Silicon Valley Bank collapse

dada_dave said:
I’ve been reading that a bailout is unlikely to be needed anyway to get most of funds back for account holders. The FDIC will sell the bank and if any additional monies are needed they can raise insurance premiums on banks.

Example:


I’m far from an expert but they appear confident and it makes a certain amount of sense.
Click to expand...
Some people are still calling this a bailout and to a certain extent it still is as while it isn’t funded through taxes you can bet banks are going to pass on the premium costs to bank customers - ie pretty much everyone who has a bank account or does businesses with a bank.
 
Chew Toy McCoy said:
www.reuters.com

Explainer: What caused Silicon Valley Bank's failure?

SVB Financial Group Inc's shutdown and takeover by banking regulators on Friday can be traced to the U.S. Federal Reserve raising interest rates and souring the risk appetite of investors.
www.reuters.com www.reuters.com


So....nice job federal reserve? Just about solving nothing with your rate increases while making it worse for finance and housing.
Click to expand...
Ehhh kinda … a lot of people are blaming Thiel and group chat chat of 200 influential VCs who all pulled their money out at the same causing a panic run. The bank was troubled due to things on the article but probably wouldn’t have fallen without the panic.

www.businessinsider.com

3 chaotic days as a tech founder impacted by SVB's collapse

Tech CEO Alexander Torrenegra detailed his experience watching SVB's implosion — from the beginning of the bank run to the eventual collapse.
www.businessinsider.com
 
In the bigger picture is this the result of deregulation allowing any and every bank to take the money you deposited and gamble with it?

I understand there are loans, but are there any limitations like they can only loan/gamble with a percentage of their deposits? An oversimplification would be they have $10 in deposits and can only loan/gamble with $1 of that total.
 
SVB didn't gamble with the investments, though. They put them in 10 year bonds, but because the interest rates went up the bonds became devalued until they come to term. You can hardly find safer investments than government bonds! One could argue that SVB execs should have read the interest market better, but they were not gambling.

My husband is a CFO of a bank and yes, banks have tons of regulations to follow and are audited regularly.
 
I spent 7 years working in IT for a subprime lender leading up to the collapse of 2008 and the biggest factor was deregulation and yes, while there are still regulations, they have been significantly reduced. I recall underwriters talking about how they couldn't believe how loose it had gotten and that there's no way they should be giving out loans under those circumstances.

It starts with deregulation, something that has been going on for a while now and with the interest rate hikes it's a perfect storm. Let's hope it slows them down but it could also be the tip of the iceberg.

Screenshot 2023-03-13 at 3.36.44 PM.png


www.independent.co.uk

Trump blamed over Silicon Valley Bank collapse for cutting down financial regulations

Fifty Republican and 17 Democratic senators voted to reduce regulations on the bank
www.independent.co.uk www.independent.co.uk
 
mollyc said:
SVB didn't gamble with the investments, though. They put them in 10 year bonds, but because the interest rates went up the bonds became devalued until they come to term. You can hardly find safer investments than government bonds! One could argue that SVB execs should have read the interest market better, but they were not gambling.

My husband is a CFO of a bank and yes, banks have tons of regulations to follow and are audited regularly.
Click to expand...

Yes large banks (Chase, Citi, WF, BOA) have entire departments dedicated to managing interest rate risk. Even large regional banks like SVB don't have the expertise to do it properly.
 
Chew Toy McCoy said:
In the bigger picture is this the result of deregulation allowing any and every bank to take the money you deposited and gamble with it?

I understand there are loans, but are there any limitations like they can only loan/gamble with a percentage of their deposits? An oversimplification would be they have $10 in deposits and can only loan/gamble with $1 of that total.
Click to expand...

en.wikipedia.org

Fractional-reserve banking - Wikipedia

en.wikipedia.org en.wikipedia.org

Generally the issue is:

A) How much do they need to keep in reserve. Too low and it makes banks fragile, too high and you don't get as much lubrication of the economy, which includes the type of loans that working and middle class folks rely on. Banks will tend to loan out as much as they are legally allowed to, because profit.
B) What type of loans they are making. Junk loans like what we had leading up to the 2008 collapse add inherent risk as well.

For A, the reserve rate when it was set originally was roughly 10%. It was just shy of 18% in the 50s/60s, and back down to around 10% more recently. As of March 2020, it was dropped to zero. Apparently to help further stimulate the approval of loans. Since we are still in that environment where a bank needs to hold onto zero percent of deposits, you are going to get more fragile banks.

The real trick here is that I don't even remember that they did this. How the heck did they sneak this in while the pandemic was starting? The fact that it hasn't been reversed seems to play a role in failures like SVB.
 
As an aside, the more I hear about this, the more I'm reminded of this bit from Sneakers:

Cosmo : In prison I learned that everything in this world, including money, operates not on reality...
Martin Bishop : ...but the perception of reality.
Cosmo : Posit: People think a bank might be financially shaky.
Martin Bishop : Consequence: People start to withdraw their money.
Cosmo : Result: Pretty soon it *is* financially shaky.
Martin Bishop : Conclusion: You can make banks fail.
Cosmo : [imitates buzzer] I've already done that. Maybe you've heard about a few?
Click to expand...
 
Fun fact. The average bank has maybe 40-50% with depositors over 250k. SVB was at about 95%. This wasn’t exactly bailing out the little guy.
 
dada_dave said:
To be fair probably had a much higher proportion of businesses as depositors.
Click to expand...

I heard there is a service available, which SVB offered, that they can spread out their money between network banks that assures their money will be at or below the insured amount of 250k at each. Little to no depositors took advantage of that and the commentator put it out there as just another example of Silicon Valley arrogance thinking they know how to do everything better.
 
Chew Toy McCoy said:
I heard there is a service available, which SVB offered, that they can spread out their money between network banks that assures their money will be at or below the insured amount of 250k at each. Little to no depositors took advantage of that and the commentator put it out there as just another example of Silicon Valley arrogance thinking they know how to do everything better.
Click to expand...
These are called reciprocal deposits, and I’m an expert on them as it turns out (the history of the companies, who invented what, the relevant banking regulations and laws behind the technology, who sued who for patent infringement and who won and lost, the current lawsuit now being appealed, etc.)

My prior sentence seems weird, but I was just really amused at how you happened to bring up this thing which I’m randomly an expert on.
 
Chew Toy McCoy said:
I heard there is a service available, which SVB offered, that they can spread out their money between network banks that assures their money will be at or below the insured amount of 250k at each. Little to no depositors took advantage of that and the commentator put it out there as just another example of Silicon Valley arrogance thinking they know how to do everything better.
Click to expand...
Also just human laziness - that’s a subject I’m less randomly an expert in :)
 
dada_dave said:
Also just human laziness - that’s a subject I’m less randomly an expert in :)
Click to expand...
seems to me that many of these depositors couldn’t really have used such a service anyway. The way it works is that when you deposit, say, $1 million in bank X, the service keeps keeps (a little less than) $250k in the first bank. The next (little less than) $250k goes to banks 2, 3 and 4. (they keep it under 250k so that accrued interest doesn’t push it over 250k). BUT, in return, OTHER banks have to send $750k back to bank X. (Not necessarily from 2, 3 and 4) In other words, you are depositing $1m in bank X, and bank X has to have $1m in deposits - it’s just that $750k comes from other banks in exchange for your $750k. This is all done in computer bookkeeping - money doesn’t actually move.

So if you’re Roku or somebody and want to use this sort of service to spread hundreds of millions of dollars, there has to be enough money in other banks to come back in the other direction. Given the volume, this could have been difficult.
 
Cmaier said:
seems to me that many of these depositors couldn’t really have used such a service anyway. The way it works is that when you deposit, say, $1 million in bank X, the service keeps keeps (a little less than) $250k in the first bank. The next (little less than) $250k goes to banks 2, 3 and 4. (they keep it under 250k so that accrued interest doesn’t push it over 250k). BUT, in return, OTHER banks have to send $750k back to bank X. (Not necessarily from 2, 3 and 4) In other words, you are depositing $1m in bank X, and bank X has to have $1m in deposits - it’s just that $750k comes from other banks in exchange for your $750k. This is all done in computer bookkeeping - money doesn’t actually move.

So if you’re Roku or somebody and want to use this sort of service to spread hundreds of millions of dollars, there has to be enough money in other banks to come back in the other direction. Given the volume, this could have been difficult.
Click to expand...

I get that might be a nice service/convenience to offer wealthy customers with many millions of $.

But personally, that's something I'd rather manage myself parsing out chunks of $ to different banks.

Also...there's quite a bit of flexibility in titling accounts to have greater FDIC protection. But that would get tedious or not possible starting with many millions of $.
 
Citysnaps said:
Also...there's quite a bit of flexibility in titling accounts to have greater FDIC protection. But that would get tedious or not possible starting with many millions of $.
Click to expand...

Most brokerage firms will do this for you. Just like investing in a mutual fund except instead of stocks, it is in CD's.
 
Herdfan said:
Most brokerage firms will do this for you. Just like investing in a mutual fund except instead of stocks, it is in CD's.
Click to expand...

My comment about multiple ways of titling multiple account categories, and having greater FDIC insurance as a result, was with respect to having larger amounts of money held in a single bank, with all accounts insured by the FDIC.

Another option is purchasing Treasury Bills (T-Bills) directly from the US Treasury. A 26 week bill is currently paying around 4.9% interest. That's down from 5.3% interest a week ago. Not FDIC insured, but the US Treasury has never defaulted on paying a bill holder.

The nice thing about Treasury Bills is they are not subject to state income tax.
 
Last edited:
Citysnaps said:
Another option is purchasing Treasury Bills (T-Bills) directly from the US Treasury. A 26 week bill is currently paying around 4.9% interest. That's down from 5.3% interest a week ago. Not FDIC insured, but the US Treasury has never defaulted on paying a bill holder.
Click to expand...

And that is one of the things that started this in the first place.

Why keep money in a bank paying <1% when you can get the same safety and a 5% return. People and companies were pulling money from banks to buy Treasuries.

The thing about economics is nothing works in a vacuum. Do one thing such as increasing rates to slow down inflation, and you can bet there is going to be a converse reaction somewhere else.
 
Back
Top