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

[Lanark]

Silicon Valley Bank was shuttered by US regulators on Friday after a rush of deposit outflows and a failed effort to raise new capital called into question the future of the tech-focused lender.
With about $209bn in assets, SVB has become the second-largest bank failure in US history after the 2008 collapse of Washington Mutual.
https://www.ft.com/content/6943e05b-6b0 ... 64fb456504

[Lanark]

Lulu Cheng Meservey has a thread explaining that the financial collapse of SVB was largely driven by communication failures.
https://twitter.com/lulumeservey/status ... 2693144576

[1nvest]

SVB's risk officer quit nearly a year ago and they never hired a new one until February. When banks intend to hold bonds to maturity they don't have to mark to market, but it was flagged that there was a risk if they did have to sell them fast. The CEO dumped a couple million in shares and options last week, right before going out and telling the world about that risk. Big players started pulling their money out, such that SVB started having to actually sell bonds intended to be held to maturity and book the losses due to yields having risen/bond prices having declined.

The FDIC have quickly taken over SVB, to calm/kill the potential contagion, and depositors will be able to get their money (up to protected limits) as of Monday morning opening. According to the WSJ there is a $620bn unrealised hole across FDIC banks, so SVB is not alone, rather its management, communications and structure induced the large-scale withdrawals/collapse. Absent the bank-run and having held the bonds to maturity SVB would have been fine. As will better better banks management/structure/communications be less inclined to see bank-run contagion.

[Newroad]

It's a very specific case.

It may mean they go 25 bps rather than 50 bps as previously priced in.

The real issue is if US consumers believe the Fed (or the FDIC) won't make reasonable efforts to ensure that "uninsured" deposits are safe. If that confidence is lost, it may cause an unnecessary run on banks that are otherwise fine to those which are perceived as safer (namely, the big eight).

Hence, the market action in smaller US banks yesterday.

Regards, Newroad

[1nvest]

It's a very specific case.

It may mean they go 25 bps rather than 50 bps as previously priced in.

The real issue is if US consumers believe the Fed (or the FDIC) won't make reasonable efforts to ensure that "uninsured" deposits are safe. If that confidence is lost, it may cause an unnecessary run on banks that are otherwise fine to those which are perceived as safer (namely, the big eight).

Hence, the market action in smaller US banks yesterday.

Regards, Newroad

Any other company that could have bought SVB and had the liquidity to cover its bonds, would make a killing as its just marked to market losses, no losses if the bonds are held to maturity, and as such has large upside reward potential for any such 'buyer'. The FED/FDIC have stepped in to be that 'buyer' and grab the upside 30 cents (or whatever) on the dollar 'price' for themselves (hold the bonds until maturity whilst paying out anyone withdrawing their money).

[1nvest]

viewtopic.php?f=76&t=38338

[Lanark]

Here is how SVB threw 50 years of goodwill and $80 billion down the drain in just 30 hours
https://twitter.com/mbdailyshow/status/ ... 1522489357

3/ With all that money rolling in, SVB wanted to put the money to work
They ended up buying $80 billion in Mortgage Backed Securities (MBS) with an average yield of 1.5%

4/ With interest rates at historic lows, that 1.5% yield didn't look half bad
Then interest rates started to rise

[TheMotorcycleBoy]

Hi Newroad

It's a very specific case.

It may mean they go 25 bps rather than 50 bps as previously priced in.

I was wondering why you think this, since the Fed has been trying to signal that it will do all that is necessary to do conquer inflation, so I'm surprised that the Fed would be willing to forgo this quest based on a single isolated collapse. I guess if other banks hold SVB assets then the contagion will spread but I'm assuming that this aint a patch on the GFC.

I do note that USD/GBP FX rate fell, but I'd been assuming that some of this was the result of the hot/cold jobs data (highly jobless claims, but also more job posts filled) that have recently come in.

The real issue is if US consumers believe the Fed (or the FDIC) won't make reasonable efforts to ensure that "uninsured" deposits are safe. If that confidence is lost, it may cause an unnecessary run on banks that are otherwise fine to those which are perceived as safer (namely, the big eight).

I see what you mean. Liquidity concern etc.?

Matt

[Newroad]

Hi Matt.

The reason I think 25 bps rather than the 50 which was previously priced in, is that I suspect the Fed will take the view this is potentially the first crack caused by their rapid and significant tightening. In that context, I would expect them to wait and see what other effects already in the pipeline will begin to appear (i.e. this is the first sign they may have already done enough).

It is possible they might even hold interest rates steady, especially if any signs of contagion in the banking system begin to emerge. I think they'll go 25 bps though. In order of probability, I think

1. 25 bps
2. 0 bps
3. 50 bps

Let's wait and see!

Regards, Newroad

[TheMotorcycleBoy]

Hi Matt.

The reason I think 25 bps rather than the 50 which was previously priced in, is that I suspect the Fed will take the view this is potentially the first crack caused by their rapid and significant tightening. In that context, I would expect them to wait and see what other effects already in the pipeline will begin to appear (i.e. this is the first sign they may have already done enough).

It is possible they might even hold interest rates steady, especially if any signs of contagion in the banking system begin to emerge. I think they'll go 25 bps though. In order of probability, I think

1. 25 bps
2. 0 bps
3. 50 bps

Let's wait and see!

Regards, Newroad

Thanks mate,

That's an interesting perspective. As you say, we shall see. I guess that the most recent USD/GBP possibly agrees with your thesis!

Matt

[TheMotorcycleBoy]

Here is how SVB threw 50 years of goodwill and $80 billion down the drain in just 30 hours
https://twitter.com/mbdailyshow/status/ ... 1522489357

3/ With all that money rolling in, SVB wanted to put the money to work
They ended up buying $80 billion in Mortgage Backed Securities (MBS) with an average yield of 1.5%

4/ With interest rates at historic lows, that 1.5% yield didn't look half bad
Then interest rates started to rise

Amazing if it really was such a significant proportion of their balance sheet. Don't those guys know about diversification, or even trimming positions that move into a loss? Surely bankers have some investing smarts, but not in this case.

Matt

[scotia]

Surely bankers have some investing smarts

Matt

Remember all those bankers that bundled together lots of sub-prime mortgages that would never be repaid, and imagined that these loan bundles were of the highest quality. And these bundles were traded back and forward within the banking sector for years before the penny dropped, and there was a frantic pass the parcel game - with the Lehman Brothers proving to be the poorest player, and going under in 2008
So I hope that this current contagion is contained. However having experienced that past widespread behaviour of the bankers in the Sub-Prime Mortgage crash, I fear that only an optimist would believe that the current problem will be limited to a single bunch of foolish bankers in a single bank.
Do we feel lucky?

[88V8]

Surely bankers have some investing smarts

Do we feel lucky?

If we do, especially those who like to be long UK banks, there will likely be some topping-up opportunities on Monday depending to what extent headless chicken gets out of his coop.

Pity the poor saps in the banking community who are even now beavering away over the weekend to determine/guess what exposure they might have so they can put out reassuring statements before market open.

V8

[TheMotorcycleBoy]

Surely bankers have some investing smarts

Matt

Remember all those bankers that bundled together lots of sub-prime mortgages that would never be repaid, and imagined that these loan bundles were of the highest quality. And these bundles were traded back and forward within the banking sector for years before the penny dropped, and there was a frantic pass the parcel game - with the Lehman Brothers proving to be the poorest player, and going under in 2008
So I hope that this current contagion is contained. However having experienced that past widespread behaviour of the bankers in the Sub-Prime Mortgage crash, I fear that only an optimist would believe that the current problem will be limited to a single bunch of foolish bankers in a single bank.
Do we feel lucky?

Exactly.

TBH - famous last words I don't think that it's going to spread that much further. Regular banks (apparently) undergo stress tests and have to hold more collateral, and unlike the days of the GFC the US has a vibrant jobs market, so despite mortgage rises for new products, I believe that the bulk of the States isn't going to experience bank runs from "regular customers of the regular banks".

Additionally - the FDIC is stumping up the money for insured accounts, and for uninsured accounts, probably held by Sil Valley startups needing to pay wage checks, many guess (I just watching Larry Summers a former FR guy on one of the news channels) that an arrangement will be devised to bankroll their wage bills for sometime.

Also:
https://www.marketwatch.com/story/the-g ... e-1cb2e6d9

I believe that as J Powell is hell bent on dealing with inflation, there are likely to be machinations afoot to isolate this incident, from the FR's overall strategy. I guess we'll find out what the market reckons on Monday.

Matt

[Steveam]

Very interesting and thought provoking speculations and a lot does depend on the regulatory circuit breaker actions. SVB did have some unique characteristics and this from the FT is helpful:

“A recent report from RBC Capital Markets ranked the 100 largest US banks in terms of various balance-sheet characteristics. SVB was 99th in the proportion of its deposits that were under $250,000, at less than 3 per cent. That is significant because large business depositors such as SVB’s are extremely price sensitive. They demand more interest as soon as they see rates rise. Small retail depositors don’t bother. Hence the immediate pressure on SVB’s margins. On the proportion of total bank assets held in securities, on the other hand, SVB was first, at 55 per cent. Most banks own lots of floating rate loans that pay more when rates rise. Not SVB.”

Best wishes, Steve

[scotia]

I fear the contagion has spread - from the BBC site at 10:24 this morning -

https://www.bbc.co.uk/news/live/uk-politics-64922187?ns_mchannel=social&ns_source=twitter&ns_campaign=bbc_live&ns_linkname=640da47bff51f554d28c0f8a%26Collapse%20of%20US%20bank%20a%20real%20crisis%20for%20UK%20tech%20sector%262023-03-12T10%3A24%3A09.167Z&ns_fee=0&pinned_post_locator=urn:asset:65b8ae7e-4a72-480e-9a0f-51cfe95728b4&pinned_post_asset_id=640da47bff51f554d28c0f8a&pinned_post_type=share

Collapse of US bank a real crisis for UK tech sector
Marc Ashdown
Business reporter

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.

I hope that the UK government intervention arrives before the markets open

[Spet0789]

The US regulators decided to exempt smaller US banks from reporting and complying with the pieces of international banking regulation which ensure banks have appropriate liquidity (specifically the Liquidity Coverage Ratio and the Net Stable Funding Ratio).

Under these metrics SVB would have been obviously vulnerable to a liquidity crisis. But as the threshold under which a bank was considered small was $250bn (yes, bn!) SVB didn’t need to report them or comply.

Simple stuff.

[Dod101]

The US regulators decided to exempt smaller US banks from reporting and complying with the pieces of international banking regulation which ensure banks have appropriate liquidity (specifically the Liquidity Coverage Ratio and the Net Stable Funding Ratio).

Under these metrics SVB would have been obviously vulnerable to a liquidity crisis. But as the threshold under which a bank was considered small was $250bn (yes, bn!) SVB didn’t need to report them or comply.

Simple stuff.

Is that the answer to my question? What on earth were the regulators doing?

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

[1nvest]

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).

[Spet0789]

The US regulators decided to exempt smaller US banks from reporting and complying with the pieces of international banking regulation which ensure banks have appropriate liquidity (specifically the Liquidity Coverage Ratio and the Net Stable Funding Ratio).

Under these metrics SVB would have been obviously vulnerable to a liquidity crisis. But as the threshold under which a bank was considered small was $250bn (yes, bn!) SVB didn’t need to report them or comply.

Simple stuff.

Is that the answer to my question? What on earth were the regulators doing?

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

Not just government bonds but also mortgage backed securities. The point is that these liquidity metrics would have made it clear that almost all of their deposits were of the flightiest type being uninsured deposits from tech companies rather than the more stable retail investor deposits of most 'proper' banks.