Silicon Valley Bank (SVB) shut down by US banking regulators

[1nvest]

I am not sure if you are referring to the same point but the Sunday Times tells us that SVB piled in big time in long term government bonds, totally unhedged, which was fine as long as interest rates were stable but as the rates were virtually zero anyway, they could move only one way and when rates began to rise the assets naturally fell. Customer balances were mostly uninsured so customers panicked.

All in all a recipe for a disaster.

Dod

I believe SVB's risk officer resigned in spring 2022 and a new one wasn't appointed until February 2023. Small US banks don't have to mark their bond holding to market so different held to maturity value compared to marked to market value, where recent interest rate hikes have seen bond prices falling. The SVB CEO sold millions of shares and their Options prior to announcing that liquidity risk - and soon after such announcement majors, quite reasonably, started moving their money away from that risk.

Begs the question - why is British regulation so aligned with that of the US, assuming like in the US smaller UK banks don't have to mark their bond holdings to market. If I hold £20K value of Gilts that at maturity return that £20K and pay 2% interest in the interim, but after interest rates have risen to 4% the marked to market value of those Gilts has dropped to £10K, and I have to sell in order to fund a roof replacement costing £10K, then I wouldn't expect taxpayers to bail me out, its my problem, not theirs. It's a opportunity for buyers who can afford to cover the liquidity of paying for the new roof without having to sell the Gilts, alongside having secured bond holdings acquired at 50p on the £1.

[88V8]

Why should we (taxpayers) bail out companies that are too unbothered to hedge their concentration risks/illiquidity? Or transfer their money whilst the window was open, as many others did?

And yet there are calls for relaxation of UK banking regs, and complaints that stock market listing over here is too onerous.
Hard for regulators, finding that balance.

Surely those employed by SVB to manage its investments should have seen this coming at the start of the interest cycle and sold down their bond holdings....

One wonders how many other silly investment strategies are lurking in our financial instos.

V8

[1nvest]

Why should we (taxpayers) bail out companies that are too unbothered to hedge their concentration risks/illiquidity? Or transfer their money whilst the window was open, as many others did?

And yet there are calls for relaxation of UK banking regs, and complaints that stock market listing over here is too onerous.
Hard for regulators, finding that balance.

Surely those employed by SVB to manage its investments should have seen this coming at the start of the interest cycle and sold down their bond holdings....

One wonders how many other silly investment strategies are lurking in our financial instos.

V8

If they had no risk officer for nearly the prior year, and likely it being the incoming new risk officer that flagged the risk after their February start date, then perhaps the rest of the board simply thought everything was fine. The CEO selling shares/Options just prior to the risk announcement is a big indicator that the risk went unseen for a long while and as interest rates were rising.

The appropriate direction for regulation IMO should be towards more bail-ins (savers/investors funding mistakes) and reduction of bail-outs (taxpayers funding mistakes). In addition to controls to prevent too-big-to-fail enforced bail-outs. Which is pretty much the course that has already been defined/set. Which also facilitates less regulation ... do what you like, but blow-up and its you/your savers/investors that will bear the burden.

[TheMotorcycleBoy]

From the WSJ

Regulators Face Urgent Task to Stem Spread From Silicon Valley Bank
Bank regulators were racing over the weekend to sort out Friday’s stunningly hasty collapse of Silicon Valley Bank and are facing high stakes as they try to shield the banking system from wider fallout.

A plan that soothes nerves about access to uninsured deposits—most of the bank’s deposits are sizable enough that they don’t carry Federal Deposit Insurance Corp. protection—could tamp down the crisis and limit any impact on the economy as the Federal Reserve focuses on combating inflation by raising interest rates.

But failing to swiftly clarify how SVB’s customers can access funds, make payroll and conduct business risks broader economic consequences and threatens to complicate the Fed’s monetary policy decisions.

“We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” Treasury Secretary Janet Yellen said in an interview on Face the Nation on CBS Sunday. “We are concerned about depositors and are focused on trying to meet their needs.”
Ms. Yellen declined to provide details on what federal policymakers are considering.

House Speaker Kevin McCarthy (R., Calif.) said he had discussed the issue with Biden administration officials.

“They do have the tools to handle the current situation,” Mr. McCarthy said on Fox News’s “Sunday Morning Futures With Maria Bartiromo.” “They do know the seriousness of this and they are working to try to come forward with some announcement before the markets open. I’m hopeful something can be announced today.”

Startup investors scrambled over the weekend to help their portfolio companies meet immediate expenses and to shore up their own access to cash after Friday’s federal seizure made some money inaccessible. Some of the company’s startup customers said the terms of their loans required them to do all of their banking at SVB, meaning they didn’t keep funds at other banks.

“It’s bad if customers can’t get access to their deposits, but it’s also bad if they take losses on their deposits. Both of those would be a concern,” said Eric Rosengren, who was president of the Federal Reserve Bank of Boston from 2007 to 2021.

Mr. Rosengren said the fallout could be particularly disruptive because of how heavily concentrated the lender was in venture capital and the technology sector. Any ultimate resolution by regulators could have further reaching implications not only for venture-capital firms, but also for endowments and pension funds that have been increasing their exposure to venture capital, he said.

and:

The FDIC said Friday that customers will have full access to their insured deposits no later than Monday morning and that it hadn’t yet determined the total amount of uninsured deposits. Those borrowers will get an advance dividend within the next week, the agency said, and uninsured depositors would receive something known as a “receivership certificate” that allows them to recoup additional payments as the FDIC sells off the bank’s assets.

SVB’s collapse is one of the highest profile casualties of the Fed’s campaign to slow the economy and bring inflation down by raising interest rates aggressively. The central bank has raised interest rates by 4.5 percentage points over the past year, the most rapid run-up since the early 1980s, and officials have signaled more increases are likely.

The economy has shown surprising resilience during the rate rises, despite a sharp slowdown in housing. Employers are hiring at a brisk pace, adding more than 800,000 jobs in the first two months of this year. Spending surged in January, while inflation firmed.

One big question this week is whether regulators can stem concerns about other small- and midsize banks whose shares have been slammed by contagion concerns. More serious financial instability could make the Fed’s decisions about how much to raise interest rates more fraught.

also:

Fed officials are set to meet March 21-22. Concerns that the economy might not be slowing enough to bring inflation down prompted Fed Chair Jerome Powell to open the door last week to raising rates by a larger half-percentage-point, as officials did in December. Officials raised rates by a smaller quarter-point at the meeting after that in early February.

Mr. Powell, who was a senior official in the Treasury Department during the George H.W. Bush administration, spent a weekend in January 1991 with counterparts from the Fed and FDIC addressing the collapse of the Bank of New England Corp., then the third-largest bank failure in U.S. history.

“We came to understand that either the FDIC would protect all of the bank’s depositors, without regard to deposit insurance limits, or there would likely be a run on all the money center banks the next morning,” he said in a speech 10 years ago. “We chose the first option, without dissent.”

https://www.wsj.com/articles/silicon-va ... d-81d1617a
Matt

[scotia]

From the WSJ
Mr. Powell, who was a senior official in the Treasury Department during the George H.W. Bush administration, spent a weekend in January 1991 with counterparts from the Fed and FDIC addressing the collapse of the Bank of New England Corp., then the third-largest bank failure in U.S. history.

“We came to understand that either the FDIC would protect all of the bank’s depositors, without regard to deposit insurance limits, or there would likely be a run on all the money center banks the next morning,” he said in a speech 10 years ago. “We chose the first option, without dissent.”
[/i]
Matt

Thanks - Very Interesting

[ursaminortaur]

He writes

A day later it appears we are on the verge of an urgent government intervention to help prop up the entire UK tech sector.
The CEOs of 140 tech start-ups wrote to the Treasury overnight starkly outlining their concerns.

and continues ...

These fledgling firms are typically cash-flow poor, so having their money stuck in SVB UK - only able to access up to £85,000 for a single account - runs the risk that they won’t be able to pay their bills - or staff - next week.

Why should we (taxpayers) bail out companies that are too unbothered to hedge their concentration risks/illiquidity? Or transfer their money whilst the window was open, as many others did?

These sorts of things will become increasingly common in the depository/digital based world into which we've transitioned. State (such as EU) policy is to direct away from taxpayer bail-outs and transition that liability over to savers/investors. It's commonly known that money you deposit becomes the banks money, not yours; Or the money you deposit into brokerages becomes the brokers money - where they buy the shares you like ... in their name. Older style retail custodial banking/brokerages have pretty much been squashed (where banks were safe keepers of your money/assets, and brokers bought stocks in your name for you).

Shares in nominee accounts are held in trust for you the beneficial owner and ring-fenced so that they cannot be claimed by the broker's creditors. Hence absent fraud or gross mismanagement where the broker has failed to properly record transactions your shares should be perfectly safe if the broker were to collapse. The only problem is that after such a collapse you may lose access to those shares for a considerable time whilst things are sorted out.

Banks have pretty much always treated deposits into bank accounts as their own and made their money by lending the money they are given out. If you wanted to just store money then you would take it to an organisation whether a bank or something else which has secure vaults for holding safe deposit boxes in which all kinds of valuables could be stored for a fee.

https://www.metrobankonline.co.uk/safe-deposit-boxes/

https://finchleysafedepositvaultltd.co.uk/

[scotia]

Money in SVB is safe - US Government
https://www.bbc.co.uk/news/world-us-canada-64935170

People and businesses who have money deposited with failed US bank Sillicon Valley Bank (SVB) will be able to access all their cash from Monday, the US government has said.
A statement from the US Treasury, the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said depositors would be fully protected.

I assume that the UK government will need to follow similarly with the SVB UK arm

[Steveam]

https://www.bbc.co.uk/news/business-64937251

HSBC buys U.K. arm for £1

I have no idea of whether this is a good deal or not.

Best wishes,

Steve

[airbus330]

https://www.bbc.co.uk/news/business-64937251

HSBC buys U.K. arm for £1

I have no idea of whether this is a good deal or not.

Best wishes,

Steve

Good for SVB depositors
Good for HSBC
Good for HMG and BoE
Bad for SVB stock and bond holders
Maybe bad for the rest of us if it encourages entrenched inflation in the USA. (more vis a vis the US rescue)

[ursaminortaur]

https://www.bbc.co.uk/news/business-64937251

HSBC buys U.K. arm for £1

I have no idea of whether this is a good deal or not.

Best wishes,

Steve

Good for SVB depositors
Good for HSBC
Good for HMG and BoE
Bad for SVB stock and bond holders
Maybe bad for the rest of us if it encourages entrenched inflation in the USA. (more vis a vis the US rescue)

HSBC only bought the UK arm (SVB-UK) rather than SVB and that arm is ring-fenced.

https://www.reuters.com/markets/deals/hsbc-says-it-has-acquired-silicon-valley-bank-uk-2023-03-13/

SVB UK is ringfenced from the U.S. group, and HSBC said the assets and liabilities of the parent company were excluded from the transaction.

[AWOL]

Ironically my Gilt ETF has had a very nice rally on the back of this. Thank goodness for diversification.

[Dod101]

https://www.bbc.co.uk/news/business-64937251

HSBC buys U.K. arm for £1

I have no idea of whether this is a good deal or not.

Best wishes,

Steve

I
Good for SVB depositors
Good for HSBC
Good for HMG and BoE
Bad for SVB stock and bond holders
Maybe bad for the rest of us if it encourages entrenched inflation in the USA. (more vis a vis the US rescue)

HSBC only bought the UK arm (SVB-UK) rather than SVB and that arm is ring-fenced.

https://www.reuters.com/markets/deals/hsbc-says-it-has-acquired-silicon-valley-bank-uk-2023-03-13/

SVB UK is ringfenced from the U.S. group, and HSBC said the assets and liabilities of the parent company were excluded from the transaction.

Presumably the UK arm of SVB is ring fenced in the same way that HSBC UK is ring fenced. Maybe something to be said for the caution of the B of E after all?

HSBC buying the UK arm of SVB is surely a good thing for everyone. It gives SVBUK the financial security it needs to reassure its customers, removes a headache fo the B of E and for all those entrepreneurs in the UK it should allow the m to get on with their business. HSBC will probably be much more conservative but there is usually a price to pay.

The wider picture is surly down to the lax regulation by the US regulators.

Dod

[scotia]

But the puzzle is that the FTSE is down by a couple of percent, while the DOW and the NASDAQ are up by about 0.7%

[1nvest]

But the puzzle is that the FTSE is down by a couple of percent, while the DOW and the NASDAQ are up by about 0.7%

Gold up +1% in US$, +2% in Pounds
FT250 down -2.5%, Dow Up
Think its a flight to safer (US$/gold) factor (along with alternatives such as Bitcoin that's up over +17% in Pound terms) - rather than having cash on deposit at risk.

Just added £135K worth of VMID (FT250) late this afternoon myself to reduce otherwise excessive cash (from prior sales (higher CGT allowance) ahead of the new financial year) so now down to close to the £85K protected amount (£90K cash left, so a little over the protected amount).

[scotia]

But the puzzle is that the FTSE is down by a couple of percent, while the DOW and the NASDAQ are up by about 0.7%

Gold up +1% in US$, +2% in Pounds
FT250 down -2.5%, Dow Up
Think its a flight to safer (US$/gold) factor (along with alternatives such as Bitcoin that's up over +17% in Pound terms) - rather than having cash on deposit at risk.

Just added £135K worth of VMID (FT250) late this afternoon myself to reduce otherwise excessive cash (from prior sales (higher CGT allowance) ahead of the new financial year) so now down to close to the £85K protected amount (£90K cash left, so a little over the protected amount).

I wonder if the protected amount is now a work of fiction - given that Biden has appeared to guarantee all deposits in SVB (and the failed Signature Bank). Would the UK government ever do otherwise? However - I still belong to the belt and braces believers, so our cash is in NS&I

[Steveam]

I’m concerned that Biden’s position (essentially guaranteeing all bank deposits) introduces considerable morale hazard and opportunity for the wide boys … why not go for higher interest rates if the risk associated with the dodgy bank is not a concern?

As a private individual of moderate means I’m unlikely to be directly impacted by this but I sniff danger here. Responsible banking is a two way street - I’m willing to tolerate slightly lower rates if I’m confident that my bank is financially secure.

Best wishes, Steve