SVB depositors, investors tried to pull $42B Thursday(bloomberg.com)
bloomberg.com
SVB depositors, investors tried to pull $42B Thursday
https://www.bloomberg.com/news/articles/2023-03-11/svb-depositors-investors-tried-to-pull-42-billion-on-thursday
206 comments
https://archive.ph/LNI2e
This explains why the FDIC couldn't find a buyer of the distressed assets and also seized the bank in the middle of the day. They always wait until after the close of business on Friday (or, at the very least end of business of whatever day) to avoid a panic
Out of 563 previous bank failures going back to October 2000, only 31 did not have an acquiring institution lined up (https://www.fdic.gov/resources/resolutions/bank-failures/fai...)
Usually the FDIC will sell the assets and liabilities of the failed bank to a healthy bank, sometimes at a negative value (paying the acquiring bank to receive the assets) and then also making the acquiring bank whole on losses of the assets
SIVB is upside down on various interest bearing assets like MBS and US Treasuries. In a normal case, it'd be cheaper for the FDIC to just make up those losses than directly make depositors whole, so they do that
In this case, given how little of SIVB's deposits are actually insured, the scale of the run before they got the doors closed, and the amount of losses they are going to take in the assets, the FDIC obviously wasn't willing to backstop the losses and no one was willing to take the risk
Depositors are definitely taking a haircut on this one
Out of 563 previous bank failures going back to October 2000, only 31 did not have an acquiring institution lined up (https://www.fdic.gov/resources/resolutions/bank-failures/fai...)
Usually the FDIC will sell the assets and liabilities of the failed bank to a healthy bank, sometimes at a negative value (paying the acquiring bank to receive the assets) and then also making the acquiring bank whole on losses of the assets
SIVB is upside down on various interest bearing assets like MBS and US Treasuries. In a normal case, it'd be cheaper for the FDIC to just make up those losses than directly make depositors whole, so they do that
In this case, given how little of SIVB's deposits are actually insured, the scale of the run before they got the doors closed, and the amount of losses they are going to take in the assets, the FDIC obviously wasn't willing to backstop the losses and no one was willing to take the risk
Depositors are definitely taking a haircut on this one
> Depositors are definitely taking a haircut on this one
That's not clear at all and many people disagree with you.
That's not clear at all and many people disagree with you.
Money doesn’t magically appear out of nowhere. SVB does not have assets on its books to pay its short term liabilities.
Unless a government agency swoops in to bail out the difference between their short term liabilities and the net present value of their long term assets, somebody is going to be taking a haircut.
The equity of the bank itself isn’t enough to cover the losses so it’s going to be depositors.
Unless a government agency swoops in to bail out the difference between their short term liabilities and the net present value of their long term assets, somebody is going to be taking a haircut.
The equity of the bank itself isn’t enough to cover the losses so it’s going to be depositors.
What if the FDIC or someone pays all depositors and then takes over the long-term bond portfolio, intending to hold to maturity?
No private institutions with hard cash are going to be willing to take the portfolio because of the opportunity cost of investing that money at higher rates of returns. Any institutions that would need to borrow to buy the portfolio would need to borrow at higher interest rates and earn lower rates generating a loss each month. There is now way to take the portfolio without a discount and not have a loss.
If there was a way out of this without a loss the bank wouldn’t be insolvent (bankrupt).
If there was a way out of this without a loss the bank wouldn’t be insolvent (bankrupt).
That’s an example of someone swooping in to save the day. Whoever does that would not do it for free as the SVB bond portfolio is worth less than the same bonds bought today (rates go up, bond prices go down). No private party is going to hand over billions of dollars for free so either the Feds do it or nobody does.
These startups are kind of the backbone of the tech economy, you'd think this would be a case where the government says "too big to fail" again.
When the alternative is going to be handing over stablecoin market dominance to unregulatable foreign entity, it’s not out of question that the government would step in to stabilize the USDC stablecoin market.
Why would they? their long term treasury bills are yielding almost 0% interest rate and current rate is closer to 6%. Ergo, no one is going to buy an out of the money long term asset at par when current yield is significantly higher. No sane rational person would do that.
I'm happy for them, I guess. Of course I could be wrong, but given the evidence I don't think I will be. More power to the VCs and everyone else if they get their money back.
But, if they were going to find a buyer they probably would've found one already. They certainly will either have to have one before the open on Monday or it's not happening. The assets of the bank become more and more toxic as time goes on (this happened with Lehman Brothers) and if someone swoops in today, on Saturday, then it's not too bad. But if it sits a week and no one wants to buy it, if someone buys it next Saturday now that bank looks like a fool and people are going to question the deal
If they don't have a buyer, depositors are taking a haircut. Maybe they will get 100% of their money back in actual dollars, but they will lose via time--the FDIC will either liquidate the assets or let them mature. If they liquidate, they will take an immediate loss. If they wait for them to mature, then sure in 10 years everyone gets their money but Time value of Money is a thing and being made whole 10 years from now is not being made whole
But, if they were going to find a buyer they probably would've found one already. They certainly will either have to have one before the open on Monday or it's not happening. The assets of the bank become more and more toxic as time goes on (this happened with Lehman Brothers) and if someone swoops in today, on Saturday, then it's not too bad. But if it sits a week and no one wants to buy it, if someone buys it next Saturday now that bank looks like a fool and people are going to question the deal
If they don't have a buyer, depositors are taking a haircut. Maybe they will get 100% of their money back in actual dollars, but they will lose via time--the FDIC will either liquidate the assets or let them mature. If they liquidate, they will take an immediate loss. If they wait for them to mature, then sure in 10 years everyone gets their money but Time value of Money is a thing and being made whole 10 years from now is not being made whole
The known portfolio isn't toxic with more time. It's just Treasury bonds and MBS. In fact they are rising in price because of SVB. However, the suspected problem is the unpublicized part of the portfolio. Some here say there are funny, poorly collateralized loans in there to the same people who made deposits there. It might turn out to be out-and-out fraud that looks like clever financial engineering.
Thats not what parent is saying. They are saying todays value of the known portfolio is not what is on the books due to interest and risk discounting the future value at which the bonds mature.
Either you sell everything now at the discounted value, leading to loss in deposits. Or you wait 10 years and pay everyone back their deposit then. Given current inflation a dollar now is only worth 50 cent in 10 years.
Either you sell everything now at the discounted value, leading to loss in deposits. Or you wait 10 years and pay everyone back their deposit then. Given current inflation a dollar now is only worth 50 cent in 10 years.
Sure, the "known" portion may not be getting more toxic, but an acquirer has to take the whole thing. The "known" and the "unknown" part you're talking about. As it goes on, people are going to increasingly wonder why no one has stepped in to buy what would otherwise be a pretty lucrative business
It's because there's a lot more bad assets there than people know or acknowledge, and most of the deposits (and therefore customers) are gone. And as time ticks on, that continues to get worse, even if it's just a perception of it getting worse that perception becomes reality
It's because there's a lot more bad assets there than people know or acknowledge, and most of the deposits (and therefore customers) are gone. And as time ticks on, that continues to get worse, even if it's just a perception of it getting worse that perception becomes reality
would be interested in knowing if the us gov just buys the assets, since at the end of the day, (longer term) there seems to be a pretty good guarantee of getting it all back (minus time value of money)
I don't think this is within the existing authority of the FDIC, or Federal Reserve to do. I'm not an expert, so happy to be corrected, but given where things are currently -- with SBV closed, assets transferred to the Deposit Insurance Bank of Santa Clara -- I believe this would take an act of Congress.
And I sincerely doubt there is appetite in Congress for a bank bailout for Big Tech.
And I sincerely doubt there is appetite in Congress for a bank bailout for Big Tech.
I appreciate that's perhaps how it'll be viewed, but let's be clear here: "big tech" is not being bailed out. Apple, Google, Meta, etc. do not have a substantial portion of their cash in SVB. Sequoia, Andreesen, etc. do not have a substantial portion of their fund in SVB (most of it is kept by their LPs until actually used). Investors of SVB are not being bailed out -- shareholders exit last (as they should).
The people being "bailed out" are the owners and employees of small businesses and startups that, just by nature of having a deposit as SVB, unconsciously acted as a creditor to an institution that had an 'A' credit rating by Moody's, a 'Buy' rating by JPM, and had passed whatever monitoring and risk tolerance requirements put in place by the Fed.
The people being "bailed out" are the owners and employees of small businesses and startups that, just by nature of having a deposit as SVB, unconsciously acted as a creditor to an institution that had an 'A' credit rating by Moody's, a 'Buy' rating by JPM, and had passed whatever monitoring and risk tolerance requirements put in place by the Fed.
Completely agree, that part of my comment was only meant to speak to the political environment.
I don't think that's likely. Other stats I've seen indicate over the past decade or two, uninsured depositors have been paid something like 75 cents on the dollar on their uninsured accounts. This would indicate the FDIC, if they don't find someone to buy the bank and make everyone whole, will liquidate the assets and pay out the accounts over a pretty short term
That was before QE. What's some bonds to the Fed when they are the kind it would buy for its own balance sheet anyway? The issue is, one, they are in QT right now; two, buying isn't enough, as these are perfectly marketable securities, just that they are worth less than face value, so the Fed or anyone buying them at market price doesn't help. You actually need someone to eat the loss by paying face value.
I've been trying to figure out what SVB's reserve requirements were and found (https://www.federalreserve.gov/monetarypolicy/reservereq.htm):
"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
Wat?
"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
Wat?
Reserve requirements are pretty silly. Many countries never had them.
What you want to keep banks afloat are capital buffers, not reserves.
Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules.
As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)
What you want to keep banks afloat are capital buffers, not reserves.
Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
In regulatory terms something like this is called 'minimum capital adequacy ratio'. But it's generally better to set up the rules of the game so that banks naturally want to have more of an equity cushion, instead of giving them strict rules on capital buffers but leave lots of incentives to work around those rules.
As an example of incentives: many tax codes around the world let you pay interest with pre-tax money but dividends have to be paid with post-tax money. (That's simplified, since there's lots of different taxes.)
Slightly ironic that you comment about the silliness of reserves on a post about insolvency of a bank that likely had little reserves
Right, but reserve requirements are in the order of a few percent, certainly not enough to prevent a bank run, or preventing you from being insolvent when the bonds you're holding went down in value by 20% due to interest rate movements. At the end of the day what you actually care about is whether you have more assets (cash or equity) than liabilities.
Reserves are but one tool in the arsenal and it's also for tightly managing the maximum leverage. If all your assets are not cash-equivalent and they fluctuate in value then there is no maximum leverage that can be guaranteed a priori and there is operational risk.
Yes, reserve requirements don't guarantee any maximum leverage either.
Suppose your assets are 50 dollar reserves and 50 dollar investments.
The liability side of your balance sheet is 20 dollars of equity and 80 dollars deposits. For a leverage ratio of 1:4.
If the investments drop 10 dollars in value (to 40 dollars), your leverage ratio goes to 1:8.
If the investments drop 20 dollars in value (to 30 dollars) your leverage ratio goes 1:infinity.
If your investments drop below 30 dollars (say to zero), you are insolvent.
Yes, reserves are a tool that banks can use. But that doesn't mean that legal minimum reserve requirements are a good idea.
Suppose your assets are 50 dollar reserves and 50 dollar investments.
The liability side of your balance sheet is 20 dollars of equity and 80 dollars deposits. For a leverage ratio of 1:4.
If the investments drop 10 dollars in value (to 40 dollars), your leverage ratio goes to 1:8.
If the investments drop 20 dollars in value (to 30 dollars) your leverage ratio goes 1:infinity.
If your investments drop below 30 dollars (say to zero), you are insolvent.
Yes, reserves are a tool that banks can use. But that doesn't mean that legal minimum reserve requirements are a good idea.
Why? I don't see any irony here.
The bank also had very few chocolate coins (probably none), but that doesn't mean requiring them to hold more of those in their vault would have improved matters.
The problem is that the bank is insolvent; not so much that the bank is out of liquidity.
If they were solvent, someone would lend them the liquidity they need.
The bank also had very few chocolate coins (probably none), but that doesn't mean requiring them to hold more of those in their vault would have improved matters.
The problem is that the bank is insolvent; not so much that the bank is out of liquidity.
If they were solvent, someone would lend them the liquidity they need.
I get that other countries are also doing this but “oh this bag is equities is safe because it’s diverse” proving to be false all the time feels like a good argument against this logic.
Granted if SVB had all these bonds that would pay out “guaranteed” that feels pretty strong
Granted if SVB had all these bonds that would pay out “guaranteed” that feels pretty strong
The problem was specifically that they were not diverse, though?
And, absence a run, they were somewhat safe. They effectively concentrated all of their risk in this category. And then got hit there
And, absence a run, they were somewhat safe. They effectively concentrated all of their risk in this category. And then got hit there
How are they proving to be false all the time? The FDIC said the last bank they took over was in 2020.
What I was glibly saying was that “we have securities X Y and Z that are in aggregate worth T dollars at current market prices, thus this is like we have T liquid dollars” shortcuts have lead to so many problems when macro economics happen.
I am being glib, though I am very wary of the safety of things that aren’t just like… cash. “We haven’t had to take over a bank for 2 years!” Isn’t as much of a vote of confidence in a system as I’d like.
I am being glib, though I am very wary of the safety of things that aren’t just like… cash. “We haven’t had to take over a bank for 2 years!” Isn’t as much of a vote of confidence in a system as I’d like.
I’d be curious to hear why such a cadence (let’s say 15 years) is an acceptable price to pay in your book. Do you think this system leads to such substantive increases in American standard of living that it’s worth giant banks toppling do often?
Just treat these leveraged entities like SEC would have brokerages treat margin accounts. There are different leverage ratios counted depending on the risk of the position and if you don't maintain margin you get called and liquidated. Such regulations should be uncontroversial but I guess SVB lobbied for infinite margin and then used it!
What makes you think they had infinite margin? (Or lobbied for it?)
They had assets on their balance sheet that lost in value. They lost enough value to wipe out all the equity, and become insolvent.
Very similar to how your brokerage account can go to zero, if you trade on margin.
The brokerage liquidating your account is pretty similar to the FDIC taking over SVB.
(Yes, in a technical sense SVB went to infinite leverage for a brief moment. Just your brokerage account can go to zero if the market moves faster than your broker pre-emptively liquidates your stuff.)
They had assets on their balance sheet that lost in value. They lost enough value to wipe out all the equity, and become insolvent.
Very similar to how your brokerage account can go to zero, if you trade on margin.
The brokerage liquidating your account is pretty similar to the FDIC taking over SVB.
(Yes, in a technical sense SVB went to infinite leverage for a brief moment. Just your brokerage account can go to zero if the market moves faster than your broker pre-emptively liquidates your stuff.)
>Expressed differently: reserves are like cash in a vault (or electronic equivalents). What you want instead is a big buffer of equity in the capital structure, so that shareholders can absorb huge losses long before creditors do.
That sounds like a Ponzi scheme. Wiki:
>A Ponzi scheme (/ˈpɒnzi/, Italian: [ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
That sounds like a Ponzi scheme. Wiki:
>A Ponzi scheme (/ˈpɒnzi/, Italian: [ˈpontsi]) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.
Sure, so when the market goes down and depositors want their money back, they can't.
The reserve requirement ratio is the amount of money the bank needs to hold at its account with one of the Federal Reserve Banks per dollar of deposits. A literal pile of cash would not count a single cent towards that requirement.
Modern requirements are based on core capital ratio, which is basically the ratio of a pile of cash that is set aside to deal with losses of assets as a fraction of the assets (weighted by risk, so, e.g., you don't need to set aside any money to protect against a literal pile of cash but you need lots of money to protect against a shitton of shitcoins).
Modern requirements are based on core capital ratio, which is basically the ratio of a pile of cash that is set aside to deal with losses of assets as a fraction of the assets (weighted by risk, so, e.g., you don't need to set aside any money to protect against a literal pile of cash but you need lots of money to protect against a shitton of shitcoins).
I mostly agree.
> A literal pile of cash would not count a single cent towards that requirement.
Are you sure about that? Do you have a source?
As far as I am aware, vault cash is fine, just way less convenient than an account at the Fed.
But I admit that I don't know the exact rules, and would be happy to be proven wrong.
> Modern requirements are based on core capital ratio [...]
I think you can strike the word 'modern' from that sentence. Capital cushions have been a thing for a long, long time. What's 'modern' is that the US mostly stopped having reserve requirements (though the new rules are written in such a way as to all-but force American banks to hold lots of American government debt as a sort-of reserve in disguise).
> A literal pile of cash would not count a single cent towards that requirement.
Are you sure about that? Do you have a source?
As far as I am aware, vault cash is fine, just way less convenient than an account at the Fed.
But I admit that I don't know the exact rules, and would be happy to be proven wrong.
> Modern requirements are based on core capital ratio [...]
I think you can strike the word 'modern' from that sentence. Capital cushions have been a thing for a long, long time. What's 'modern' is that the US mostly stopped having reserve requirements (though the new rules are written in such a way as to all-but force American banks to hold lots of American government debt as a sort-of reserve in disguise).
You are conflating two things. Reserve requirements are not same as capital. And there is a modern capital requirement, as per Basel III, in effect since 2022. Capital historically was calculated very differently.
> You are conflating two things. Reserve requirements are not same as capital.
I know. I never wanted to imply otherwise. What made you think so?
> And there is a modern capital requirement, as per Basel III, in effect since 2022. Capital historically was calculated very differently.
Yes, the rules change all the time. So there's a modern incarnation of capital requirements. But capital requirements in general aren't new.
I know. I never wanted to imply otherwise. What made you think so?
> And there is a modern capital requirement, as per Basel III, in effect since 2022. Capital historically was calculated very differently.
Yes, the rules change all the time. So there's a modern incarnation of capital requirements. But capital requirements in general aren't new.
I've gotten my information from https://www.federalreserve.gov/monetarypolicy/reserve-mainte..., although I may be misreading it.
Thanks!
Following a link from there, I get to https://www.federalreserve.gov/monetarypolicy/reserve-mainte... and this says:
> During each reserve maintenance period an institution must satisfy its reserve requirement in the form of vault cash or, if vault cash is insufficient to satisfy the requirement, in the form of a balance maintained with a Federal Reserve Bank. The portion of the reserve requirement not satisfied by vault cash is called the reserve balance requirement.
In any case, I'm still agreeing with you!
Following a link from there, I get to https://www.federalreserve.gov/monetarypolicy/reserve-mainte... and this says:
> During each reserve maintenance period an institution must satisfy its reserve requirement in the form of vault cash or, if vault cash is insufficient to satisfy the requirement, in the form of a balance maintained with a Federal Reserve Bank. The portion of the reserve requirement not satisfied by vault cash is called the reserve balance requirement.
In any case, I'm still agreeing with you!
The thing to understand about the change in policy regime that led to the elimination of the reserve requirement is this: banks were (and are) holding massively more reserves than they needed to. They didn’t need the Fed to tell them to do this, so it was not an effective monetary policy tool any more.
In economic terms: the supply of reserves was so high that it was in an inelastic part of the demand curve for reserves.
The new regime (“ample reserves”) depends on administered interest rates, rather than reserve requirements, to set short-term interest rates.
It is absolutely not the case that the reserve requirements were removed to allow banks to reduce their reserves.
In economic terms: the supply of reserves was so high that it was in an inelastic part of the demand curve for reserves.
The new regime (“ample reserves”) depends on administered interest rates, rather than reserve requirements, to set short-term interest rates.
It is absolutely not the case that the reserve requirements were removed to allow banks to reduce their reserves.
All cars have seat belts. It isn't effective policy to require them.
You need to extend your metaphor.
Imagine instead that the government was paying car manufacturers more than the cost of installation for every seat belt in a car.
You wouldn’t need to have a policy requiring seatbelts: every car would be liberally festooned with them.
Imagine instead that the government was paying car manufacturers more than the cost of installation for every seat belt in a car.
You wouldn’t need to have a policy requiring seatbelts: every car would be liberally festooned with them.
But it costs the taxpayer money that way via the interest payments, whereas one more regulation doesn't.
Honestly, if you don't understand the difference between the Treasury and the Federal Reserve (as this comment suggests), I'm sorry to say that you're not going to find this conversation very enlightening.
You must not know that the Federal Reserve returns income to the Treasury.
In 2008, the Fed started paying interest on excess reserves.
They removed reserve requirements (ie. cash you need to keep on hand) but there's still capital requirements (ie. assets you need to keep on hand).
They relaxed the need for a capital conservation buffer, too. These actions were part of the Fed's response to the market panic at the onset of the pandemic, and you can read a bit about their reasoning in their own press release:
https://www.federalreserve.gov/newsevents/pressreleases/mone...
Capital requirements are complicated. There are different types of equity and assets are risk-weighted, but treasuries and the types of bonds SVB bought are generally given the lowest risk-weightings.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
Capital requirements are complicated. There are different types of equity and assets are risk-weighted, but treasuries and the types of bonds SVB bought are generally given the lowest risk-weightings.
Funny that they didn't deem T-Bonds to be high risk given that it was they who crashed the value of those T-Bond by increasing interest rates.
You identified the root cause of this whole thing. Long-term bonds get preferential treatment in the risk-based capital calculation because they have low default risk, which allows banks to run with thinner equity capital, even though they're exposed to high interest rate risk and have a portfolio highly concentrated in one high-risk industry. Capital ratios don't adequately account for actual risk.
Yes. That's (part of) why FDIC is a bad idea: it partially insulates depositors from the need to monitor what their bank is doing.
In banking, we want a flight to quality.
In banking, we want a flight to quality.
Idk I think retail depositors should be comfortable leaving their money anywhere that’s fdic insured and it’s the bank shareholders that should have to monitor what they’re doing.
We want more monitoring in the financial system, not less.
Otherwise you could make the same argument you just made, and expand it to: shareholders should be comfortable, it should be regulators (or someone else) that should be monitoring, etc.
Otherwise you could make the same argument you just made, and expand it to: shareholders should be comfortable, it should be regulators (or someone else) that should be monitoring, etc.
It's a good idea: it does not protect shareholders at all.
We want more people in the financial system to be aware of risks and pro-actively deal with them. That includes depositors.
(And really skittish depositors could switch to banks that only invest their deposits in eg government bonds. Which are probably about as safe as FDIC insurance.)
(And really skittish depositors could switch to banks that only invest their deposits in eg government bonds. Which are probably about as safe as FDIC insurance.)
And the FAA is a bad idea because it insulates travelers from the need to monitor what their plane is doing?
Maybe? You could replace the FAA with voluntary certification. People could demand the same standards as the FAA enforces.
Let me bite the bullet:
Flying is arguably way too safe. In the sense that flying could compromise a bit on safety, and still be much safer than cars. If that compromise would lead to lower costs and thus prices, perhaps more people would fly and fewer would drive; leading to better safety on average. Despite flying becoming less safe.
Let me bite the bullet:
Flying is arguably way too safe. In the sense that flying could compromise a bit on safety, and still be much safer than cars. If that compromise would lead to lower costs and thus prices, perhaps more people would fly and fewer would drive; leading to better safety on average. Despite flying becoming less safe.
Never thought I would hear someone making that argument. You think we should let more people die in plane crashes so that flying is cheaper?
We already know cheap flying with current safety standards is economically viable, with costs approaching the cost of fuel; see low cost airlines like Ryanair. So the most effective way to lower prices is for airlines to downgrade amenities and services onboard.
We already know cheap flying with current safety standards is economically viable, with costs approaching the cost of fuel; see low cost airlines like Ryanair. So the most effective way to lower prices is for airlines to downgrade amenities and services onboard.
Let me bite here.
I think flying could be made cheaper and massively more convenient by getting rid of airport security the way it is done right now. Imagine planes being boarded like trains: there might be a security tradeoff but it would be offset by the massive time benefit for everyone involved. I know I would take that risk, I consider my own time to be more worthy than TSA considers it to be
I think flying could be made cheaper and massively more convenient by getting rid of airport security the way it is done right now. Imagine planes being boarded like trains: there might be a security tradeoff but it would be offset by the massive time benefit for everyone involved. I know I would take that risk, I consider my own time to be more worthy than TSA considers it to be
I don't think anyone is arguing about security to board a plane. They're talking about maintenance requirements and safety requires for when a plane is in flight. Things like airplane inspections.
I'm talking about all aspects.
As an example: planes almost never crash. Which is great! So you could drop the requirement to carry life-vests, without compromising safety numbers.
(If you want, you can invest 50% of the cost savings into eg anti-malaria nets, and you'd come out way ahead in terms of lives saved.)
Similarly, airplane seats are massively over-engineered. You could loosen restrictions there, and save weight and thus costs.
I think Japan might already have different domestic regulations there. I remember being on a domestic flight between Kobe and Tokyo, and the seats in economy class used a lot of mesh over aluminium frame or so. They looked a lot lighter (and also more breathable) than your typical airplane seats. See https://photos.app.goo.gl/ZDWQTNMB93mQs5Yz5 for a picture that I took.
I also agree with vlack-vingaard, but they already gave some good examples.
As an example: planes almost never crash. Which is great! So you could drop the requirement to carry life-vests, without compromising safety numbers.
(If you want, you can invest 50% of the cost savings into eg anti-malaria nets, and you'd come out way ahead in terms of lives saved.)
Similarly, airplane seats are massively over-engineered. You could loosen restrictions there, and save weight and thus costs.
I think Japan might already have different domestic regulations there. I remember being on a domestic flight between Kobe and Tokyo, and the seats in economy class used a lot of mesh over aluminium frame or so. They looked a lot lighter (and also more breathable) than your typical airplane seats. See https://photos.app.goo.gl/ZDWQTNMB93mQs5Yz5 for a picture that I took.
I also agree with vlack-vingaard, but they already gave some good examples.
This is true, we could definitely do with less "compulsory participatory theatre" at airports.
That said, the FAA != TSA. We like the FAA. They solve actual problems.
That said, the FAA != TSA. We like the FAA. They solve actual problems.
My guess is that you have two states of equilibrium. One is that accidents happen all the time. The other is that accidents are extremely rare. Both states can exist, but the middle ground is rare and impossible to engineer. The error in safety margins of overlapping complex systems is just too great.
That's a very abstract argument, and doesn't take into account any special features of planes.
So I can say: I just want planes to be as safe as, say, trains. (Or whatever other form of transportation is safer than individual cars, but not as over-burdened as planes. Perhaps busses?)
So I can say: I just want planes to be as safe as, say, trains. (Or whatever other form of transportation is safer than individual cars, but not as over-burdened as planes. Perhaps busses?)
> could replace the FAA with voluntary certification
How does that work when a plane lands on my house?
How does that work when a plane lands on my house?
That one post seems to say, too bad, you die but it's for a good cause because two other people didn't die in a car crash.
Essentially, yes.
It's very similar to why we allow cars to crash so much in the first place. To paraphrase JumpCrisscross:
> How does that work when a [car runs me over]?
It's very similar to why we allow cars to crash so much in the first place. To paraphrase JumpCrisscross:
> How does that work when a [car runs me over]?
FDIC insulates customers, but it does not at all insulate the banks; if a bank fails, it fails, FDIC or no. So it doesn't at all remove the incentive for banks to avoid failure by not making poor investments in the same way that, say, a bailout might.
It doesn't have to be all or nothing, and the current cap on insured deposits is a nice balance.
Small depositors aren't finance pros, they don't have the training or network to monitor bank management, so we protect them from rogue management.
Large depositors can and should worry about their bank's solvency, so we focus their minds by leaving their deposits uninsured.
Unfortunately, when large depositors catch a whiff of insolvency, they don't help fix the problem, they're first to pull their deposits and leave everyone else to pay the bill.
So we should treat them as we treat creditors in a bankruptcy, and claw back the cash they were able to withdraw in the days leading up to the bank's closure.
Small depositors aren't finance pros, they don't have the training or network to monitor bank management, so we protect them from rogue management.
Large depositors can and should worry about their bank's solvency, so we focus their minds by leaving their deposits uninsured.
Unfortunately, when large depositors catch a whiff of insolvency, they don't help fix the problem, they're first to pull their deposits and leave everyone else to pay the bill.
So we should treat them as we treat creditors in a bankruptcy, and claw back the cash they were able to withdraw in the days leading up to the bank's closure.
Well, it was their interest risk, not their credit risk, that caused the problem here.
But it's an interesting thought.
But it's an interesting thought.
Yes. Though as a small nitpick, I wouldn't describe capital requirements as 'assets you need to keep on hand'.
No matter your capital structure, all your liabilities will be matched by assets. What matters is that after your accounting for your fixed liabilities, like deposits, you still have plenty of total assets left over to have a thick equity cushion to absorb losses.
In accounting terms, equity is also a liability. But it's a very benign one, as your shareholders can't demand their money back.
There are other forms of liabilities that act like equity in their ability to absorb losses. But equity is the simplest and generally the most import one.
No matter your capital structure, all your liabilities will be matched by assets. What matters is that after your accounting for your fixed liabilities, like deposits, you still have plenty of total assets left over to have a thick equity cushion to absorb losses.
In accounting terms, equity is also a liability. But it's a very benign one, as your shareholders can't demand their money back.
There are other forms of liabilities that act like equity in their ability to absorb losses. But equity is the simplest and generally the most import one.
Wow, I never thought of / heard anyone explain equity as a liability to pay to shareholders. It’s brilliant!
You might like to read up on the very basics of accounting. There's lots of other interesting concepts there.
See https://martin.kleppmann.com/2011/03/07/accounting-for-compu... for an intro.
Accounting might sound rather boring, but at its core its about understanding businesses (and economies) with numbers. It can be as varied and interesting as companies are.
Of course, in practice there's lots of cruft build on top of relatively simple concepts. But the simple underlying concepts are still fascinating. The link above explains double entry book keeping in terms of graph theory and network flows.
The basics of deprecation are also quite interesting (to me, at least).
See https://martin.kleppmann.com/2011/03/07/accounting-for-compu... for an intro.
Accounting might sound rather boring, but at its core its about understanding businesses (and economies) with numbers. It can be as varied and interesting as companies are.
Of course, in practice there's lots of cruft build on top of relatively simple concepts. But the simple underlying concepts are still fascinating. The link above explains double entry book keeping in terms of graph theory and network flows.
The basics of deprecation are also quite interesting (to me, at least).
Just a small comment on this:
To me, accountants have a better grip on reality than economists. It's an accountant who taught me real economics (I was originally pursuing a math degree with economy as a 'minor' (not really how it's working in my country but close enough)). I had to unlearn some of what I learned in my first year, but I had a way better grip on how money work after that (and decided to create value and changed course).
To me, accountants have a better grip on reality than economists. It's an accountant who taught me real economics (I was originally pursuing a math degree with economy as a 'minor' (not really how it's working in my country but close enough)). I had to unlearn some of what I learned in my first year, but I had a way better grip on how money work after that (and decided to create value and changed course).
Yes. Well, carpenters have an even better grip on reality.
Accountants and economists are doing different things. Both fields are useful, and there's some small overlap between the two.
Many people could benefit from learning some 'rationalised' accounting, ie accounting without the accumulated historical accidents and tax dodges. (Those are also interesting. But less as a description of a reality, and more in the same vein that the Talmud is interesting.)
Accountants and economists are doing different things. Both fields are useful, and there's some small overlap between the two.
Many people could benefit from learning some 'rationalised' accounting, ie accounting without the accumulated historical accidents and tax dodges. (Those are also interesting. But less as a description of a reality, and more in the same vein that the Talmud is interesting.)
But orthodox economic theory goes against most thing i learned. To be honest, i really thought it didn't matter, that macroeconomics was on its own, and that economists are valid expert to listen to. We were still in eurozone crisis, and while i thought "This plan doesn't make much sense" when the Troika laid out what Greece should do, GDP and socioeconomic markers were not stuff i learned or cared about.
And then like 5 years ago, i learn about MMT, read about it, disagree on some points, but it overall make much, much more sense and si way closer to reality than Friedman theories to me. It seems like macroeconomics do follow the stuff i learned when i wanted to become a quantitative analyst or whatever (i only wanted to do math tbh, and didn't follow finance classes that much).
And then during Covid we have all those "expert" economists who start to talk everywhere. But now, i am sure they are talking out of their own asses. They had now idea of what production is. The simple idea that production is linked with energy is novel for them. They probably are useful, like sociologists are useful, but i'd like to hear them on medias as much as i hear sociologists. Or even less, since i do think sociologists have real-world application to their thesis, for harm reduction during stampede. Let's say as much as medievalists historians.
And then like 5 years ago, i learn about MMT, read about it, disagree on some points, but it overall make much, much more sense and si way closer to reality than Friedman theories to me. It seems like macroeconomics do follow the stuff i learned when i wanted to become a quantitative analyst or whatever (i only wanted to do math tbh, and didn't follow finance classes that much).
And then during Covid we have all those "expert" economists who start to talk everywhere. But now, i am sure they are talking out of their own asses. They had now idea of what production is. The simple idea that production is linked with energy is novel for them. They probably are useful, like sociologists are useful, but i'd like to hear them on medias as much as i hear sociologists. Or even less, since i do think sociologists have real-world application to their thesis, for harm reduction during stampede. Let's say as much as medievalists historians.
MMT is both novel and correct. The problem is that the novel parts aren't correct, and the correct parts aren't novel.
Have a look at https://www.econlib.org/library/Columns/y2021/Sumnermodernmo... for MMT.
I suggest having a look at market monetarism. See eg https://marketmonetarist.com/2015/07/14/the-euro-a-monetary-...
What kind of orthodox economy theory have you had a look at?
Have a look at https://www.econlib.org/library/Columns/y2021/Sumnermodernmo... for MMT.
I suggest having a look at market monetarism. See eg https://marketmonetarist.com/2015/07/14/the-euro-a-monetary-...
What kind of orthodox economy theory have you had a look at?
The experts are the ones who engineered decades of low interest rates so their buddies can get cheap loans and play financial games with the economy. They've never been trustworthy.
My little brain sees this as a reason for failure here.
SVB had liquid assets (bonds) that it could sell to meet the demands of the depositors, but those assets fell in value creating losses. The bank was forced to crystalise those losses because it had no cash buffer to fall back on.
If some substantial part of the liquidity had been held as cash this wouldn't have happened.
SVB had liquid assets (bonds) that it could sell to meet the demands of the depositors, but those assets fell in value creating losses. The bank was forced to crystalise those losses because it had no cash buffer to fall back on.
If some substantial part of the liquidity had been held as cash this wouldn't have happened.
No. This week, the treasuries and other assets in capital are effectively cash equivalents.
The worst part of it, is that once interest rates started raising and they started seeing the obvious (but not critical!) impact on their long-maturity bonds, they simply could have switched to shorter-maturity bonds and be totally fine.
But they preferred to gamble.
But they preferred to gamble.
What I don’t understand is why they weren’t restored as part of the effort to tamp down inflation, and instead the fed just raised rates. Seems like that should’ve been the first move.
Isn't cash kept on hand the relevant attribute here? Whether they're solvent or not, they ran out of cash to meet withdrawals.
The textbook story about banks taking in deposits and lending some of them back out hasn't been true in modern economies for a long time. Banks don't need deposits to make loans.
It's a long story, so I always recommend going down the Modern Monetary Theory rabbit hole.
It's a long story, so I always recommend going down the Modern Monetary Theory rabbit hole.
[deleted]
Old news ;)
If I get a loan from Bank A, then I use that loan to pay a person who deposits the IOU into Bank B. Bank B will go to Bank A and demand the money in cash because it's a competitor bank. If bank A has zero cash on hand they immediately hit a bank run, so basically bank A wants to keep a certain ratio at all times.
Thus through the existence of competitor banks, banks are NATURALLY incentivized to keep a reserve ratio. A reserve ratio enforced by law is not necessary in a capitalist economy with healthy competition. Competition prevents banks from going crazy with creating money out of thin air via loans. The removal of the reserve ratio by the government is relatively inconsequential.
However this natural regulation through competition is negated by the existence of an entity without competition. The central bank. The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. Low interest rates are what caused inflation and high interest rates from the central bank are what are now being used to stop inflation.
So in this case Bank A can now borrow a bunch of money from the Central Bank thereby increasing it's reserve ratio allowing it to lend more money out. In a sense, the central bank is essentially the entity where the fractional reserve ratio actually matters.
The central bank is unregulated so they can print money to loan to other banks however much they like. Thus a bank run on the central bank is impossible. The ratio in this case matters more as a metric that correlates with inflation.
Thus through the existence of competitor banks, banks are NATURALLY incentivized to keep a reserve ratio. A reserve ratio enforced by law is not necessary in a capitalist economy with healthy competition. Competition prevents banks from going crazy with creating money out of thin air via loans. The removal of the reserve ratio by the government is relatively inconsequential.
However this natural regulation through competition is negated by the existence of an entity without competition. The central bank. The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. Low interest rates are what caused inflation and high interest rates from the central bank are what are now being used to stop inflation.
So in this case Bank A can now borrow a bunch of money from the Central Bank thereby increasing it's reserve ratio allowing it to lend more money out. In a sense, the central bank is essentially the entity where the fractional reserve ratio actually matters.
The central bank is unregulated so they can print money to loan to other banks however much they like. Thus a bank run on the central bank is impossible. The ratio in this case matters more as a metric that correlates with inflation.
I have great sympathy for your argument, and agree with the gist of it.
What you are describing is pretty close to the free banking eras of eg Scotland and Canada.
> The central bank is unregulated [...]
That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
> [...] The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. [...]
It's probably more productive to think in terms of the total money supply, and less in terms of interest rates.
For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
Simplified a bit, they 'set' the exchange rate by standing by to buy and sell Singapore dollar to any comer. They have a printing press, so they can push down the exchange rate as much as they want to, and they also have enough assets to prop it up.
Crucially, this framework doesn't need to worry about any zero bound on interest rates. It works as long as Singapore dollars are worth anything more than zero.
What you are describing is pretty close to the free banking eras of eg Scotland and Canada.
> The central bank is unregulated [...]
That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
> [...] The central bank functions as an entity that loans money to banks with interest. It is this interest rate that is used to regulate the money supply in the US. [...]
It's probably more productive to think in terms of the total money supply, and less in terms of interest rates.
For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
Simplified a bit, they 'set' the exchange rate by standing by to buy and sell Singapore dollar to any comer. They have a printing press, so they can push down the exchange rate as much as they want to, and they also have enough assets to prop it up.
Crucially, this framework doesn't need to worry about any zero bound on interest rates. It works as long as Singapore dollars are worth anything more than zero.
> I have great sympathy for your argument, and agree with the gist of it.
I'm not making an argument. I'm stating the current status quo of the US. No argument was ever made here about whether I think it's right or wrong.
>That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
It is true. The central bank is overall unregulated because the central bank IS the regulator. In the same way a government is unregulated so is the central bank. In the US the central bank is more or less the fourth branch of the government.
You're talking about "many central banks." while I'm simply talking about the Federal reserve in the US. I think you're mistaken, I'm not making a general statement about how central banks across the world works.
>For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
This is true. However one of the primary ways they influence the money supply is through interest rates. Interest rates are also one of the triggers of the SVB bank run.
>For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
They don't need to be, but they ARE quite central in the US. Additionally given how the US dollar is sort of the central peg of all other currencies, the US would rather the Dollar remain the Rate at which all other currencies are set against. That way the US in a way indirectly and collectively controls the worlds monetary value.
I didn't offer any opinions in my initial reply. I'm simply stating what's going on in the US about the nature of the reserve ratio and how it doesn't matter when applied to SVB. It seems you're trying to make an argument here against one I never made?
I'm not making an argument. I'm stating the current status quo of the US. No argument was ever made here about whether I think it's right or wrong.
>That's not true. Many central banks have lots of regulations on them. However, they are not regulated by the kind of competition you outlined above.
It is true. The central bank is overall unregulated because the central bank IS the regulator. In the same way a government is unregulated so is the central bank. In the US the central bank is more or less the fourth branch of the government.
You're talking about "many central banks." while I'm simply talking about the Federal reserve in the US. I think you're mistaken, I'm not making a general statement about how central banks across the world works.
>For one, loaning money to banks is only one part of what the Fed does. They also outright buy and sell assets (eg in open market transactions). In many instances, the banks (technically) lend money to the Fed by having positive account balances at the Fed.
This is true. However one of the primary ways they influence the money supply is through interest rates. Interest rates are also one of the triggers of the SVB bank run.
>For a contrasting example on how interest rates don't need to be the focus of monetary policy, have a look at the Monetary Authority of Singapore. Instead of using interest rates as a channel to communicate and effect their monetary policy, they use the exchange rate of the Singapore dollar to a basket of foreign currencies. Crudely, instead of 'setting' the interest rate, they 'set' the exchange rate.
They don't need to be, but they ARE quite central in the US. Additionally given how the US dollar is sort of the central peg of all other currencies, the US would rather the Dollar remain the Rate at which all other currencies are set against. That way the US in a way indirectly and collectively controls the worlds monetary value.
I didn't offer any opinions in my initial reply. I'm simply stating what's going on in the US about the nature of the reserve ratio and how it doesn't matter when applied to SVB. It seems you're trying to make an argument here against one I never made?
> The central bank is overall unregulated because the central bank IS the regulator.
Even regulators are regulated. There are laws that prescribe what the Fed can and can not do, and how.
> Additionally given how the US dollar is sort of the central peg of all other currencies, the US would rather the Dollar remain the Rate at which all other currencies are set against. That way the US in a way indirectly and collectively controls the worlds monetary value.
Yes, if you wanted to do a similar system for the USD, you would probably want to peg a basket of commodities instead of the exchange rate.
Or you could have the Fed target the TIPS spread directly: https://fred.stlouisfed.org/series/T10YIE
Even regulators are regulated. There are laws that prescribe what the Fed can and can not do, and how.
> Additionally given how the US dollar is sort of the central peg of all other currencies, the US would rather the Dollar remain the Rate at which all other currencies are set against. That way the US in a way indirectly and collectively controls the worlds monetary value.
Yes, if you wanted to do a similar system for the USD, you would probably want to peg a basket of commodities instead of the exchange rate.
Or you could have the Fed target the TIPS spread directly: https://fred.stlouisfed.org/series/T10YIE
> Even regulators are regulated
Ron Paul campaigned for "auditing the Fed" perhaps more than he campaigned for president. Was he exaggerating, or does Congress not actually audit and otherwise oversee the Fed?
Ron Paul campaigned for "auditing the Fed" perhaps more than he campaigned for president. Was he exaggerating, or does Congress not actually audit and otherwise oversee the Fed?
The Fed gets regular audits as far as I can tell. But perhaps Ron Paul was campaigning for more thorough ones? (Or it was just a good sound bite?)
https://www.econlib.org/archives/2009/07/audit_the_fed_o.htm... and https://www.csmonitor.com/Commentary/Opinion/2009/0803/p09s0... might be interesting.
You might also like https://www.alt-m.org/2020/03/30/when-the-fed-tried-to-save-...
https://www.econlib.org/archives/2009/07/audit_the_fed_o.htm... and https://www.csmonitor.com/Commentary/Opinion/2009/0803/p09s0... might be interesting.
You might also like https://www.alt-m.org/2020/03/30/when-the-fed-tried-to-save-...
>Even regulators are regulated. There are laws that prescribe what the Fed can and can not do, and how.
I mean sure, you can say that. The US government is regulated too. But in general the government IS the regulator of the people just as the central bank IS the regulator of monetary policy.
I mean sure, you can say that. The US government is regulated too. But in general the government IS the regulator of the people just as the central bank IS the regulator of monetary policy.
-- two causes --
(1) SVB assumed low interest rates would continue, took risk.
(2) 94% of SVB's deposits are uninsured by FDIC (40-50% is typical), meaning there are big sum deposits that go past $250,000. Customers took some counterparty risk.
After the letter came in 1 + 2 -> bank run.
-- what happens --
Everyone gets the insured $250k quickly. Rest is stuck for possibly long time. Most of it will be recovered eventually, but some small percentage might be lost.
There will be local liquidity crisis in the valley in the order of $50 billion at least, but other banks can give emergency bridge loans against assets stuck in SVB once they figure out how much they are worth.
"The mood" of the market is ruined. Risk analysis tightens. Some other wheels may drop.
(1) SVB assumed low interest rates would continue, took risk.
(2) 94% of SVB's deposits are uninsured by FDIC (40-50% is typical), meaning there are big sum deposits that go past $250,000. Customers took some counterparty risk.
After the letter came in 1 + 2 -> bank run.
-- what happens --
Everyone gets the insured $250k quickly. Rest is stuck for possibly long time. Most of it will be recovered eventually, but some small percentage might be lost.
There will be local liquidity crisis in the valley in the order of $50 billion at least, but other banks can give emergency bridge loans against assets stuck in SVB once they figure out how much they are worth.
"The mood" of the market is ruined. Risk analysis tightens. Some other wheels may drop.
I have the most esoteric financial law trivia question.
If I deposit a dollar in my bank account. Do I legally own that money? Or do I have a legal contract with the bank that they’ll give me back that money?
If I deposit a dollar in my bank account. Do I legally own that money? Or do I have a legal contract with the bank that they’ll give me back that money?
https://www.sgrlaw.com/does-the-money-in-your-bank-account-r...
> At the moment of deposit, the funds become the property of the depository bank.
> Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
At least in New York state, the answer to the first question is no. I imagine it's the same everywhere else.
> At the moment of deposit, the funds become the property of the depository bank.
> Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
At least in New York state, the answer to the first question is no. I imagine it's the same everywhere else.
Yup. you just have a claim on that institution. It not like holding stock or bonds
Further, the FDIC (a US insurance agency with sweeping banking powers) guarantees that you will be able to redeem AT MOST AND UP TO $250,000, per account; guaranteed by the "legitimacy" of the USDollar (aka Taxpayers and US Debt holders).
[deleted]
[deleted]
It's the latter and it's true of any form of money; i.e., money as defined in legal terms. Money always has a counter-party and there's a finite chance of that counter-party not honouring their commitment. For example, last year treasury announced sanctions after Ukraine conflict where they froze Russian USD assets. This is essentially the govt of United States deciding to not honour their commitment.
Even when you physically own money, let's say physical cash/bills, the counterparty could default. For instance in Nov 2016 govt of India declared that about 90% of currency in circulation stop being money within a certain deadline.
In my mind whenever I try to analyse money or different forms of money I always think in terms of counterparty.
Even when you physically own money, let's say physical cash/bills, the counterparty could default. For instance in Nov 2016 govt of India declared that about 90% of currency in circulation stop being money within a certain deadline.
In my mind whenever I try to analyse money or different forms of money I always think in terms of counterparty.
I mostly agree.
> Money always has a counter-party [...]
That's mostly true for most forms of money. But not technically true for gold coins or bitcoin.
> For example, last year treasury announced sanctions after Ukraine conflict where they froze Russian USD assets. This is essentially the govt of United States deciding to not honour their commitment.
That's sort-of true. It's a bit simplified. The treasury isn't typically the counterparty for these commitments. What they did was ban other entities from honouring their own commitments.
So eg if a bank in Singapore didn't want to lose access to the USD ecosystem, they had to cease honouring their commitments to certain Russian entities.
That's independent of whether those commitments were specified in USD, Singapore dollars, Euros, British Pounds or pork bellies.
> Money always has a counter-party [...]
That's mostly true for most forms of money. But not technically true for gold coins or bitcoin.
> For example, last year treasury announced sanctions after Ukraine conflict where they froze Russian USD assets. This is essentially the govt of United States deciding to not honour their commitment.
That's sort-of true. It's a bit simplified. The treasury isn't typically the counterparty for these commitments. What they did was ban other entities from honouring their own commitments.
So eg if a bank in Singapore didn't want to lose access to the USD ecosystem, they had to cease honouring their commitments to certain Russian entities.
That's independent of whether those commitments were specified in USD, Singapore dollars, Euros, British Pounds or pork bellies.
Thanks for clarifying about the treasury part. I thought treasury (or the US Govt) had instructed federal reserve to freeze assets of Russian entity.
> But not technically true for gold coins
In so far as gold is used as money one is indeed relying on rest of humanity/society to accept it in exchange for whatever you need. Granted that for most (all?) of their existence, civilised humans have accepted gold as money because of its use as jewellery and its attractive qualities. But there's still a possibility that some tribe/community will refuse to accept gold as money as they don't have any use value of it.
In my mind, money is a promise or a contract which says here's a "thing" I'll give you in exchange for goods or services. The other party could always walk away from that contract or decide to not honour that promise.
Gold/cattle etc., have worked as money because they have an intrinsic use value which one could fall back to if it stops working as money.
Which brings me to the next point.
> ..or bitcoin.
I could never understand the intrinsic use value of Bitcoin. People think of it as store of energy or whatever but what is the intrinsic use of Bitcoin? ETH at least is used as a currency to get work done on Ethereum chain so that is its intrinsic use value.
> But not technically true for gold coins
In so far as gold is used as money one is indeed relying on rest of humanity/society to accept it in exchange for whatever you need. Granted that for most (all?) of their existence, civilised humans have accepted gold as money because of its use as jewellery and its attractive qualities. But there's still a possibility that some tribe/community will refuse to accept gold as money as they don't have any use value of it.
In my mind, money is a promise or a contract which says here's a "thing" I'll give you in exchange for goods or services. The other party could always walk away from that contract or decide to not honour that promise.
Gold/cattle etc., have worked as money because they have an intrinsic use value which one could fall back to if it stops working as money.
Which brings me to the next point.
> ..or bitcoin.
I could never understand the intrinsic use value of Bitcoin. People think of it as store of energy or whatever but what is the intrinsic use of Bitcoin? ETH at least is used as a currency to get work done on Ethereum chain so that is its intrinsic use value.
> I thought treasury (or the US Govt) had instructed federal reserve to freeze assets of Russian entity.
I'd need to look that up. But I don't think Russian entities directly held assets at the federal reserve? It's mostly about the commitments of third parties?
> In so far as gold is used as money one is indeed relying on rest of humanity/society to accept it in exchange for whatever you need.
Hence my use of the term 'technically'. Yes, the industrial uses for gold are relatively limited. So its value is mostly (but not totally) a social construct.
However imagine for a second coins made of something that has enormous industrial value but hasn't acquired any social value (yet). Eg coins made of graphene or so? (Not sure about a specific example.)
In any case, there's no contractual counterpart for gold. It's an expectation, but no on in obligated to live up to that obligation.
> In my mind, money is a promise or a contract which says here's a "thing" I'll give you in exchange for goods or services. The other party could always walk away from that contract or decide to not honour that promise.
For proper contracts, there would be contract penalties. Eg if your bank refuses to pay out cash when asked.
> I could never understand the intrinsic use value of Bitcoin. People think of it as store of energy or whatever but what is the intrinsic use of Bitcoin? ETH at least is used as a currency to get work done on Ethereum chain so that is its intrinsic use value.
Network effects aren't good enough for you?
I'd need to look that up. But I don't think Russian entities directly held assets at the federal reserve? It's mostly about the commitments of third parties?
> In so far as gold is used as money one is indeed relying on rest of humanity/society to accept it in exchange for whatever you need.
Hence my use of the term 'technically'. Yes, the industrial uses for gold are relatively limited. So its value is mostly (but not totally) a social construct.
However imagine for a second coins made of something that has enormous industrial value but hasn't acquired any social value (yet). Eg coins made of graphene or so? (Not sure about a specific example.)
In any case, there's no contractual counterpart for gold. It's an expectation, but no on in obligated to live up to that obligation.
> In my mind, money is a promise or a contract which says here's a "thing" I'll give you in exchange for goods or services. The other party could always walk away from that contract or decide to not honour that promise.
For proper contracts, there would be contract penalties. Eg if your bank refuses to pay out cash when asked.
> I could never understand the intrinsic use value of Bitcoin. People think of it as store of energy or whatever but what is the intrinsic use of Bitcoin? ETH at least is used as a currency to get work done on Ethereum chain so that is its intrinsic use value.
Network effects aren't good enough for you?
I’ve struggled for a long time to explain to others what money is, but “money always has a counter party” is a great way to start, thanks.
IANAL, but a finance guy.
Depositing money is lending money. It's presented like some special thing, but at the end of the day you no longer have your dollar, you have an IOU for a dollar issued by the bank. Yes, you have a deal with the bank that they will give you your money back whenever you want.
Now normally there's no point in mincing words, you have 50K at the bank, whatever. But if the bank fails, you still don't have the money in your hands, you are still owed it. What normally happens when a business can't pay back its debts is there's a bankruptcy procedure and everything is frozen until a bankruptcy lawyer parachutes in to handle things. Now keep in mind they are bankrupt because they don't have a way to pay back everyone, so there are laws about how your IOUs are settled. This is called a haircut, because chances are the creditors will not get back the full amounts they're owed. (In rare cases a bankrupt business somehow manages to sell its assets for more than the liabilities.)
If it's a bank, there's insurance schemes in various countries to help out the depositors.
But the deal is basically that, you are lending money to the bank, and they are lending to other people eg mortgages, business loans, overdrafts, etc.
Getting back to your question, there's not a whole lot of meat on the "what does the law say" bone. SVB is dead, carcass is divided up between the creditors.
Depositing money is lending money. It's presented like some special thing, but at the end of the day you no longer have your dollar, you have an IOU for a dollar issued by the bank. Yes, you have a deal with the bank that they will give you your money back whenever you want.
Now normally there's no point in mincing words, you have 50K at the bank, whatever. But if the bank fails, you still don't have the money in your hands, you are still owed it. What normally happens when a business can't pay back its debts is there's a bankruptcy procedure and everything is frozen until a bankruptcy lawyer parachutes in to handle things. Now keep in mind they are bankrupt because they don't have a way to pay back everyone, so there are laws about how your IOUs are settled. This is called a haircut, because chances are the creditors will not get back the full amounts they're owed. (In rare cases a bankrupt business somehow manages to sell its assets for more than the liabilities.)
If it's a bank, there's insurance schemes in various countries to help out the depositors.
But the deal is basically that, you are lending money to the bank, and they are lending to other people eg mortgages, business loans, overdrafts, etc.
Getting back to your question, there's not a whole lot of meat on the "what does the law say" bone. SVB is dead, carcass is divided up between the creditors.
Going off on a tangent:
All publicly issued stocks in the US are technically owned by one obscure New York company. Your broker has a contractual relationship with them, and you have a contractual relationship with your broker.
See https://en.wikipedia.org/wiki/Cede_and_Company
Technically, you don't own any (public) shares.
All publicly issued stocks in the US are technically owned by one obscure New York company. Your broker has a contractual relationship with them, and you have a contractual relationship with your broker.
See https://en.wikipedia.org/wiki/Cede_and_Company
Technically, you don't own any (public) shares.
You have a legal contract with FDIC which insures all deposits upto $250K is what I know. If the bank goes bust FDIC owes you your money under 250K.
I don't think individual deposit holders technically have a legal contract with the FDIC. Are you sure? Do you have any sources on that?
You are right in practice that the FDIC guarantees small deposits.
You are right in practice that the FDIC guarantees small deposits.
You are right. There is no legal contract, it's an insurance policy. In practice this is as good as having a legal contract is what I meant.
In practice it's probably better than a legal contract for a small time depositor in some ways, because there's lots of political pressure on FDIC to make good on that.
If it was just a legal contract, in the worst case you'd have to sue to hold them to account.
(On the other hand, politics can change from one day to the next; but contracts are harder to unilaterally change.)
If it was just a legal contract, in the worst case you'd have to sue to hold them to account.
(On the other hand, politics can change from one day to the next; but contracts are harder to unilaterally change.)
[deleted]
[deleted]
What does owning a dollar even mean? Fundamentally, isn’t your dollar bill also a legal certificate with the Fed?
Once upon a time bills (banknotes) were bearer instruments which could be exchanged with the Treasury for silver. (Or with whatever issuing entity in whatever they promised--typically gold or silver.) A bearer instrument is payable by the drawee to whomever physically presents the instrument.
These days the value of bills is solely in being legal tender; that is, an authentic bill can be used for satisfaction of any court-ordered debt. That's not the same thing as requiring people to transact with you using those bills. But if someone sued you in court and gained a judgement against you, then you could use those bills to satisfy the judgement. Example: you ran away with a candy bar after the clerk refused to take your dirty dollar bill. They sue you. The court orders you to pay the store $1, which you can satisfy with an authentic $1 note, even the original dirty note.
Maybe the clerk refused the bill because the store only accepts Bitcoin payments. I'm not sure, but the judgment could in theory include whatever costs the store incurred (if any) by being forced to take cash, which you would could also pay in cash. Because ultimately whatever damages or costs were incurred can be satisfied by the jurisdiction's legal currency, in which such damages and costs are also typically denominated.
These days the value of bills is solely in being legal tender; that is, an authentic bill can be used for satisfaction of any court-ordered debt. That's not the same thing as requiring people to transact with you using those bills. But if someone sued you in court and gained a judgement against you, then you could use those bills to satisfy the judgement. Example: you ran away with a candy bar after the clerk refused to take your dirty dollar bill. They sue you. The court orders you to pay the store $1, which you can satisfy with an authentic $1 note, even the original dirty note.
Maybe the clerk refused the bill because the store only accepts Bitcoin payments. I'm not sure, but the judgment could in theory include whatever costs the store incurred (if any) by being forced to take cash, which you would could also pay in cash. Because ultimately whatever damages or costs were incurred can be satisfied by the jurisdiction's legal currency, in which such damages and costs are also typically denominated.
Maybe the HN crowd will finally understand the value of crypto? Oh wait.. banks and currency are save
[deleted]
What happens to their employees? Do they work for the FDIC now? Laid off?
Friday, they became FDIC employees. How long they remain FDIC employees is probably an open question, depending on role and the ultimate disposition of the bank
"FDIC employees" doesn't sound accurate. They are still employees of the same bank, just that the bank is now run by the FDIC. They are not all suddenly Federal government employees.
There was a really good explainer podcast by NPR's Planet Money back in 2009 on the FDIC takeover of a community bank in Washington State which covers this:
"Anatomy Of A Bank Takeover" (2009)
On a mid-January night, some 80 agents of the Federal Deposit Insurance Corp. pull into Vancouver, Wash. Their rental cars are generic, their arrival times staggered. One by one, agents check into a hotel, each quietly offering a pseudonym to the guy at the desk.
They're here to take over the Bank of Clark County, which the FDIC has decided is insolvent. It's the agency's job to insure American bank deposits and to step in when a bank fails. The FDIC tries to keep the planning for its operations top secret, to avoid sparking a panicked run on the bank. ...
<https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...>
Specifically as to who the employees of the failed bank work for:
The FDIC agents announce that, through the weekend, the staffers will be temporary employees of the FDIC. Stay and help us, the agents say.
FDIC liquidators themselves often come from previously-failed banks as well, though that's a small fraction of former banks' employees.
"Anatomy Of A Bank Takeover" (2009)
On a mid-January night, some 80 agents of the Federal Deposit Insurance Corp. pull into Vancouver, Wash. Their rental cars are generic, their arrival times staggered. One by one, agents check into a hotel, each quietly offering a pseudonym to the guy at the desk.
They're here to take over the Bank of Clark County, which the FDIC has decided is insolvent. It's the agency's job to insure American bank deposits and to step in when a bank fails. The FDIC tries to keep the planning for its operations top secret, to avoid sparking a panicked run on the bank. ...
<https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...>
Specifically as to who the employees of the failed bank work for:
The FDIC agents announce that, through the weekend, the staffers will be temporary employees of the FDIC. Stay and help us, the agents say.
FDIC liquidators themselves often come from previously-failed banks as well, though that's a small fraction of former banks' employees.
No, the bank they worked for is no longer in business. The FDIC created a new bank, the Deposit Insurance National Bank of Santa Clara, and transferred all of SIVB's deposits to the DINB. On Monday, all of the physical branches of SIVB will open as branches of DINB
https://www.fdic.gov/news/press-releases/2023/pr23016.html
https://www.fdic.gov/news/press-releases/2023/pr23016.html
To clarify:
The new bank "Deposit Insurance National Bank of Santa Clara" (DINB) received "all _insured_ deposits of Silicon Valley Bank", and is intended to open for business on Monday.
The remainder of SVB (including loans and uninsured deposits) are now held by FDIC as conservator/receiver of the failed bank.
The new bank "Deposit Insurance National Bank of Santa Clara" (DINB) received "all _insured_ deposits of Silicon Valley Bank", and is intended to open for business on Monday.
The remainder of SVB (including loans and uninsured deposits) are now held by FDIC as conservator/receiver of the failed bank.
Fair, I should've clarified that DINB does not have every penny that SIVB had. However, the point still stands: The tellers at the window on Monday will be working for DINB (which is owned by the FDIC) not SIVB
Even beyond that point, though, the FDIC now owns Silicon Valley Bank so even everyone else who worked for the bank that didn't transfer to DINB still now works for the FDIC (as long as they're still employed--which is probably a rapidly shrinking amount of time)
https://www.sec.gov/ix?doc=/Archives/edgar/data/719739/00011...
>On March 10, 2023, SVB Financial Group’s (the “Company”) wholly owned subsidiary, Silicon Valley Bank (the “Bank”) was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation was appointed as receiver. The Company is no longer the parent company of the Bank.
Even if someone remains on the payroll of Silicon Valley Bank, they are an employee of the FDIC since it now owns Silicon Valley Bank
SIVB did have a holding company, so not every single employee of the company moved to the FDIC. Those at the holding company, not the actual bank, most certainly didn't transfer to the FDIC
Even beyond that point, though, the FDIC now owns Silicon Valley Bank so even everyone else who worked for the bank that didn't transfer to DINB still now works for the FDIC (as long as they're still employed--which is probably a rapidly shrinking amount of time)
https://www.sec.gov/ix?doc=/Archives/edgar/data/719739/00011...
>On March 10, 2023, SVB Financial Group’s (the “Company”) wholly owned subsidiary, Silicon Valley Bank (the “Bank”) was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation was appointed as receiver. The Company is no longer the parent company of the Bank.
Even if someone remains on the payroll of Silicon Valley Bank, they are an employee of the FDIC since it now owns Silicon Valley Bank
SIVB did have a holding company, so not every single employee of the company moved to the FDIC. Those at the holding company, not the actual bank, most certainly didn't transfer to the FDIC
But the federal government (fdic) will pay them, pay their accrued holiday pay, etc.
The federal government pays a vast number of people a vast amount of money every day. Not all of them are employees.
Usually the FDIC has another bank buy the failed bank, and the employees would become employees of the purchasing bank
In this instance, the FDIC wasn't able to find a buyer so all these people work for the FDIC until final disposition of their jobs
SIVB no longer exists as an operating bank, they are going to work on Monday, who are they working for if not the FDIC?
In this instance, the FDIC wasn't able to find a buyer so all these people work for the FDIC until final disposition of their jobs
SIVB no longer exists as an operating bank, they are going to work on Monday, who are they working for if not the FDIC?
Splitting hairs.
The FDIC isn't the federal government. It is not supported by tax dollars. It's funded by fees FDIC charges to the banks it insures.
FDIC is an agency established and granted powers under US federal law, and its chair is nominated by the President, subject to Senate confirmation. Fundamentally, it is just as much part of the US federal government as any other independent federal agency, such as the CIA or EPA or NASA, is. The fact that, unlike most other federal agencies, it gets its funding through hypothecated taxation rather than general revenue, doesn't make it any less of a federal agency.
Also, while the law may call them "fees", they are taxes – it is not like banks have a choice in paying them – just because the law doesn't call something a "tax", doesn't make it not a tax (see National Federation of Independent Business v. Sebelius)
Also, while the law may call them "fees", they are taxes – it is not like banks have a choice in paying them – just because the law doesn't call something a "tax", doesn't make it not a tax (see National Federation of Independent Business v. Sebelius)
So the VC thinkbois basically created a run on SVB. Nice job guys!
Anyway, the only rational voice I've been hearing so far is Bob Elliott (used to be on the IC at Bridgewater/advisor to Ray Dalio and taught multiple courses on the banking system) - https://twitter.com/BobEUnlimited
Probably a good idea to just ignore all the moronic VC threads and fintwit influencers.
It seems like the most likely scenario is that depositors will be made whole quickly and equity holders will get fucked since SVB's balance sheet looks pretty strong. Matt Levine came to the same conclusion.
Anyway, the only rational voice I've been hearing so far is Bob Elliott (used to be on the IC at Bridgewater/advisor to Ray Dalio and taught multiple courses on the banking system) - https://twitter.com/BobEUnlimited
Probably a good idea to just ignore all the moronic VC threads and fintwit influencers.
It seems like the most likely scenario is that depositors will be made whole quickly and equity holders will get fucked since SVB's balance sheet looks pretty strong. Matt Levine came to the same conclusion.
Can you please make your substantive points without snark and name-calling? The latter break the site guidelines and your account looks to have been making a habit of that. We ban such accounts and I don't want to ban you because you've clearly got some good points—so if you'd please review the rules and stick to them, we'd be grateful.
https://news.ycombinator.com/newsguidelines.html
https://news.ycombinator.com/newsguidelines.html
What were they supposed to do? They knew the clock is ticking. Whoever bailed first will be Ok and the last will be left hiding the bag. That goes for their portfolio companies as well. This is game-theoretic decision making. I am a bit rusty on Nash equilibrium, so I am not sure if this was inevitable outcome.
If you map 'pull all your money' as defect and 'leave your deposits in the bank' as cooperate, you can make a case for it being a prisoner's dilemma, though I don't claim to know if everything would be okay if people didn't pull out.
The Nash is to defect in the prisoner's dilemma. That's not the whole story, mind you, because there's a case for tit-for-tat and similar strategies in repeated games, but this looks like a one-shot game from what I know, so... yeah.
The Nash is to defect in the prisoner's dilemma. That's not the whole story, mind you, because there's a case for tit-for-tat and similar strategies in repeated games, but this looks like a one-shot game from what I know, so... yeah.
But it is never a one-shot game. It is now a fact that “capital firms Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective all advised their startups to pull their cash from the bank”.
Valley is small. There is real loss of wealth now, because SVB is no more. And there’d be likely a ripple effect.
Valley is small. There is real loss of wealth now, because SVB is no more. And there’d be likely a ripple effect.
I suspect, there will be a bailout. Silicon Valley has very good relationship with the current White House. It would not be a stretch to make the case for a bailout. All the Government has to do is to provide $10-$30B (?) worth of liquidity of the next 2 - 3 years, until the rates will go down. Then, they could sell the whole fixed income portfolio.
What makes you think rates are going down in the next 2-3 years? Rates could continue going up and put SVB further underwater
The very strong argument for a bailout is if there isn't one, every company will look very hard at where their cash is, and shifting it around could cause more bank runs. With how fast this went, there needs to be something concrete on Monday.
And they’d make money on the bailout, right?
Prisoner's dilemma doesn't have a part where they take all the prisoners from the Silicon Valley Jail and move them to the First Republic jail with a bunch of other prisoners and ask them the same question, do they?
To be fair if there's a run on a bank happening you want to be following the people creating the run so you can be one of the first ones out the door.
Incidentally there's a major moral hazard problem for bank runs in that unlike e.g. stock market or commodities panics, there isn't any ability to "buy the dip" or hold through the panic.
Incidentally there's a major moral hazard problem for bank runs in that unlike e.g. stock market or commodities panics, there isn't any ability to "buy the dip" or hold through the panic.
“Becker held the roughly 10-minute call with investors at about 11:30 a.m. San Francisco time. He asked the bank’s clients, including venture capital investors, to support the bank the way it has supported its customers over the past 40 years, the person said.”
The above was the right answer that would have maximized the wealth generating machine.
The above was the right answer that would have maximized the wealth generating machine.
Agreed. I wish the VC community had come together and financed a stock purchase with SVB to recapitalize it instead of running for the hills. Unfortunately, VCs aren't exactly known for their community-oriented mindset.
Sad thing is that the defectors are clearly the short-term winners in that case.
Long term, the purchasing power of the Valley will be diminished and financial services disrupted. This might result in substantial disruption of businesses and cascades of business failures. Which may in turn affect defectors. But this seems to be the only negative feedback loop.
Long term, the purchasing power of the Valley will be diminished and financial services disrupted. This might result in substantial disruption of businesses and cascades of business failures. Which may in turn affect defectors. But this seems to be the only negative feedback loop.
>the most likely scenario is that depositors will be made whole quickly
Insured depositors (up to $250K) will absolutely be made whole quickly. They'll get their money on Monday.
Uninsured depositors, up to some multiple of the $250K, will probably be made whole, but it will likely take a couple of weeks.
Uninsured depositors beyond whatever multiple the FDIC decides to accommodate (likely somewhere in the millions to tens of millions of $), will probably get some fraction of their deposits back, but it could take several months.
This talking point that all depositors will be made whole quickly is dangerous and almost certainly false. The FDIC needs to liquidate or find a buyer for SVB and the value of the assets isn't enough to make everyone whole, beyond that there is the FDIC insurance fund but it's likely insufficient, beyond that requires Congress passing a law to enable a further bailout.
Insured depositors (up to $250K) will absolutely be made whole quickly. They'll get their money on Monday.
Uninsured depositors, up to some multiple of the $250K, will probably be made whole, but it will likely take a couple of weeks.
Uninsured depositors beyond whatever multiple the FDIC decides to accommodate (likely somewhere in the millions to tens of millions of $), will probably get some fraction of their deposits back, but it could take several months.
This talking point that all depositors will be made whole quickly is dangerous and almost certainly false. The FDIC needs to liquidate or find a buyer for SVB and the value of the assets isn't enough to make everyone whole, beyond that there is the FDIC insurance fund but it's likely insufficient, beyond that requires Congress passing a law to enable a further bailout.
> So the VC thinkbois basically created a run on SVB. Nice job guys!
You say it like that absolves SVB.
You say it like that absolves SVB.
SVB has around $200B under management. The bank run on Thursday pulled $41B out of it. That is 20% of their total AUM. That is an insane bank run. No bank is setup for that kind of bank run.
> No bank is setup for that kind of bank run.
Banks in Scotland's free banking era used to have a capital cushion of around 1/3 of their balance sheet.
Not saying that this kind of capital cushion is viable in today's regulatory environment. Just to give an example of existing real world banks that were set up for that kind of bank run.
In any case, I agree that scarcely any bank today would be set up for that kind of run. That still doesn't absolve SVB. They put themselves in a position where it's rational for their depositors to run.
Banks in Scotland's free banking era used to have a capital cushion of around 1/3 of their balance sheet.
Not saying that this kind of capital cushion is viable in today's regulatory environment. Just to give an example of existing real world banks that were set up for that kind of bank run.
In any case, I agree that scarcely any bank today would be set up for that kind of run. That still doesn't absolve SVB. They put themselves in a position where it's rational for their depositors to run.
Are you sure about that?
I would make me very nervous if every single bank had ~50% of it's balance sheet in rock bottom rate 10Y bonds that have dropped in value 30+% in the last year
I'm pretty sure most banks have assets > liabilities even after rate hikes, which is the root cause with SVB, not the bank run
I would make me very nervous if every single bank had ~50% of it's balance sheet in rock bottom rate 10Y bonds that have dropped in value 30+% in the last year
I'm pretty sure most banks have assets > liabilities even after rate hikes, which is the root cause with SVB, not the bank run
> I would make me very nervous if every single bank had ~50% of it's balance sheet in rock bottom rate 10Y bonds that have dropped in value 30+% in the last year
This is a separate issue. SVB is likely insolvent because of their MBS issue. But their liquidity available last week is significantly less than their assets.
This is a separate issue. SVB is likely insolvent because of their MBS issue. But their liquidity available last week is significantly less than their assets.
Correct me if I'm wrong, but nowadays any (sufficiently large?) solvent bank can just borrow from the Fed and survive such a run.
> Correct me if I'm wrong, but nowadays any (sufficiently large?) solvent bank can just borrow from the Fed and survive such a run.
Why didn't SVB borrow then? I understand they were the 18th largest US bank last week. And they had more assets than just 47B that was the bank run. But the FDIC took them over because they didn't have the liquidity to serve the needs of the bank run as of Thursday night.
I think that you can not just arbitrarily borrow from the fed, there are limits.
Why didn't SVB borrow then? I understand they were the 18th largest US bank last week. And they had more assets than just 47B that was the bank run. But the FDIC took them over because they didn't have the liquidity to serve the needs of the bank run as of Thursday night.
I think that you can not just arbitrarily borrow from the fed, there are limits.
It's because they weren't solvent.
I think that isn't how it works. The fed just yesterday added the ability for banks to borrow nearly unlimited amounts against their assets. I do not think this existed previously. It is an emergency measure.
You missed the important part - they added the ability to borrow while valuing collateral at cost. Previously it had to be valued at market price, which was not sufficient for SVB (because it was insolvent on the mark-to-market basis).
> So the VC thinkbois basically created a run on SVB. Nice job guys!
On purpose. Billions of their wealth depended on FED's easy monetary policy (ZIRP, NIRP, QE infinite) for last 30 years or so.
For likes of Gary Tan, Peter Thiel and Cathie Wood (and Ray Dalio) creating moral panic and trying to force FED's hand to reverse normalising monetary policy is the only possible way to keep status quo and their wealth.
Is The Fed Listening? | ITK with Cathie Wood - https://www.youtube.com/watch?v=jvL2Q0cJLyo
30% of YC companies exposed through SVB can’t make payroll in the next 30 days - https://news.ycombinator.com/item?id=35100743
Peter Thiel’s Founders Fund Advises Companies to Withdraw Money From SVB - https://www.bloomberg.com/news/articles/2023-03-09/founders-...
On purpose. Billions of their wealth depended on FED's easy monetary policy (ZIRP, NIRP, QE infinite) for last 30 years or so.
For likes of Gary Tan, Peter Thiel and Cathie Wood (and Ray Dalio) creating moral panic and trying to force FED's hand to reverse normalising monetary policy is the only possible way to keep status quo and their wealth.
Is The Fed Listening? | ITK with Cathie Wood - https://www.youtube.com/watch?v=jvL2Q0cJLyo
30% of YC companies exposed through SVB can’t make payroll in the next 30 days - https://news.ycombinator.com/item?id=35100743
Peter Thiel’s Founders Fund Advises Companies to Withdraw Money From SVB - https://www.bloomberg.com/news/articles/2023-03-09/founders-...
It definitely seems to be done on purpose, but they didn't tell all their friends (David Sacks for example). For Thiel this was a win-win thing, his companies are all fine while hurting the competition and he gets to whine about government from new angles. Also quite in keeping with his soulless character
SVB created a run on themselves by betting against rising interest rate.
Nope, wrong. Their balance sheet is strong and they are fully solvent. This is completely different from an FTX situation.
They DID make a bad bet, but they were still solvent as a bank. The liquidity crisis was caused due to poor communication on SVB's part and typical VC herd mentality.
Read the full article by Matt Levine for a breakdown.
They DID make a bad bet, but they were still solvent as a bank. The liquidity crisis was caused due to poor communication on SVB's part and typical VC herd mentality.
Read the full article by Matt Levine for a breakdown.
> Nope, wrong. Their balance sheet is strong and they are fully solvent.
The fact that they sold assets for a loss indicates that they are not.
The fact that the FDIC took over the bank indicates that they are not.
The fact that the bank is winding down with no other bank willing to buy them indicates that they are not.
What fact would you put forward to support your assertion that the bank is fully solvent. Because right now you are saying the opposite of the market, the FDIC and the banks competitors.
If they were fully solvent it would be pretty trivial to find a buyer to keep the bank to Silicon Valley startups going.
The fact that no one will take on their liabilities is very damning.
The fact that they sold assets for a loss indicates that they are not.
The fact that the FDIC took over the bank indicates that they are not.
The fact that the bank is winding down with no other bank willing to buy them indicates that they are not.
What fact would you put forward to support your assertion that the bank is fully solvent. Because right now you are saying the opposite of the market, the FDIC and the banks competitors.
If they were fully solvent it would be pretty trivial to find a buyer to keep the bank to Silicon Valley startups going.
The fact that no one will take on their liabilities is very damning.
I partially agree with you... except "The fact that they sold assets for a loss indicates that they are not." is not true. Firms sell assets at losses all the time -- that doesn't mean they are not solvent. That means they had a loss, but their assets were still greatly in excess of their liabilities (as reported by the FDIC 211b vs 195b).
What they were not able to do was have enough cash on hand to deal with a bank run.
What they were not able to do was have enough cash on hand to deal with a bank run.
What you are saying reported by FDIC as 211B vs 195B was December 31st IIRC
And it appears that wasn't market to market
Since then they have had $40B in withdrawals causing them to sell all liquid assets at a loss and not being able to furnish withdrawals
The California regulator has explicitly stated they are insolvent: https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
And it appears that wasn't market to market
Since then they have had $40B in withdrawals causing them to sell all liquid assets at a loss and not being able to furnish withdrawals
The California regulator has explicitly stated they are insolvent: https://dfpi.ca.gov/2023/03/10/california-financial-regulato...
The assests they sold recovering as soon as intrest rates drop is as close to a sure thing as you get in finance.
The only reason to realise the loss is they needed the money now.
The only reason to realise the loss is they needed the money now.
>as soon as intrest rates drop
Which could take a lot longer than people seem to expect. If you look at the past 100+ years of economic history, 2009-2021 is a complete anomaly. ZIRP is not the normal state of affairs, nor are negative real rates. There was an attempt at returning to normalcy from 2017-2019 but then Covid hit. Starting last year the Fed is attempting once again to return to a normal monetary environment. Rates are likely headed higher than people think and will remain there longer than people think.
Which could take a lot longer than people seem to expect. If you look at the past 100+ years of economic history, 2009-2021 is a complete anomaly. ZIRP is not the normal state of affairs, nor are negative real rates. There was an attempt at returning to normalcy from 2017-2019 but then Covid hit. Starting last year the Fed is attempting once again to return to a normal monetary environment. Rates are likely headed higher than people think and will remain there longer than people think.
I think what they meant to say is they were solvent, till the run.
They weren't solvent, 100 billion in 2033 dollars doesn't equal 100 billions in 2023 dollars.
Solvency and liquidity are two different things.
2033 dollars lost a lot of value due to interest rate increases. Higher interest rates means that 2023 dollars would convert to more 2033 dollars, so now if you want to sell 2033 dollars for 2023 dollars you would get less back.
If the interest rates weren't increased they would just have sold their 2033 dollars and everything would be fine, a bank doesn't go under just because it takes a while to get billions of dollars, the whole issue is that they ran out of assets due to their assets having lost value.
If the interest rates weren't increased they would just have sold their 2033 dollars and everything would be fine, a bank doesn't go under just because it takes a while to get billions of dollars, the whole issue is that they ran out of assets due to their assets having lost value.
[deleted]
That might be true, but it's got me thinking. Suppose you owe $100M and had $80M of cash. That would be considered both involvent and illiquid, correct? Now suppose you go out and buy $80M worth of 10 year treasuries with the cash you have. At current rates you will have $115M in 10 years, plenty of money to pay of your liabilities of $100M. Does that mean that if you're "insolvent" you can magically make yourself "solvent" by buying a bunch of bonds?
No, because you need to value the bonds at their current market value, which would presumably be 80 MM. The fact that you believe an asset will get you a certain amount of money doesn’t mean it’s worth that now.
If the debt is due in ten years, it won't be worth $100m, and you can presumably just pay it off with the cash.
In that context no it’s the same thing. It’s profitability and balanced books (liabilities matching assets) that are different. A business can be profitable and insolvent if cash flow temporarily dries (e.g. you can’t hold employee salaries because customers take too long to pay invoices). A viable business needs both profitability (long term) and cash flow/solvability (short term).
Unmatched assets and liabilities (like FTX) is not insolvency, it’s fraud, and mechanically causes insolvency when the cash is gone after the run.
Unmatched assets and liabilities (like FTX) is not insolvency, it’s fraud, and mechanically causes insolvency when the cash is gone after the run.
They are, and this is a full-on solvency issue, not just a liquidity one. Think of it this way: suppose you have an investment that pays out $100 in 2031, plus a low rate of interest that due to interest rates increasing substantially in 2022 is now below what you can get from savings accounts or ultra-safe investments like Treasury bonds. That investment may have been worth $100 in 2021, but it's worth substantially less in 2023 because someone with $100 in 2023 could put it into those higher-interest investments and end up with a lot more money by 2031. However, banking regulations allow banks to not immediately recognize that drop in the value of their reserves by claiming they'd hold the investments to maturity.
I’m not saying they are insolvent. Their bet led them to having to raise money, and that gave enough signal for their depositors to pull money. Don’t blame VCs, their reactions were rational in this situation.
Only inasmuch as they knew other VCs and depositors would be panicking in response to the signal.
There's another possible stable equilibrium where no one panics because they know no one else will panic and that the bank is solvent.
There's another possible stable equilibrium where no one panics because they know no one else will panic and that the bank is solvent.
Well SVB can't raise the interest rate they pay to depositors much without taking a bath, and I don't see why someone would want to keep their money in the bank once it is paying a notably lower interest rate than most other banks. Maybe some more time or wider spread of people wanting to withdraw would've kept them alive long enough to salvage something. But they put a huge amount of their money into this bond that they will be stuck with for a long amount of time. I dunno bank run almost just seems inevitable here.
I read Matt Levine's write-up: as always, a delight!
However it didn't strike me as him making a case that SVB is solvent.
However it didn't strike me as him making a case that SVB is solvent.
His thesis is that they'll bail out the depositors to avoid other runs.
Yes, that's my reading as well. Which sounds rather different to me than 'Their balance sheet is strong and they are fully solvent.'
Their balance sheet is weak, but they kept going because some accounting tricks allowed them to defer mark-to-market on their losses.
Their balance sheet is weak, but they kept going because some accounting tricks allowed them to defer mark-to-market on their losses.
No, the bank is actually insolvent.
> On March 8, 2023, the Bank announced a loss of approximately $1.8 billion from a sale of investments (U.S. treasuries and mortgage-backed securities). On March 8, 2023, the Bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.
Source: https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...
> On March 8, 2023, the Bank announced a loss of approximately $1.8 billion from a sale of investments (U.S. treasuries and mortgage-backed securities). On March 8, 2023, the Bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million. Despite attempts from the Bank, with the assistance of regulators, to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.
Source: https://dfpi.ca.gov/wp-content/uploads/sites/337/2023/03/DFP...
Matt Levine article: https://archive.is/GafKl
How is a bank spunoff back again after a fed takeover?
The FDIC will probably sell the carcass to another bank in the next few days.
They’ve also created new banks in the past (presumably when they can’t facilitate a shotgun marriage).
E.g. the first big bank failure in 2008, and the 3rd largest failure ever (after WaMu and now SVB), IndyMac became OneWest
https://en.m.wikipedia.org/wiki/List_of_bank_failures_in_the...
> On March 19, 2009, a seven-member investor group, IMB Holdco, led by Steven Mnuchin—which included billionaire Christopher Flowers, John Paulson, Michael Dell, and George Soros—purchased Independent National Mortgage Corporation (IndyMac Bank) of Pasadena, California for $13.65 billion from the FDIC and created OneWest from the remains of IndyMac
https://en.m.wikipedia.org/wiki/OneWest_Bank
E.g. the first big bank failure in 2008, and the 3rd largest failure ever (after WaMu and now SVB), IndyMac became OneWest
https://en.m.wikipedia.org/wiki/List_of_bank_failures_in_the...
> On March 19, 2009, a seven-member investor group, IMB Holdco, led by Steven Mnuchin—which included billionaire Christopher Flowers, John Paulson, Michael Dell, and George Soros—purchased Independent National Mortgage Corporation (IndyMac Bank) of Pasadena, California for $13.65 billion from the FDIC and created OneWest from the remains of IndyMac
https://en.m.wikipedia.org/wiki/OneWest_Bank
In this case they created a new bank. From an outsider's perspective, it implies the bank run was either too sudden, or SVB would have been too expensive, for FDIC to be able to run an expedited auction.
In one of the earlier two threads a poster linked to this segment of 60 Minutes: https://www.youtube.com/watch?v=TAE8i40A5uI . (I would link to the comment directly but I can't find it right now. Apologies to the poster.) In case of a relatively small bank, the FDIC had run a secret auction a few days earlier, and had an acquirer ready on the day.
SVB was pretty big. Lining up a buyer that can absorb and handle a balance of ~$200B might take a while, and interestingly there may be political reasons to discourage depositor haircuts. Buying at firesale prices favours those with deep enough pockets. Buying at par (or near enough) needs more than just money - it gives advantage to those who can do extensive diligence really fast.
In one of the earlier two threads a poster linked to this segment of 60 Minutes: https://www.youtube.com/watch?v=TAE8i40A5uI . (I would link to the comment directly but I can't find it right now. Apologies to the poster.) In case of a relatively small bank, the FDIC had run a secret auction a few days earlier, and had an acquirer ready on the day.
SVB was pretty big. Lining up a buyer that can absorb and handle a balance of ~$200B might take a while, and interestingly there may be political reasons to discourage depositor haircuts. Buying at firesale prices favours those with deep enough pockets. Buying at par (or near enough) needs more than just money - it gives advantage to those who can do extensive diligence really fast.
The fact that a bank can be sold off in "the next few days" yet it takes the average person 30 days minimum to close on a house...
If you are willing to sell at a discount, you can sell faster.
But more importantly, you probably don't have as many highly paid bankers, lawyers, accountants and regulators trying to push the deal through. Nobody could afford that.
But more importantly, you probably don't have as many highly paid bankers, lawyers, accountants and regulators trying to push the deal through. Nobody could afford that.
Wait should I buy SVB?
Trading in their shares is halted.
However, in principle, if you believe in the efficient market hypothesis, and if SVB shares would still be traded, they would be traded at a (low enough) price that makes buying their shares reasonably thing to do.
However, in principle, if you believe in the efficient market hypothesis, and if SVB shares would still be traded, they would be traded at a (low enough) price that makes buying their shares reasonably thing to do.
Curious what the efficient market hypothesis has to do with this?
Seems pretty opposite to me -- I would think if you are a value investor then the price may have dropped low.
Seems pretty opposite to me -- I would think if you are a value investor then the price may have dropped low.
> Curious what the efficient market hypothesis has to do with this?
Let's back away from SVB, because it's not currently traded.
In 2020 the car rental company Hertz went bankrupt. Nevertheless, the stock traded a low but non-zero price.
You can either say that people were crazy, or if you take the efficient market hypothesis to heart, you can see it as an indication that there was a positive probability that Hertz stock would be worth something after the bankruptcy.
As for the value investor perspective: for SVB you would try to come up with your own valuation, compare that to the market price (and thus market capitalisation), and if the latter was low enough, you'd buy.
As an efficient market guy, you'd skip the first step, and just assume that the market price is probably fair enough; and just buy an index fund that includes a small fraction of SVB.
(SVB used to be in the S&P 500.)
Let's back away from SVB, because it's not currently traded.
In 2020 the car rental company Hertz went bankrupt. Nevertheless, the stock traded a low but non-zero price.
You can either say that people were crazy, or if you take the efficient market hypothesis to heart, you can see it as an indication that there was a positive probability that Hertz stock would be worth something after the bankruptcy.
As for the value investor perspective: for SVB you would try to come up with your own valuation, compare that to the market price (and thus market capitalisation), and if the latter was low enough, you'd buy.
As an efficient market guy, you'd skip the first step, and just assume that the market price is probably fair enough; and just buy an index fund that includes a small fraction of SVB.
(SVB used to be in the S&P 500.)
If you're an efficient market hypothesis, you don't believe there is any value that can be had because it's completely built into the market, so there's no reason to pay attention to the news and just buy a fund in the first place.
This likely depends on which version of EMH you're referring to, and what information is "efficient", but typically speaking you don't care if things drop or rise because you believe that it's efficiently priced.
Can you help me understand where you and I differ?
This likely depends on which version of EMH you're referring to, and what information is "efficient", but typically speaking you don't care if things drop or rise because you believe that it's efficiently priced.
Can you help me understand where you and I differ?
Yes, details depend on exactly what version of EMH you'd subscribe to. I think we mostly agree.
One fairly sensible version of EMH is the notion that even an efficient market pays you to take certain risks. Eg an insurance company might be paid to take weather risk when they insure crops. If there's enough competition, that risk will be efficiently priced.
People can spend extra effort to learn more about crops or the weather, and thus get a better handle on the probabilities and variances. At some point you hit diminishing returns. Different people have different amounts of productivity, ie how much effort leads to how much improvement in understanding of risk. The market price will be driven by the most productive people and companies; because they hit diminishing returns last. (To give a silly illustration: I could spend a lot of effort trying to understand the weather better, but because I have no clue, that effort wouldn't do me much good. An expert will do much better. And so it's the experts who effectively set the price in competition with each other.)
The same applies for credit risks that a bank faces when it makes a mortgage loan.
In an efficient market, the risk for holding SVB stock would be priced efficiently. But you'd maybe want to investigate whether it's the kind of risk you want in your portfolio. Or, if your investigative abilities are at the productivity frontier, you might also want to just check out SVB in general, to see if the market price is slightly off compared to your expert judgement.
One fairly sensible version of EMH is the notion that even an efficient market pays you to take certain risks. Eg an insurance company might be paid to take weather risk when they insure crops. If there's enough competition, that risk will be efficiently priced.
People can spend extra effort to learn more about crops or the weather, and thus get a better handle on the probabilities and variances. At some point you hit diminishing returns. Different people have different amounts of productivity, ie how much effort leads to how much improvement in understanding of risk. The market price will be driven by the most productive people and companies; because they hit diminishing returns last. (To give a silly illustration: I could spend a lot of effort trying to understand the weather better, but because I have no clue, that effort wouldn't do me much good. An expert will do much better. And so it's the experts who effectively set the price in competition with each other.)
The same applies for credit risks that a bank faces when it makes a mortgage loan.
In an efficient market, the risk for holding SVB stock would be priced efficiently. But you'd maybe want to investigate whether it's the kind of risk you want in your portfolio. Or, if your investigative abilities are at the productivity frontier, you might also want to just check out SVB in general, to see if the market price is slightly off compared to your expert judgement.
Wouldn't this be attempted insider trading then?
Doesn't that come with jail time at that scale?
Doesn't that come with jail time at that scale?
Can you elaborate? Nothing about this situation is at all related to insider trading.
You're completely correct.
They likely got inside information which triggered their action, but insider trading would probably only apply to stock trades because of this information.
I was just a little confused.
I was just a little confused.