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Bank Run

Seems like with SVB it was just a perfect storm of bad ALM (long term assets without interest rate risk protection matched up against a bunch of short term liabilities), bad market timing (steep increases in interest rates devaluing their holdings paired with a client base that was largely outflowing cash even before the run), and lack of regulation (this exact scenario should have been stress tested).

Glad depositors are being made whole and we aren’t bailing out shareholders and other debtors.
 
Check the date on this tweet. It was in plain sight!

 
DeacMan said:
Banks only have to keep so much capital in reserve by law. No bank is beyond failure in theory. The issue here was the duration of the investments into which SVB placed a lot of their capital and what happened to the value of those bonds when interest rates rose. Dumb choice.

And it appears SVB isn't the only financial institution sitting on investments the regulators don't require them to mark to market.

US banks sitting on unrealized losses of $620 billion

www.msn.com
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This just seems crazy to me though. SVB bought long-term bonds, which are about as safe and conservative of an asset that anyone can buy. So they have a bunch of their capital in bonds and interest rates rose, which created a delta between the assets they were holding and the loans they were issuing. Is that really crazy? Or dumb? Seemed like they played it fairly safe and they would have largely been okay if a bunch of rich dudes weren't sitting around thinking about it and then decided to pull all their money (just in case).

This is me partly trying to just understand what happened. So the above could be misinformed.
 
MichDeac25 said:
This just seems crazy to me though. SVB bought long-term bonds, which are about as safe and conservative of an asset that anyone can buy. So they have a bunch of their capital in bonds and interest rates rose, which created a delta between the assets they were holding and the loans they were issuing. Is that really crazy? Or dumb? Seemed like they played it fairly safe and they would have largely been okay if a bunch of rich dudes weren't sitting around thinking about it and then decided to pull all their money (just in case).

This is me partly trying to just understand what happened. So the above could be misinformed.
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Long term bonds like that are safe in that you’ll eventually earn the stated yield if you hold it to maturity.

What if you have to sell it early though? Someone needs to be willing to buy it, and who is going to buy a bond at face value from you paying 1.5% (for example) when they could buy one at 3% from someone else? So the bond you hold is worth less than face based on what the interest rates are now. So you’re sitting on a ticking time bomb with an large loss waiting to happen if you ever have to sell it…

…which SVB had to do in order to have cash to satisfy its customers deposit outflow activity. Oops. Big loss ensues, other large depositors smell blood and pull their money and tell all their friends and now the bank is insolvent.
 
TLDR it wasn’t so much the delta bw the loans they were issuing and this, it was a failure to manage the basic blocking and tackling of deposit inflow/outflow management.
 
MichDeac25 said:
This just seems crazy to me though. SVB bought long-term bonds, which are about as safe and conservative of an asset that anyone can buy. So they have a bunch of their capital in bonds and interest rates rose, which created a delta between the assets they were holding and the loans they were issuing. Is that really crazy? Or dumb? Seemed like they played it fairly safe and they would have largely been okay if a bunch of rich dudes weren't sitting around thinking about it and then decided to pull all their money (just in case).

This is me partly trying to just understand what happened. So the above could be misinformed.
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Investing in bonds wasn’t the issue and the issues were there before the run. It was the interest rate risk they were taking on by being so long. Definitely ways to mitigate that risk by either diversifying terms or swapping fixed for floating. But those options come with a cost. Ooooooooooooppppsss
 
06deacon said:
TLDR it wasn’t so much the delta bw the loans they were issuing and this, it was a failure to manage the basic blocking and tackling of deposit inflow/outflow management.
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That feels core to a bank’s reason for existence
 
MichDeac25 said:
This just seems crazy to me though. SVB bought long-term bonds, which are about as safe and conservative of an asset that anyone can buy. So they have a bunch of their capital in bonds and interest rates rose, which created a delta between the assets they were holding and the loans they were issuing. Is that really crazy? Or dumb? Seemed like they played it fairly safe and they would have largely been okay if a bunch of rich dudes weren't sitting around thinking about it and then decided to pull all their money (just in case).

This is me partly trying to just understand what happened. So the above could be misinformed.
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Let DEACMAN announce DELTA!
 
TownieDeac said:
That feels core to a bank’s reason for existence
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Everyone sees the receiver make the td catch, no one notices the guard pulling to set the block giving the route time to develop. Except ph I guess he sees everything.
 
MichDeac25 said:
This just seems crazy to me though. SVB bought long-term bonds, which are about as safe and conservative of an asset that anyone can buy. So they have a bunch of their capital in bonds and interest rates rose, which created a delta between the assets they were holding and the loans they were issuing. Is that really crazy? Or dumb? Seemed like they played it fairly safe and they would have largely been okay if a bunch of rich dudes weren't sitting around thinking about it and then decided to pull all their money (just in case).

This is me partly trying to just understand what happened. So the above could be misinformed.
Click to expand...

The issue was a mismatch on the timing of needed cash flows. And those "rich" dudes you are referencing are largely small corporations who need to make payroll and grasped their capital was at risk.

1 - SVB gets X stream of deposits typically.
2 - SVB invests in the conservative 10 year bonds. They do not have to mark them to market.
3 - VC's slow investing in new companies and follow on rounds
4 - Interest rates rise making the mark to market value of the 10 years plummet
5 - Deposits fall off the X stream rate bc there is less money being invested by VCs
6 - Withdrawals continue at something higher than the X stream rate as start ups continue to burn cash (even if they have slowed their burn in many cases)
7 - Someone sees the disconnect and the bank run starts

This would all have been avoided if SVB had to mark to market their bond investments bc the capital needs would be laid bare.
 
06deacon said:
Long term bonds like that are safe in that you’ll eventually earn the stated yield if you hold it to maturity.

What if you have to sell it early though? Someone needs to be willing to buy it, and who is going to buy a bond at face value from you paying 1.5% (for example) when they could buy one at 3% from someone else? So the bond you hold is worth less than face based on what the interest rates are now. So you’re sitting on a ticking time bomb with an large loss waiting to happen if you ever have to sell it…

…which SVB had to do in order to have cash to satisfy its customers deposit outflow activity. Oops. Big loss ensues, other large depositors smell blood and pull their money and tell all their friends and now the bank is insolvent.
Click to expand...
With the tweet thread bmoney posted, it seems like the combo of a massive deposit inflow starting in 2019 combined with its decision to invest those massive inflows into long-term bonds, combined with depositors needing/wanting access to their cash in 2022-2023 is what sunk the boat.
 
MichDeac25 said:
With the tweet thread bmoney posted, it seems like the combo of a massive deposit inflow starting in 2019 combined with its decision to invest those massive inflows into long-term bonds, combined with depositors needing/wanting access to their cash in 2022-2023 is what sunk the boat.
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Correct but you should add in the slowdown in the rate in ongoing deposits after Covid bc VCs slowed investment generally.
 
06deacon said:
I’m going to agree and disagree with this. It wasn’t that interest rates going up caused the bank to fail, it was decisions the bank had made that made them susceptible to interest rate increases and what that can cause (deposit inflows going down requiring more liquidity to fund customers deposit outflows).

How’d they have the ability to make that sort of bad decision though. Stress testing would have probably made that decision harder to justify.
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Not if the stress testing doesn't mark the value of the bonds to market. That's what baffles me. The accounting rules don't provide the bonds be marked to market and never have. Not sure if the stress testing would have done so.
 
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