Silicon Valley Bank fails

[zbigi]

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...

With the caveat that (I think) this only works for Euros transfer, so not that useful for the 25% of EU people who are not in Eurozone.

[Seppia]

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.

Funny how this never happens to Chase.
This was the bank of VCs and startups, too concentrated in one sector and this is the result of bad risk management.

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.

I call them clowns because the Chamats/Thiels/Sacks of the world are the ones talking about creative destruction when they are taking in millions and other people are losing their jobs, but are quick to pivot to socialism when it’s their ass at stake.

The standard answer to their requests should be “fuck off”

[7Wannabe5]

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

Well, let's just say that it's not exactly a coincidence that the industry is based on the same math used in the 18th century casinos where debauched heirs to significant fortunes would continue to double-down until last spin of wheel was called.

[loutfard]

With the caveat that (I think) this only works for Euros transfer, so not that useful for the 25% of EU people who are not in Eurozone.

Indeed. For EU bank account holders with a non-eurozone account, this is useful for €-denominated transfers, whether local or within the SEPA zone. That's more useful than many might think, both in terms of cost and speed.

[bostonimproper]

Funny how this never happens to Chase.
This was the bank of VCs and startups, too concentrated in one sector and this is the result of bad risk management.

I mean obviously the biggest banks don’t have the same concentration risk. But regional banks might, and that may be the next area to watch out for.

[Ego]

Whatever happened to the Bankrate Safe & Sound ratings of banks and credit unions? They used to do ratings based on CAEL: capitalization, asset quality, earnings and liquidity. It is gone and similar products now charge. Any suggestions?

[AxelHeyst]

I thought Matt Levine's take/explanation was helpful for me to understand the dynamic (as someone at the bottom of the learning curve on micro and macro...). https://www.bloomberg.com/opinion/artic ... p-bank-run

What I got out of his article:
-When interest rates are low, VCs throw cash at startups
-SVB's customers were all startups
-So SVB didn't have many loans to give out, because VCs were giving startups cash. All their customers were making *deposits*.
-So the majority of where SVB put their holdings was these long maturity fixed income securities, because what else could they do with it. No one wanted loans from them, (which is how more diversified banks avoid interest rate risk?).
-Turns out, it's not just the fact that their securities were a bet on interest rates, their *customers* were a bet on interest rates.
-It's this double whammy that did/is doing SVB in and set them up for classic bank run.

[theanimal]

Whatever happened to the Bankrate Safe & Sound ratings of banks and credit unions? They used to do ratings based on CAEL: capitalization, asset quality, earnings and liquidity. It is gone and similar products now charge. Any suggestions?

Bauer Financial has free ratings for banks and credit unions. https://www.bauerfinancial.com/star-ratings/#loadhere . Though the free portion is only the rating, you have to pay to get more details.

They base it off of an institution's capital ratio along with the following.

In addition to the capital ratio, other criteria are used to determine the BauerFinancial™ Star-Rating. Some of these include but are not limited to: profitability/loss trend, evaluating the level of delinquent loans, chargeoffs and repossessed assets, the market versus book value of the investment portfolio, regulatory supervisory agreements, the community reinvestment rating (CRA), historical data and liquidity.

[jacob]

Plus ca change ...

[Ego]

@theanimal, that's great! Exactly what I was looking for. Thank you!

I call them clowns because the Chamats/Thiels/Sacks of the world are the ones talking about creative destruction when they are taking in millions and other people are losing their jobs, but are quick to pivot to socialism when it’s their ass at stake.

The standard answer to their requests should be “fuck off”

Agreed. The trouble is, if they don't get backstopped on Monday then anyone with over $250K in any small institution is going to yank it out on Monday afternoon, causing small/local banks all over the country to crater.

[chenda]

This is why Adam Smith warned against limited liability. If the director's own mansions and yachts were on the line as collateral they might have been a lot more cautious as to how they run things.

[7Wannabe5]

Well, maybe things will change when AI is running all the LLCs.

[Seppia]

The trouble is, if they don't get backstopped on Monday then anyone with over $250K in any small institution is going to yank it out on Monday afternoon, causing small/local banks all over the country to crater.

Are they?
We are not in some banana republic, US banks on average are in a good place and people who have that kind of money in th aggregate know if a bank is solid or not.
If I understand correctly brokerage assets are segregated, so "above $250k" means above $250k in cash, your VTSAX doesn't count and isn't at risk whatever happens to the bank.
My guess is bank runs could happen at other similarly badly run/with no real risk management banks, which isn't necessarily a bad thing.

We need to stop rewarding bad behaviour by financial institutions or we will inevitably create all the worst incentives

[jacob]

Oh man ...

I'll +1 Seppia's comment. Furthermore, I'd like to do some numbers instead of the "news of the days" just to establish a base rate.

This is well-worth reading: https://en.wikipedia.org/wiki/Base_rate_fallacy

I'll list the latest years during which some bank failed in the US and nothing remarkable happened (people got eventually got their money back due to FDIC) and it didn't even make the news: https://www.fdic.gov/resources/resoluti ... bank-list/
2023 (SVB), 2020, 2020, 2020, 2020, 2019, 2019, 2019, 2019, 2017, 2017, 2017, 2017, 2017, 2017, 2017, 2017, 2016, 2016, 2016, 2016, 2016, 2015, 2015, 2015, 2015, 2015, 2015, 2015, 2015, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2014, 2013, ... and so on and so forth. This is basically banking business as usual.

I don't even know why SVB is news (while everything else was ignored) or why this thread is growing so fast. This is a random case of dog bites man gone viral. Not man bites dog end of the world. Insofar this had happened in Pig Sty, Indiana rather than Hacker Town, California, it would never have made the news.

There are about 5000 commercial banks in the US which means that the likelihood of suffering this kind of "first world problem" is about <0.05% per year. That's 10x less than dying of COVID or cancer or stroking out or a fatal heart attack! What eventually happens is that you'll get your money back after a couple of months or whatever. This is a semi-common problem insofar you're investing in CDs in multiple banks. It's like P2P investing except bigger and faster when it comes to recovery. It happens. People parking six-fig amounts of cash already know.

This is why both why there's a central bank in the first place and why it works. Oi ... I sound so establishment... maybe this will come back to bite me, but: Quick and easy solution in case you get "money cancer": Just have 2 checking accounts. Don't consolidate everything in one single place. Something something common sense, but ...

[chenda]

@jacob - I'm guessing it's due in part to the cache which Silicon Valley (of the IT crowd) has and the fact its going through a period of contraction, and along comes a defaulting bank which unfortunately is actually called Silicon Valley, further harming the brand value.

As an aside, there must be a strip club called Silicon Valley somewhere...

[Ego]

Quick and easy solution in case you get "money cancer": Just have 2 checking accounts. Don't consolidate everything in one single place. Something something common sense, but ...

SVB had some customers with extremely large cash deposits, far above FDIC insurance limits. I read on Bankrate that the amount of excess-deposits (those above FDIC insurance limits) in US banks rose to $3T after covid. I just looked up total US bank deposits.... $19.3T.

Back of envelope, 16% of US deposits uninsured. Is that right? If it is, that's a big lack of common sense.

Edit to add... SVB is the second largest bank failure in US history so that may explain why people are talking about it.

https://www.bankrate.com/banking/saving ... -deposits/
https://ycharts.com/indicators/us_banks_total_deposits

[take2]

SVB also catered to crypto companies, which most other banks don’t. Makes sense that (what’s left of) their cash deposits would exceed FDIC limits if they had no other choice.

[zbigi]

Back of envelope, 16% of US deposits uninsured. Is that right? If it is, that's a big lack of common sense.

Not neccessarily. If you're a big company, you're likely to have much more in cash than the insured amount . And, fooling around with multiple accounts is not an option in such case - you just have to eat the risk.

[Seppia]

Looks like thanks to a few geniuses yelling fire in a crowded theater (see Bill Ackman and David Sacks Twitter among others) we may indeed have an issue on Monday.

Moments like these are why I only bank with the strongest safest banks even while staying below insured limits.

[Ego]

Not neccessarily. If you're a big company, you're likely to have much more in cash than the insured amount . And, fooling around with multiple accounts is not an option in such case - you just have to eat the risk.

Of course. I was referring to @jacob's comment above about how it is common sense that people should have multiple accounts. My point is that all those companies with uninsured risk - even in very safe local and regional banks - are going to be moving it to the giant TBTF institutions.

It doesn't really matter if there is an actual problem. What matters is if those people with the large deposits believe there is the possibility of a problem. If they control 16% (or even 5%) of the deposits at smaller banks then we have a problem.

Looks like thanks to a few geniuses yelling fire in a crowded theater (see Bill Ackman and David Sacks Twitter among others) we may indeed have an issue on Monday.

Risks of going to the theater:
- Fire
- People making a mistake and yelling FIRE when there is no fire.
- People benefiting from panic by making the most fearful in the audience believe there is a fire so that they will yell FIRE!

You've got to anticipate all, right?