I actually think that SVB should have its own thread...
It's big news!
It's big news!
Coverage of SVB's collapse has been abysmal. The issue at hand is not that they supply banking services to the start up/VC world but that that facing a tidal wive of new deposits last year (more than doubled) from the venture capital bubble, they "conservatively" bought lots of government securities with those new deposits, without giving serious consideration to duration risk. When the Fed needed to raise interest rates to make up for the ultra loose fiscal and monetary policy of the previous two years, all those long term securities were under water even though there was no credit risk.
When deposits started declining as new deals dropped and companies with earlier funding burned through cash, SVB had no choice but to sell securities at a loss. Other banks have an asset base that if marked to market would cancel most or all of their equity but what was unique about them is that they had a relatively small number of customers with very high average balances, and they all talk to each other online all the time. When word got out that they were taking a $1.8 billion loss on the sale of securities, everyone wanted their money out right away. Those who got theirs out in time did fine while the others must wait until the FDIC liquidates assets. If you're the first one in line, then it's not panic.
Interesting to see how this plays out. Do they liquidate the remaining bank and non insured depositors get a share or do they just convert those uninsured deposits to shareholdings in a what world be a new company. I don't know if the latter is actually legally an option but if it were out night have the advantage of being quicker.I'm assuming that losses to deposits will be capped at the discount from par the treasury bonds they invested in are trading at. For the portion of deposits invested in treasuries Minus FDIC insurance and hedging etc.
Hopefully over the weekend a deal has been done and damage is minimised.
The important deal is already done. For small depositors it's business as usual albeit in a new bank set up over the weekend.I hope there is a deal before the open or this will cascade as why would anybody want to keep their money with regional smaller banks.
That in itself isn't an issue. The problem was the deposits were primarily short term 'overnight' deposits. Their 'cash equivalents' were 10 year bonds at a fixed interest rate. The fixed bonds weren't hedged. So once a 'run' on deposits started, they had to sell the bonds at a massive loss (1.8bn reported) hitting their capital immediately. What happened was the same effect as if they'd just been speculating on interest rates.It had €73 billion of loans
It had €123 billion of cash and cash equivalents
financed by
€16 billion of equity
And €195 bn in deposits
How does this compare to other mainstream banks?
Let's not forget banking is inherently risky. They borrow short and lend/invest long. The difference in rates is your profit but that's what they are entitled to earn for the maturity-mismatch they take on.That in itself isn't an issue. The problem was the deposits were primarily short term 'overnight' deposits. Their 'cash equivalents' were 10 year bonds at a fixed interest rate. The fixed bonds weren't hedged. So once a 'run' on deposits started, they had to sell the bonds at a massive loss (1.8bn reported) hitting their capital immediately. What happened was the same effect as if they'd just been speculating on interest rates.
A mainstream bank either matches liquidity terms, or would hedge any mismatch so they're not carrying the loss.
What's interesting is SVB were one of the banks that lobbied to increase the size of banks for which enhanced controls came in after the financial crisis. In the US banks under 250bn have reduced liquidity stress testing requirements.
In Ireland, both BOI and AIB are classed as 'systemically important' so face far more regulation than SVB did.
How does this compare to other mainstream banks?
It's a bit like the credit unions. Taking in loads of deposits which it can't lend, so it just puts it on deposit somewhere else or invests in bonds.
Brendan
No it isn't. 97% of their depositors are not covered by the FDIC. The risk here is the significant number of small and medium businesses who had large sums deposited in the bank. If they can't make payroll next week then it will have huge ramifications for both the US economy and our economy here in Ireland.The important deal is already done. For small depositors it's business as usual albeit in a new bank set up over the weekend.
Let me clarify I was looking at it from the perspective of a bank run spreading to other banks. To avoid a large scale run on multiple banks you want to keep the small depositors calm. That's what the FDIC have done.No it isn't. 97% of their depositors are not covered by the FDIC. The risk here is the significant number of small and medium businesses who had large sums deposited in the bank. If they can't make payroll next week then it will have huge ramifications for both the US economy and our economy here in Ireland.
Well there are two types of maturity transformation. Deposits are accessible on demand or short notice; loans cannot be called in except at maturity, This is liquidity transformation. That is a major rationale of banks for society and it is supported by liquidity reserve requirements and ultimately the Central Bank as lender of last resort.Not that the same thing couldn't happen - it very much could, if a bank isn't doing that maturity transformation it isn't being a bank - but with a more diversified deposit pool it should be more remote.
It's a typical back collapse really.The impact of government bond investments by this bank is critical to the whole story, they were supposedly safe assets except in an aggressively rising interest rate environment like now. This bank became vulnerable because alot of its customers (tech companies) needed their money back (also indirectly because of rising interest rates) but because those bonds had now fallen in value they were unable to meet those deposit demands.
Therefore the whole issue of requiring banks to hold so much capital in government bonds is critical to this whole story and is not unique to this bank