I don’t know how banks work

[Anonymous]

Anonymous wrote:

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.

Yep, take away the interest rate risk and the tech bro depositors, and SVB was about as boring as a bank can be.

[Anonymous]

Banks do a lot more than hold money for individuals, but let’s limit it to that for simplicity’s sake:

You deposit your money in a bank account. The bank charges you a small amount of money for that service. The bank also lends your money out. This is how banks make money.

FDIC exists so that you can be assured that you will have access to your money—up to $250K—if you need it.

There’s nothing evil about a bank lending money out. It’s how they make money.

In the case of SVB, a lot of their depositors’ funds were invested in bonds that had low interest rates attached to them. That was well and good until the Fed increased rates. Then those bonds became less profitable investments. Couple that with Peter Thiel saying people should withdraw their money from SVB and you get a bank run. No bank can survive a big enough run, so SVB failed.

SVB’s problem is they overinvested in these bonds and didn’t tell their customers about the extent of risk involved in purchasing them, given fed interest rate hikes. Hence why the CEO and CFO of SVB are being sued for misleading investors.

[Anonymous]

Anonymous wrote:Banks do a lot more than hold money for individuals, but let’s limit it to that for simplicity’s sake:

You deposit your money in a bank account. The bank charges you a small amount of money for that service. The bank also lends your money out. This is how banks make money.

FDIC exists so that you can be assured that you will have access to your money—up to $250K—if you need it.

There’s nothing evil about a bank lending money out. It’s how they make money.

In the case of SVB, a lot of their depositors’ funds were invested in bonds that had low interest rates attached to them. That was well and good until the Fed increased rates. Then those bonds became less profitable investments. Couple that with Peter Thiel saying people should withdraw their money from SVB and you get a bank run. No bank can survive a big enough run, so SVB failed.

SVB’s problem is they overinvested in these bonds and didn’t tell their customers about the extent of risk involved in purchasing them, given fed interest rate hikes. Hence why the CEO and CFO of SVB are being sued for misleading investors.

SVB's problem was that silicon valley vc funded tech is actually a very small community and when Thiel advised companies he funded to pull their money word got out and there was a bank run.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Banks do a lot more than hold money for individuals, but let’s limit it to that for simplicity’s sake:

You deposit your money in a bank account. The bank charges you a small amount of money for that service. The bank also lends your money out. This is how banks make money.

FDIC exists so that you can be assured that you will have access to your money—up to $250K—if you need it.

There’s nothing evil about a bank lending money out. It’s how they make money.

In the case of SVB, a lot of their depositors’ funds were invested in bonds that had low interest rates attached to them. That was well and good until the Fed increased rates. Then those bonds became less profitable investments. Couple that with Peter Thiel saying people should withdraw their money from SVB and you get a bank run. No bank can survive a big enough run, so SVB failed.

SVB’s problem is they overinvested in these bonds and didn’t tell their customers about the extent of risk involved in purchasing them, given fed interest rate hikes. Hence why the CEO and CFO of SVB are being sued for misleading investors.

SVB's problem was that silicon valley vc funded tech is actually a very small community and when Thiel advised companies he funded to pull their money word got out and there was a bank run.

You can’t ignore the bond issue though. That’s the crux of the lawsuit that was just filed.

[Anonymous]

Anonymous wrote:

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.

Right. and stock tanked. all the above

[Anonymous]

Anonymous wrote:Banks do a lot more than hold money for individuals, but let’s limit it to that for simplicity’s sake:

You deposit your money in a bank account. The bank charges you a small amount of money for that service. The bank also lends your money out. This is how banks make money.

FDIC exists so that you can be assured that you will have access to your money—up to $250K—if you need it.

There’s nothing evil about a bank lending money out. It’s how they make money.

In the case of SVB, a lot of their depositors’ funds were invested in bonds that had low interest rates attached to them. That was well and good until the Fed increased rates. Then those bonds became less profitable investments. Couple that with Peter Thiel saying people should withdraw their money from SVB and you get a bank run. No bank can survive a big enough run, so SVB failed.

SVB’s problem is they overinvested in these bonds and didn’t tell their customers about the extent of risk involved in purchasing them, given fed interest rate hikes. Hence why the CEO and CFO of SVB are being sued for misleading investors.

Their investors should have been asking those questions. Not to excuse SVB management from employing a less than bright strategy.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Banks do a lot more than hold money for individuals, but let’s limit it to that for simplicity’s sake:

You deposit your money in a bank account. The bank charges you a small amount of money for that service. The bank also lends your money out. This is how banks make money.

FDIC exists so that you can be assured that you will have access to your money—up to $250K—if you need it.

There’s nothing evil about a bank lending money out. It’s how they make money.

In the case of SVB, a lot of their depositors’ funds were invested in bonds that had low interest rates attached to them. That was well and good until the Fed increased rates. Then those bonds became less profitable investments. Couple that with Peter Thiel saying people should withdraw their money from SVB and you get a bank run. No bank can survive a big enough run, so SVB failed.

SVB’s problem is they overinvested in these bonds and didn’t tell their customers about the extent of risk involved in purchasing them, given fed interest rate hikes. Hence why the CEO and CFO of SVB are being sued for misleading investors.

Their investors should have been asking those questions. Not to excuse SVB management from employing a less than bright strategy.

Absolutely they should have. Now we’re in the blame game, and it’ll be up to the lawyers to hash it out.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

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.

Right. and stock tanked. all the above

The stock price is irrelevant unless the people behind the bank run were also shorting the stock. But that's a matter for the SEC.

There is no mix of securities they could have held to survive the size and speed of the withdrawals.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

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.

Right. and stock tanked. all the above

The stock price is irrelevant unless the people behind the bank run were also shorting the stock. But that's a matter for the SEC.

There is no mix of securities they could have held to survive the size and speed of the withdrawals.

This exactly. The only way to be able to redeem $42B in deposits in one day is by having $42B in cash reserves on your balance sheet. SVB was giving their depositors 2.2% interest on checking and savings. You can’t have cash on asset side on the balance sheet earning 0%.

Even UST and TBill take T+1 Day to settle. Even if SVB had $100B in 30 day TBills that they could sell at par in the market, they wouldn’t have been able to meet the $42B deposit redemption requests because of settlement time lag.

[Anonymous]

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

You stupid

[Anonymous]

Anonymous wrote:Apparently neither do the financial regulators.

Or the former SVB managers.

[Anonymous]

This is a super useful thread! Thank you (except for the non-helpful people)

[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.

Excellent, clear description. It makes it really hard to understand why the guys running this place were making such big bucks. Even I understand that when interest rates go up, bond prices go down. Ugh.