Collapse of Silicon Valley Bank and possible bank run

[CVByrne]

6 hours ago, villakram said:

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.

Clueless nonsense 

[CVByrne]

3 hours ago, LondonLax said:

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

 

Requirement to hold high quality liquidity to sustain a run for 30 days. This is set as an amount of liquid assets (which they had in Treasuries) to cover a % of their deposits in case of a run. They did and the issue was the selling of the Treasuries at a loss actually created a loss. Those assets are in the banking book and thus not mark to market they are covered by accrual accounting (this means the day to day prices moves are irrelevant unless you ever sell them). The fact they had to sell them turned it into a big loss which they could only shore up by a stock issuance. In SVBs case when VCs told their clients to withdraw funds that is a run no bank who's entire client base is within a single sector can survive. They would have had the same problem even if they were subject to Dodd Frank or not. 

It's not like Dodd Frank is the regulation that covers Banks from these types of risks. The Basel framework is what drives the global regulations that covers banks capital and leverage ratio and net stable funding ratio. So to repeat the exact thing Dodd Frank specified couldn't save SVB. 

[CVByrne]

2 hours 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.

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.

Yes when you read Headlines blaming Trump for this you know it's political partisanship. SVB is a very unique situation that they had a core client base in a specific part of the tech sector. That sector is getting hammered and their customers have been drawing down their deposits at the same time as the exact liquid securities they held to cover this also dropped in value rapidly. 

They made a key key error. They chose long dated US Treasuries as they provided a better return than going for short dated ones which had less price risk to interest rates. It's an error that cost them dearly.

[KentVillan]

11 minutes ago, CVByrne said:

Yes when you read Headlines blaming Trump for this you know it's political partisanship. SVB is a very unique situation that they had a core client base in a specific part of the tech sector. That sector is getting hammered and their customers have been drawing down their deposits at the same time as the exact liquid securities they held to cover this also dropped in value rapidly. 

They made a key key error. They chose long dated US Treasuries as they provided a better return than going for short dated ones which had less price risk to interest rates. It's an error that cost them dearly.

Right, but had they been subject to the same regulatory requirements as larger banks, wouldn’t they have had to report and rectify this much sooner?

[Vive_La_Villa]

1 hour ago, CVByrne said:

The opportunity to buy cheap is rare

Spot on. Also doesn’t last long either as some sort of easing will inevitably lead to a bounce. As the covid crash showed 

[CVByrne]

1 hour ago, KentVillan said:

Right, but had they been subject to the same regulatory requirements as larger banks, wouldn’t they have had to report and rectify this much sooner?

No, they complied with the larger bank rules. They held the liquid assets (treasuries) to cover a bank run. The flaw is actually with the rule here. The rules were written post Financial Crash and mainly about big banks. Simply put, a run on a bank will be because bad things are happening in the wider economy (usually a debt crisis or something). So in this situation the liquid safe assets the banks holds will rise rapidly in value so when they sell them to cover the withdrawals they sell them, they are booking profit and they get the cash to give to cover the withdrawals. 

This bank would have gone down no matter what once they made the error on the long dated bonds. They grew during a period of zero interest rates by being the bank for the growth tech stocks. So they are uniquely vulnerable to that specific part of the tech sector. 

[Rds1983]

There's a lot of Fintechs and Payment Processing suppliers who relied upon or had heavily invested in SVB. 

There's a big question as to how these firms will be impacted, if they can continue operations this week/pay their staff etc and then ultimately for the UK Banks how critical are these firms for their day to day operations and what resiliency plans are in place.

Hopefully plans and controls were already in place and for these Fintech firms it would only be cashflow/funding issues which the larger Banks can help with.

[JPJCB]

19 minutes ago, CVByrne said:

No, they complied with the larger bank rules. They held the liquid assets (treasuries) to cover a bank run. The flaw is actually with the rule here. The rules were written post Financial Crash and mainly about big banks. Simply put, a run on a bank will be because bad things are happening in the wider economy (usually a debt crisis or something). So in this situation the liquid safe assets the banks holds will rise rapidly in value so when they sell them to cover the withdrawals they sell them, they are booking profit and they get the cash to give to cover the withdrawals. 

This bank would have gone down no matter what once they made the error on the long dated bonds. They grew during a period of zero interest rates by being the bank for the growth tech stocks. So they are uniquely vulnerable to that specific part of the tech sector. 

You’re acting like it’s normal to leave holdings of these securities completely unhedged against interest rate risk. It’s banking 101 that you protect yourself against that which SVB demonstrably failed to do.

far from them doing the right thing and getting unlucky, they took out a massive open interest rate position using customers money. Absolutely shambolic risk management 

[CVByrne]

10 minutes ago, JPJCB said:

You’re acting like it’s normal to leave holdings of these securities completely unhedged against interest rate risk. It’s banking 101 that you protect yourself against that which SVB demonstrably failed to do.

far from them doing the right thing and getting unlucky, they took out a massive open interest rate position using customers money. Absolutely shambolic risk management 

No, I said already they made a key key error. They paid the price and that is the way corporate world works. They should have recognised the error earlier or raised capital before statement on selling the securities. It's very poor risk management. Their loss is their rivals gain. 

[CVByrne]

31 minutes ago, Rds1983 said:

There's a lot of Fintechs and Payment Processing suppliers who relied upon or had heavily invested in SVB. 

There's a big question as to how these firms will be impacted, if they can continue operations this week/pay their staff etc and then ultimately for the UK Banks how critical are these firms for their day to day operations and what resiliency plans are in place.

Hopefully plans and controls were already in place and for these Fintech firms it would only be cashflow/funding issues which the larger Banks can help with.

HSBC has already taken the customers in UK. As I said SVBs error is other banks gains. There are processes in place so the day to day operations of the customers aren't impacted. The company itself can fail (that's how it should be, the safety net is for the depositors not the company) without significantly impacting the operations of the clients.

[Rds1983]

26 minutes ago, CVByrne said:

HSBC has already taken the customers in UK. As I said SVBs error is other banks gains. There are processes in place so the day to day operations of the customers aren't impacted. The company itself can fail (that's how it should be, the safety net is for the depositors not the company) without significantly impacting the operations of the clients.

They'll be plenty of non-UK Fintechs being used by UK Banks.

Hopefully resiliency plans in place but minimise it but I am 100% positive people in UK banks will be scrabbling around looking at vulnerabilities. 

[CVByrne]

25 minutes ago, Rds1983 said:

They'll be plenty of non-UK Fintechs being used by UK Banks.

Hopefully resiliency plans in place but minimise it but I am 100% positive people in UK banks will be scrabbling around looking at vulnerabilities. 

I'm sure all Banks UK and other will be looking at potential vulnerable sectors. I think mainly in their loan books to SMEs who might be exposed to downturn and default. Also exposure to Emerging Market Economies who suffer badly with a strong dollar.

[Mister_a]

At least the banks can save some money not bothering to hire risk management experts anymore, seeing as the taxpayer invariably picks up all of the failures.

[CVByrne]

59 minutes ago, Mister_a said:

At least the banks can save some money not bothering to hire risk management experts anymore, seeing as the taxpayer invariably picks up all of the failures.

More clueless nonsense 

[villakram]

6 hours ago, CVByrne said:

Clueless nonsense 

FDIC limit is $250k. 

Losses for those with > $250k == 0. Failure to carry out fiducial responsibilities rewarded. 

 

[Mister_a]

53 minutes ago, CVByrne said:

More clueless nonsense 

Error 404. Argument not found.

Edited March 13, 2023 by Mister_a

[KentVillan]

2 hours ago, Mister_a said:

At least the banks can save some money not bothering to hire risk management experts anymore, seeing as the taxpayer invariably picks up all of the failures.

The taxpayer hasn’t picked up the failure here, though. The bank has gone bust.

[KentVillan]

4 hours ago, CVByrne said:

No, they complied with the larger bank rules. They held the liquid assets (treasuries) to cover a bank run. The flaw is actually with the rule here. The rules were written post Financial Crash and mainly about big banks. Simply put, a run on a bank will be because bad things are happening in the wider economy (usually a debt crisis or something). So in this situation the liquid safe assets the banks holds will rise rapidly in value so when they sell them to cover the withdrawals they sell them, they are booking profit and they get the cash to give to cover the withdrawals. 

This bank would have gone down no matter what once they made the error on the long dated bonds. They grew during a period of zero interest rates by being the bank for the growth tech stocks. So they are uniquely vulnerable to that specific part of the tech sector. 

Are you sure they complied with the larger bank rules?

[CVByrne]

20 minutes ago, KentVillan said:

Are you sure they complied with the larger bank rules?

Two things to say. There are lots of regulations SVB have to comply with in terms of net stable funding ratio and banking capital. So people citing part of the Dodd Frank rules that no longer apply to small regional banks are making out that the banks are free of any regulation or something. 

From what I've read they complied with everything. The rules relating to holding enough in liquid assets to cover a run on the bank. There is no way they could survive a run the size and speed of what happened. 

There is no rules that can exist at all ever that can save a bank from everyone having a run on the banks as quickly as it was. The entire concept of fractional reserve banking is built on the fact that banks only have a fraction of the liabilities in reserves. 

[MakemineVanilla]

3 hours ago, CVByrne said:

More clueless nonsense 

There are a lot of guys offering up the run as click-bait - would you say they are over-stating the risk?