I actually think that SVB should have its own thread...
It's big news!
It's big news!
Silicon Valley Bank collapse
- Thread starter MrEarl
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DublinHead54
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Reasonable to expect digital asset prices to go down given the connection to Silvergate / SVB. I also understand that Circle (USDC Stablecoin) held a portion of the cash supporting USDC at SVB. Given the importance of USDC as a trading pair for digital assets, we should expect some contagion and price impact on the back of SVB collapse.
NoRegretsCoyote
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DublinHead54
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It appears this is going to significantly impact the stablecoin market.
USDC has lost its peg to the dollar due to confirming $3.3bln of its cash was on deposit at SVB.
USDC has lost its peg to the dollar due to confirming $3.3bln of its cash was on deposit at SVB.
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I'd be very concerned for some of their customers - who may take big losses on their deposits, or those who rely on working capital facilities and now may have issues covering their payroll, taxes or trade creditors. Some may suddenly have serious cashflow problems, with risk for jobs, or even companies, as a result.
The tech sector is not an easy one to bank, so a lot of traditional banks won't want to go near the companies that are impacted, unless they've got particularly robust unencumbered assets (most likely debtors, which may also now be less reliable payers)
The tech sector is not an easy one to bank, so a lot of traditional banks won't want to go near the companies that are impacted, unless they've got particularly robust unencumbered assets (most likely debtors, which may also now be less reliable payers)
I also wonder how the ISIF is positioned, and how badly exposed, or may be.
While I think it invested in SVB managed fund, I wonder if those funds are now going to see their risk profiles increase, radically, and perhaps be forced to cash out, or accept losses if some of their investments go into administration, or go bust, due to SVB going down?
If it was also providing funding for some loans through SVB, you'd have to hope that it had a direct claim on those loans, in the event of SVB going under. Then you'd also wonder if it had put SVB in significant funds in advance of SVB identifying suitable borrowers, and if so, if that money is now at risk.
While I think it invested in SVB managed fund, I wonder if those funds are now going to see their risk profiles increase, radically, and perhaps be forced to cash out, or accept losses if some of their investments go into administration, or go bust, due to SVB going down?
If it was also providing funding for some loans through SVB, you'd have to hope that it had a direct claim on those loans, in the event of SVB going under. Then you'd also wonder if it had put SVB in significant funds in advance of SVB identifying suitable borrowers, and if so, if that money is now at risk.
DublinHead54
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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.
Hopefully over the weekend a deal has been done and damage is minimised.
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galway_blow_in
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Regardless of how serious a contagion risk exists ?, markets will probably fall for a while off the back of it , they were already extremely concerned about interest rate increases
So insured deposits now reside in the "National Bank of Santa Clara".
Hard to see anyone stepping into to buy what remains of the business (assets and deposit base).
The genie is out of the bottle now. Every large corporate depositor - at this bank and others - will be looking to diversify their bank exposures now. This is a very different situation to restructuring a bank with a large pool of small retail deposits.
It does remind me a bit of the financial crises. Questions will be asked what bank will be next. You would hope that this business model is fairly limited to a small number of banks.
Hard to see anyone stepping into to buy what remains of the business (assets and deposit base).
The genie is out of the bottle now. Every large corporate depositor - at this bank and others - will be looking to diversify their bank exposures now. This is a very different situation to restructuring a bank with a large pool of small retail deposits.
It does remind me a bit of the financial crises. Questions will be asked what bank will be next. You would hope that this business model is fairly limited to a small number of banks.
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.
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DublinHead54
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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.
Brendan Burgess
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Here is its last balance sheet
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?
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
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?
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
The important deal is already done. For small depositors it's business as usual albeit in a new bank set up over the weekend.
So someone like me who doesn't have a quarter of million dollars should be okay. However My imaginary tech firms and it's imaginary millions might be another story.
Nothing is going to change the reality that big depositors need to look at their expsures. CFO's of firms will be expected to show that they've taken action to limit the risk to their firm from a bank collapse regardless of how this is resolved. That means a lot of large deposits could be withdrawn from certain banks on Monday if they haven't already done so.
A benign outcome would be where there is a bit of shuffling but more or less the totals stay the same. If you're a bank with a well diversified deposit base you're hopefully less at risk. If you've gone after big money and you're reliant on a small number of depositors then you're in trouble.
If course it's not black and white there will be a few banks with a bit of both.
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.
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.
On the face of it there isn't a lot this bank or silvergate did wrong when you just look at the asset side. However, seen in the context of their liabilities it was high risk. A reliance on a small number of large (corporate) depositors was always trouble waiting to happen.
From an Irish perspective our retail banks are just that retail banks and have a lot of small balances spread across a large number of depositors. Yes there's big corporate in there too but not magnified to the same degree as what we're seeing in the two US banks.
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.
Credit union is a good analogy - small pool of depsiitiors but with an important difference its retail deposits and not corporate deposit. Those deposits (or perhaps I mean depositors) are a lot more inert than what svb would probably have had.
interested21
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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.
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.
How bad the fall out of the rest of it will be depends on how many company's make up that 97%.
Duke of Marmalade
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Everybody in this parish, including yours truly, have been screaming that the QE induced inflated bond price bubble was just waiting to be deflated. How could an institution of that size not have seen that?
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
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
Duke of Marmalade
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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.
The other form of maturity transformation is in the term of the interest rate commitment. Again, deposits are subject to variable or very short term rate. Mortgages used to be mainly variable rate so there was no mismatch on this count.
What has happened here is that the assets had interest rate terms much longer than the variable/short term rate of the deposits. There is no strong societal reason for that form of maturity transformation.
It's a typical back collapse really.
Value of bonds going down, on it's own might not be enough to bring the bank down if it was business as normal. Yes it might eat into profits and possibly capital but it might have been okay. But then throw in a bank run and the need for fire sales and crystallisation of those losses and it became a vicious circle.