Counterpoint: This WSJ Article [1] and their latest 10Ks confirm that:
- Their actual assets market-to-market (sold on the fair market) is about $26 bln less than the amount they're carried at on their books. This is as of year end 2022, probably more today.
- This would wipe out all their equity, loans, and start hitting depositors.
- If there was a bank run, First Republic probably would not be able to meet all depositors.
- First Republic in some ways is in worse shape that SVB. SVB had all their assets in medium duration (10 year) treasuries. First Republic has a lot more 30 year mortgages they gave people at ultra low 2% interest rates. Today 30 year mortgages are 6%, which means if they tried to resell these loans they'd get more than 50% off.
- Personally, I know of at least a couple of HNWIs who pulled funds other than $250K today. Who can blame them -- what's the upside if you have more than $250K in? First Republic relies on wealthy deposits, and these are not insured.
All true, but they have a $60b debt facility to draw down on before they'd consider liquidating their HTM bond portfolio. Given that they have $120b in uninsured deposits diversified across a disparate client portfolio, it seems like they're truly in a much stronger position than SVB.
I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.
SVB was only able to borrow $15B from their FHLB debt facility, before they got cut off. The FHLB total capacity is ~$60 billion. Is First Republic stating actual numbers they are guaranteed to have access to?
Their shareholders are already panic selling (FRC down 36%), their bonds appear to be sinking, and few private parties wants to throw good money after bad. When you have to put out an emergency statement to reassure everyone of your creditworthiness, it's already gone.
I do agree that First Republic is in a much better situation relatively to SVB, but illiquidity and insolvency risk is real. I don't really see a reason why any business or individual with more than $250K shouldn't be wiring funds out ASAP, unless you're feeling extra charitable and want to be the bail-in to those who run before you.
There is nothing to lose, other than setting up new accounts.
>I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.
Everyone saying "they will be made whole" is completely missing the fact that money has a time value. There's nothing "made whole" about getting access to your money weeks or months from now.
If a bank’s portfolio of long-term fixed income instruments has a mark to market value that is $27bn less than their hold-to-maturity value, and the bank borrows $27bn at market rates to cover the shortfall, they will pay approximately, wait for it, $27bn (present value) in net interest while waiting for maturity to happen.
If the bank can manage to borrow the money in the form of non-interest-bearing deposits for the entire term of these instruments, then, sure, they’ll end up okay, because they will effectively make enough money on these deposits to cover their losses.
But the whole industry of non-interest-bearing deposits is a bit odd. When interest rates are around 2% and banks are offering maybe 0.75% interest, it may not be worth their clients’ time to try to earn interest. But when FDIC-insured banks are paying 3-4.5%, convincing a client to keep holding $2M in a non-interest-bearing account instead of spending an hour a week shuffling assets between checking and savings is a much harder sell, and much of those $27bn of required profits may well end up in the pockets of a bank’s customers. Which makes the effective value of the bank’s equity look bad, and maybe negative, and the bank may be toast.
Put another way, if you are actually insolvent, credit at market rates cannot make you solvent unless you have some other source of profit.
> - If there was a bank run, First Republic probably would not be able to meet all depositors.
That's true for all banks, even JP Morgan Chase. Every single one of them has some withdrawal limit, past which they are screwed. And that limit is definitely lower than 100% of deposits.
Institutions deemed relatively safer (e.g. JPM Chase) are the banks that people withdraw to. Nobody is taking out $20M in cash, they're moving it to the "too big to fail" banks.
>If everyone knows this, why keep your money there?
Because that applies to literally every single operative bank, and given FDIC insurance and other refulation, the risk of deposit losses for average joe is so small that they do not need to care.
Not really the money can and will be clawed back if a bank is placed into bankruptcy or receivership. The legal system disincentivizes runs on the bank by enforcing a 90 day look back period where withdrawals have to be repaid so that funds can be distributed more broadly and fairly.
Why would they sell the mortgages now? Why not just hold them. When they originated and funded the loan they did it with deposits or fed funds, why not just hold and collect the payments?
If there is a run, then selling is actually the worst thing to do because theoretical losses become irreversible actually losses. It’s highly likely interest rates will go down in a year or two but.
If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.
As rates go up, those mortgages will become less valuable (because they pay a lower interest rate than new loans will). At the same time, rates going up means the bank is going to have to pay more in interest to depositors, meaning they will need to offload assets to maintain their margin requirements.
This is why commercial banks tend to not hold on to the loans they originate any more, and instead sell them to funds. There is correlated risks for the banks, where their assets become less valuable at the exact time they need to sell them. Banks don’t like to hold mortgages for this reason.
I assume they sell these loans if the amount withdrawn outpaces what they have cash on hand. Since their mortgages are mostly mortages from the low interest era, they're less valuable to buyers.
If there is a run, it's a question of whether they have enough liquid cash. If they run out they have to start selling things unless they can somehow get some other kind of cash injection.
> This is about as strong as a signal they could put out to stop a possible run.
Or a desperation signal, which might actually trigger a run. Like what happened with SVB.
The minute the CEO of SVB tried to reassure investors and told them everything would be ok if they just kept their deposits with them, immediately everyone started withdrawing.
Are the “safe” banks all putting out statements about the strength of their financials? They probably don’t feel like they really need to say anything. They feel safe, and that’s what keeps them safe. The moment they panic, their clients panic.
Another interpretation is that this is generally how the FDIC likes to do things: take over on Friday and reopen on Monday. Not sure that will happen in this case but the regulators get two days to prepare to reopen, which at least in recorded US history is seamless and without risk for retail depositors.
The 2-day shutdown is hence critical for the functioning of the financial system. Same for reporting earnings afterhours. Those calling for 24/7 trading are aloof of how entrenched systems need change management
The title is mine; given that this is an 8-K filing, there is no built-in title. First Republic Bank, a San Francisco regional bank that's seen its stock affected by the Silicon Valley Bank collapse and is often compared to SVB, filed this with the SEC today (Friday) to reassure investors (and clients) that its situation is different from SVB's.
In general, if anyone wants to go through all the recent 8-K filings, this is what SEC EDGAR is for. Here's a link that'll bring up all recent 8-K filings by date and time, descending:
In general, I would expect a ton of 8-Ks on Monday the 13th for companies to release information on their exposure to SIVB, particularly if their exposure is minor or non-existent.
Thanks for that. I find it interesting that so many of the companies filing SVB-related 8-Ks (even if to say "we have no/minimal deposits with SVB") are biotech/pharma. Traditional tech gets most of the attention, but SVB has been the Bay Area's biotech banker as much as anyone else, and thanks to its specialized wine practice is probably even more dominant in that sector.
Same with startups. If you are an investor and not that company’s first call, then one of two things happen: email saying not exposed, or silence as they work through things.
Sure you can. I'm sure you'll do integrations with 9001 different legacy systems and the other endless bullshit that comes with software dev in the public sector. All by yourself. Let there be no doubt that you had it all planned out in your head already in the 10 seconds it took you to think up that comment. Because you're that good.
I’m not super well informed about this space, but my understanding was that SVB’s issue wasn’t that its depositors were from the tech sector, but rather that it had put a ton of capital into investments that are significantly less valuable (on the open market today) now than they were a year ago due to increasing interest rates.
I’m curious how the tech sector matters here specifically?
The tech sector has been withdrawing money in aggregate (because they continue paying payroll and rent but haven't been raising as much money recently) which increases liquidity pressure, and furthermore tech depositors are more skittish due to experience with FTX and thus prone to panic bank runs. They also have larger average account sizes, way beyond FDIC limits, which makes them more likely to need to withdraw money to protect their cash.
SVB did have some issues with losses but they likely were still solvent; the bigger issue was just a lack of liquidity and a sudden bank run - 45 billion (out of ~175 billion in deposits) was withdrawn in a single day before they ran out of liquidity.
The tech sector isn’t an issue in itself, it’s that (1) all their deposits all came in at once because it’s one sector, so there was a huge demand surge for deposit interest, leading to a supply shortfall of loans they could issue and hence kinda desperately parking the money somewhere, which ended up putting their risk balance off kilter (bonds with interest rate risk); (2) all of their depositors (aka creditors) talk to each other and listen to the same people, so bank runs happen really fast. Compare this to First Republic bank: demand for deposit interest does not surge dramatically because there is finite liquid cash needing to be deposited and so one sector getting a cash infusion comes at the cost of another. It smoothes out. Plus their customers don’t all talk to each other and behave like worst-case bank runners.
All sectors are pretty highly correlated in the cash they have on hand and how they behave with it. It would be equally risky to be a bank that only deals with oil companies. Nevertheless it offers efficiencies for acquiring new customers and new business, so banks do it.
The big concern is the contagion spreading. All banks are vulnerable to failure if deposits are taken out quickly, especially in this market where assets have taken a huge hit over the last 12 months.
FRB wants people to believe the contagion is limited to tech and that they have limited exposure to it, so that folks don’t take deposits out en masse. If people start to think that it’s unstable, then they’ll take money out and it’ll be a death spiral like SVB.
If people don’t get their access to their cash by Monday (or a week later at latest), then any rumor of liquidity issues at any bank will lead to a bank run. Once you know / experience it, bank runs feel like a legit thing to do.
If First Republic could say they could meet all depositor demands, they would have. But instead this is the most they can say to stave off a run.
And to their credit, the fact that they're not tech heavy means the tech firms pulling from SVB aren't likely as scarred and pulling from First Republic. But First Republic has a ton of HNWIs too who are not insured.
This isn't Bank of America serving mom and pops, it's rich people who will pull and are uninsured by FDIC.
Matt Levine reports that the reason they had to buy those low-yield investments that plummeted is because it’s tech-sector customers had too much money in the boom times. Too much deposits means they need to buy a lot of something, and in the boom times that was low-yield stuff.
Sort of the other way to handle it would be to say “we can’t find risk-free yield for the volume of cash we just had deposited, so deposits now get 0.8% instead of 1.0%”
Which is kinda fine? Means you might lose some business as others chase yield. But I feel like most startups don’t actually have that much cash in the bank so they shouldn’t really be chasing yield anyway.
It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
I'd also like to point out that VCs were telling all their portfolio companies "Pack it in and conserve cash as you're not getting another round." That caused a lot of companies that would otherwise have put their cash into an investment vehicle to instead hold it in their accounts.
It will also be interesting to see if someone is going to wind up in jail for initiating the bank run. Someone shared confidential info that started this whole thing.
It matters because recent underperformance in the sector led to the initial deposit outflows in the first place. If you’re concentrated heavily in a single sector, you’re likely to see higher correlations in the behavior of your depositors.
Every asset is a risk. Banks should have right to do exactly two things. Keep their customers saving and issue loans. There's plenty of risks even in that activity. Every other thing bank does is just piling up risk to unreasonable levels.
Issuing a loan is buying an asset. You give the borrower money and in exchange buy their promise to pay it back with interest. And in fact that’s what SVB did, except instead of originating the loans themselves they bought them from the original lender.
I think this was a weird thing where deposit demand was so much greater than loan demand. They had too much money and thought they were doing a safe thing. But failed to consider the time aspect and how rapid interest rate increases nuke them.
Banks do provide a valuable service and having them reject deposits isn’t a solution.
"Trading in Pacific West, Western Alliance, and First Republic were stopped due to volatility after they all initially fell 40 to 50 percent. Trading was also briefly stopped in Signature Bank after its shares fell nearly 30 percent. Several of those banks sought to reassure the market by putting out statements highlighting their differences from SVB in terms of asset and depositor base."
I'd really like to know where people are withdrawing their money from these banks to. They're not taking suitcases of cash, so it must be flowing to some other financial institutions. Is it going to traditional big banks (BofA, Wells, Chase, etc.)?
Yes -- all the people I know withdrawing from small banks are going to Chase or Morgan Stanley. These largest banks have to mark-to-market their losses and have a lot of cash (short duration) assets, and are literally too big to fail.
Confusingly, the two banks you named are JP Morgan Chase, and Morgan Stanley. JP Morgan Chase is the biggest bank there is, but Morgan Stanley is far smaller (but still ginormious) and doesn't rank in the top 10 banks. The top 3 banks are JP Morgan Chase, Bank of America, and Citigroup.
And, more importantly, are national banks regulated by the occ so they can't do the same kinds of risky things that svb & co can do. (They can do other risky things that they come up with historically, especially pre dodd-frank, but not this)
idk how many companies are doing this right now, but recurring investment on 4 week T-bills are safe, can absorb arbitrary amounts of cash, and yield much more than the large banks. But it can take a bit to set up a TreasuryDirect account.
Everyone and their mother aping into T-bills will also have the effect of lowering the rates on Treasuries, making 1.5% bonds a reasonable choice again.
I’m thinking our diversified stock portfolio is safe (in that the number of shares we hold should not change, and it’ll go back up before we need the money decades from now).
I’m hoping that’s not naive.
I’m curious about Wealthfront’s strategy of spreading savings across many partner banks to get $2M in FDIC insurance per account though.
I can't speak to Wealthfront specifically, but what you're describing with them is very commonly called a sweeps account. They are explicitly understood under FDIC's rules as automated balance accounts.
Where you can run afoul is if you personally have accounts at the same banks that your sweep accounts use. And you might not even know it. E.g., Mercury isn't a bank: they use Evolve Bank and Choice Financial Group. So if you also had an account at Evolve bank, you're capped at 250k across the total of both accounts.
Readit News
- Their actual assets market-to-market (sold on the fair market) is about $26 bln less than the amount they're carried at on their books. This is as of year end 2022, probably more today.
- This would wipe out all their equity, loans, and start hitting depositors.
- If there was a bank run, First Republic probably would not be able to meet all depositors.
- First Republic in some ways is in worse shape that SVB. SVB had all their assets in medium duration (10 year) treasuries. First Republic has a lot more 30 year mortgages they gave people at ultra low 2% interest rates. Today 30 year mortgages are 6%, which means if they tried to resell these loans they'd get more than 50% off.
- Personally, I know of at least a couple of HNWIs who pulled funds other than $250K today. Who can blame them -- what's the upside if you have more than $250K in? First Republic relies on wealthy deposits, and these are not insured.
[1] https://archive.is/QuOSD#selection-335.147-335.315
I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.
Their shareholders are already panic selling (FRC down 36%), their bonds appear to be sinking, and few private parties wants to throw good money after bad. When you have to put out an emergency statement to reassure everyone of your creditworthiness, it's already gone.
I do agree that First Republic is in a much better situation relatively to SVB, but illiquidity and insolvency risk is real. I don't really see a reason why any business or individual with more than $250K shouldn't be wiring funds out ASAP, unless you're feeling extra charitable and want to be the bail-in to those who run before you.
There is nothing to lose, other than setting up new accounts.
Everyone saying "they will be made whole" is completely missing the fact that money has a time value. There's nothing "made whole" about getting access to your money weeks or months from now.
https://www.fhlbboston.com/fhlbank-boston/rates#/long-term
If a bank’s portfolio of long-term fixed income instruments has a mark to market value that is $27bn less than their hold-to-maturity value, and the bank borrows $27bn at market rates to cover the shortfall, they will pay approximately, wait for it, $27bn (present value) in net interest while waiting for maturity to happen.
If the bank can manage to borrow the money in the form of non-interest-bearing deposits for the entire term of these instruments, then, sure, they’ll end up okay, because they will effectively make enough money on these deposits to cover their losses.
But the whole industry of non-interest-bearing deposits is a bit odd. When interest rates are around 2% and banks are offering maybe 0.75% interest, it may not be worth their clients’ time to try to earn interest. But when FDIC-insured banks are paying 3-4.5%, convincing a client to keep holding $2M in a non-interest-bearing account instead of spending an hour a week shuffling assets between checking and savings is a much harder sell, and much of those $27bn of required profits may well end up in the pockets of a bank’s customers. Which makes the effective value of the bank’s equity look bad, and maybe negative, and the bank may be toast.
Put another way, if you are actually insolvent, credit at market rates cannot make you solvent unless you have some other source of profit.
Dead Comment
That's true for all banks, even JP Morgan Chase. Every single one of them has some withdrawal limit, past which they are screwed. And that limit is definitely lower than 100% of deposits.
https://en.wikipedia.org/wiki/Fractional-reserve_banking
If everyone knows this, why keep your money there? Tech exposure has nothing to do with it. "In a bank run, he who runs first, runs best".
Because that applies to literally every single operative bank, and given FDIC insurance and other refulation, the risk of deposit losses for average joe is so small that they do not need to care.
Regular people and businesses don't hear about these things. Today, only 1 other person in my friend group of 6 heard about SVB.
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If there is a run, then selling is actually the worst thing to do because theoretical losses become irreversible actually losses. It’s highly likely interest rates will go down in a year or two but.
The “demand” in “demand deposit” accounts means that selling isn't optional as the cash runs out in a run.
A bank is not an unregulated crypto exhange that can just impose arbitrary withdrawal limits to protect the absence of liquidity.
> If there is a run
If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.
This is why commercial banks tend to not hold on to the loans they originate any more, and instead sell them to funds. There is correlated risks for the banks, where their assets become less valuable at the exact time they need to sell them. Banks don’t like to hold mortgages for this reason.
This is about as strong as a signal they could put out to stop a possible run.
Or a desperation signal, which might actually trigger a run. Like what happened with SVB.
The minute the CEO of SVB tried to reassure investors and told them everything would be ok if they just kept their deposits with them, immediately everyone started withdrawing.
Are the “safe” banks all putting out statements about the strength of their financials? They probably don’t feel like they really need to say anything. They feel safe, and that’s what keeps them safe. The moment they panic, their clients panic.
I guess we’ll see what happens.
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https://www.sec.gov/cgi-bin/browse-edgar?action=getcurrent&d...
In general, I would expect a ton of 8-Ks on Monday the 13th for companies to release information on their exposure to SIVB, particularly if their exposure is minor or non-existent.
Probably a lot filed today/monday that look like this:
Kintara Therapeutics, Inc. confirms that it does not hold any deposits or securities or maintain any accounts at Silicon Valley Bank.
I’m curious how the tech sector matters here specifically?
SVB did have some issues with losses but they likely were still solvent; the bigger issue was just a lack of liquidity and a sudden bank run - 45 billion (out of ~175 billion in deposits) was withdrawn in a single day before they ran out of liquidity.
The tech sector isn’t an issue in itself, it’s that (1) all their deposits all came in at once because it’s one sector, so there was a huge demand surge for deposit interest, leading to a supply shortfall of loans they could issue and hence kinda desperately parking the money somewhere, which ended up putting their risk balance off kilter (bonds with interest rate risk); (2) all of their depositors (aka creditors) talk to each other and listen to the same people, so bank runs happen really fast. Compare this to First Republic bank: demand for deposit interest does not surge dramatically because there is finite liquid cash needing to be deposited and so one sector getting a cash infusion comes at the cost of another. It smoothes out. Plus their customers don’t all talk to each other and behave like worst-case bank runners.
All sectors are pretty highly correlated in the cash they have on hand and how they behave with it. It would be equally risky to be a bank that only deals with oil companies. Nevertheless it offers efficiencies for acquiring new customers and new business, so banks do it.
FRB wants people to believe the contagion is limited to tech and that they have limited exposure to it, so that folks don’t take deposits out en masse. If people start to think that it’s unstable, then they’ll take money out and it’ll be a death spiral like SVB.
And to their credit, the fact that they're not tech heavy means the tech firms pulling from SVB aren't likely as scarred and pulling from First Republic. But First Republic has a ton of HNWIs too who are not insured.
This isn't Bank of America serving mom and pops, it's rich people who will pull and are uninsured by FDIC.
Which is kinda fine? Means you might lose some business as others chase yield. But I feel like most startups don’t actually have that much cash in the bank so they shouldn’t really be chasing yield anyway.
It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
It will also be interesting to see if someone is going to wind up in jail for initiating the bank run. Someone shared confidential info that started this whole thing.
As rates have increased, long duration treasuries and MBSes are now worth 20-30% less.
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Dead Comment
Every asset is a risk. Banks should have right to do exactly two things. Keep their customers saving and issue loans. There's plenty of risks even in that activity. Every other thing bank does is just piling up risk to unreasonable levels.
SVB bought a load of treasury bonds which is equivalent from a risk perspective from issuing a 10 year (or whatever) loan to the government, right?
Banks do provide a valuable service and having them reject deposits isn’t a solution.
But keep in mind that people also went through a pandemic, where panic was the go-to option.
Should we? At minimum keep as close to $250k or less spread across however many banks as practical, right now.
https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa...
Now that said, there are hot money managers that will do this for you.
Dead Comment
"Trading in Pacific West, Western Alliance, and First Republic were stopped due to volatility after they all initially fell 40 to 50 percent. Trading was also briefly stopped in Signature Bank after its shares fell nearly 30 percent. Several of those banks sought to reassure the market by putting out statements highlighting their differences from SVB in terms of asset and depositor base."
https://arstechnica.com/tech-policy/2023/03/silicon-valley-b...
https://www.insiderintelligence.com/insights/largest-banks-u...
I’m hoping that’s not naive.
I’m curious about Wealthfront’s strategy of spreading savings across many partner banks to get $2M in FDIC insurance per account though.
Where you can run afoul is if you personally have accounts at the same banks that your sweep accounts use. And you might not even know it. E.g., Mercury isn't a bank: they use Evolve Bank and Choice Financial Group. So if you also had an account at Evolve bank, you're capped at 250k across the total of both accounts.