I don’t know how banks work

[Anonymous]

Watch It’s a Wonderful Life.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Apparently neither do the financial regulators.

Blame Trump-era roll-back of the regulations that would have prevented this.

In the case of SVB they would not have. They would not have been caught in the adverse interest rate scenario and they would have more than met the liquidity requirement.


Regulation is not a magic bullet.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Take your money and give you very very small interest. Let others borrow your money from them and charge high interest and bank keeps that money. If everyone withdraws money at the same time, bank collapses. Exhibit 1 SVB

What made everybody decide to withdraw all at the same time in this case?

A certain Venture Capitalist said it was a good idea on a freaking group chat with his techbro buddies. Seriously.

Wrong. The idiot chair of the FDIC gave remarks Monday announcing that the Fed’s ramping up of interest rates had left certain banks exposed to substantial unrealized losses (simplified: rising interest rates were causing bank assets to lose value). Then, the shorts and bottom feeders and group chats went nuts and created a panic about SVB, which was the poster child for this type of exposure.

Now, as of a couple hours ago, the Fed has announced it’s going to lend against those deteriorated assets but will value them at par (as if those unrealized losses are not real after all). The only way that makes sense is if the Fed reversed course on rates, at which point the prices of those assets will recover.

If this all sounds circular and stupid, you understand more than you think.

[Anonymous]

It is helpful to look at sources of banks' funds and uses of those funds.

Simplified below

Sources of funds:
Deposits. These can be time time deposits but mostly they are demand deposits, which means the bank does not know when depositors may wish to withdraw their money but can model it based on past patterns. Since demand deposits can be withdrawn at any time, they typically pay de minimis or no interest. Time deposits, which are locked in for a certain period of time do carry interest, the amount of which is determined by yield curves. Usually, but not always, shorter terms pay less interest than longer terms.

Debt: This is usually sourced from bond issuance and will pay an interest rate that is a function of their maturity and market perceived credit quality of the bank (the greater the perceived credit risk, the higher the rate)

Equity: This comes from people who buy common shares in their bank because they believe the bank will provide reasonable returns given their risk tolerance. Equity is perpetual--it never needs to be paid back. Return is provided via dividends, higher stock price owing to good prospective earnings and the like.

Uses of funds:

Loans: Banks lend the money to individual and businesses so that they can buy houses and cards, expand their plants, etc. These loans will be for a fixed term and may be for a fixed rate or a floating rate. Floating rate is good for banks because if they have to increase rates on deposits they are not stuck with low fixed rates on loans. However, for many reasons many customers prefer fixed rates. So, banks will determine the loans rates based on terms, fixed or floating, and credit risk of borrower. They also price in a spread over what they are paying for their sources of funds so they can make a profit.

Securities: Banks holds these for a variety of reasons. Unlike loans they can be sold very quickly in case they need to raise cash to meet depositors demands for cash (liquidity demands). They may not see good lending opportunities so they park funds in government securities. Buying a a government security is like making a loan to the government and the return will depend on maturity of the security and the shape of the yield curve, which in turn is affected by inflation expectations.

Other things: Premises, equipment etc.

Banks may also seek out businesses that are not dependent on interest rates, mostly commissions from ancillary services like custody and wealth management. Interest rate risk management and maintaining liquidity can be complicated given demand deposits, guessing about future interest rates, etc. (SVB clearly was unable to do this well.)

How SVB comes into this: They were awash in deposits as their tech company customer base had plenty of venture capital shoved at it. Many of the depositors and customer base did not need loans, so SVB had relatively few. They parked most of their funds in government securities. In order to generate earnings, they went for higher paying long dated government securities. But by locking in and not actively trading them, they were stuck with low paying long dated securities as interest rates were rising. The value of those securities as a result went down, but for some technical accounting reasons they did not have to realize those losses in earnings.

When venture capitalist funding for fintechs started to dry up, the tech company depositors started withdrawing deposits. SVB had to sell some securities, realizing their embedded losses and decided to raise capital to fill the hole. The planned capital raise drew attention to the embedded losses on the rest of the securities and questions arose about its viability. The deposit withdrawals accelerated and it became clear that under run conditions, SVB would have to sell large amount of securities, taking very large losses and would no longer be a viable institution.

[Anonymous]

Anonymous wrote:It is helpful to look at sources of banks' funds and uses of those funds.

Simplified below

Sources of funds:
Deposits. These can be time time deposits but mostly they are demand deposits, which means the bank does not know when depositors may wish to withdraw their money but can model it based on past patterns. Since demand deposits can be withdrawn at any time, they typically pay de minimis or no interest. Time deposits, which are locked in for a certain period of time do carry interest, the amount of which is determined by yield curves. Usually, but not always, shorter terms pay less interest than longer terms.

Debt: This is usually sourced from bond issuance and will pay an interest rate that is a function of their maturity and market perceived credit quality of the bank (the greater the perceived credit risk, the higher the rate)

Equity: This comes from people who buy common shares in their bank because they believe the bank will provide reasonable returns given their risk tolerance. Equity is perpetual--it never needs to be paid back. Return is provided via dividends, higher stock price owing to good prospective earnings and the like.

Uses of funds:

Loans: Banks lend the money to individual and businesses so that they can buy houses and cards, expand their plants, etc. These loans will be for a fixed term and may be for a fixed rate or a floating rate. Floating rate is good for banks because if they have to increase rates on deposits they are not stuck with low fixed rates on loans. However, for many reasons many customers prefer fixed rates. So, banks will determine the loans rates based on terms, fixed or floating, and credit risk of borrower. They also price in a spread over what they are paying for their sources of funds so they can make a profit.

Securities: Banks holds these for a variety of reasons. Unlike loans they can be sold very quickly in case they need to raise cash to meet depositors demands for cash (liquidity demands). They may not see good lending opportunities so they park funds in government securities. Buying a a government security is like making a loan to the government and the return will depend on maturity of the security and the shape of the yield curve, which in turn is affected by inflation expectations.

Other things: Premises, equipment etc.

Banks may also seek out businesses that are not dependent on interest rates, mostly commissions from ancillary services like custody and wealth management. Interest rate risk management and maintaining liquidity can be complicated given demand deposits, guessing about future interest rates, etc. (SVB clearly was unable to do this well.)

How SVB comes into this: They were awash in deposits as their tech company customer base had plenty of venture capital shoved at it. Many of the depositors and customer base did not need loans, so SVB had relatively few. They parked most of their funds in government securities. In order to generate earnings, they went for higher paying long dated government securities. But by locking in and not actively trading them, they were stuck with low paying long dated securities as interest rates were rising. The value of those securities as a result went down, but for some technical accounting reasons they did not have to realize those losses in earnings.

When venture capitalist funding for fintechs started to dry up, the tech company depositors started withdrawing deposits. SVB had to sell some securities, realizing their embedded losses and decided to raise capital to fill the hole. The planned capital raise drew attention to the embedded losses on the rest of the securities and questions arose about its viability. The deposit withdrawals accelerated and it became clear that under run conditions, SVB would have to sell large amount of securities, taking very large losses and would no longer be a viable institution.

Bingo. Thanks for setting it out so clearly

[Anonymous]

Watch It’s a Wonderful Life. Seriously, it explains banking and runs on banks.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Take your money and give you very very small interest. Let others borrow your money from them and charge high interest and bank keeps that money. If everyone withdraws money at the same time, bank collapses. Exhibit 1 SVB

What made everybody decide to withdraw all at the same time in this case?

A certain Venture Capitalist said it was a good idea on a freaking group chat with his techbro buddies. Seriously.

Wrong. The idiot chair of the FDIC gave remarks Monday announcing that the Fed’s ramping up of interest rates had left certain banks exposed to substantial unrealized losses (simplified: rising interest rates were causing bank assets to lose value). Then, the shorts and bottom feeders and group chats went nuts and created a panic about SVB, which was the poster child for this type of exposure.

Now, as of a couple hours ago, the Fed has announced it’s going to lend against those deteriorated assets but will value them at par (as if those unrealized losses are not real after all). The only way that makes sense is if the Fed reversed course on rates, at which point the prices of those assets will recover.

If this all sounds circular and stupid, you understand more than you think.

So the dregs of the internet started a whisper chain that connected to a douchey techbro venture capitalist who panicked and pulled the trigger?

[Anonymous]

Are credit unions more or less safe than other types of banks?

[Anonymous]

Anonymous wrote:Are credit unions more or less safe than other types of banks?

In terms of numbers of failures credit unions have had quite a bit more than banks.

See: https://www.bankrate.com/banking/credit-unions/list-of-failed-credit-unions/

But credit unions typically are quite small, don't do exciting finance, and tend to have few deposits over the insurance limit.

As long as you keep your deposits under $250,000 you are good with either a bank or credit union.

[Anonymous]

Anonymous wrote:So this SVB situation is going over my head.

I saw a Bloomberg article that said, if I remember right, SVB invested a lot in U.S. Treasuries or Bonds long term, while the fed kept raising rates and that messed them up. It was how they invested people's deposits. How it had nothing to do with the fact that they lent money to tons of tech companies I dunno. You'd think that was the problem but that's not what I'm reading.

[Anonymous]

plus obviously their stock plummeting + people rushing the bank. when most of their deposits are 100% FDIC insured anyway

[Anonymous]

The still made a lot of money over the past 24 months, right? I just want. to make sure that capitalism is still working properly.

[Anonymous]

Anonymous wrote:The still made a lot of money over the past 24 months, right? I just want. to make sure that capitalism is still working properly.

Capitalism has never “worked properly” in my lifetime and I’m 41.

[Anonymous]

Anonymous wrote:

Anonymous wrote:It is helpful to look at sources of banks' funds and uses of those funds.

Simplified below

Sources of funds:
Deposits. These can be time time deposits but mostly they are demand deposits, which means the bank does not know when depositors may wish to withdraw their money but can model it based on past patterns. Since demand deposits can be withdrawn at any time, they typically pay de minimis or no interest. Time deposits, which are locked in for a certain period of time do carry interest, the amount of which is determined by yield curves. Usually, but not always, shorter terms pay less interest than longer terms.

Debt: This is usually sourced from bond issuance and will pay an interest rate that is a function of their maturity and market perceived credit quality of the bank (the greater the perceived credit risk, the higher the rate)

Equity: This comes from people who buy common shares in their bank because they believe the bank will provide reasonable returns given their risk tolerance. Equity is perpetual--it never needs to be paid back. Return is provided via dividends, higher stock price owing to good prospective earnings and the like.

Uses of funds:

Loans: Banks lend the money to individual and businesses so that they can buy houses and cards, expand their plants, etc. These loans will be for a fixed term and may be for a fixed rate or a floating rate. Floating rate is good for banks because if they have to increase rates on deposits they are not stuck with low fixed rates on loans. However, for many reasons many customers prefer fixed rates. So, banks will determine the loans rates based on terms, fixed or floating, and credit risk of borrower. They also price in a spread over what they are paying for their sources of funds so they can make a profit.

Securities: Banks holds these for a variety of reasons. Unlike loans they can be sold very quickly in case they need to raise cash to meet depositors demands for cash (liquidity demands). They may not see good lending opportunities so they park funds in government securities. Buying a a government security is like making a loan to the government and the return will depend on maturity of the security and the shape of the yield curve, which in turn is affected by inflation expectations.

Other things: Premises, equipment etc.

Banks may also seek out businesses that are not dependent on interest rates, mostly commissions from ancillary services like custody and wealth management. Interest rate risk management and maintaining liquidity can be complicated given demand deposits, guessing about future interest rates, etc. (SVB clearly was unable to do this well.)

How SVB comes into this: They were awash in deposits as their tech company customer base had plenty of venture capital shoved at it. Many of the depositors and customer base did not need loans, so SVB had relatively few. They parked most of their funds in government securities. In order to generate earnings, they went for higher paying long dated government securities. But by locking in and not actively trading them, they were stuck with low paying long dated securities as interest rates were rising. The value of those securities as a result went down, but for some technical accounting reasons they did not have to realize those losses in earnings.

When venture capitalist funding for fintechs started to dry up, the tech company depositors started withdrawing deposits. SVB had to sell some securities, realizing their embedded losses and decided to raise capital to fill the hole. The planned capital raise drew attention to the embedded losses on the rest of the securities and questions arose about its viability. The deposit withdrawals accelerated and it became clear that under run conditions, SVB would have to sell large amount of securities, taking very large losses and would no longer be a viable institution.

Bingo. Thanks for setting it out so clearly

You are welcome. One thing I should have noted is that sources of funds are known as liabilities, while uses of funds are generally called assets. I find, however, that if you start out with using those terms, you lose people who are unfamiliar with accounting.

[Anonymous]

banks are basically legal Ponzi schemes.