I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk.
We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .”
Also consider the past 10 years have probably been the friendliest 10 years to startups ever.
I don’t think startups will have a harder time banking in the future.
This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. Buying 10 year low yield securities and not hedging them against rising rates.
Plenty of banks would love to have the deposits of startups and VCs.
I bet a bank like Mercury or some other ones will grow to take SVB’s place.
I think the attention is put on some, likely, bonds backfiring. Not going into questioning how a 20y old bank would buy very long bonds as historically lowest returns. There is even more likely some bad lending in there in the order of billions that either have or are going going to materialise as defaults. And that's plain'n simple having to wipe numbers from the books, and those books aren't going to look good.
Banks take deposits but also loan with a 10x or even more ratio. Not difficult to imagine a SV bank would have lended a lot of cash, with marginal interests that aren't covering the actual risk.
Only speculation on my part there but needs to see further unwinding to bring some clarity or where the hole mostly comes from.
Until then, the narrative sounds far better than pointing out a widespread bad credit issue that other banks are also going to face in the coming months.
> This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank.
And those startups should have diversified their millions of VC cash to reduce their exposure and over-centralization on a single bank. In fact, they should not have been over-relying on VC cash in the first place. Now they will be getting $250k out of the millions of VC cash they chose to place in SVB.
The FDIC system working as intended once a bank goes under. No bailouts and no exceptions.
> I bet a bank like Mercury or some other ones will grow to take SVB’s place.
Mercury is not a bank. [0] It just works with other FDIC banks like Evolve Bank & Trust and CFG (Choice Financial Group).
no. the problem with long term AAA securities was only 100B of their 200B book. the dead loans to startups are a much bigger problem and why nobody would buy them.
Banks assume a lot of risk if they are overweight in any single sector. Having some startups is fine if it’s not a giant portion of your depositor base to the point that you have major sector risk.
I’m really glad ZeroTier used a boring old mainstream bank that didn’t specialize in any one sector. We looked at SVB. Bullet dodged.
Yes, reality eventually back fires. It's not like the fed figured they should turn around because "inflation". It may simply be that they can't keep printing since it has become much harder to dump it anymore on (global) producers. See the geopolitics, Finance101 isn't enough to grasp the magnitude and seriousness of what's been going on lately.
> [...] SVB was actually assuming quite a bit of risk.
Honest question: compared to what?
Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan?
Or is the case that JP Morgan is as insolvent as SVB, but JPM's depositors are less likely to withdraw their funds (because it's a big bank and it has primarily retail customers)?
These are honest questions; I'm not suggesting JPM is in the same situation. However, I'd like to see some numbers.
I'm not sure I completely follow the linked PDF, but it seems to be suggesting exactly that:
So, the big question for investors and depositors is this: how much duration risk
did each bank take in its investment portfolio during the deposit surge, and how
much was invested at the lows in Treasury and Agency yields? As a proxy for these
questions now that rates have risen, we can examine the impact on capital ratios
from an assumed immediate realization of unrealized securities losses (see next page
for a full explanation of our methodology). That’s what is shown in the first chart:
again, SIVB was in investment duration world of its own as of the end of 2022, which
is remarkable given its funding profile shown earlier.
The argument seems to be exactly that SVB both had highly interest rate sensitive depositors and significant unhedged duration risk. Both led to correlated interest rate risk at SVB and both were unique in the US banking world.
Another key comment by Cembalest
As shown below, being flooded with deposits from fast-money VC firms and other
corporate accounts at a time of historically low interest rates might have been
more of a curse than a blessing.
The chart shows that SVB's balance sheet expanded by 250% from 2019 to 2022 (compare JPM at ~40%, one of the lower banks listed and the next closest, Western Alliance at ~180% and Truist at ~150%).
What bank ever refused a Startup if what they are looking for is just banking? And what do startups want with a bank? Are they not capitalized by the VC's?
"The liabiity issue: extreme reliance on institutional/VC funding rather than traditional retail deposits While capital, wholesale funding and loan to deposit ratios improved for many US banks since 2008, there are exceptions. As shown in the first chart, SIVB was in a league of its own: a high level of loans plus securities as a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits. Bottom line: SIVB carved out a distinct and riskier niche than other banks, setting itself up for large potential capital shortfalls in case of rising interest rates, deposit outflows and forced asset sales..."
No, what they're saying is a far greater portion of their deposits are from depositors below $250K who have no rational motivation to participate in a bank run.
This is rather silly explanation of what happend, especially from JP Morgan...
Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. SVB didn't.
Since April 2022 till January 2023 SVB had vacant position of Credit Risk Officer.. And the explanation is simple - SVB's former head of risk, Laura Izurieta had left after 1Q2022 when looses from bond portfolio started to grow. She has probably already realized the final outcome as this is ABC of risk management (and in April 2022 the path of rate increases had been already set in motion by FED).
Now look at the timing of insiders selling shares of SVB...
Which part is silly though? The JPM report is indeed essentially saying that they didn't properly hedge interest rate risk.
It just adds that SVB's situation was exacerbated by the fact that the health and size of the deposit base they had cultivated was also inversely correlated with interest rates (ie VC and startup activity declines with rising rates), which made their situation even more precarious than at other banks.
> Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk.
Just a thought: the UK gilt crisis in December was related to pension funds holding long term gilts. And these pension funds all properly hedge the interest rate risk, they normally don't care how rates evolve.
However, the market value of the gilts was changing too fast for the hedging to work. My understanding is that money couldn't be moved around fast enough to meet margin calls. Which then caused a bad feedback loop of forced liquidations of gilts, and the Bank of England had to step in to handle the crisis.
So with this new story of duration risk at SVB, I'm wondering now whether other banks are in danger. They may have hedged their duration risk, but what if the hedging mechanism turns out to be broken?
> the UK gilt crisis in December was related to pension funds holding long term gilts
No, you got it wrong.. UK pension funds didn't have much gilts. UK pension funds had swaps on gilts and mostly assets equal to long term gilts (AAA rated). Like for example ownership of a parking lots in Germany, apartments in Norway - safe, steady cash flows. This is what chasing yields at zero interest rates does.
Penions funds needed a window of few days to make a fire sale of these assets to meet their margin calls. It takes about two weeks from some junior analyst from BlackRock visiting said parking lot in Germany, checking books to BlackRock depositing money at UK Pension fund bank account. So Bank of England opened unlimited discount window for UK Pension funds for about two weeks. And then it closed.
it's even worse than that. the pension funds were selling swaps (paying variable rates). that's why the BoE needed to step in to buy gilts - to drive the yield down and stop the bleeding from both the variable payout and capital losses incurred when liquidating gilts at a loss.
zirp has caused some pretty astounding fuckups and i'm sure there are many more to come.
> how is the opposite end of this hedge hedging their position?
Plenty of financial functions create natural short interest rate exposure. Like SVB, they have no business speculating on rates, so they hedge it away. (The Fed is also involved in the repo market.)
Interest rate swaps maybe. Svb would be on the side that is getting a floating rate payment, while they pay a fixed one to the other side, so when the rates increase it would offset the loss in bond price. Thing is I’m not sure if they need to hedge if the bonds are for 1 year because they will get the money back anyways
Any regular bond holding would include a mix of maturities - 1, 2, 5, 10 year bonds. This provides constantly maturing bonds leading to liquid cash with yield on the longest term instruments.
That being said, I don't think it's possible for all banks to hedge interest rate risk. The risk, to the system as a whole, doesn't go away just because it's transferred to someone else.
This really sheds clarity on the situation. SVB was in bad shape long before the run, and there is no apparent next domino to fall. FDIC limits are very well understood and relatively easy to work with (despite the rampant FUD about “who’s going to use multiple bank accounts”, deposit sweep programs are highly available and convenient). This is a risk management failure by depositors (in addition to the bank of course), and should be treated as such.
what you have to ask is how much of the "deposits" were loans from SVB? that is the real issue. SVB "loaning" money to startups on the premise that they would park it in SVB accounts. nobody knows how big that number is, but it is the real problem.
This appears to be the case - the JPMorgan analyst is (paraphrasing) saying that if you did a fire sale on all of the assets of the banks in isolation the difference between their capital ratios (the amount that they have to have on hand to meet depositors) is minimal. Notice that of all of the banks in the fifth chart the blue line and the bronze line are nearly even - except for SIVB, which has no bronze line. That's not good. I can't speak to this person's methodology, but if what he is saying is true there's almost no risk of contagion in the broader banking sector. And if that's true then there's $152 billion dollars of VC capital that's going to evaporate Monday morning.
It should be noted that JPMorgan participated in the bailout in 2008, with the resulting headaches that that entailed, and Dimon has explicitly stated that he wouldn't participate in a current bailout. So JPMorgan may not be entirely objective. However, to my eyes, this appears rather clear.
This is not risk management failure by depositors.
Depositors can and should assume that regulations prevent banks from assuming outsize risk like this.
This is a policy failure of the regulators that oversee banks. Banks should not be allowed to have so little cash on hand, especially when we knew with high likelihood the fed would raise rates.
> Depositors can and should assume that regulations prevent banks from assuming outsize risk like this
Small depositors, yes. Institutional depositors, no.
Not all banks are equal. SVB was borderline investment grade before it collapsed. Treasury advice strikes me as low-hanging fruit VCs could have guided their companies on. Instead, most universally recommended SVB because the priority was reducing friction, not risk.
I am surprised they show JPM in all their comparison charts (typically research doesn't cover their own employer). By showing JPM as an outlier on the opposite of the spectrum to SVB, it feels a little bit like a marketing document.
I can't speak for literally all businesses, but more or less everything a business publishes is marketing/PR. They fully control what they allow to be published, why wouldn't they make sure it paints them in a positive light wherever possible?
the irony of this whole situation is VCs and startups pouncing on the chaos to encourage people to move their money into even more opaque neobanks eg Mercury/Brex/Ramp as if they don’t have the same issues with relying on VC funded startup deposits but even worse in that their balance sheets are hidden.
We use their Treasury account type for most of our cash. It's split between Morgan Stanley and Vanguard funds.
Now, if Mercury fails it's going to be a pain in the ass to get at the money in these backer accounts. So we keep what we need for 2 months of operations with another bank. We were using SVB for this, now we have to find a new emergency backup bank.
also use mercury for the same reason. they are a tech company that provides a good interface to baking services at a wholesale price, which is very different than trying to be a bank. for actual banking i see know reason to use anyone other than jpm chase.
Agreed that these neobanks aren't a wise choice, but I still think the VCs made the right call in advising their portfolio companies - they had a literal vested interest in their success, they had to do something, this eventually was going to happen.
Maybe a stupid question: if banks can collapse from a bank run, shouldn’t the entire model be questioned? A bank run is simply when a threshold number of customers decide to withdraw their cash, with every right to do so. With social media + frictionless mobile banking, the entire notion of teetering your model on mitigating the risk of a “bank run” seems anti-customer, regressive, and unsustainable.
SVB didn’t collapse because of the bank run. There was a bank run because they collapsed. It is true that the bank run may have accelerated the collapse slightly but they were in really bad shape before it started.
A lot of people want to blame depositor panic, but I don’t think that is really fair. In a properly managed bank, the assets exceed the liabilities, which means that if people want their money out, the bank can liquidate their assets to pay them and still have money left over. SVB’s assets are worth far less than their liabilities (to the tune of nearly $100B dollars by some estimates). Panicking depositors didn’t cause that.
I’m not blaming depositors. In fact, I think depositors have a right to panic withdraw. They’re making a decision to take business elsewhere, as they should.
That that can cause or accelerate collapse makes me question the entire bank model.
What other model leads to instant death, damage to their entire customer base, and collateral damage to the broader system, when a certain number of customers decide to go elsewhere?
Customers also want to earn easy, high interest, that's the main issue. You're taking a risk (albeit a small one) with your deposits; your money is being lent by the bank and they pay you interest in return.
If you only want your cash to be held safely, put it in a safety deposit box.
Give me a break, no one is getting high interest returns from their cash savings account. A pittance is given to savers so banks cause my money for lending. Yet, when I want to borrow money from the bank on their credit card the interest rate is in the double digit percentages.
Precisely:
“At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%.”
In the UK, you are only covered up to £80k though... I could understand people wanting to get at least money over £80k out, but also how long does it take to get access to your cash if you have to go through the government insurance procedure. Is it days, weeks, months ? I have no idea and wouldn't want to have to find out.
The chart titled “Impact of unrealized securities losses on capital ratios” really shows just how inadequate the tier 1 capital ratio is (what regulators use). Ignoring the impact of unrealized losses in assets marked as held to maturity is crazy. Seems like a regulator problem to me, no bank taking deposits should be able to make high duration and negatively convex (from high MBS holdings) without hedges.
Readit News
We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .”
Also consider the past 10 years have probably been the friendliest 10 years to startups ever.
This isn’t even the fault of startups. It’s a complete risk management mistake on the side of the bank. Buying 10 year low yield securities and not hedging them against rising rates.
Plenty of banks would love to have the deposits of startups and VCs.
I bet a bank like Mercury or some other ones will grow to take SVB’s place.
Banks take deposits but also loan with a 10x or even more ratio. Not difficult to imagine a SV bank would have lended a lot of cash, with marginal interests that aren't covering the actual risk.
Only speculation on my part there but needs to see further unwinding to bring some clarity or where the hole mostly comes from.
Until then, the narrative sounds far better than pointing out a widespread bad credit issue that other banks are also going to face in the coming months.
Edit: typos
And those startups should have diversified their millions of VC cash to reduce their exposure and over-centralization on a single bank. In fact, they should not have been over-relying on VC cash in the first place. Now they will be getting $250k out of the millions of VC cash they chose to place in SVB.
The FDIC system working as intended once a bank goes under. No bailouts and no exceptions.
> I bet a bank like Mercury or some other ones will grow to take SVB’s place.
Mercury is not a bank. [0] It just works with other FDIC banks like Evolve Bank & Trust and CFG (Choice Financial Group).
[0] https://mercury.com/how-mercury-works
Deleted Comment
I’m really glad ZeroTier used a boring old mainstream bank that didn’t specialize in any one sector. We looked at SVB. Bullet dodged.
It is now time for Bilious[0] to appear.
[0] https://discworld.fandom.com/wiki/Bilious
Yes, reality eventually back fires. It's not like the fed figured they should turn around because "inflation". It may simply be that they can't keep printing since it has become much harder to dump it anymore on (global) producers. See the geopolitics, Finance101 isn't enough to grasp the magnitude and seriousness of what's been going on lately.
Honest question: compared to what?
Did long duration assets (like bonds) comprise a greater proportion of SVB's assets compared to, say, JP Morgan?
Or is the case that JP Morgan is as insolvent as SVB, but JPM's depositors are less likely to withdraw their funds (because it's a big bank and it has primarily retail customers)?
These are honest questions; I'm not suggesting JPM is in the same situation. However, I'd like to see some numbers.
Another key comment by Cembalest
The chart shows that SVB's balance sheet expanded by 250% from 2019 to 2022 (compare JPM at ~40%, one of the lower banks listed and the next closest, Western Alliance at ~180% and Truist at ~150%).Yes. JPMorgan is subject to the Fed’s stress tests and Basel III, both of which test duration. (SVB successfully lobbied to be exempt from both.)
It wasn’t because of “Startups”.
What they're saying is: "JPM is just as insolvent as SIVB. The only difference is that JPM's customers are less likely to withdraw their funds."
Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. SVB didn't.
Since April 2022 till January 2023 SVB had vacant position of Credit Risk Officer.. And the explanation is simple - SVB's former head of risk, Laura Izurieta had left after 1Q2022 when looses from bond portfolio started to grow. She has probably already realized the final outcome as this is ABC of risk management (and in April 2022 the path of rate increases had been already set in motion by FED).
Now look at the timing of insiders selling shares of SVB...
It just adds that SVB's situation was exacerbated by the fact that the health and size of the deposit base they had cultivated was also inversely correlated with interest rates (ie VC and startup activity declines with rising rates), which made their situation even more precarious than at other banks.
Just a thought: the UK gilt crisis in December was related to pension funds holding long term gilts. And these pension funds all properly hedge the interest rate risk, they normally don't care how rates evolve.
However, the market value of the gilts was changing too fast for the hedging to work. My understanding is that money couldn't be moved around fast enough to meet margin calls. Which then caused a bad feedback loop of forced liquidations of gilts, and the Bank of England had to step in to handle the crisis.
So with this new story of duration risk at SVB, I'm wondering now whether other banks are in danger. They may have hedged their duration risk, but what if the hedging mechanism turns out to be broken?
No, you got it wrong.. UK pension funds didn't have much gilts. UK pension funds had swaps on gilts and mostly assets equal to long term gilts (AAA rated). Like for example ownership of a parking lots in Germany, apartments in Norway - safe, steady cash flows. This is what chasing yields at zero interest rates does.
Penions funds needed a window of few days to make a fire sale of these assets to meet their margin calls. It takes about two weeks from some junior analyst from BlackRock visiting said parking lot in Germany, checking books to BlackRock depositing money at UK Pension fund bank account. So Bank of England opened unlimited discount window for UK Pension funds for about two weeks. And then it closed.
This is what happend.
zirp has caused some pretty astounding fuckups and i'm sure there are many more to come.
https://www.reuters.com/markets/europe/why-are-britains-pens...
How are other banks hedging interest rate risk?
And how is the opposite end of this hedge hedging their position?
Plenty of financial functions create natural short interest rate exposure. Like SVB, they have no business speculating on rates, so they hedge it away. (The Fed is also involved in the repo market.)
That being said, I don't think it's possible for all banks to hedge interest rate risk. The risk, to the system as a whole, doesn't go away just because it's transferred to someone else.
Deleted Comment
It should be noted that JPMorgan participated in the bailout in 2008, with the resulting headaches that that entailed, and Dimon has explicitly stated that he wouldn't participate in a current bailout. So JPMorgan may not be entirely objective. However, to my eyes, this appears rather clear.
Depositors can and should assume that regulations prevent banks from assuming outsize risk like this.
This is a policy failure of the regulators that oversee banks. Banks should not be allowed to have so little cash on hand, especially when we knew with high likelihood the fed would raise rates.
Small depositors, yes. Institutional depositors, no.
Not all banks are equal. SVB was borderline investment grade before it collapsed. Treasury advice strikes me as low-hanging fruit VCs could have guided their companies on. Instead, most universally recommended SVB because the priority was reducing friction, not risk.
Deleted Comment
But given https://techcrunch.com/2021/02/19/brex-applies-for-bank-char... and the fact that https://www.brex.com/svb-emergency-line emerged literally overnight... it's unclear to me whether these strategies are truly robust, or whether much of this is hype driven by Thiel and other Brex etc. investors - who are, at the very least, incentivized to capitalize on this situation.
We use their Treasury account type for most of our cash. It's split between Morgan Stanley and Vanguard funds.
Now, if Mercury fails it's going to be a pain in the ass to get at the money in these backer accounts. So we keep what we need for 2 months of operations with another bank. We were using SVB for this, now we have to find a new emergency backup bank.
Brex and Ramp are similar to Mercury.
"Mercury checking and savings deposits are FDIC-insured up to $1M. As a broader effort, we are working on expanding all coverage up to $4M."
https://mercury.com/faq
A lot of people want to blame depositor panic, but I don’t think that is really fair. In a properly managed bank, the assets exceed the liabilities, which means that if people want their money out, the bank can liquidate their assets to pay them and still have money left over. SVB’s assets are worth far less than their liabilities (to the tune of nearly $100B dollars by some estimates). Panicking depositors didn’t cause that.
That that can cause or accelerate collapse makes me question the entire bank model.
What other model leads to instant death, damage to their entire customer base, and collateral damage to the broader system, when a certain number of customers decide to go elsewhere?
Customers also want to earn easy, high interest, that's the main issue. You're taking a risk (albeit a small one) with your deposits; your money is being lent by the bank and they pay you interest in return.
If you only want your cash to be held safely, put it in a safety deposit box.
Deleted Comment