Was there a piece of repealed regulation that would have prevented SVB's collapse? Or is this just generic airing out of all of SVB's dirty laundry now that they're pariahs?
The Economic Growth, Regulatory Relief, and Consumer Protection Act [1] which was introduced in 2018 "increase the asset threshold at which certain enhanced prudential standards shall apply, from $50 billion to $250 billion".
Apparently SVB had assets of ~$220 billion in 2022 [2].
Would "enhanced prudential standards" have caught the interest rate risk that SVB was exposed to? I dug into this a bit, and it looks like the stress tests[1] that they prescribe seems to be around loan losses, not interest rate risk.
I think it would cover interest rate risk because an increase in rates causes bond value to decrease, implying the bonds SVB held lose value and they would not be able to cover capital.
And if they have to value it appropriately every quarter, the issue likely would have been seen earlier and maybe they could have changed their positions as the rates were rising instead of being in a hole and trying to do it all at once.
At least I think that’s how the regulations might have worked here.
The requirement to mark-to-market and undergo liquidity tests I think would’ve flagged the interest rate exposure back when SVB started on this path.
> Calculating the amount of a highly liquid asset. In calculating the amount of a highly liquid asset included in the liquidity buffer, the bank holding company must discount the fair market value of the asset to reflect any credit risk and market price volatility of the asset.
The part you quoted seems to be for "liquidity buffer" (ie. cash on hand for withdraws), not for the overall balance sheet.
>A bank holding company subject to this subpart must maintain a liquidity buffer that is sufficient to meet the projected net stressed cash-flow need over the 30-day planning horizon of a liquidity stress test conducted in accordance with paragraph (a) of this section under each scenario set forth in paragraph (a)(3)(i) through (iii) of this section.
Look at Basel III and their liquidity tests. TLDR: government bonds (Treasuries for SVB) that matures in 5+ years are considered illiquid, and banks which are subject to Basel III (which SVB would be under old rules) must have at least 100% liquidity coverage ratio (which based on SVB's client base would require SVB to hold ~30% in short-term bonds).
The latter. Arguably, being exempt from Dodd-Frank may well have allowed SVB to be more resilient than otherwise.
The general thrust of Dodd-Frank was to push banks away from high-risk investments. The Volcker Rule that’s at the heart of Dodd-Frank is most explicit about this, it expressly forbids certain types of investment for being too high-risk. Treasury bonds are considered to be some of the lowest-risk investments possible, with correspondingly low returns (in fact, in researching this I discovered, horrifyingly, that it’s not uncommon for Treasury bonds to be described as literally risk-free). The Volcker Rule has a specific exemption to explicitly allow trading in U.S. Government securities, in recognition of their perceived low risk.
SVB held a lot of Treasury bonds, percentage-wise more than most other banks. This is because they had a lot of startups depositing a lot of venture capital funding, they needed somewhere to invest it, and Treasury bonds were one of the few investment options that were in regulatory compliance and available in large amounts.
When the Federal Reserve started rapidly increasing interest rates, this tanked the value of Treasury bonds. And “tanked” is no exaggeration; there are grim charts from the beginning of this year like https://www.usbancorpassetmanagement.com/index/our-insights/... and back in November 2022 we had the Chairman of the FDIC warning that these unrealized losses could very quickly become actual losses for a bank that needed to increase liquidity.
Which is precisely what happened to SVB, down to the letter.
The argument that “Dodd-Frank exemption is good actually” goes like so: if the regulations were applied more stringently to SVB, they would have bought even more safe-bet Treasury bonds (and offered lower interest rates to depositors), and thus they would have been even more blown out by Federal Reserve increasing rates.
DFAST is another part of Dodd-Frank, and one part that might have helped catch this issue, I agree - although, I do wonder what potential Federal Reserve interest rates they would have plugged into the calculations…
The 2021
Report https://www.federalreserve.gov/publications/files/2021-dfast... took the baseline scenario to 1.9% in 2024 for 10yr Treasury returns, while the adverse scenario went to 1.5%. Likewise for the previous year: in 2020, baseline took it to 2.7% in 2023 while the adverse scenario went to 2.2%. The 2022 Test variables are quoted at https://www.federalreserve.gov/publications/2022-Stress-Test... saying year 2025 would see 2-1/2 and 1-1/2, for baseline and adverse respectively. For comparison, the actual rate now is close to 4%. So, honestly, I’m not sure if DFAST would have caught it, since this is a full percentage point and a half above the highest values they used in the last three tests. 2019 had 3.6% in baseline for 2022, so maybe it would have, though.
But ignore that, let’s assume DFAST would have clearly highlighted this. If it did, it would be cautioning “you have the potential for significant unrealized losses, make sure you maintain a good position so you can carry those securities to maturity” - which SVB was doing right up until its dwindling liquidity was in reach of a big bank run. The stress test is simply not designed to detect all potential periods where a sudden bank run of significant scale might kill a bank - fundamentally, it’s a capital stress test, not a liquidity stress test.
At best I think we can say DFAST, in some years but not in others, could plausibly have given a moderate to strong indication that more of SVB’s assets would be tied up than usual. From that, you could certainly take a hint and look at liquidity.
But then you have to have enough paranoia to model “The Fed lights a rocket under the interest rate just like they said they wouldn’t” and “our depositors, who all walk around with their burn rates practically tattooed on their foreheads, decide to do a bank run” at the same time to see this coming. And then you have to tell other people this is coming, and grit your teeth listening to them quote the Fed’s forecast that interest rates will stay low. Ultimately they would calculate the cost of your proposal and ask you why they ought to give up that much potential profit to hedge against the chance of these two unlikely events happening together - “that’s like seeing a pair of black swans mating”, they would say to you.
Again, I want to stress I’m not saying Dodd-Frank caused this, I’m not saying Dodd-Frank exemptions for SVB were a good thing, etc. I’m saying that this collapse was mostly out of scope of Dodd-Frank, the parts that were in scope were affected in both directions, and all of this in service of the original point: the article bringing up their exemption lobbying is just airing dirty laundry, not elucidating the cause of the downfall.
If you're subjected to a regulation with periodic reporting, you're just not going to play and look bad on a report if you can avoid it. And you know parameters will be refreshed
SVB did lobby so it could play the game it wanted, it looks like it was a basic game from what I can read in the media.
In Europe the current test is page 5, 2023 10 year interest rate at 4.5% in the stress test, and you see that it's a moving target (nice historical graph):
Incentives matter ... While regulation will not prevent failure, it helps. We already know what happens after deregulation of risk management in banking.
Disclaimer: worked for a decade in finance, including on software used for those report computations...
That's the thing I don't get at all, they had what, something like 160b in deposits - they could've kept 150b in bills, ten billion in Treasury bonds, and still made millions to hundreds of millions per year ostensibly risk free - surely enough to keep a ledger balanced. The bet on mbs at historic lows seemed like a pennies in front of steam rollers play
Bob, responsible for risk management, goes to the boss and says "Hey here is the plan that makes us $X and keeps us at acceptable risk of interest rate changes." Jim, the boss says "Jeez $X isn't very much money, our shareholders expect returns! If we changed our portfolio like this we'd make $Y. You are being a debbie downer, bond prices won't collapse and even if they do we just hold them to maturity and we are fine. We simply can't leave this much money on the table."
Notice the risk free rate is based on short term bonds.
Those are not as sensitive to rate changes as they regularly reach maturity and you roll them over.
If SVB had owner those they would not have had liquidity problems which lead to insolvency.
> Notice the risk free rate is based on short term bonds. Those are not as sensitive to rate changes as they regularly reach maturity and you roll them over.
That is not why they are less sensitive to interest rates. They are less sensitive to interest rates because the value of a bond (assuming no coupon) is (whatever you get paid at maturity)^((1+rate)^(-time to maturity)). The sensitivity to rates increases exponentially with the time!
If you buy 30-year bonds, hold them to maturity then roll them over, and don’t mark to market, you are just taking the graph of your returns and heavily smoothing it. And the smoothing obscures a fascinating thing about bonds: they’re sensitive to rates both ways. When rates go up, existing bonds lose present value immediately, but they start to gain present value at the new higher rate forever, or at least until the next rate change or until you sell them or let them mature without rolling them over.
If you want to do an honest HTM forecast of SVB’s position, you need to project everything out to the same future time, say 10 years. So you’re looking at SVB’s portfolio, with a reasonable expectation (with error bars or confidence intervals) of returns over 10 years, in 2033 dollars. In this model, the value of SVB’s 10-year bonds didn’t change, but the value of its liabilities exploded: it needs to pay a lot more interest on its interest-bearing deposits, and customers (I assume) are a lot more likely to demand interest when rates are high.
Banks often do this, trade short term risk for long term and pocket the difference.
It seems SVB didn't account for the fact that there was a strong correlation between the source of their money (tech propped up by low rates) and their investment risk (bonds/loans propped up by low rates).
I'm honestly unsure if we can ascribe this to to incompetence or greed.
Because rates were near 0 at the time for short term bonds. Interest rates were so low that there was nowhere else to park the money. Usually this is fixed with loans but with startups having lots of VC money they didn’t need loans.
It could only have panned out if the interest rate have remained. Once the interest rate increased, the deposits will chase higher rate, which SVB can’t provide and depositors will naturally withdraw their funds.
True but that doesn't happen all at once. Rates have been rising for more than a year now (not in a straight line but overall of course). They could have unwound this carry trade in March 2022 and probably come out ahead. Had they waited until summer 2022 they probably would have had a small loss. As it turns out though they held on for bigger losses.
The kind of mortgage-backed securities they held are still US Government securities! They are “mortgage-backed” more-or-less in the sense that the Government is willing to offer such-and-such amount of investment opportunity at so-and-so rate of return because they are holding a bunch of mortgages that they expect will be able to pay for it. They are different to Treasury bonds in important ways so it’s imprecise for me to refer to all of it as Treasury bonds, I agree.
In practical terms, the reason SVB held MBSes was the same reason they held Treasury bonds (low risk because of Government guarantee), Treasury bonds and MBSes react to Federal Reserve rate increases in much the same way, and the ways that MBSes and Treasury bonds differ are largely walled off by the Government guarantee and thus immaterial to SVB (if the housing market does some wild stuff then MBSes might pay out differently to Treasury bonds, but this didn’t happen here).
you are doing a pretty good job trying to explain away the officers of this bank running it into the ground. you havent even started to try to excuse their lending practices. what are you trying to accomplish? their CRO committed career-ending blunders and even with only short term securities on their books this bank could run into serious trouble simply by dint of their customer base all running into trouble at the same time, as is happening. why do you need to posture here man-splaining this shit incorrectly to people who dont know any better
I think fwlr is doing a good job bringing actual data & detail to the conversation. They don't seem to be attempting to excuse or exonerate the bank officers, indeed they do call this behavior "dirty laundry". But they are fairly questioning whether the regulation would have actually prevented this scenario. If there is a subtext intended, it seems to be that the Fed didn't adhere to its previous assertions about how fast interest rates would rise, which is something that would undermine the stress tests.
> If there is a subtext intended, it seems to be that the Fed didn't adhere to its previous assertions about how fast interest rates would rise
This is extremely perceptive! I do feel that way, and you know what? I didn’t fully realize that I did until you pointed it out. Yeah, two major activities of the Federal Reserve are “saying what it will do with interest rates in the next few years” and “changing interest rates”, it’s really bizarre that they can’t get these two to even remotely line up. I know they have to respond to fluctuating macroeconomic situations, but is that really enough to almost completely disconnect “their predictions of their actions” from “their actions”? It feels like a bit like a fig leaf, it kinda doesn’t pass a smell check.
Thanks for your contributions. I've been pondering the same thing. You've saved me a lot of effort.
> Yeah, two major activities of the Federal Reserve are “saying what it will do with interest rates in the next few years” and “changing interest rates”, it’s really bizarre that they can’t get these two to even remotely line up.
So you can put this down to SVB operated on the best available advice, butt the best available advice was wrong. Well that, and their customer base was a bunch of lemmings.
Because the officers of the bank are guilty of maybe 10% more garden variety bank greed than the average bank, while the real criminals here are the Silicon Valley CEOs who conspired to start a bank run and within 24 hours were demanding taxpayers fork over billions to clean up all their mess.
> …while the real criminals here are the Silicon Valley CEOs who conspired to start a bank run…
Yeah, way to victim blame.
Only an irrational person would “take one for the team” and leave their assets in an obviously failing bank.
I mean, if only so-and-so had kept their mouth shut nobody would have noticed that some cryptodudes and dudettes had blown a few measly billion of their customers’ funds.
> (in fact, in researching this I discovered, horrifyingly, that it’s not uncommon for Treasury bonds to be described as literally risk-free)
Correct me if I'm wrong, they are practically risk-free if held to maturity no? It's only when you need them to be a liquid asset that you can sell for money in a pinch that it's not so risk free as the amount you can get for them depends on the market.
I think your explanation is missing one big thing: duration
It isn’t that treasury bonds are inherently “risky”. The risk is that when you hold longer duration bonds at low interest rates like SVB did, even modest rate increases will have a large effect on value.
Combine that with the bonehead investment in MBS which allegedly only yielded 1.5% at 10 year duration and you have massive losses.
But is that covered by Dodd-Frank? I think what the parent is getting at is that interest rate risk isn't factored in at all, only asset type (ie. whether it's "safe" stuff like treasury or it's "risky" stuff like derivatives). I skimmed https://en.wikipedia.org/wiki/Provisions_of_the_Dodd%E2%80%9... and can't find anything relating to interest rate risk.
Here is Dean Baker quoted in The Intercept, “SVB would have been required to undergo regular stress tests before the [Dodd-Frank] revision; among the stresses you look at are sharp rises in interest rates, which is apparently what did in SVB. Presumably, if its books had been subject to this test, the risk would have been detected and they would have been required to raise more capital and/or shed deposits.” [1] And in fact we know that the proximate trigger was SVB announcing that they were raising capital.
With all due respect to Dean and his fantastic work on the sounding the alarm before the GFC, I think he’s wrong here. The stress test doesn’t really consider sharp changes in Federal Reserve interest rates, it uses one predicted rate for the baseline scenario and a second predicted rate for the adverse scenario. With those rates it calculates the other variables, including bond rates. The highest treasury rate in either scenario in the last three years is like 2.5%, while the current rate right now is almost 4%, so I would argue the interest rate rises considered in the stress test are not quite capturing the pressure SVB was actually under. (There’s room to disagree; the baseline scenario for 2019 does predict 3.6% in 2022, so at least some years might have tested the right amount of stress.)
More fundamentally though, the stress test is testing capital, not liquidity. What actually did in SVB was a bank run during a liquidity crisis. Due to interest rate rises, their liquidity got so bad they had to sell long-term assets at a loss, and when they announced they were raising capital to cover that loss, they triggered a bank run: the ultimate and most cruel test of liquidity there is. The stress test they lobbied their way out of would have indicated poor-but-manageable health, it’s not useless, and they should have been required to do it. But the stress test does not involve simulating a bank run, it would not have predicted this collapse.
I agree that this is not black and white. However as an example, the Europeans are basically saying this situation cannot happen under Basel3 which is exactly what the D-F relaxing allowed SVB to avoid. One thing that will be telling is if another bank collapses under similar circumstances.
I don’t think the stress test is meant to model a collapse. As has been mentioned elsewhere, no bank survives outflows of 40-50% of deposits. I understand Baker’s comment to imply that stress tests are not simply “are you over this minimum bar” but also designed to probe for any weakness in lots of different scenarios so the weaknesses are discovered and can be addressed. I imagine it like the regulator is the parent telling the kid to eat their veggies — they might not force them into your mouth but they’re acting as a third party check on your worst impulses. If that’s the case, the stress test should have prompted a discussion about this risk about nine months ago. That this fell apart so fast implies that risk management failed, that those discussions never happened, and so there will presumably be motion to fix that weakness for next time. So you’re right that the run would still have killed them, but better long term risk management would have prevented the blood in the water that spooked the VCs that caused the run.
PS: I feel like that one meme from it’s always sunny — everything is connected to everything. Have to look past the first-order effects.
For what it’s worth, the most plausible scenario I can see where SVB doesn’t collapse is something like “Their lobbying isn’t successful, they are required to undergo rigorous Dodd-Frank testing, because of this they are forced to get a risk officer, the risk officer armed with the kinda-worrying stress test results convinces SVB management to at least ratify a liquidity strategy even if they don’t really want to act on it, when they go to sell bonds and raise capital they present it as part of this liquidity strategy, the VCs see the strategy and aren’t as spooked, so the wave of withdrawals fizzles out instead of becoming a bank run - but inside SVB it gets way closer to a full-blown run than anyone outside realizes, and this scares management into executing on the liquidity strategy”. That’s an absurdly long chain of events and it’s very easy to step off that path at any point (or just get unlucky) so I still think it’s unlikely, but if I had to give an account of how SVB hypothetically survived, this is what I’d give.
The is the most "smoking gun" explanation that I've seen of how everyday corruption caused this.
However, I'd love to see a follow that confirms the law resulted in a change in bond purchases by SVB.
I think that’s fair. I hope we do see that and other details of how this all went sideways come out over the next months and years.
I assume though, that like any black swan there were many things that went wrong together. Lately at work, I have been telling people that one in a million happens eight times per day at just 100 requests per second! Shit is going wrong in small ways all the time. So you design for that — but eventually in a big system enough of those minor failures will line up to cause something you notice. You probably remember that huge facebook outage in 2021? Lots of things went wrong and then they were locked out of their own conference rooms. The financial system is different parts at a different scale but the same theory of failure applies.
Not smoking guns, more like a bad bet here, and a stupid decision there, and one dumbass VC influencer gets jumpy and runs his dumbass mouth in slack and bobs your uncle bye bye SVB.
While we can easily see that long-duration low-yield bonds are risky if interest rates rise, I would point out 2 things.
1. Financial analysts were not devoting much time to analyzing the risks from rapid rate increases, as rapid rate increases were deemed very unlikely (in part because the Federal Reserve itself had offered guidance that it was unlikely!). Furthermore, the time that was spent on analysis of this low-probability event was spread very thin (interest rate increases affect pretty much everything), and the perception of “zero risk” in T bonds would have bumped them to the end of the list for analysis, meaning even less analysis time for this outcome. Just now on Twitter I’ve seen two financial analyses praised for their prescience in this event - one from the FDIC, one from Byrne Hobart. Both of them only picked this up after the rate increases came into effect.
2. Even if there was full awareness of this risk, and plenty of forewarning that the rapid rate increase was definitely coming, the regulations as written would still permit these investments. The bank itself would probably have made smarter decisions and wouldn’t have collapsed, but that would be orthogonal to the regulations under discussion in the OP. (In my initial comment I even sketched out the argument that the regulations would have been mildly opposed to the smarter decisions.)
You're making a lot of very specific assertions in this thread about what bank officers or regulators would/should have done, or what the effect of SIFI stress tests would have been, without any actual evidence to back this up. Do you actually have inside information or prior experience on these things?
I have no inside information on SVB or their depositors, and no prior experience with managing a bank run. (I also have no exposure to SVB, nor do I have any stock market positions that may be affected by it.)
If you want my motivation for discussing it all day: I’m curious, it’s an interesting and fast-moving puzzle that a lot of smart people are discussing. If you want my qualifications for offering so many specific assertions: I’ve read the primary sources and it just doesn’t seem like it would fix or prevent this the way other people assume it would. If in my enthusiasm I’ve oversold myself as an expert, I apologize unreservedly.
https://news.ycombinator.com/item?id=35119007 Sources here for DFAST 2022, 2021, 2020. 2019 is in the parent comment to that. You’re looking for Appendix A, Supervisory Scenarios, Tables A3 and A5 (Domestic Variables). Note that the actual interest rate used is not explicitly specified anywhere I could see, there’s a footnote that it was calculated by Federal Reserve staff according to Lars E. O. Svensson (1995), “Estimating Forward Interest Rates with the Extended Nelson-Siegel Method”. The 10 year treasury bond return is derived largely from just the interest rate, though, and it’s also the variable we actually care about - if they did give us the interest rate we would just be using it to calculate the Treasury rate anyway.
No, if you have to sell your bonds with, say, 9 years remaining, you won't get 100B for them. Think about it, you paid 100B to get 10-yr treasury bonds paying 2%/$4 billion, annually. Now someone can go to a treasury auction and pay 100B and get 4%/$8 billion annually. Why would they still pay you $100 B for yours? They are obviously worth less.
Yes, and if you hold it for the 10 year term, you do get the money back, plus a small amount of interest. The problem is that now, you can buy bonds with a shorter term that provide higher interest rates. Thus to sell the old bonds now, you have to sell them for less than you paid for them so that the return on them becomes competitive with buying a new bond.
Not necessarily. They’re worth 100B still, but they require the purchaser to “lock up” their capital. If you need liquid cash now and potential buyers are only interested in locking up their capital for higher gains/rewards, you might consider selling at a loss.
Keeping cash in a vault is of course highly impractical, and also doesn't produce any money for you or the bank. If that's what you want, I think you could find it but it would be at a security company (security as in guards), not a bank.
The electronic equivalent would be depositing the money with the federal reserve. (What they do with the physical bills I don't know! But most deposits would be coming in electronically these days anyways.) However, up until the passage of the Emergency Economic Stabilization Act of 2008, the fed didn't even pay interest on reserves. [1] Now they do, but until 2022 this rate was only 0.15%. [2]
The first problem with this would have been it didn't provide enough money to run the bank. SVB's non-interest expenses were over $2 billion annually for the last 3 years, so with $200 billion of deposits you need at least to earn 1%, just to keep the lights on. Also your deposits will go up and down but you'll still have to pay your rent, so better be more than 1%. (This is how they ended up invested in longer duration treasuries, to earn more money by taking on greater interest rate risk.)
But the more fundamental problem with just keeing the money at the fed is that I don't think they would let you. It is not, traditionally, the social-economic purpose of a bank to just collect deposits and do nothing with them. Instead, the bank is supposed to take in deposits and then provide loans to the community (credit cards, business loans, mortgages, etc.). Probably this purpose has gotten a little fuzzy over time, since banks are not holding on to the loans, but it is the basic idea.
There is a company calling itself "The Narrow Bank" that actually wants to do exactly this, deposit all client money at the fed. [3] Tellingly, the fed has not granted them approval yet to do so. Maybe they will! But notice that this proposed bank is bare bones: no physical branches, no tellers, no ATMs, no FDIC insurance, just a place to deposit vast amounts of money from institutional clients and earn money from the interest rate spread from the fed vs what you pay out. I do not think such a bank would be very popular with many "regular" people or businesses, who have needs beyond just stashing money under an electronic mattress.
This regulation would have required that they undergo more rigorous stress testing by the fed.
Would it have prevented a bank run by a bunch of spooked VCs? We’ll never know, but one would imagine it would have put them in a better financial position.
Why do we even need regulations, isn't it in the shareholders best interests that the bank doesn't go bust? If these supposed regulations could have prevented shareholders from losing money, wouldn't they have done them voluntarily instead of needing regulations?
It's not regulations that are the problem. They were obviously using this bank as a free margin account using customers money to leverage their debts. They did it because they have a lot of money to win when betting with other people's money and only 100% to lose.
10x margin and the government making your counterparty whole if you fail?
Of course this degenerate bank used it in the most VC way.
Don't make a single client of them whole. Those banking there probably had connections to the people making tons of money when the bets went their way. Those who recommended banking there need to lose their credibility.
The risk they took was not a mistake. It was a feature. It was intended.
You need regulation because you have a better and more productive society when you have it than when you don’t.
Having to pay a lot of attention to your bank to wonder what’s going on behind the scenes is work and requires expertise. There’s no reason to have everyone do it, we can create agencies full of experts to do it for us.
You can't regulate away malicious intents from misaligned incentives. Regulations giving banks privileges is what caused this abuse to happen in the first place. You can't solve it with further regulations.
Only thing that can stop this misalignment of incentives is to revoke the regulatory privileges of banks. Let everyone bank directly at the Fed. There's no reason these banks should get the privilege of holding other people's money. They dont hold the risk so they shouldn't hold the privilege.
> You can't regulate away malicious intents from misaligned incentives.
This sentence sounds profound but it’s meaningless.
Of course you can regulate incentives, by definition a regulation is something that changes the incentive structure.
For example the fact that I have more money if I don’t pay my taxes is one incentive. If that was the only incentive at work there’s a good chance I wouldn’t pay anything. But there’s also an incentive that if I pay I avoid heavy fines and possible imprisonment. So I do.
I have a financial incentive to steal shit, and a regulatory incentive to not steal shit. And so on.
Sure you can do it, to people with criminal prosecution. Criminal prosecution isn't regulation. If the only deterrent to stealing things were fines, the poor would only be stealing things all day. They would have nothing to lose and everything to win .
But when you're up against corporations, the only thing they can lose is money. And the incentive structure is such that losing 100% with some probability is still profitable. That's why this happens. No regulation can bring the loss further down. Therefore you can't regulate it away.
Regulation is only a possible solution to a problem when it has a high enough probably for a penalty, and high enough penalty (100% is always the maximum!), to tilt back the expectation value from different choices.
You can't solve this with regulation. Regulation can't, by definition, solve misaligned behavior which already happens under when the risk is 100% loss on getting discovered.
Your premise has a hole in it. The maximum is not “100% of the corporate assets” at all.
Regulation doesn’t just apply to the corporate entity it applies to the actual humans involved.
You can have regulations that require those humans to provide regular documents to the government with severe penalties for falsifying them, you can require licensing and training and all sorts of things.
Of course criminal prosecution is a type of regulation. It’s also a standard counterpart to run of the mill corporate regulations that creates incentives for people to follow regulations. People have kids and families and most certainly respond to incentives.
You can threaten those humans with loss of everything they own and their own personal feeedom.
Try running an airline without any licensing and see if shutting down the airline is the maximum consequence . Good luck with that.
Regulations have teeth. The government of course can do more than just wipe out a company.
Youd’t think people wouldn’t want to drive under the influence and risk dying in a car crash, but they do ! They also main innocent along the way. That’s why you need regulations.
I mostly agree with this. these players should not be rewarded for using the deposits of the bank as a multiplier of their funds AUM, and the portfolio companies were pawns who willingly played along, or were ignorant and either way deserve to lose.
I'm not sure if it's tied to a specific repeal, but letting them keep the MBS at face value on their books is an obvious mistake in hindsight.
Also in retrospect they were likely insolvent or at best barely capitalized at the end of last year. Probably should have been pushed into receivership or forced to recapitalize then.
As I understand, their problem wasn't capital as such, it was liquidity. I.e. they had the assets that were above their deposits, it's just that these assets were not liquid, so when the run happened, they predictably couldn't raise liquidity fast enough. If that's the case, adding more capital would help only if it'd be enough capital to cover all deposits participating in the run, but I'm not sure many banks have that amount of capital just laying around, if it's in billions. FDIC has billions though.
This framing is a bit weird. The bond assets are not worth enough to cover SVB's deposit liabilities. Thus in a very real sense SVB was insolvent.
The fact that these were marked as "hold to maturity" for accounting purposes, means this insolvency was concealed until SVB faced a a liquidity crunch.
The issue was never that these bonds can't be sold (are illiquid), but that their real value was much lower than how they were valued under the applicable accounting rules.
> The bond assets are not worth enough to cover SVB's deposit liabilities.
I don't think this is actually true. Could you provide the source for that? I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth $1M, and I ask you to give me $1M tomorrow, you couldn't do it - but that doesn't mean your house is worth less. It means it's an illiquid asset that can't be easily converted to cash. Even if you agreed to sell it for $100, you probably couldn't pull it off in one day. Maybe you could take a loan against the house - but even that is hard to do by tomorrow.
> but that their real value was much lower
What's "real value"? Is it the value of the income stream when held to maturity? Then I never encountered any mention that these bonds were bad (in fact, some of them were Treasuries which are as good as any bond can be) - could you provide a source for this claim? If you mean "fire sale" value then yes, of course the "fire sale" value was low - but that's not because the bonds were bad, you can not value an asset by it's "fire sale" value.
> I understood that the bond assets can not be converted to enough liquidity to cover withdrawal demands, but it's not the same thing. If you own a house worth $1M, and I ask you to give me $1M tomorrow, you couldn't do it - but that doesn't mean your house is worth less.
The same bonds can be held in two different ways MTM (Mark to Market) and HTM (Hold to Maturity), the underlying bond is equally liquid (in that they would be sold to the same pool of buyers) but the way they are tracked in accounting differs.
It's like if you bought a house for $1M but then the housing market crashed and prices dropped by 20%. Regardless of whether you value the house as still worth 1M or $800k on your balance sheet, that doesn't change the liquidity of the house.
> What's "real value"? Is it the value of the income stream when held to maturity?
The market price of the bond.
> Then I never encountered any mention that these bonds were bad (in fact, some of them were Treasuries which are as good as any bond can be) - could you provide a source for this claim? If you mean "fire sale" value then yes, of course the "fire sale" value was low - but that's not because the bonds were bad, you can not value an asset by it's "fire sale" value.
There are two types of risk for these bonds. One is the risk of the bond issue defaulting on the bond. You are correct that this risk is extremely low for Treasury bonds (thought not for the MBS bonds that SVB also owned a lot of).
The other risk is due to interest rate changes. The reason the bonds are worth less on the market now is because interest rates have gone up. You can buy a 5 year bond with a higher interest rate than the 10 year bonds that SVB owns. Thus, if you are selling those bonds, you have to offer them at a discount so that buyers will see a comparable return to new bonds sold with higher interest rates.
The lower price has nothing to do with the number of bonds SVB needed to sell vs the size of the market for those bonds, but rather that the market values those bonds as lower given the current interest rates, regardless of how many of those bonds SVB needed to sell.
This was indeed the specific regulation that would have stopped SVB's books from being allowed to get into its present state, yes. It was a Basel III requirement after the 2008 financial crisis.
The earliest Federal Registry is this Federal Reserve Notice, dated March 14, 2014.
"Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule."
Note the word "non-bank". And pre-dates any 2018 actions.
a) when you raise millions of dollars, don't set it in one account, figure out how to get deposit insurance. Many banks offer programs to spread deposits across many institutions, so it's not like you necessarily need to administer a lot of accounts directly.
b) don't bank where Peter Thiel and his friends bank. Cause they're panicy. Probably try to avoid anything he and his friends use heavily without commitments, where them pulling out will cause major immediate issues.
So essentially what you're saying is people should open a new account for every $250k they have, so their money is insured. Insane that this is something that people now need to worry about.
> So essentially what you're saying is people should open a new account for every $250k they have
OP mentioned that there might be a service for that, and potentially also insurance that you can take out yourself for higher amounts.
> Insane that this is something that people now need to worry about.
Always has been, that is if you were just somewhat risk averse - more than one (unrelated!) bank account has always made sense.
FWIW, here in the EU we're only covered until 100k €, so 2.5 times as many banks required to spread safely ;-P
But, a lot of people do not need to have the cash around all the time, so one can but a big amount into relatively safe securities like S&P500 or for lower risk, which might be preferred here, gov bonds, and keep only the cash on hand for a few months of your expenses, which means most of the time two banks are enough, and having an account on two unrelated banks makes sense anyway - as if one has a bank run or fails completely you have still access to the cash on the other, for short-term things.
For companies this can work too, but they need a constant revenue stream matching their normal monthly expenses (e.g., salaries, office rents, ...) for it to work best.
I find it kind of insane to have people walking around with a 100 million bank account for their runway in the best cheese grater.
Call me crazy but I think a company with this much financial holdings would normally have a CFO that buys bonds that vest at the right times, and would have cried a tiny tear at getting less than ideal interest rates on them instead of having a bank collapse with all their finances because it wouldn't be competitive at recruiting more clients with zero financial management going forward.
Perhaps decades of no inflation and low interest expectations have left people confused to the fact that when you have millions you are an investment holding company.
You don't need to spread it out so each account is < $250k, you need to spread it out enough so you can still make payroll if one fails while you wait for its assets to be sorted out. In most cases for a startup this means two, maybe three if you suspect your two might be correlated; at some point you start buying your own bonds/bills too.
Nearly every bank that does reasonable amounts of commercial services has a product that just does this for you. Googling FDIC sweep account will yield plenty of examples. There are also ones that will hold T bills or similar as well.
It’s abstracted away from you and trivial to do. These startups just didn’t do it.
Even if you have all your money spread across different accounts (of the same category) at the same bank they all contribute to the $250k limit. It needs to be spread across account categories and banks.
>> "The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately chartered insured bank. For example, if a person has a certificate of deposit at Bank A and has a certificate of deposit at Bank B, the amounts would each be insured separately up to $250,000. Funds deposited in separate branches of the same insured bank are not separately insured."
Be careful of what hard dependencies you choose. The more dependent you are on a third party, or the more dependencies you have, the higher your black swan risk is. Of course, dependencies are a requirement to do business.
>Except in this case you want more “dependencies.”
More specifically, if you must have 3rd party dependencies, make sure you fully understand the risks, distribute exposure to adequately minimize central points of failure, and have failover procedures in place to reduce possible downtime.
The technical crowd that successfully run high-uptime web infrastructure with demanding SLAs generally understand this idea very well.
If there's only one back that's willing to fund your venture, maybe you want to do further due diligence on why they'd be willing to go against the odds. Is it really "they believe in what you're trying to do" or is it they are so much less risk averse that maybe they're playing a little loose and fast in other areas that might also be a signal?
The more I keep reading about SVB, the more cultish it sounds.
There needs to be a startup allowing to distribute deposits between bank accounts and operate them as single aggregate account. So that other startups won't keep their money all in the same bank. Not sure if I'm kidding or not.
This has been around since there has been FDIC insurance.
This whole thing reminds me of the regular phenomenon where people in Silicon Valley think they are geniuses because they discovered SRO’s or buses or the fact that you can dig tunnels in the ground for cars or something.
There's not really a lesson here about running a start-up for founders. However there's definitely a lesson here about how societies work that Silicon Valley could better internalize.
I’d argue the real lesson here is that startups with VC money can’t afford to treat their bank account as a black-boxed third party API. Hire a risk-averse financial analyst as CFO early on and task them with the responsibility of making your financial holdings bulletproof to as many different economic shocks as possible.
The Greg Becker of the article (SVB CEO & president) was in SF Fed board of directors until Friday [1]. The current risk officer worked at NY Fed [2]. Previous risk officer was director of Freddie Mac [3]. Yellen was the 11th President of the SF Fed [5] and the current president is her protégé [6].
They knew exactly what they were doing. The Fed looked the other way. They sold a lot of stock in the past month [7]. They are very well connected into the Fed and Treasury. I doubt anybody will get any kind of serious legal troubles.
Feels like a never ending cycle. Economic calamity occurs. New regulations brought in. The very next day the industry starts lobbying to have those regulations removed. They find receptive ears and achieve their goal. Economic calamity occurs.
As pointed out elsewhere on HN there is a bank with essentially 0% of risk from going bankrupt by means of improper/mismatched investment. The concept is "narrow banking" and involves pass-through deposit to the central bank. The government refuses to issue a banking license.
In this case I'd argue over-regulation is the reason why you can't have this form of safer bank.
Would a stress test have mattered here? The loans weren't the problem.
> The stress test is a forward-looking quantitative evaluation of bank capital that demonstrates how a hypothetical macroeconomic recession scenario would affect firm capital ratios
There was no recession and no loan loss. The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases) until it got $40 billion in withdrawals in a day.
This headline implies that being labeled as systemically important would have flagged what went wrong here, and it's not clear that this is true.
> The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases)
That’s an “albeit” you could drive the second largest bank failure ever though. If I have $100k of net assets and I lose $10k due to interest rate increases, I’m fine. If I have $100k but I lose $150k due to interest rate increases, then I’m only fine if I have some other source of income before whatever debt I have comes due.
SVB was only capitalized fine in a universe in which they could maintain a large non-interest-bearing deposit volume, and make adequate profit on it, for long enough to erase the hole in their balance sheet before their bonds matured and they would inevitably be forced to realize their loss. Or if their implicit gamble that rates would go back down would pay off. (Of course, the latter also reduces the income from said non-interest-bearing deposits.)
I don’t know how bank stress tests work, but I sure hope they would notice that the bank’s liabilities exceeded their assets even assuming said assets could be sold calmly and at favorable prices. And no, “I’ll hold them to maturity so they’re worth 20% more than they are actually worth” should not be part of that calculation.
SVB would have passed stress tests because they did what all banks were supposed to do. They invested in "safe" long term treasuries. The only economic environment hypothetical they would fail is, "what happens if there is a bank run and you are forced to realize losses". But what bank can survive a bank run? The Dodd-Frank stress tests don't try to ensure banks can survive bank runs, do they?
When banks invest in the long run, your assets can depreciate in value temporarily to get through short term business cycles. By investing long, a bank's balance sheet will be the average of both assets that aged poorly and assets that aged well. The average should reflect the long term growth of the economy.
The treasuries purchased in the last 2 years depreciated a lot in value and most of SVB's growth happened in the last two years, so there current balances are skewed heavily towards assets purchased right before the interest rate hikes began. If SVB were able to continue operating for say another 10 years, they would be fine even if interest rates never returned to near 0 levels. Additional treasuries would be purchased and the fraction of the balance sheet that consisted of 2020-2022 treasuries would shrink. The rest of the portfolio would probably increase in value. Treasuries purchased today are cheap and have a large upside as rates start coming down, even if rates don't fall all the way to 0. The gains from cheap treasuries purchased towards the end of 2022 and after have potential to dramatically grow in value.
There really isn't any evidence that SVB behaved irresponsibly nor that stricter regulation under Dodd-Frank would have made a difference. If SVB had been inclined to invest in riskier types of investments, Dodd-Frank would have pressured SVB to buy treasuries.
Not all banks are equally likely to have a bank run.
China for example restricts banks from being over exposed to a single sector, so the rapid collapse of an industry does not trigger liquidity issues as badly ad those that hit SVB.
On paper SVB might well have been solvent until they got withdrawals. This is possible because you can account for bonds in two ways: mark to market, or held to maturity.
In the second case you don't look at market prices. This actually makes some sense. If you intend to hold your bonds to maturity, any unrealized losses will naturally resolve themselves as you reach maturity. Hence a balance sheet that doesn't mark the losses is a more accurate picture. But only IF you never need those bonds for liquidity.
Note that liquidity crunches can ruin balance sheets even without this bond-specific feature. For example if you own 10% of a company stock, and need to dump all of it, the price will drop by a lot. They were accounted using Mark to Market, but even that was too optimistic in the face of liquidity crunches.
> Hence a balance sheet that doesn't mark the losses is a more accurate picture. But only IF you never need those bonds for liquidity.
I grade this as a fail of a hypothetical CFO interview I’m running. Sorry.
> Note that liquidity crunches can ruin balance sheets even without this bond-specific feature. For example if you own 10% of a company stock, and need to dump all of it, the price will drop by a lot.
Of course, but that’s an unrelated effect.
I can lose money by buying something that loses value. I can also lose money by buying something that is hard to sell without paying large spread or causing a large market impact because I sold it. These are entirely orthogonal — I could buy securities that go up and lose some or all of the gain due to a forced sale.
SVB’s bonds went down, in an NPV sense or a mid-market sense or any other sense that considers what they’re actually worth today.
> Hence a balance sheet that doesn't mark the losses is a more accurate picture.
A dollar in ten years isn't equivalent to a dollar today, so I don't think it's really an accurate picture to claim otherwise.
You could use the held to maturity value as part of a projection of your balance sheet into the future. Although, mark to market to get current value and assume prevailing interest rates to get to future value should get you to the same place.
I agree that if 20% of your deposits are demanded in the same day, that's going to cause at least big problems if not failures to most banks.
Balance sheets mix maturity very often.
Outstanding loans to others, unpaid invoices, issued bonds, loans with banks. All of these are on the balance sheet, none of them represent dollars now.
A balance sheet does not show "what is left if we needed to liquidate now". It shows some approximation of "what do we own, and what do we owe". If you fully intend to hold something to maturity (either bonds you own, loans you made, bonds you issued, or borrowed money) then it doesn't make sense to value that at market prices when you know that the price will converge to 100cents on the dollar before you sell it.
If you borrowed at 1% interest and interest rates rise, you don't mark down your debt in value. Even though the 'market value' of that loan definitely dropped.
If the hold to maturity holdings were marked to market, it would have been apparent that there were problems. At the very least, SVB would have had to acknowledge that their holdings were not worth nearly as much as they used to be. I think the larger banks in the US are required to do this with their holdings. The FT indicated that if the US required all it's banks to adhere to the Basel III regulations instead of just the large ones, SVB would not have had the same issues either.
> The bank was capitalized fine (albeit with underperforming treasury assets given interest rate increases) until it got $40 billion in withdrawals in a day.
You, like many others, are counfounding the trigger (Panic Withdrawls) with the cause (Lack of Diversification and bad risk-management in general). And the withdrawls come after their sale of assets at a loss of 2Billion+ "following a larger-than-expected decline in deposits" (This was their declaration for the fire sale, so no it was not capitalised so fine). Ofcourse this type of operation would cause panic and 40Billion in withdrawls after this type of declaration was to be expected and accounted for.
> Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective all advised their startups to pull their cash from the bank, people familiar with the matter said.
> Customers immediately tried to pull their money, including many of the venture-capital firms the bank had cultivated over decades. Peter Thiel’s Founders Fund, Coatue Management, Union Square Ventures and Founder Collective all advised their startups to pull their cash from the bank, people familiar with the matter said.
A few days ago a VC warned all the companies in its portfolio that SVB was in trouble and they should withdraw all their funds. That's probably what OP was talking about.
Perhaps, perhaps not. A stress test tests more than general recession but sector or segment concentrated losses. One that included maturity exposure may have failed, depends on the test.
With reps like this doesn't seem you really need to lobby that hard.
I’m working with my CA colleagues to address the Silicon Valley Bank crisis. We must make sure all deposits exceeding the FDIC $250k limit are honored. Banking is about confidence. If depositors lose confidence on the safety of their deposits over 250k then we are in trouble.
> We must make sure all deposits exceeding the FDIC $250k limit are honored
Why? Depositors know what the insurance limit is. One could choose to not leave more than 250K in a bank, and/or they could choose to find a way to hedge their risk.
If people stop trusting banks, a lot of friction gets added to the financial system. People stop worrying about creating value and start worrying about storing value.
Short term, people will consider taking out their deposits, which might trigger more bankruns. That might truly ruin our financial system and drop us into a recession.
If aliens came to earth I wonder if they'd truly see much difference in value creation between dollars stored in a private bank and dollars stored in a pile of cash. Either way the same non-financial goods and services are on the market.
...And yet, there is a certain security in that instead of someone getting one number and taking over or locking out your account, they first have to physically find your money.
People underestimate the power of not having assets somewhere they can be frozen by a third-party. Risk is never destroyed. It's just changed from form to form...
Hey if you don't want the return on your deposits spent on fraudulently represented "insurance" which of course is paid to the same people (government) demanding FDIC/NCUA insurance before chartering a retail bank, simply keep your money under a mattress. You see you don't have to pay the tax, it's an insurance because it's an optional thing and instead you can choose to have the money stolen by cops by the side of the road in "civil asset forfeiture."
Of course if anybody else took your money representing it as bailing out everyone under 250k, but actually was fraudulently representing it and you found out you were forced to pay "insurance" to bail out accounts over 250k, well then we'd just call it insurance fraud.
I didn't say there were good options for people wanting to deposit more than 250K. But people claiming that those who wound up in this situation couldn't possibly have foreseen the problems are mistaken. There's a reason why I don't put all of my money in a single bank account, why can't these companies do the same?
But really, this is obscuring the point. The people screaming "bailout" aren't the unfortunate people who work for a company who uses Rippling. No it's the person who normally yells "free market!".
Yeah, I mean take your funds and put them under your mattress, because like where else is it safer? It totally sucks that your clients chose to put your funds in a highly geographically and industry central bank that failed for understandable reasons.
We also don't bail out the West Texas Bank for oil barons either when their bank fails.
That pretty much implies ALL deposits are insured, not just up to 250k. Which can’t be true because there really isn’t that much money to backstop all deposits across all banks.
Likely plenty. Most of the smaller banks without sophisticated risk management likely haven't hedged against interest rate risk or adjusted their bond portfolios as interest rates rose. Unfortunately none of the regulatory frameworks even take interest rate risk into account, likely because of a 30 year bull run in bonds made everyone complacent to it. Generally speaking they only really monitor stress under a certain amount of bad debt (i.e failed loans) and risk level of assets held. T Bills get basically perfect zero risk score despite being heavily exposed to interest rate risk.
They measure duration risk on short term assets but not long term assets like SVBs bonds which are (for better or worse) classified under different rules that allow them to be held to maturity without needing to account for mark-to-market losses for capital assessment purposes.
As a result stress tests which measure various interest rate scenarios, deposit withdrawals and increased bad debt ratios aren't overly affected by these long duration bonds.
That is all good and well as long as these assets truly are held to maturity and forced selling doesn't take place.
Then again, maybe it's fine. These tests are meant to ensure the banks can handle changing economic conditions. They aren't meant to be able to protect banks against a bank run of this scale.
Prior to joining SVB as Chief Administrative Officer, Gentile worked as Chief Financial Officer at Lehman Brothers' Global Investment Bank. Gentile left Lehman in 2007, just one year before it went bankrupt in 2008.
He was CAO of SVB Securities, a previously independent bank acquired by SVB in 2019, becoming one of three subsidiaries owned by SVB. Unlike SVB, it continues to operate.
Dang, dang, you are one hell of a mod. I can't believe you are giving me a 3rd chance. I will try my best. As my username suggests, this was a joke account, but I have come to appreciate this place. You're tolerance has given me pause.
Is there a reason why the election of a new government did not result in the return of the previous regulations? Was the Congress and White House not able to change the rule?
Another result of low interest rate. SVB thought he was smart to buy longer term bonds, so he would get higher interest + inflation and interest rates thought differently.
If you're talking about SJIM, that fund's inception date is literally 12 days ago. "Doing above average" in that timespan doesn't say much. Also, according to the chart on fund's website, it's actually down since its inception.
The sort of answer which makes Reddit mod types angry, even when it's true. It's mostly for fun even when it's mostly just based on noticing humorous patterns rather than some scientific financial theory we must all take very seriously.
