I don’t know how banks work

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:SVB invested heavily in govt bonds and failed so its a major problem and the fed is again messing things up. They should have raised rates earlier and slower, and now they raised them to late and to fast and too far.

Fed is full of idiots.

The issue with respect to SVB is that it did not use a proper, common investment strategy such as laddering. Laddering bond investments means that one invests in bonds with different maturity dates (and with different maturity lengths).

Laddering bond investments minimizes investment risk and should facilitate liquidity.

SVB GAMBLED with its clients' deposits. IF interest rates declined, then the GAMBLE would have paid off. But, our banking system is not--and should not be--based on gambling and guessing.

rates are going to be cut, the fed has failed to understand the market, they are causing massive losses and failures and inflation is not changing. they don't have a way to change inflation, this isn't the 70s its more complicated as its a geo polical issue w/ supply chain being choked off by russia and china.

Indefinite low interest rates are what got us into this inflation mess. How can you deny that?

[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 Since demand deposits can be withdrawn at any time, they typically pay de minimis or no interest.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.

+1 This is an accurate account.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:SVB invested heavily in govt bonds and failed so its a major problem and the fed is again messing things up. They should have raised rates earlier and slower, and now they raised them to late and to fast and too far.

Fed is full of idiots.

The issue with respect to SVB is that it did not use a proper, common investment strategy such as laddering. Laddering bond investments means that one invests in bonds with different maturity dates (and with different maturity lengths).

Laddering bond investments minimizes investment risk and should facilitate liquidity.

SVB GAMBLED with its clients' deposits. IF interest rates declined, then the GAMBLE would have paid off. But, our banking system is not--and should not be--based on gambling and guessing.

rates are going to be cut, the fed has failed to understand the market, they are causing massive losses and failures and inflation is not changing. they don't have a way to change inflation, this isn't the 70s its more complicated as its a geo polical issue w/ supply chain being choked off by russia and china.

Indefinite low interest rates are what got us into this inflation mess. How can you deny that?

They're not. They're saying that the risk of a bank run is more dangerous than inflation in the short term.

[Anonymous]

Can they claw back the millions that the CEO and other officers got when they sold their stock in the bank they worked at days and even hours before the bank tanked?

That's the part that truly disgusts me

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:SVB's directors took a gamble that the Federal Reserve would not raise interest rates [by investing depositors' money in low yielding, long-term US Government Treasury bonds.

When depositors wanted their money to invest elsewhere for a higher return or to use in their businesses, SVB had to sell these long-term government bond investments at a loss because interest rates had risen substantially--just as the federal reserve repeatedly told the world that it would do.

In short, the officers and directors of SVB put all of their eggs in one basket and this gamble did not pay off. And the entire world--except for SVB officers and directors--knew that such a gamble of placing a large bet on low yielding, long-term government treasuries was destined for failure.

They also had way too much depositer risk. Highly concentrated interconnected depositers withdrew tens of billions of dollars all at the same time. Any bank would fail if 1/3 of their deposits were pulled on a single day.

Wow ! You really do not understand. Just wow.

PP described exactly what happened to SVB. There was a small whiff of trouble, but nothing that is unusual. Unfortunately for SVB, they heavily relied on on VC funded tech start up. Once the VC funds started advising their companies to pull funds, it turned into a bank run

Good Lord.

We see things on a different level.

You and the previous poster to whom you refer are describing WHAT happened while I am sharing WHY it happened.

If you want to avoid the same result, the WHAT does NOT matter, the WHY does.

Simple example: Car crash. What happened = damage to car bumpers. Why it happened = brake failure. If you just know what happened, it is likely to happen again; but, if you know why something happened, the problem can be corrected so that the situation is far less likely to occur again.

And why it happened was because a small group of depositers with an outsized amount of cash exited at the same time. The size and coordination of the withdrawals is what caused the issue. Had the withdrawal amounts been either smaller or spread out then this would not have happened.

You partially understand.

The bank should have had adequate funds to handle these withdrawals, but it didn't because SVB GAMBLED on long-term bond investments that did not even come close to meeting the liquidity rights of its depositors.

I think it was this. they had lot of long term investments in treasuries or bonds, and maybe to get more cash available for withdrawals the borrow rate would be more than they are earning due to rate hikes

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:SVB's directors took a gamble that the Federal Reserve would not raise interest rates [by investing depositors' money in low yielding, long-term US Government Treasury bonds.

When depositors wanted their money to invest elsewhere for a higher return or to use in their businesses, SVB had to sell these long-term government bond investments at a loss because interest rates had risen substantially--just as the federal reserve repeatedly told the world that it would do.

In short, the officers and directors of SVB put all of their eggs in one basket and this gamble did not pay off. And the entire world--except for SVB officers and directors--knew that such a gamble of placing a large bet on low yielding, long-term government treasuries was destined for failure.

They also had way too much depositer risk. Highly concentrated interconnected depositers withdrew tens of billions of dollars all at the same time. Any bank would fail if 1/3 of their deposits were pulled on a single day.

Wow ! You really do not understand. Just wow.

PP described exactly what happened to SVB. There was a small whiff of trouble, but nothing that is unusual. Unfortunately for SVB, they heavily relied on on VC funded tech start up. Once the VC funds started advising their companies to pull funds, it turned into a bank run

Good Lord.

We see things on a different level.

You and the previous poster to whom you refer are describing WHAT happened while I am sharing WHY it happened.

If you want to avoid the same result, the WHAT does NOT matter, the WHY does.

Simple example: Car crash. What happened = damage to car bumpers. Why it happened = brake failure. If you just know what happened, it is likely to happen again; but, if you know why something happened, the problem can be corrected so that the situation is far less likely to occur again.

And why it happened was because a small group of depositers with an outsized amount of cash exited at the same time. The size and coordination of the withdrawals is what caused the issue. Had the withdrawal amounts been either smaller or spread out then this would not have happened.

You partially understand.

The bank should have had adequate funds to handle these withdrawals, but it didn't because SVB GAMBLED on long-term bond investments that did not even come close to meeting the liquidity rights of its depositors.

I think it was this. they had lot of long term investments in treasuries or bonds, and maybe to get more cash available for withdrawals the borrow rate would be more than they are earning due to rate hikes

There was $42 billion worth of withdrawals in one day.

[Anonymous]

Anonymous wrote:

Anonymous wrote:SVB was well enough capitalized that the why and the what are the same thing

Nope ! This is not an issue of being adequately or inadequately capitalized.

This issue is exactly that stated in the thread tile: "I don't know how banks work." And, clearly, the officers and directors of SVB do not know & understand how banks work.

Capitalization is just one part of a bank's operations. Adequate capitalization is different than PROPER capitalization.

SVB would have been "well enough capitalized" (to use your words) if the maturity date of the investments (long-term government treasuries) matched the maturity date of the deposits. But, checking accounts and savings accounts are on-demand accounts without a specific maturity date. So SVB's excessive investment in long-term bonds was poor management of the bank's deposits relative to the liquidity rights of the bank's depositors.

Am I naive in wondering why checking account deposits are invested at all?

[Anonymous]

Anonymous wrote:Can they claw back the millions that the CEO and other officers got when they sold their stock in the bank they worked at days and even hours before the bank tanked?

That's the part that truly disgusts me

+1 disgusting, immoral group of people and they don't care who loses money, as long as they protect themselves

[Anonymous]

Anonymous wrote:There are a couple of threads regarding tattoos that warrant mentioning in this thread.

The tattoo threads ask for readers opinions about tattoos.

I dislike tattoos, but in the SVB situation, I see a need for tattoos that would serve the public interest.

Each teller at SVB and all officers and directors of SVB should have clearly visible forehead tattoos that read STOOPID in order to give fair warning to the public.

Not the tellers! They had nothing with poor management at the top.

[Anonymous]

Anonymous wrote:Not sure, but I suspect that the thread was started by, and the thread title written by, the officers and directors of SVB.

I really Lol'ed at this. Love your dry humor!

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:SVB was well enough capitalized that the why and the what are the same thing

Nope ! This is not an issue of being adequately or inadequately capitalized.

This issue is exactly that stated in the thread tile: "I don't know how banks work." And, clearly, the officers and directors of SVB do not know & understand how banks work.

Capitalization is just one part of a bank's operations. Adequate capitalization is different than PROPER capitalization.

SVB would have been "well enough capitalized" (to use your words) if the maturity date of the investments (long-term government treasuries) matched the maturity date of the deposits. But, checking accounts and savings accounts are on-demand accounts without a specific maturity date. So SVB's excessive investment in long-term bonds was poor management of the bank's deposits relative to the liquidity rights of the bank's depositors.

Am I naive in wondering why checking account deposits are invested at all?

Yes

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:SVB was well enough capitalized that the why and the what are the same thing

Nope ! This is not an issue of being adequately or inadequately capitalized.

This issue is exactly that stated in the thread tile: "I don't know how banks work." And, clearly, the officers and directors of SVB do not know & understand how banks work.

Capitalization is just one part of a bank's operations. Adequate capitalization is different than PROPER capitalization.

SVB would have been "well enough capitalized" (to use your words) if the maturity date of the investments (long-term government treasuries) matched the maturity date of the deposits. But, checking accounts and savings accounts are on-demand accounts without a specific maturity date. So SVB's excessive investment in long-term bonds was poor management of the bank's deposits relative to the liquidity rights of the bank's depositors.

Am I naive in wondering why checking account deposits are invested at all?

Yes

What? Checking is a free product. If your deposits aren't invested, then why do you think the bank is offering the product?

[Anonymous]

Anonymous wrote:This ⬇️ My big question— Were depositors aware that their money was invested in long term, low interest treasuries? Liquidity in saving/checking is just that. They chose to dump well over the 250k FDIC insured into single accounts. It’s such a simplistic mistake and one has to wonder who was watching the fig tree.

To continue--and to repeat my prior posts above--it does NOT matter what type of business SVB's main clients operated. It does NOT matter that VC (venture capital) money dried up. It does NOT matter that payrolls needed to be met.

All that matters is that the bank failed to match up the liquidity rights of its depositors with the investment terms of the bank's investments. (If you understand this very basic concept, then you should be able to understand that the SVB bank officers and directors were derelict in their duties--that SVB officers and directors "don't know how banks work".

SVB business clients always had payroll obligations and typically have funding needs. All of this could have been handled by SVB since it was ADEQUATELY capitalized, but it failed because it was NOT PROPERLY capitalized.

It was in their public reports, including publicly available reporting to regulators. Few people would know to look at these, and even fewer would understand implications in the numbers. But the numbers told a story that would have warned at least a few people about the bank.

[Anonymous]

Anonymous wrote:

Anonymous wrote:This ⬇️ My big question— Were depositors aware that their money was invested in long term, low interest treasuries? Liquidity in saving/checking is just that. They chose to dump well over the 250k FDIC insured into single accounts. It’s such a simplistic mistake and one has to wonder who was watching the fig tree.

To continue--and to repeat my prior posts above--it does NOT matter what type of business SVB's main clients operated. It does NOT matter that VC (venture capital) money dried up. It does NOT matter that payrolls needed to be met.

All that matters is that the bank failed to match up the liquidity rights of its depositors with the investment terms of the bank's investments. (If you understand this very basic concept, then you should be able to understand that the SVB bank officers and directors were derelict in their duties--that SVB officers and directors "don't know how banks work".

SVB business clients always had payroll obligations and typically have funding needs. All of this could have been handled by SVB since it was ADEQUATELY capitalized, but it failed because it was NOT PROPERLY capitalized.

It was in their public reports, including publicly available reporting to regulators. Few people would know to look at these, and even fewer would understand implications in the numbers. But the numbers told a story that would have warned at least a few people about the bank.

People really should appreciate the irony that the last wave of bank failures was because of exotic financial instruments that no one actually understood. This wave seems to be based on investments in the most vanilla bonds you could possibly invest in.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

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

I follow @yourrich.bff on IG. She did a great job of explaining what happened to SVB, in a very simple, easy to understand way

https://www.instagram.com/p/CpqU7Mag4vS/

She almost gets it right.

She is just parroting the many articles available online to explain WHAT happened with a partial understanding and explanation of WHY it happened.

To continue--and to repeat my prior posts above--it does NOT matter what type of business SVB's main clients operated. It does NOT matter that VC (venture capital) money dried up. It does NOT matter that payrolls needed to be met.

All that matters is that the bank failed to match up the liquidity rights of its depositors with the investment terms of the bank's investments. (If you understand this very basic concept, then you should be able to understand that the SVB bank officers and directors were derelict in their duties--that SVB officers and directors "don't know how banks work".

SVB business clients always had payroll obligations and typically have funding needs. All of this could have been handled by SVB since it was ADEQUATELY capitalized, but it failed because it was NOT PROPERLY capitalized.

But any bank would fail to meet simultaneous withdrawal of 1/3 of its depositors. Or did that happen after they announced the first shortfall?

I believe it was precipitated by the proposed capital raise. I think the need for more capital took people by surprise and they took another look at their financials that were telling a potentially concerning story. I don't know who their advising IB was, but they screwed up to.