to be the prevailing interest rate (some literally use LIBOR+X), and lets the clients pay over time. The mark-up is not called interest, it is called a market profit on reselling. It is functionally identical to interest, but is officially not considered interest. Interestingly, banks aren't allowed to charge late fees for this under Islamic law, but as they still remain the legal owners until the entire cost is paid, they can repossess for non-payment.
Mudarabah is for companies that want loans, either startups or existing companies that want to expand. The not-a-loan is structured as a joint venture with profit and loss sharing, often with a new holding company. The bank becomes a part-owner of the holding company in a way that entitles the bank to collect profits on the joint venture up to a certain percentage of the original not-a-loan. Again, functionally identical to interest, but officially not.
It is worth noting that conservative Islamic clerics have raised objections over these, but have been overruled everywhere that money rules.
i think this comment is the second most interesting one in the whole thread, following the one that pointed out that svb's stock fell 60% today (true: https://finance.yahoo.com/quote/SIVB/)
Sell equity stakes or form a joint partnership. This is exactly how most startups get funding.
Also, it’s not clear to me that credit has lifted people out of poverty; I’d argue that interest based lending has kept people in poverty, transferring wealth to those who already have it.
I dunno, people buying a house (and the mortgage that goes with it — their biggest loan of their life) is (to me) a good thing, rather that everyone a renter.
Why though? It perpetuates real-estate bubbles by incentivizing a large portion of the populace to speculate on non-productive assets. If real estate weren’t so highly incentivized in the US, I’d rather be a renter with a long term lease with all its legal protection and invest my money in a business or something. We’d have a much larger renting class and likely would be able to push through much more renter friendly policies. As it stands, majority of Americans act like bourgeoisie when they really aren’t.
When you have everyone is a renter, then renters change laws to make it not profitable for people to own rentals which the government eventually picks up. I don’t know anyone from eastern block countries living in the Soviet time that wants anything like that.
Why does a business need a loan? They can just sell shares/equity to raise funds. It's better in every way; there's skin in the game. Why would anyone even want to loan money to a startups? If the startup founders go out of business and flee the country, the lender loses everything. The downside is unlimited. Yet if the startup does well and it becomes a billion dollar company, the lender will get maybe 20% return on their loan; the upside is limited. There is a reason why independent people invest their money in startups as opposed to loaning them money... It's only banks and big institutions which loan money to private equity to go towards startups; and it's never their own money... It's typically the public's money (as bank loans represent newly printed credit which dilutes the value of citizens' currency). Nobody in their right mind would loan their own cash to a startup at sub-8% annual ROI when inflation is 8%+... In the best possible case, you end up with the same amount of buying power as you started with; in the worst case, you lose everything.
As for car loans and home loans... Similar thing. If people couldn't get loans for houses, real estate prices would have to come down to an affordable level that people could save for. If people couldn't get a loan for a car which they need as part of their small business, they could sell equity in their business to raise money for the car.
The question above are circular. How would people get loans if loans didn't exist? They wouldn't, we don't need them and society would be better off.
Well before mortgages home ownership was about 2% and we had a very small number of people who owned all the real estate because people couldn’t afford it without a loan.
If your happy with going back to this that is your perogative but I would
Be against your world view.
A house would only cost around 5 years' worth of the median salary. Now it's like 15 years and that doesn't even account for the fact that taxes are way higher today and so it's much harder to save... With modern tech, things should be a lot better but for most people, it's worse, much worse.
Salaries have not being keeping up with productivity gains as the economy has become anti-competitive by design. Every time money changes hands, it gets taxed maybe 30% on average... By the time $100 has changed hands 10 times, there is only $3 left out of it for the people (the rest went to the government). It centralizes everything around the government; money cannot flow too far from it. The modern economy is a giant social scheme with 0 merit. For many, it's hell on earth.
These would be good questions to ask an undergraduate microeconomics professor. They have answers. It's not that nobody has ever thought about this before.
I know the answer; it's because being able to issue unlimited money, diluting the public's savings and salaries and then collecting interest on it benefits certain powerful people in a risk-free manner. That's not the answer which an economics professor would give me though. They are not trained to use their analysis skills so much as providing canned explanations. These economics professors have to pay their bills too and their paychecks come from the people earning interest on the big loans... The paychecks of economists literally come from this system that they're supposed to analyze in an unbiased way. Not going to happen.
Damn it can someone please just give me free money so I don't have to be confronted with this reality and think about this stuff every day? Maybe if I could also benefit from it without having to work, it would be easier to just let it be. It's exhausting to get screwed every day and knowing exactly how I'm being screwed and yet having no power to do anything about it except whining online to random people hoping desperately that the system will improve just enough that I can get the tiniest opportunity. I've been working on side hustles for 10 years straight but I've never had the social connections to get traction regardless of how good the product is or how much users love it.
It's not about information. It's about social connections; that's how you get opportunities. Information and intelligence is worthless and a pretext.
If I befriend Elon Musk and he makes one tweet about any of my existing projects, I'll be a millionaire within a year. 100% guaranteed. I wouldn't have to change anything or know anything more. Then I would have impostor syndrome instead.
It's easy to claim that anyone who doesn't receive any help suffers from Dunning-Kruger effect and someone who receives a lot of help and had it easy 'suffers' from impostor syndrome. I know how this works. Only those who really struggled can see both sides.
The system is constantly trying to rationalize and justify itself to its beneficiaries. It doesn't quite invest as much effort to rationalize itself to its victims; and also, it's just not as effective when victims have no financial incentive to believe it.
You're wrong about whether fractional reserve banking is broadly good for people living in developed economies - it is - but you're unlikely to be talked out of this conspiracy kick you're on, so :shrug:. All the best to you!
Well it's not good for me and I'm merely a typical product of this system. The system will make plenty more of me. I was totally alone a few years ago, now I look like a moderate. Unfortunately, future contrarians may not be as curious, tolerant and understanding as me so they will probably end up blaming capitalism as a whole and demand communism... China will swoop in and 'liberate' the people. When this happen, I will be shrugging my shoulders in complete apathy due to moral exhaustion.
If intelligent people cannot separate the monetary system from capitalism, the average person won't either.
It is good for you. The fact that there is a thriving economy, that there are lots of businesses to work for, that you can start a business if you want to and get money from a bank to do so, this is all very good for you.
But sure, keep wishing we could go back to feudalism or whatever, great plan!
I think that's a possible answer worth discussing , but nothing precludes that now. There's a reason why people don't crowdsource shares in their house when they want to buy it or if they're business when they create it. Sometimes they would rather pay the interest than share their asset. Sometimes there is a lack of Interest in people wanting a steak
Investment with real skin in the game. If you have to take on much higher risk to get returns we will find ourselves being more careful about those returns actually happening.
so...it would take actual generations for people to get out of being utterly broke since in your world, you'd have to save up as a poor person to actually open up a business or do anything worthwhile. sounds so fun, sign me up. i want my family to be poor for 250 years until we finally have 2 million that we need to start that farm my great great great grandfather wanted to.
some people on this website literally live on a different planet or don't actually have any understanding of...anything and just say things because it sounds smart
A lost folks in general (and SV in particular) operate on the principle of "got mine f you". They're comfortable so now we don't need to do anything to make anyone else so. It's a symptom of the greater issue of a lack of empathy.
How easy is it for a real life poor person to just get $2M to start a farm? Almost everyone I've met with family farm inherited the land which was probably traced back to it being claimed in the frontier days.
In the agricultural corner of the world I consider my motherland, there are banks that cater specifically for farmers and fishermen. Actually, my first bank ever belong in this category, probably the biggest fish in this pond. It's honestly rather inconvenient if you are not in the agricultural demographic; if you live in the urban areas it's next to impossible finding a convenient branch.
I'm not in a position to elaborate how their loans work but they do exist and I'm also pretty sure two million of our not-USD currency is not a prohibitive amount to loan to start a farm. It's a realistic investment people in rural areas can do.
Being able to create money out of thin air doesn't actually create the associated claim on value that the money represents.
So you're looking at this in terms of how you interact with money in the existing system. But all else being equal there would still be the same amount of value created & we can imagine ways that the value is distributed without the weirdness of banks & how we currently create money.
Savings don't grow, not in real terms and on a societal scale. A miniscule fraction of real goods and services in the economy can get buried in the basement and saved for thirty years.
my cousin's grandfather is 101 and lives in the house he lived his childhood in; i think he was born there. he and his parents have expanded the house significantly since then, as well as, of course, repairing and maintaining it. it's very comfortable now. a society that builds durable housing stock is saving up the goods and services that went into its construction
one of the things in the house is a nearly complete collection of national geographic magazines, going back before he was born; a treasury of knowledge about how people lived all over the world during that century-plus, as well as how they were seen from the point of view of the usa, ready to be perused and enjoyed at any moment without tracking cookies, broken links, images scanned at the wrong settings, or javascript incompatibilities. the images are mostly "retina display" resolution and famous for their beauty. preserving them for this century-plus has consumed very little resources
right now i'm listening to a song by rush recorded 40 years ago; every year there is a wider variety of recorded music available for me to listen to and compositions for me to sing, as long as we don't start losing it faster than it is recorded
last night i washed a shirt i got as a gift 17 years ago; if i can keep it from getting eaten by moths or sour sweat, it will surely last another 13 years
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but these are mostly consumer goods, not capital goods like lathes and motorcycles; having more shirts, national geographics, or rush songs won't increase my economic productivity, which is what is needed for such savings to grow rather than shrink more slowly (though plausibly you can be more economically productive if you have a house big enough to set aside a space for sewing or grinding telescope mirrors or enlarging negatives). and for that it isn't necessary for the actual material good itself to survive for decades; it is only necessary for it to augment economic production by more than its own value during its lifetime, however short that lifetime may be
a car may have a lifetime of 10 years and, by enabling an uber driver to provide higher-value services than they otherwise could have, produce twice as much value as its inflation-adjusted cost of manufacture over that lifetime, 20% of the cost of manufacturing it every year. multiply that by the number of uber drivers in a society, and you have savings growing, in real terms, on a societal scale. and there are a thousand kinds of capital goods like this which continue to produce real value over a period of time once savings have been invested in them: house insulation, refrigerators, washing machines, olive trees, engine lathes, kitchen knives, electric drills, laptops, and so on. even factors of production that are consumed within a few months or a year can qualify, like knitting yarn
(however, a drill you buy, use once, and then leave in the garage and never use again does not; it may not be decaying very fast but it's not growing)
this is how a society can grow its savings in real terms on a societal scale, through accumulating capital goods and knowledge so that its productivity can increase over time
Nice stories, and I don't doubt that some money can be productively invested. But does the marginal dollar saved wind up in a productive investment, or does it wind up malinvested? In other words, is money the bottleneck for increasing productivity, or is it figuring out improved processes and predicting the future economic landscape?
What you've just created is a world in which the only people who can afford to buy a home are people with rich families they can borrow money from. Congratulations, you've concentrated wealth in even fewer hands.
I've lived in homes built that way. They're always a little janky, but usually much higher quality overall because they're built for a family and not for quick turnaround.
I know guys who are literally growing the timber for their dream home while they live in a singlewide. Lifestyle inflation in the USA is caused in large part by access to this easy debt, and it routinely ruins people in the bottom half of the income distribution.
Owners typically have skin in the game now as do those that provide a loan.
There's a reason that people don't save up the purchase price of a home in order to buy it. They are willing to pay a serious premium in terms of Interest so that they can have a home today instead of waiting 15 years for 30 years in order to purchase a property.
If you want a car to get to a job and make money, you want it now, and are willing to pay more later. Without the car, you wont be able to work and save.
This is incorrect, in standard macroeconomics, credit theoretically has no effect on the long term growth rate of an economy. The only thing that grows an economy are increases in worker productivity, theoretically driven be technological advancement.
See https://www.stlouisfed.org/on-the-economy/2015/june/what-dri...
Loans are just move the money around and create “business cycles” of booms and busts. Which in my opinion exacerbate wealth inequality as opposed to reduce it.
I'd say that's a crude reductionist view. See https://www.jstor.org/stable/2118406 to name one paper but there's tons of research on the link between capital markets and economic growth
What part of that crude or reductionist?
Technological progress being the sole driver of growth is the dominant view in macroeconomics. Even the paper you link attests to that.
You would have to use the money you inherited or were given annually from your parents more carefully so that you have it to spend on the things you really need or where you see a big opportunity. It's a sacrifice but it's all worth it in the end to get rid of fractional lending, which I find confusing and distasteful.
Thing is, I want to start a business but need several hundred thousand USD in machinery. Lathes or bakery ovens are not free after all. I don't have that right now, and if I need to save up for several decades the opportunity will have passed. How do I convince people to lend me money without any interest?
You can replace "want to start a business" with "want to buy a house" if you prefer.
Can't be cheaper than the materials and labor costs to build it. If house prices get too cheap house builders / contractors will stop building. This will pinch supply and keep house prices high enough that only cash rich (corps and banks) can afford them. Most people will have no choice but to rent indefinitely. Those who manage to save up some $400k may finally afford to buy a house just in time for retirement.
But if house prices (and therefore rents) go down, people will need lower salaries for an equally comfortable life, pushing labour costs down, making housing cheaper. Man economics is easy
Why would rent go down if a large part of the market is owned by a monolith (banks/institutional investors) who can impose price control? This is already slowly happening. Also the median price of rent in a market is not so much a function of house ticket prices, but rather house affordability. A $400k house in a cash-only market is not more affordable than a $600k house in a market with loans. That is, in a cash market, few people will be able to say ya know, with these rent prices it actually makes more sense to buy than rent - let's go buy a house in full with cash.
That all said, I'm not trying to be a lending market lobbyist. I personally avoid borrowing whenever possible, and don't even have a credit card. My contention is simply that current lending practices are the cause a lot of societal issues, but if lending did not exist whatsoever things would be substantially worse.
Well they are hardly "given" any capital, they sell part of themselves for money. The VCs don't do it out of the goodness of their heart, they expect to get back more later. In any case if loans were not available and equity investments (by people who are already rich and thus have money to spare for investments) were the only way to fund capital intensive new companies, that would make my point even more.
that machinery being so expensive is part of a long tradition of 'developed countries' (powerful peoples) wielding power over other weaker countries by means of technological availability restrictions.
The history of the textile industry is but an instance of this historical pattern of behavior.
all I'm saying is that it's all part of the same 'power system' of government and order.
in the end, interests is comparable to imposing a rent on upon time usage. i.e. interest forces us to pay with money for the time we live (or time we spent), regardless of whether we are working or doing whatever, regardless of where we are as long as we are under the influence of money created through loans with interest.
that we must pay taxes on top of the interest exacted from all of us is just a cherry on top.
> that machinery being so expensive is part of a long tradition of 'developed countries' (powerful peoples) wielding power over other weaker countries by means of technological availability restrictions.
I'm having real trouble unpacking what you mean here. Machinery is expensive because... there's a worldwide cartel keeping prices up to keep out new players? Could it also be that making machines is hard and requires a lot of research/labor/material?
Here come all the very smart economics 101 graduates to explain why rich people should be paid for owning money while everyone else is forced to sell their labor for a wage under threat of homelessness
Well, a lot of religions created before the modern era of banking say that lending with interest is a sin, and there are some people that still believe it.
The comment I responded to advocates for a world where this forum would never have existed. I could have been less snarky, but I am genuinely mystified how someone could have posted such a thoughtless and unsubstantiated comment and seemingly not even realized it.
Bank CEO: "That’s my ask. We’ve been there for 40 years, supporting you, supporting the portfolio companies, supporting venture capitalists."
I wonder how many people's lives and livelihoods have been upended by this trash saying "it's just business"? Now he wants people to be nice to him? Better idea - go live on the street - it's just business.
The scale of SVB's downfall won't be close to Enron's as far as I can tell. I think Burry is referring to SVB being the first domino in a long row that's going to fall.
Always knew startups were a scam. This just proves it. I can't believe these tech companies got away with it for so long before the whole house of cards came down.
Nah, especially among older folks, 100K+ in a bank account is fairly common. My mom does, my grandmother did, my stepmother does, and trust me none of these folks are 1%ers or even close.
Huh. Well, I'm surprised. $100k in a bank account is earning next to nothing, and is probably (opportunity) costing at least $5k/year. I would have assumed that people that can afford not to care about that would be in the highest tiers of wealth.
I have several ideas (with no scientific basis, just observation) on what drives the behavior. Old people today lived through some much leaner times than we are accustomed to, so having easily accessible cash is appealing. They don't care to deal with investment complexity. And they have this kind of money in a checking account because it just accumulated through routine saving over the course of 50 years; it's habit.
Plus, their situations are different from a typical younger person today. All of the folks in my family who keep large amounts of cash in their checking account are mostly not relying their own savings to live. They all have pensions and social security, they're not pulling from an IRA at this point. They've never had the habit of directly investing in their own retirement.
I don't really understand why anyone would keep more than the FDIC insured amount in a bank.
Also, I'm constantly fascinated by how many smart people fundamentally don't understand the economics of banking and how these (often private) institutions create and destroy money.
Maybe it's just because I haven't managed that kind of money on behalf of an organization, but it seems like you would get super paranoid about that aspect of things: spread your money between multiple banks, hold low risk assets with capital you don't immediately need, possibly even hold some in a straight up vault.
I urge you to withdraw your funds before they collapse. These are the same frauds that closed my account because they didn't like the business I was in.
Becker said the bank has “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”
Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.