Silicon Valley Bank collapse

RedOnion said:
That in itself isn't an issue. The problem was the deposits were primarily short term 'overnight' deposits. Their 'cash equivalents' were 10 year bonds at a fixed interest rate.
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Hi Red

But if they did not have excessive deposits they would not have had to look for a risky home for them.

Their losses seem to have come from their bond purchases and not their loans.

It was the same with the Credit Unions 10 years ago. They bought bonds in Icelandic banks and others which they knew nothing about.

Brendan
 
skrooge said:
It's a typical back collapse really.
Value of bonds going down, on it's own might not be enough to bring the bank down if it was business as normal. Yes it might eat into profits and possibly capital but it might have been okay. But then throw in a bank run and the need for fire sales and crystallisation of those losses and it became a vicious circle.
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but its a bank collapse caused by the Fed , first lowering interest rates too low and inflating the prices of government bonds and then rising interest rates too rapidly over the last year but not taking into consideration that many banks and financial institutions are required by regulations to hold those very assets. This will probably put a stop to rising interest rates for now.
 
joe sod said:
but its a bank collapse caused by the Fed , first lowering interest rates too low and inflating the prices of government bonds and then rising interest rates too rapidly over the last year but not taking into consideration that many banks and financial institutions are required by regulations to hold those very assets. This will probably put a stop to rising interest rates for now.
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Bad management caused the collapse. The banks were operated in a way that meant it was not able to withstand the rising rates.

If this is an isolated incident of 2 badly run banks it shouldn't impact monetary policy... But it's a bigger if then it was a week ago.
 
skrooge said:
Bad management caused the collapse. The banks were operated in a way that meant it was not able to withstand the rising rates.

If this is an isolated incident of 2 badly run banks it shouldn't impact monetary policy... But it's a bigger if then it was a week ago.
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but also bad management by the Fed and by extension all the global central banks. A year ago our own former Central Bank governor was saying there would be no interest rate rises by the ECB when they were at zero and now they talking about 5% before they stop . When the Central banks don't know whats happening how can a mere bank be on top of things especially when a key asset they are required to buy, government bond interest rates are controlled by the world's central banks.
 
joe sod said:
but also bad management by the Fed and by extension all the global central banks. A year ago our own former Central Bank governor was saying there would be no interest rate rises by the ECB when they were at zero and now they talking about 5% before they stop . When the Central banks don't know whats happening how can a mere bank be on top of things especially when a key asset they are required to buy, government bond interest rates are controlled by the world's central banks.
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You'll find bank profitability is generally expected to improve with the increase in interest rates. A steepening of the yield curve should be good for most banks. At least the well run banks.

Most central banks are very clear on what they're about. A year ago - well a little over - inflation was low but rising. Then all hell broke loose and we were plunged into a war in Europe and an energy crises. Or put another way an inflation shock. Central banks reacted, can you argue that were partly to blame in the first place - with years of printing money and keeping rates low - yes, but that doesn't give a bank a free pass to mismanage it's business.

That mere bank you speak of had assets of $212 billion, I'm sure it was capable of employing someone to look at interest rate risk in its securities portfolio and someone else to point out a small pool of corporate depositor might present a risk. It took a risky punt and it hasn't paid off.
 
I think the government should step in and guarantee all the deposits, let the bank fail but the depositors should be rescued.
 
Brendan Burgess said:
But if they did not have excessive deposits they would not have had to look for a risky home for them.
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I looked at their annual report and noninterest-bearing demand deposits went from $81bn to $126bn in the course of 2022.

Customers were parking huge amounts of cash with them for lack of anything else to do with it. I'm puzzled as to why SVB didn't introduce credit union-style depositor limits or just start paying negative rates.

Otherwise I don't see the insolvency as being particularly difficult to execute. There's no indication of poor performance in the loan book, and the other assets can be valued very easily as they are marketable.

Overall this looks like really poor risk management at entity level (and poor supervision) rather than anything more systemic.
 
NoRegretsCoyote said:
Otherwise I don't see the insolvency as being particularly difficult to execute. There's no indication of poor performance in the loan book, and the other assets can be valued very easily as they are marketable.
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interesting that in this case the crises was sparked not by loans going bad but by too much money "invested" in low interest rate government bonds whose value then fell. Maybe they would have been better off to lend out more money to businesses than to put them in government bonds. In other words the spark for this crises is the exact opposite of the 2008 financial crash, too much money in low and zero interest rate bonds
 
joe sod said:
Maybe they would have been better off to lend out more money to businesses than to put them in government bonds.
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They would lend as much as they can to creditworthy customers.

They should have done what Coyote suggested and turned down big deposits. Banks hate doing that and many credit unions resisted it. But where there is not enough loan demand and plenty of cash, it's the right strategy.

Brendan
 
Brendan Burgess said:
They would lend as much as they can to creditworthy customers.

They should have done what Coyote suggested and turned down big deposits. Banks hate doing that and many credit unions resisted it. But where there is not enough loan demand and plenty of cash, it's the right strategy.

Brendan
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Alternatively just do what Irish did with the pandemic deposits - take it in and just deposit it with the central bank.

As had been said this was primarily large corporate deposits that could have charged negative rates for the pleasure of depositing it in svb. That's if they really wanted to dissuade firms from depositing. I imagine someone in the bank liked the idea of the bigger balance sheet.

It really looks like a bank where no one thought to look at how the balance sheet matched up.
 
Very interesting to read, on Twitter, the focus on the US deposit insurance provided by FDIC.

- Many calling for an increase the 250,000 USD per account per bank threshold.
- Many calling for a separate "backstop" for amounts over the insurance threshold.
- Some calling for a deposit bank guarantee of all amounts in the short-term to prevent contagion.
- Many interesting stats on how the deposit insurance (despite the 250k level) does not cover the majority of deposits in many US banks.

The EU has had a deposit insurance threshold of 100,000 EUR for a number of years now. I wonder if the outcome of this collapse might be the increase in deposit insurance levels in the US (or some other form of coverage for uninsured deposits) and perhaps the EU will follow suit.
 
Talk of an "advance dividened" for the uninsured portion of the deposit book within the week. That should help with some of the short term cashflow issues.

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I wonder will all those tech companies that were taking their money out of this bank be looking to keep it in cash now :)
They might even now be in favour of Danny Healy Raes rural independents bill of making it illegal to refuse cash payments
 
There we have it, the Government stepping in as backstop for depositors and guaranteeing 100%. Hopefully this reduces contagion risk and happy for all those employees that will still get paid this week.

Joint Statement by Treasury, Federal Reserve, and FDIC

Washington, DC -- The following statement was released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Cha
www.federalreserve.gov
 
All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.
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It looks like a Quinn-style levy on the banks for years to come.

I'm not a moral hazard monster, but surely a CFO of a tech firm who parked all $30m of reserves in one bank should be punished with a haircut of 2% or 3%.
 
NoRegretsCoyote said:
I'm not a moral hazard monster, but surely a CFO of a tech firm who parked all $30m of reserves in one bank should be punished with a haircut of 2% or 3%.
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I agree.......these were sophisticated depositors....who understand counterparty risk.....and that deposits over $250k in any US bank become unsecured liabilities to that institution.....the only credible explanation I've seen is either incompetence or SVIB required such cash balances to be held there as part of lending/lines of credit they provided to those tech firms.

If so those firms took a risk with their cash for which they received rewards on the lending side rates/duration. In lots of respects they became effective bond holders in their corporate banking provider. They've got away with murder in this instance but they shouldn't the next time.........because there will always be a next time.
 
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