Collapse of Silicon Valley Bank and possible bank run

[KentVillan]

2 hours ago, villakram said:

FDIC limit is $250k. 

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

 

$250k is a tiny bank balance for a business - it's likely only got 5-10 employees, maybe even less. Small businesses simply don't have the wherewithal / sophistication / responsibility to monitor and understand the health of their bank, which is why the govt regulates commercial banks.

The argument for moral hazard is much stronger once you start looking at say $5m+ balances, in which case a business really should have individuals working internally who are capable of picking up on and mitigating this kind of risk.

[CVByrne]

16 minutes ago, MakemineVanilla said:

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

I don't see any risk the to real banking system

[KentVillan]

Blog post on “bail out” by Dan Davies:

https://blog.danieldavies.com/2023/03/it-what-it-is-it-is-understandable-that.html?m=1
 

Quote

Call it what it is

 

It is understandable that the Federal Reserve and FDIC are reluctant to use the “b-word” to describe the operations announced at the weekend to respond to the crises at Silicon Valley Bank and Signature Bank of New York.  As bailouts go, they don’t look particularly expensive.  The FDIC has extended its guarantee to cover uninsured deposits at these two banks (which won’t cost anything if the assets are good).  And the Fed will use the Treasury’s Exchange Stabilisation Fund to backstop a funding program to allow any other banks with similar problems to trade out of their unrealised securities losses in a reasonably graceful way.

Neither of these programs will cost taxpayers’ money, as the press releases identify.  As long as we pretend that FDIC premiums aren’t taxes, that the ESF is costless unless it takes a loss and that credit from the Fed doesn’t count, then the economy is getting all the benefit of stabilising the system, for free.  It’s good policy.

But a bailout is what it is, and what it ought to be called.  The credit lines represent a subsidy to bad treasury management on the part of banks who should never have allowed themselves to get so badly overextended in terms borrowing short and lending long.  (They also, perhaps conveniently, avoid anyone having to ask impertinent questions about why the bank supervisors allowed these positions to develop in the first place).

The extension of the FDIC guarantee, though, is not just a bailout – it’s specifically a bailout for billionaires.  It undermines the whole point of limiting deposit insurance, and exposes the fund to risk.  And the benefit of this risk assumption mainly goes to the venture capital investment industry.

That industry has, frankly, done the exact opposite of having covered itself in glory over the last week.  We have discovered that major VCs put pressure on their portfolio companies to deposit at Silicon Valley Bank.  Then they encouraged those same companies to run on the bank.  And then some of them spent the weekend attempting to raise panic about the rest of the financial system, in order to put pressure on the government for a bailout.  All after having spent the previous decade talking about “moral hazard” with respect to student loan forgiveness, and praising themselves for “disrupting” the old fashioned financial system with cryptocurrency.

If there had been no bailout – if the FDIC had operated normally and not extended insurance to people who hadn’t paid the premium – then the bill would have arrived at the VCs’ door.  They are the owners of the tech startup companies, and they would have been the ones responsible for ensuring that those companies could make payroll if they had lost money in a bank failure through no fault of their own.  It might not have been pleasant for the VCs to put up more funding, or to admit that their contribution of management expertise and financial acumen had been so spectacularly negative, but they would still have done it. To let a good investment go bad in this way would, as Professor John Cochrane points out, a clear example of the sunk cost fallacy.  The venture funds were the source of the cash that was at risk in the SVB failure; it’s their loss that has been socialised.

And the fact that the VCs were able to use their portfolio companies as human shields in this way – a natural extension of the pretence that venture capitalists are in the tech industry rather than the financial industry – shows us what the real long-term cost of our current system of bailouts is, in terms of policy.  Because the Fed and FDIC will always find a way to stabilise the system, populist yahoos and libertarians can rail against “bailouts” and pass legislation to “protect the taxpayers”, all on the understanding that it is purely playtime; that when things get serious, someone will find a way to bail them out.

This is no way to run a financial system, particularly since there is the constant risk that one day the anti-bailout loudmouths will accidentally succeed. The Fed needs to say, loud and clear, that “Yes, this is a bailout, and that is good.  A bailout is often the best and cheapest way to prevent a catastrophe.  The people benefiting from it may be quite comically unattractive and undeserving, but finance is not a morality play.  Take your bailout and try to be less silly next time”.

So yes, contrary to what I said earlier, there is some cost to the taxpayer, although it’s not of an order comparable with the 2007/08 financial crisis, and it doesn’t let as many obvious culprits off scot-free as last time round.

[CVByrne]

15 minutes ago, KentVillan said:

Blog post on “bail out” by Dan Davies:

https://blog.danieldavies.com/2023/03/it-what-it-is-it-is-understandable-that.html?m=1
 

So yes, contrary to what I said earlier, there is some cost to the taxpayer, although it’s not of an order comparable with the 2007/08 financial crisis, and it doesn’t let as many obvious culprits off scot-free as last time round.

There is an ocean between covering the deposits in a bank and bailing out that bank. The article deliberately misleads by pretending the billions on deposit at SVB were "Billionaires" as if Billionaires have their money sitting in bank accounts (they don't, ever). The money that was there was company accounts. If they were frozen while the bank went through liquidation those companies would go under and then you've now got a crisis on your hands. It then spills over to swaths of tech companies going out of business instantly. 

The simple fact in this story, the regulators were asleep at the wheel and SVB bank were idiotic and they deserve to go down and their investors and bond holders, their staff and management all lose. 

People want to talk about moral hazard. A bank run ends any and all bank. Period. The only thing that can stop it is the Government. The system is built on fractional reserve banking. That's the way it is. I take in £1000 in deposits and I loan £900 of that out. The entire global economy is built on this system of debt. It's not something we can change without a massive blood soaked revolution. 

Edited March 13, 2023 by CVByrne

[KentVillan]

32 minutes ago, CVByrne said:

There is an ocean between covering the deposits in a bank and bailing out that bank. The article deliberately misleads by pretending the billions on deposit at SVB were "Billionaires" as if Billionaires have their money sitting in bank accounts (they don't, ever). The money that was there was company accounts. If they were frozen while the bank went through liquidation those companies would go under and then you've now got a crisis on your hands. It then spills over to swaths of tech companies going out of business instantly. 

The simple fact in this story, the regulators were asleep at the wheel and SVB bank were idiotic and they deserve to go down and their investors and bond holders, their staff and management all lose. 

People want to talk about moral hazard. A bank run ends any and all bank. Period. The only thing that can stop it is the Government. The system is built on fractional reserve banking. That's the way it is. I take in £1000 in deposits and I loan £900 of that out. The entire global economy is built on this system of debt. It's not something we can change without a massive blood soaked revolution. 

Nah, read the piece again - the billionaires he's referring to are the VCs, not the individual depositors. Dan Davies knows his stuff - was a regulatory economist at Bank of England, worked for various banks, writes in FT etc. Not a bluffer.

[CVByrne]

18 minutes ago, KentVillan said:

Nah, read the piece again - the billionaires he's referring to are the VCs, not the individual depositors. Dan Davies knows his stuff - was a regulatory economist at Bank of England, worked for various banks, writes in FT etc. Not a bluffer.

I know, what he's saying is the VCs told the companies they invested in to withdraw deposits in SVB which caused the run on the bank. He's saying they caused it so they should lose their money by the companies who banked with SVB having their accounts frozen while the bank is liquidated. Roku had half a billion in SVB. So a 20 year old publicly traded company who employs 3000 people should be let die? So a Crypto firm who banked with SVB and has VC investments in it can also die? The guy is talking complete nonsense. Then also worth pointing out that the VCs are companies too btw, not people. 

It's clear he's taking aim at the VCs for causing this and not paying the price. But he's talking complete nonsense. As if there were only tech start ups who banked with SVB and that then the VCs would pump more capital into those companies rather than write off their investments. This was caused by SVB being morons and the their regulators being asleep at the wheel. 

Edited March 13, 2023 by CVByrne

[KentVillan]

2 minutes ago, CVByrne said:

I know, what he's saying is the VCs told the companies they invested in to withdraw deposits in SVB which caused the run on the bank. He's saying they caused it so they should lose their money by the companies who banked with SVB having their accounts frozen while the bank is liquidated. Roku had half a billion in SVB. So a 20 year old publicly traded company who employs 3000 people should be let die? So a Crypto firm who banked with SVB and has VC investments in it can also die? The guy is talking complete nonsense. Then also worth pointing out that the VCs are companies too btw, not people. 

It's clear he's taking aim at the VCs for causing this and not paying the price. But he's talking complete nonsense. As if there were only tech start ups who banked with SVB and that then the VCs would pump more capital into those companies rather than write off their investments. This was caused by SVB being morons and the their regulators being asleep at the wheel. 

No, read the piece properly - he's saying the VCs would have had to bail out their own businesses, which they own, in the short term.

The point is that VC-funded small businesses are not really small businesses in the sense of a standalone bootstrapped, self-funding entity. They are little offshoots of the big VC funds who effectively own them.

He's not saying the rescue shouldn't have happened, he is saying the VCs have got away with murder here by creating the environment for this in the first place, then triggering the run, then demanding support.

[CVByrne]

9 minutes ago, KentVillan said:

No, read the piece properly - he's saying the VCs would have had to bail out their own businesses, which they own, in the short term.

The point is that VC-funded small businesses are not really small businesses in the sense of a standalone bootstrapped, self-funding entity. They are little offshoots of the big VC funds who effectively own them.

He's not saying the rescue shouldn't have happened, he is saying the VCs have got away with murder here by creating the environment for this in the first place, then triggering the run, then demanding support.

My two points are Roku has nothing to do with VCs in any way it's a 20 year old publicly traded company with 3000 employees. 

The VCs had nothing to do with SVB being morons AND the regulator being negligent. 

Yes the bank run was started by the VCs telling the companies they invested in to withdraw funds. I assume they only did this after they had taken their own funds out.

So his argument on principle about the VCs fair enough. But in a real world scenario what he's said is just fiction. That we get the VCs money back into SVB, then let any company we deem not VC related to be secured. Then let SVB be liquidated with the cherry picked cash of VCs in it. 

It's total nonsense. 

[KentVillan]

4 minutes ago, CVByrne said:

My two points are Roku has nothing to do with VCs in any way it's a 20 year old publicly traded company with 3000 employees. 

The VCs had nothing to do with SVB being morons AND the regulator being negligent. 

Yes the bank run was started by the VCs telling the companies they invested in to withdraw funds. I assume they only did this after they had taken their own funds out.

So his argument on principle about the VCs fair enough. But in a real world scenario what he's said is just fiction. That we get the VCs money back into SVB, then let any company we deem not VC related to be secured. Then let SVB be liquidated with the cherry picked cash of VCs in it. 

It's total nonsense. 

That's not his point. He's not saying VCs should be punished in order to inflict harm on Roku and so on. He agrees with the what was done, for the reasons you say. He's just pointing out that they're extremely lucky words removed who don't deserve morally to have been rescued in this way, but that finance isn't a morality play.

The VCs had a lot to do with their portfolio companies being overexposed to SVB's negligence.

[villakram]

@CVByrne What financial institution do you work for?

[CVByrne]

9 hours ago, KentVillan said:

That's not his point. He's not saying VCs should be punished in order to inflict harm on Roku and so on. He agrees with the what was done, for the reasons you say. He's just pointing out that they're extremely lucky words removed who don't deserve morally to have been rescued in this way, but that finance isn't a morality play.

The VCs had a lot to do with their portfolio companies being overexposed to SVB's negligence.

I disagree with him blaming the VCs though when I'd blame SVB and regulators. The VCs - like any customer of the bank - were acting in the interest of themselves and their money. He does tbf at the end say the actions to bail out the depositors was the right one. (apologies I missed reading the end on my first pass were he does the 180). I do agree with his conclusion, if you protect depositors you reduce the risk of bank runs and if you make the banks who should fail due to their mistakes fail then the people who made the mistakes pay the price. 

Edited March 14, 2023 by CVByrne

[CVByrne]

6 hours ago, villakram said:

@CVByrne What financial institution do you work for?

None of them. I work in financial regulation. I've worked on Dodd Frank (the Volcker rule part which prohibits banks from proprietary trading). Solvency II and Basel III (which is the reform of bank capital to ensure when the next crisis hits banks are properly capitalised). 

So I suppose my skin in the game is seeing the stability of the big GSIBs and RSIBs being resilient enough for the coming recession. 

Edited March 14, 2023 by CVByrne

[Rds1983]

11 hours ago, CVByrne said:

So a 20 year old publicly traded company who employs 3000 people should be let die? So a Crypto firm who banked with SVB and has VC investments in it can also die? 

This is what I was talking about yesterday.  There's a lot of Fintechs and Payment Processors who were tied up with SVB and will now potentially need financial support. There might be some short term pains whilst they secure this but the financial sector should hopefully be fine long term. 

[Rds1983]

The Technology sector is more at risk than the Financial but there will definitely be some downstream impacts.

Credit Suisse aren't looking good though and I'd keep an eye on Charles Schwab, Western Alliance and PacWest.

[villakram]

7 hours ago, CVByrne said:

None of them. I work in financial regulation. I've worked on Dodd Frank (the Volcker rule part which prohibits banks from proprietary trading). Solvency II and Basel III (which is the reform of bank capital to ensure when the next crisis hits banks are properly capitalised). 

So I suppose my skin in the game is seeing the stability of the big GSIBs and RSIBs being resilient enough for the coming recession. 

You must have gotten a good laugh at the statements from Mr. Franks given his involvement in Signature.

From the regulations perspective, what do you make of the implied Fed backing of all US banking deposits given their precedent setting decisions over the weekend. Given that they already have an implied floor under the stock market, this is not an especially helpful development imho. Banks needing to behave at a certain level due to the need to protect their liquid capital base will be sorely missed one day.

Internationally, how is this seen? Perfectly above board given international money flows and the connected nature of things or bordering on protectionist behavior etc.

 

[tonyh29]

 BNP Paribas now dropped 9 % this morning  .. don't know if its related to SVB but it would seem a reasonable bet 

 

Edit - seems Barclays have also dropped around 9% today as well 

Edited March 15, 2023 by tonyh29

[Rds1983]

On 14/03/2023 at 10:17, Rds1983 said:

Credit Suisse aren't looking good though and I'd keep an eye on Charles Schwab, Western Alliance and PacWest.

Credit Suisse trading halted and main investor not going to offer further support. 

[Rds1983]

Credit Suisse bouncing back very nicely. Fair play to anyone who was brave enough to buy shares yesterday.

[sne]

Largest bank in Switzerland UBS about to buy Credit Suisse for $€1b apparently.

[KentVillan]

This Credit Suisse situation is looking more intense now.