Silicon Valley Bank fails

[bostonimproper]

From AP News:

U.S. regulators rushed to seize the assets of Silicon Valley Bank on Friday after a run on the bank, marking the largest failure of a financial institution since Washington Mutual collapsed at the height of the financial crisis more than a decade ago.

Silicon Valley Bank, the nation’s 16th largest bank failed after its depositors — mostly technology workers and venture capital-backed companies — hurried to withdraw money this week as anxiety over the bank’s health spread. It is the second biggest bank failure in U.S. history.

…

The White House said that Treasury Secretary Janet Yellen is “watching closely.” The White House sought to reassure people that the banking system is much healthier than it was in the Great Recession.

“Our banking system is in a fundamentally different place than it was, you know, a decade ago,” said Cecilia Rouse, chair of the White House Council of Economic Advisers. “The reforms that were put in place back then really provide the kind of resilience that we’d like to see.”

…

At the same time, the bank was hit hard by the Federal Reserve’s fight against inflation and an aggressive series of interest rate hikes to cool the economy.

As the Fed raises its benchmark interest rate, the value of bonds, typically a stable asset, start to fall. That is not typically a problem but when depositors grow anxious and begin withdrawing their money, banks sometimes have to sell those bonds before they mature to cover that exodus.

That is exactly what happened to Silicon Valley Bank, which had to sell $21 billion in highly liquid assets to cover the exodus of deposits. It took a $1.8 billion loss on that sale.

[Ego]

A couple weeks ago I had to transfer funds between accounts at different institutions and needed to perform the ACH verification. It took three days for the two small deposits to appear on the website of the receiving institution. I was eventually able to enter them and verify that I controlled both accounts.

I would imagine there are many SVB customers clicking refresh over and over again, waiting for those two small deposits to appear. This situation made me realize the wisdom in setting up the verification of all accounts in both directions now, even if I have no intention of transferring between them.

[Smashter]

The company I work for is one of the many companies wrapped up in this. We have millions in SVB that can't be accessed right now. We are not sure if we'll be able to make payroll on the 15th. Wild times!

It's time for our investors to provide some short term loans to keep operations running. They talk the talk of being there for you through thick and thin. Time to walk the walk. Early indications are that they will come through for us. Fingers crossed.

I am grateful to be in a resilient position with my personal finances, and I am thankful to the forum for helping me get there.

[Ego]

Sorry to hear that @Smashter.

Something I've always wondered about situations like this one. Let's say I heard the rumors on Thursday, walked into the bank and got a cashier's check for my balance, then opened a new account today (Friday) at a different bank with those funds. Would they clear or would I be screwed?

[zbigi]

People tried to pull $42b out of the bank on Thursday. By Friday, there were no more liquid cash left. So, the check would most likely bounce.

[jacob]

Something I've always wondered about situations like this one. Let's say I heard the rumors on Thursday, walked into the bank and got a cashier's check for my balance, then opened a new account today (Friday) at a different bank with those funds. Would they clear or would I be screwed?

They would likely not clear. Normal clearance time is 2 business days, but for new customers/large checks/... it can be up to a week, whereas good customers may have their checks/transfer cleared on the same day/almost immediately. If the sending bank is front page news, the receiving bank would almost surely bounce the check/wait as long as possible. You wouldn't be totally screwed since the check would still be covered by FDIC. It might take a while to get the money back though. Dunno

[Seppia]

It’s funny that the clown VCs that pulled out the money causing the bank to go down are now asking for a bailout.
Capitalism in 2023

[chenda]

It’s funny that the clown VCs that pulled out the money causing the bank to go down are now asking for a bailout.
Capitalism in 2023

Just like 2008. Mortgage holders get screwed, bankers get bailed out and receive lavish bonuses paid for by the taxpayer.

[Sclass]

Oh that is funny alright. It would have just kept on going if they hadn’t pulled the plug.

I’ve had some dealings with SVB.

They were the bank for the startup I worked for. After I left my job in 2012 I got a call from the bank. Apparently my old boss had used one of my patents for collateral on a big line of credit. They wanted to know what I thought it was worth. After the fact. It was worthless IMO. All I could think at the time is what a bunch of idiots. It was a little late to be doing due diligence.

It was like they were dying to lend out the money and needed just the tiniest excuse to do it. I was stunned at the level of idiocy.

I wasn’t surprised to read the headlines yesterday. I’m hoping this doesn’t go far. Sadly I can imagine a lot of lenders getting into trouble trying to cash out old low rate bonds if there is a current run on deposits. It’s just too easy to keep stacking IOUs till there is a sharp rise in rates and you need cash. I think the whole system is built on this idiocy.

ETA - I don’t know if I’d call those VCs clowns. They listened to the earnings call and they pulled the plug. They got their money back. The clown VCs are the ones who lost their uninsured deposits.

[bostonimproper]

My understanding is that this is not really a case of SVB making bad loans really but rather a lack of liquidity due to long-term low interest government bonds on their balance sheet falling in value because interest rates have been hiking up.

Which is to say: this is not a tech or SVB issue, but a broader issues for banks at large. Though SVB had unique circumstances with depositors withdrawing money in concert with one another due to highly concentrated customer niche which made them more susceptible to a bank run, this just may be the first domino to fall as a result of the Fed tightening.

[Dave]

My understanding is that this is not really a case of SVB making bad loans really but rather a lack of liquidity due to long-term low interest government bonds on their balance sheet falling in value because interest rates have been hiking up.

Which is to say: this is not a tech or SVB issue, but a broader issues for banks at large. Though SVB had unique circumstances with depositors withdrawing money in concert with one another due to highly concentrated customer niche which made them more susceptible to a bank run, this just may be the first domino to fall as a result of the Fed tightening.

These things can be analyzed from different angles, but presumably SVB could have not bought such long-dated securities, thus not putting themselves at such high exposure to interest rate risk. This would have prevented downstream issues as the security portfolio wouldn't have fallen so much, spooking deposit holders.

Same story, different day. Return chasing while ignoring "tail" (if that) risk + leverage + idiosyncratic circumstances = boom.

[Dave]

To add, these risks are not unforseeable and not all actors take on such risk. See how Interactive Brokers' asset book is managed for a stark contrast to SVB. Short asset tenor. Capital vastly in excess of regulatory requirements. Etc.

[rube]

@ego or other with experience in the USA banking system: is it (still) customary to work with checks instead of electronic (internet) transfers?
Personally I started using internet banking almost 30 years ago and the last check that I had to mail was probably 23 years ago. Checks sound so ehm, 90's?

Although most transfers over here (Europe) are now instantly received by the receiving bank account, there is still a clearing process going on in the background that takes more time and I expect that in such a case discussed here, the transfer could be cancelled after 1 or 2 days if it was just not in time for settlement.

[loutfard]

@ego or other with experience in the USA banking system: is it (still) customary to work with checks instead of electronic (internet) transfers?
Personally I started using internet banking almost 30 years ago and the last check that I had to mail was probably 23 years ago. Checks sound so ehm, 90's?

Not in the US, but all my US friends and family tell me the US feels like the stone age indeed in terms of consumer banking. Compare to https://en.wikipedia.org/wiki/Single_Euro_Payments_Area .

Although most transfers over here (Europe) are now instantly received by the receiving bank account, there is still a clearing process going on in the background that takes more time and I expect that in such a case discussed here, the transfer could be cancelled after 1 or 2 days if it was just not in time for settlement.

SEPA Instant Credit Transfer (SCT Inst), also called SEPA Instant Payment, provides for instant crediting of a payee, the delay being less than ten seconds, initially, with a maximum of twenty seconds in exceptional circumstances. Most EU banks offer this service. I could imagine the clearing would not go so smoothly with massive load on a bank suffering a bank run...

[Sclass]

Yeah, I was just saying their lending practices to my old organization were moronic. The story was just to illustrate how a bunch of mindless people were behind the curtain over there.

And I agree, it’s not bad lending, it’s rate risk. The scary thing about all of this is that banks take deposits at short term rates and lend at long term rates. It’s called running a bank. I guess it is all about the degree to which they do it. @Dave says it best.

These things can be analyzed from different angles, but presumably SVB could have not bought such long-dated securities, thus not putting themselves at such high exposure to interest rate risk.

[bostonimproper]

@Dave Agreed this was a failure of risk management. I’m just saying it’s not one that’s quite as egregious as the investment in MBS in the Great Recession and, further, one that I think is quite likely to be replicated at some other banks.

[jacob]

@ego or other with experience in the USA banking system: is it (still) customary to work with checks instead of electronic (internet) transfers?
Personally I started using internet banking almost 30 years ago and the last check that I had to mail was probably 23 years ago. Checks sound so ehm, 90's?

Checks are still a thing. Commonly used for rent, refunds, and certain bills. The last check I wrote was less than a week ago. I write 5-10 checks per year. Rarely for buying groceries or paying for retail. (Larger amounts like buying a car is mostly handled by wire transfer over the phone.) Direct deposit also exists via the ACH (e.g. paychecks). Oftentimes checks are used to initiate an ACH transfer. For example, I'd write a check to someone by hand and give it to them. They'd scan it with their smartphone using their banking app. Alternatively, they can walk ... I mean drive (nobody walks) ... over and deposit it in their bank which will then scan it. The bank will use this image to get the money from my bank via ACH. Depending on how good a customer the receiver is, the bank may front the money instantly. For example, when I deposit money to my broker electronically (essentially writing a check to myself), the money is available in less than a minute. If I walk a physical check down to the broker's office, it may take a few minutes more (however long it takes them to scan it and submit it electronically).

TL;DR - Paper is still very much a thing, but in the back office/behind the curtain transfers are electronic.

Stone-agey as this sounds, I appreciate how the US system remains accessible to the remaining dinosaurs walking amongst us.

[Sclass]

@bostonimproper, right. I just cannot get past the fact that this is likely business as usual for banks. Scary since I don’t know the subtleties between how banks manage their debt portfolios. If people are left to do the greediest stupid thing they can get away with they will in some cases.

What was the word for this back in 08? On the tip of my tongue. Ahh yes, “moral hazard”.

[7Wannabe5]

@Sclass:

Whatever do you mean? Don't you know that the realm of Finance serves as a frictionless machine making perfectly efficient the will of the intelligent actors in our economy?

[Sclass]

you mean efficiently moving money out of my pocket to theirs?