Silicon Valley Bank has failed
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I'm not familiar with Bitcoin... is that a cryptocurrency or part of the Fed's fiscal policy?
It's a land of milk and honey.I'm not familiar with Bitcoin... is that a cryptocurrency or part of the Fed's fiscal policy?
Life comes at you fast.
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Silicon Valley Congressman Fundraising With Whiny Venture Capitalist
Rep. Ro Khanna, who stumped aggressively for a depositor bailout at Silicon Valley Bank, now will solicit funds with David Sacks, one of the loudest supporters of that policy.
prospect.org
The comparison between East Palestine and SVB is possible if you assume that Norfolk Southern was full of DEI grifters and didn’t have a risk management officer.
More from Matt Levine:
One lesson of the Silicon Valley Bank failure is that some bank deposits are better than others. Lots of US regional banks were doing more or less the same thing in 2021: They were taking money from depositors, promising to give it back whenever the depositors wanted, paying 0% interest on those deposits, and investing the money in long-term bonds at like 2% interest. Then interest rates went up and those bonds were worth much less than they used to be. If the depositors all asked for their money back at the same time, as is their right, the banks would have to sell the bonds at a big loss, leaving them without enough money to pay depositors. On the other hand if all the depositors kept their money in the bank as rates went up, without even demanding higher interest rates on their checking accounts, then the bank would be fine. The bank would be great, even: As rates go up, the bank will earn more on its assets,[1] but it won’t have to pay more to its sleepy and undemanding depositors. A bank with sleepy depositors would do well, a bank with antsy depositors would go bust, even if their investments were the same.
One way to say this is that a bank with sleepy and undemanding depositors is much more valuable than a bank with nervous and demanding depositors, but it is hard to measure that. In fact bank regulation does try to measure that; it knows that some types of deposits are flightier than others, and liquidity regulations require banks to have more cash to cover flighty deposits than stable ones. (For instance, deposits that are not covered by deposit insurance are flightier than ones that are.) But it is a crude and imprecise approach to a basically social set of questions: What are your depositors like? Do they talk to each other? When they get together, do they tend to calm each other down or work each other up?
Another way to say it is that a bank’s assets have some duration — some sensitivity to interest rates — that is driven mainly by the official terms of those assets: A long-term fixed-rate bond has a lot of duration, a floating-rate loan has less. And the bank’s liabilities have some duration that is driven partly by their legal terms (if the bank issues long-term bonds, they have a lot of duration) but mostly by the behavior of their depositors. In some technical sense a checking account has zero duration — the customer can take her money out at any time — but in a practical sense, if all your customers keep their money in their checking accounts for years without even looking at the interest rate, that is very valuable long-term financing.
And then the idea is basically to match the (actual, legal) duration of your assets with the (rough, behavioral) duration of your liabilities. But you don’t really know the duration of your deposits; you have to estimate it.
Silicon Valley Bank took a lot of interest-rate risk with its assets — it bought long-term bonds and got rid of its interest-rate hedges — perhaps because it thought it had pretty long-lived liabilities. Why not? It invested a lot in its relationships with its depositor customers — Silicon Valley venture capitalists and the tech startups they backed — and probably figured they were loyal. It took them out to nice events, it supported them when times were tough, it gave them loans no one else would give them, it worked with them to find financial solutions, it had good customer service. “Our customers love us and won’t leave if some other bank offers them 0.25% higher interest rates,” SVB could reasonably have thought, “so it’s fine if we put their money in 6-year bonds.” Also apparently a lot of SVB’s loans to startups contained covenants requiring the startups to keep their deposits at SVB, so in some rough sense the customers couldn’t leave.
The simple story of SVB’s failure is that it had an asset-liability mismatch: It had all these demand deposits, it used them to buy long-term bonds, and when interest rates went up those bonds lost value. But the counterargument would be that SVB thought it had long-term liabilities — these locked-in, loyal deposits — and so matched its assets to its liabilities. When rates went up, its bonds became less valuable, but its loyal stable deposits became more valuable: Having cheap funding from loyal customers is even better when interest rates go up. SVB hedged the interest-rate risk on its bonds by investing in good relationships with its depositors.
This counterargument is not crazy! It just turned out to be totally wrong. It turned out that SVB’s depositors were not more loyal than average bank customers, but less loyal.[2] Here is a Bloomberg News story about how the network of SVB customers panicked each other into a bank run:
On the other hand First Republic Bank seems to have basically similar problems to SVB — deposit flight, interest-rate losses — and it is not exactly in great shape. But here is another Bloomberg articleabout how its customer network is more loyal than SVB’s:
One lesson of the Silicon Valley Bank failure is that some bank deposits are better than others. Lots of US regional banks were doing more or less the same thing in 2021: They were taking money from depositors, promising to give it back whenever the depositors wanted, paying 0% interest on those deposits, and investing the money in long-term bonds at like 2% interest. Then interest rates went up and those bonds were worth much less than they used to be. If the depositors all asked for their money back at the same time, as is their right, the banks would have to sell the bonds at a big loss, leaving them without enough money to pay depositors. On the other hand if all the depositors kept their money in the bank as rates went up, without even demanding higher interest rates on their checking accounts, then the bank would be fine. The bank would be great, even: As rates go up, the bank will earn more on its assets,[1] but it won’t have to pay more to its sleepy and undemanding depositors. A bank with sleepy depositors would do well, a bank with antsy depositors would go bust, even if their investments were the same.
One way to say this is that a bank with sleepy and undemanding depositors is much more valuable than a bank with nervous and demanding depositors, but it is hard to measure that. In fact bank regulation does try to measure that; it knows that some types of deposits are flightier than others, and liquidity regulations require banks to have more cash to cover flighty deposits than stable ones. (For instance, deposits that are not covered by deposit insurance are flightier than ones that are.) But it is a crude and imprecise approach to a basically social set of questions: What are your depositors like? Do they talk to each other? When they get together, do they tend to calm each other down or work each other up?
Another way to say it is that a bank’s assets have some duration — some sensitivity to interest rates — that is driven mainly by the official terms of those assets: A long-term fixed-rate bond has a lot of duration, a floating-rate loan has less. And the bank’s liabilities have some duration that is driven partly by their legal terms (if the bank issues long-term bonds, they have a lot of duration) but mostly by the behavior of their depositors. In some technical sense a checking account has zero duration — the customer can take her money out at any time — but in a practical sense, if all your customers keep their money in their checking accounts for years without even looking at the interest rate, that is very valuable long-term financing.
And then the idea is basically to match the (actual, legal) duration of your assets with the (rough, behavioral) duration of your liabilities. But you don’t really know the duration of your deposits; you have to estimate it.
Silicon Valley Bank took a lot of interest-rate risk with its assets — it bought long-term bonds and got rid of its interest-rate hedges — perhaps because it thought it had pretty long-lived liabilities. Why not? It invested a lot in its relationships with its depositor customers — Silicon Valley venture capitalists and the tech startups they backed — and probably figured they were loyal. It took them out to nice events, it supported them when times were tough, it gave them loans no one else would give them, it worked with them to find financial solutions, it had good customer service. “Our customers love us and won’t leave if some other bank offers them 0.25% higher interest rates,” SVB could reasonably have thought, “so it’s fine if we put their money in 6-year bonds.” Also apparently a lot of SVB’s loans to startups contained covenants requiring the startups to keep their deposits at SVB, so in some rough sense the customers couldn’t leave.
The simple story of SVB’s failure is that it had an asset-liability mismatch: It had all these demand deposits, it used them to buy long-term bonds, and when interest rates went up those bonds lost value. But the counterargument would be that SVB thought it had long-term liabilities — these locked-in, loyal deposits — and so matched its assets to its liabilities. When rates went up, its bonds became less valuable, but its loyal stable deposits became more valuable: Having cheap funding from loyal customers is even better when interest rates go up. SVB hedged the interest-rate risk on its bonds by investing in good relationships with its depositors.
This counterargument is not crazy! It just turned out to be totally wrong. It turned out that SVB’s depositors were not more loyal than average bank customers, but less loyal.[2] Here is a Bloomberg News story about how the network of SVB customers panicked each other into a bank run:
And:
SVB had a reasonable model of “networking with venture capitalists and making them love us and giving them wine will make them slow to move their money,” whereas in fact the right model was “having a very networked group of sophisticated customers means that they will be quite quick to move their money.” Traditional banks do not have customers who will spring into action to set up a telephone chain to cause a bank run. But Silicon Valley is efficient and scalable, so they got their money out fast.
On the other hand First Republic Bank seems to have basically similar problems to SVB — deposit flight, interest-rate losses — and it is not exactly in great shape. But here is another Bloomberg articleabout how its customer network is more loyal than SVB’s:
This is the same exact story as SVB — a network of investors and founders who bump into each other in California and chat about the craziness at their bank — but with different outcomes. SVB’s customers worked each other up and took their money out; First Republic’s customers — at least some of them — calmed each other down and kept their money in.
WSJ News Exclusive | JPMorgan, PNC Bidding for First Republic as Part of FDIC Takeover
Big banks including JPMorgan Chase and PNC Financial Services Group are vying to buy First Republic Bank in a deal that would follow a government seizure of the troubled lender.
www.wsj.com
the internet changes all the traditional "run on the bank" dynamics.
that said, capitalism will always require some form of gun to the head to mandate proper banking behavior.
Awesome a consolidation of banks. Maybe we can have just one bank? Wouldn’t that be great 🫤
WSJ News Exclusive | JPMorgan, PNC Bidding for First Republic as Part of FDIC Takeover
Big banks including JPMorgan Chase and PNC Financial Services Group are vying to buy First Republic Bank in a deal that would follow a government seizure of the troubled lender.
A
anon_6hv78pr714xta
Guest
To the moon!!!🦍🦍🦍🚀🚀🚀
Tell your pride to F#ck off
A
anon_6hv78pr714xta
Guest
‘Unflinching’ Fed panel report reveals causes of Silicon Valley Bank's downfall
It has renewed calls from policymakers for stronger banking regulations.
www.washingtonexaminer.com
Commercial vacancy rates are 30% in San Francisco. The worse is yet to come as much vacant space is still under lease. Other cities are similar. The commercial real estate bust is coming. This will take down many more banks.
Meanwhile, our leaders focus on reparations, safe injection sites, and gender dysphoria while scratching their heads over inner city decay. The sexist in me will say much of this is the product of toxic femininity.
The main pain points are in office, other areas of commercial (industrial/warehouse, retail, hotels, etc) are still looking strong.
The question/concern everyone has is that like 25% of office buildings are up for refinancing next year. At obviously much higher rates than the 3% that a lot are sitting on. If office vacancy rates remain elevated, and leases are not renewed.... you could start seeing more pressure on lenders.
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