Collapse of Silicon Valley Bank and possible bank run

[KentVillan]

Think this deserves a thread.

My understanding is that basically:

• Silicon Valley Bank (SVB) is / was a commercial bank that was particularly integrated into the VC-funded Silicon Valley startup scene.
• Commercial banks make their money from receiving deposits, transaction fees, and earning interest on loans, mortgages, etc.
• Because SVB was very much the bank of the profit-free startup scene, it basically became a dumping ground for startups' VC funds - and these surged in 2021 with all the cheap money flying around during the Covid pandemic.
• Startups didn't really need much in the way of credit since they were so well funded. So in order to generate returns, in addition to lending money to business customers, SVB was investing them in long-term fixed-rate bonds / mortgage-backed securities.
• They didn't factor in the risk that interest rates would suddenly rise in 2022/23 and demolish the value of their investments.
• On top of that, funding has dried up for tech startups, so suddenly SVB's business customers have been withdrawing much more cash to cover payroll, costs, etc.
• So it's basically a double whammy of interest rates affecting their investments and affecting their customers.

 

For the time being, received wisdom seems to be that the impact will be limited to the tech startup ecosystem, but one to keep an eye on? Won't be the last thing to go wrong as interest rates pull the plug on a lot of mad stuff.

From what I remember of 2007/08, what starts out as something that seems quite niche and elite, suddenly becomes a widespread **** of pain for ordinary people.

These masters of the universe suddenly become egalitarian food bank democrats when their gambles go wrong...

 

 

[Tegis]

14th biggest bank in the US. Thats a pretty big bank

[Lichfield Dean]

It's ok guys, I know why this happened. I shuffled some of my ISA investments around into a small North American companies fund, so of course the bank that serves most of them immediately exploded in flames.

[limpid]

Edit: This is probably fake

[Lichfield Dean]

https://www.bbc.co.uk/news/business-64930944

UK to help tech firms after Silicon Valley Bank collapse

More than 250 bosses of UK tech firms signed a letter addressed to Mr Hunt on Saturday calling for government intervention.

One source in a tech firm told the BBC: "It all feels like it could be pretty terminal for UK tech."

"This Monday, at least 200 firms employing tens of thousands of people will find they can't pay their staff or suppliers because the bank they had an account with has gone bust," the source said.

Between 30% and 40% or UK start-ups employing up to 50,000 people could be affected by the collapse, the source added.

 

[Davkaus]

Are we about to socialise more losses?

[KentVillan]

3 hours ago, Davkaus said:

Are we about to socialise more losses?

Janet Yellen is saying US gov will support depositors but not the bank itself. And my understanding is they can do this without actually injecting any taxpayer money long term (it’s more about taking control of SVB assets and reshuffling).

[Lichfield Dean]

3 hours ago, KentVillan said:

Janet Yellen is saying US gov will support depositors but not the bank itself. And my understanding is they can do this without actually injecting any taxpayer money long term (it’s more about taking control of SVB assets and reshuffling).

The BBC article was about the British arm of the bank and what our gov are going to do.

It appears to be more than just a USA problem...

[KentVillan]

10 minutes ago, Lichfield Dean said:

The BBC article was about the British arm of the bank and what our gov are going to do.

It appears to be more than just a USA problem...

It’s mainly a US problem if you look at who banks (banked) with SVB.

And same point applies here, it’s not really a case of socialising SVB’s losses, it’s about protecting (relatively) innocent depositors.

Bear in mind these were just cash deposits in current accounts, not high risk investments. The argument for hammering small business depositors to avoid moral hazard seems pretty shaky, and presenting this as socialising losses is a bit wide of the mark.

It’s different from the 2008 bailouts where banks themselves were bailed out for high risk behaviour, when they should have known better.

[CVByrne]

19 hours ago, KentVillan said:

• Silicon Valley Bank (SVB) is / was a commercial bank that was particularly integrated into the VC-funded Silicon Valley startup scene.
• Commercial banks make their money from receiving deposits, transaction fees, and earning interest on loans, mortgages, etc.
• Because SVB was very much the bank of the profit-free startup scene, it basically became a dumping ground for startups' VC funds - and these surged in 2021 with all the cheap money flying around during the Covid pandemic.
• Startups didn't really need much in the way of credit since they were so well funded. So in order to generate returns, in addition to lending money to business customers, SVB was investing them in long-term fixed-rate bonds / mortgage-backed securities.
• They didn't factor in the risk that interest rates would suddenly rise in 2022/23 and demolish the value of their investments.
• On top of that, funding has dried up for tech startups, so suddenly SVB's business customers have been withdrawing much more cash to cover payroll, costs, etc.
• So it's basically a double whammy of interest rates affecting their investments and affecting their customers.

Yes you're mostly right here. Essentially they had large cash inflows in terms of deposits in 2021 due to the boom cause by massive money printing and zero interest rates. They did the right thing with all this and they parked all their clients Deposits (which are liabilities on balance sheets) with long dated US Government bonds. Those would yield around 1.5% so on the face of it they did the right thing. If anything "bad" happens to the economy the value of these US Government Bonds will rise as people rush to safe assets. What happened though was interest rates rose and rose fast due to the inflation and because they bought longer data US Gov Bonds they dropped in price. (normally this is fine as you just wait it out and they will rise back as they always expire at par as US  Government literally cannot default as it can print money). The interest rate rises have hit tech and they hit growth tech the most. This means VC money dries up, so inflows of deposits slow and the growth tech companies burn through their deposits to pay staff etc. This meant SVB had a cashflow problem, they would need some cash to top up. Now they would be forced to sell the Government Bonds at a loss to get that cash. So their plan was raise capital by issuing stock to cover the losses of the fact they had to sell the bonds to get the cash. Then they would hedge the future bonds with interest rate swaps to they're not at the mercy of the interest rate volatility anymore.

Unfortunately this spooked VCs who told the companies who they are invested in to withdraw the deposits from the bank and that spread to twitter and caused a run on the bank. 

So basically this is an issue for less sophisticated regional banks. In 99% of all situations Buying Government Bonds is the absolute best way to be risk adverse as economy goes down and government bonds rise in value so you earn money there and that should hedge your losses. In SVBs case they are so tied to VC tech firms that are taking the biggest pounding in the last 12 months it makes sense they were the ones who got caught on both sides here. This is an isolated incident as was Archegos 12 months ago. However, raising interest rates to this level and this quickly will cause other issues with other less secure companies who are exposed to risks. The Central Banks know that stopping inflation requires a recession and they are just hoping it's a mild one. 

I feel we'll see a decent sized recession, but one more akin to early 2000s where it is more associated with technology industry than wider real economy. 

[CVByrne]

8 hours ago, limpid said:

 

So this is 100% false. Dodd Frank is a conduct regulation. It has absolutely zero to do with SVB and that's just twitter bullshit.

SVB did the right thing. They just got caught out by the uniqueness and rarity of the fact the stock market & Government bonds went down in tandem. Added to the uniqueness of their customer base.

Edited March 12, 2023 by CVByrne

[Sid4ever]

When does Peston appear outside a SVB Branch, surely until then we are fine?

[KentVillan]

2 hours ago, CVByrne said:

In SVBs case they are so tied to VC tech firms that are taking the biggest pounding in the last 12 months it makes sense they were the ones who got caught on both sides here. This is an isolated incident as was Archegos 12 months ago. However, raising interest rates to this level and this quickly will cause other issues with other less secure companies who are exposed to risks. The Central Banks know that stopping inflation requires a recession and they are just hoping it's a mild one. 

I feel we'll see a decent sized recession, but one more akin to early 2000s where it is more associated with technology industry than wider real economy. 

The question surely is... yes, the specifics of this collapse were unique to SVB and perhaps a handful of similar banks, but the cause was a major change in the economic landscape that is affecting everything... so what is the next mini-crisis (or mega crisis) to emerge from rising interest rates?

[villakram]

Full FED bailout of the financial system underway. Same as it ever was. Mark to market... lol, you must be joking.

Make sure to keep up your mortgage/car/tax payments, however.

[LondonLax]

7 hours ago, CVByrne said:

So this is 100% false. Dodd Frank is a conduct regulation. It has absolutely zero to do with SVB and that's just twitter bullshit.

SVB did the right thing. They just got caught out by the uniqueness and rarity of the fact the stock market & Government bonds went down in tandem. Added to the uniqueness of their customer base.

You’re going to have to expand on that a bit. This is the claim from the financial analyst at a major Australian broadsheet:

In 2018, however, Donald Trump (in the midst of his war on regulation of all kinds) proudly signed a bill that rolled back most of those requirements for banks with less than $US250 billion of assets, leaving only about a dozen of the largest and most systemically important banks required to meet the Dodd-Frank rules.

Trump, and many Republicans, pondered aloud at the time about getting rid of Dodd-Frank even for the largest banks but thankfully didn’t get around to it. The core of the US system is, as are most banking systems elsewhere (including Australia’s), stringently regulated, soundly capitalised, holds high-quality liquidity and is regularly and rigorously stress-tested. 

SVB was approaching $US200 billion of assets in 2018 and was one of the banks which lobbied hard to be free of the regulations.

One of the key requirements of those regulations was that banks hold enough high-quality liquidity to sustain a run for 30 days. SVB didn’t last 48 hours. It is inevitable that the question of how sub-$US250 billion banks should be regulated will be revisited.

https://www.smh.com.au/business/banking-and-finance/trump-the-fed-and-the-implosion-of-one-of-america-s-most-unusual-banks-20230313-p5crix.html (behind a paywall). 
 

Forbes’ financial analyst also has a pretty comprehensive explanation of how the F-D regulations would have likely helped prevent this from happening. 

How Trump’s Deregulation Sowed The Seeds For Silicon Valley Bank’s Demise

https://www.forbes.com/sites/mayrarodriguezvalladares/2023/03/12/how-trumps-deregulation-sowed-the-seeds-for-silicon-valley-banks-demise/?sh=83a531034320

Edited March 13, 2023 by LondonLax

[KentVillan]

@LondonLaxnot disputing either of those pieces, because not qualified to shoot back, but one thing I remember about the last financial crisis was the vast majority of financial journalism outside a handful of specialist publications (Bloomberg, FT, etc) was just wrong on basic points of fact, or was axe grinding about tangential issues.

What I do know is the 2018 reforms had a decent amount of bipartisan support from Democrats in the House and Senate, so pinning this on Trump / Republicans seems a bit wide of the mark. Pinning it on greedy lobbying by mid sized banks maybe is more credible, and the general American love of deregulation.

But there’s a piece by Dan Davies in the FT (paywalled unfortunately), who I think does know his stuff, and it seems there’s an element here of this problem being allowed to accumulate longer than it should have because SVB didn’t have the same requirements as a “systemically important” bank - and that this couldn’t happen in Europe because most European countries apply these regulations to any size of institution.

Interested in what @CVByrnethinks anyway. It sounds to me like the deregulation is a contributing factor, rather than the actual cause? Which I guess was the point being made.

Edited March 13, 2023 by KentVillan

[Vive_La_Villa]

Looking at Nasdeq out of hours there doesn’t seem to be much panic there.  Market happy with a bailout ?

[LondonLax]

23 minutes ago, KentVillan said:

@LondonLaxnot disputing either of those pieces, because not qualified to shoot back, but one thing I remember about the last financial crisis was the vast majority of financial journalism outside a handful of specialist publications (Bloomberg, FT, etc) was just wrong on basic points of fact, or was axe grinding about tangential issues.

One thing that I do know is the 2018 reforms had a decent amount of bipartisan support from Democrats in the House and Senate, so pinning this on Trump / Republicans seems a bit wide of the mark. Pinning it on greedy lobbying by mid sized banks maybe is more credible, and the general American love of deregulation.

But there’s a piece by Dan Davies in the FT (paywalled unfortunately), who I think does know his stuff, and it seems there’s an element here of this problem being allowed to accumulate longer than it should have because SVB didn’t have the same requirements as a “systemically important” bank - and that this couldn’t happen in Europe because most European countries apply these regulations to any size of institution.

Interested in what @CVByrnethinks anyway. It sounds to me like the deregulation is a contributing factor, rather than the actual cause? Which I guess was the point being made.

Someone has kindly archived that FT article if you are interested in reading it. 
 

Quote

Silicon Valley Bank is a very American mess 

The rules work! They just weren’t applied to SVB Financial

https://archive.is/gmJxU

[KentVillan]

 

That was quick 

[CVByrne]

8 hours ago, KentVillan said:

The question surely is... yes, the specifics of this collapse were unique to SVB and perhaps a handful of similar banks, but the cause was a major change in the economic landscape that is affecting everything... so what is the next mini-crisis (or mega crisis) to emerge from rising interest rates?

That is a good question. We really don't know what the tail risks are. We know they are there it's shown that raising interest rates this high essentially always has the desired effect of causing a recession and that has companies failing like every recession (except Covid which was a special case). What I mean from the specific case of SVB is that all these Government Bonds will rise when the normal recession hits (they already rose rapidly on Thu/Fri). So all the regular banks capital bases are going to increase in value. Since the 2008 crisis there has been waves of regulation to stop it from ever happening again. It really only took one key change that that was leverage ratio. Banks can't run risks like they were allowed in the de regulation era of self regulation. Banks re regularly stress tested too and due to growth in technology and cloud computing all kinds of hypothetical scenarios can be run. Banks have simply changed, the volatile profits from risk taking is no longer there as the Hedge Fund industry has shrunk as people move to index funds. So the big banks are perfectly fine as an industry and we have interventionist Central Banks.

I personally think we just look at what has been benefits the most from record low interest rates and money printing. Stocks in general have risen too high. Tech stocks especially and then the growth tech stocks the most. Companies that have no plans to make money anytime soon as they are in the growth phase and transitioning to profitable business models is years away. So I see more job losses in the tech sector. The other thing interest rates will do is cause the recession as people have less money to spend, that lowers the revenue of companies and can lead to job losses. The real worry is always in a debt crisis in a sector. Who knows what one, it could be the property sector but not really as that's linked to banking and interest rates which are solid and can be cut rapidly. 

I really see this most likely as a new 2000s in terms of a tech bubble and a "normal" recession. But nobody really knows. My main aim in this is to put money into stock market via pension when S&P has hit nearly 50% drop from it's all time high. The opportunity to buy cheap is rare