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Bank run on Silicon Valley Bank (techcrunch.com)
570 points by albertut 6 months ago | hide | past | favorite | 834 comments

From https://techcrunch.com/2023/03/09/silicon-valley-banks-share... :

Becker said the bank has “ample liquidity” to support its clients “with one exception: If everybody is telling each other that SVB is in trouble, that will be a challenge.”

Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.

Matt Levine is fond of this highly relevant quote by Bagehot: “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”

It seems that CEOs of banks haven't learned anything since 1873 when this was observed.

A variant of Thatcher's "Being powerful is like being a lady, if you have to tell people you are, you aren't".

Or Tywin Lannister's "Any man who must say, 'I am the King', is no true king."

It's really amazing that both Thatcher and Reagan came to power at around the same time, delivered such fabulous witticisms, and caused very similar societal harm.

Not really. They delivered exactly what the biggest demographic group at the time wanted. Which is... Exactly what you expect in a democracy with a particularly large voter bloc...

Fabulous witticisms is usually take down of someone or something that is hard to argue against, but rarely actually factually correct. People who deploy it are arguing by emotion and insult, which would explain why they are also people capable to cause a lot of societal harm.

"Fabulous witticisms" feels good to listener and is funny, because it validates what people want to hear. It is rarely actually correct or actually correctly describes world.

I think you need to hear better comedians. The best ones are funny and accurate.

Not that shocking. Both the UK and US had suffered under economic policies that didnt deliver.

Not shocking the voters wanted something different.

Didn't deliver!? That's an absurd claim.

Not really. Carter didnt talk about the “general malaise” just for fun.

The economy was pretty much in the dumpster for most of the 70’s in both countries.

Not unusual for the old guard to be turfed out when that happens.

UK before Tatcher was a depressed society with stagflation, rising crimes, crumbling infrastructure; that couldn't even clean its own streets. It was a society completely hamstrung by old unions that would happily collapse the economy in face of global competition, as long as their jobs gave the same pay - nominally.

Thatcher won two landslide re-elections for a reason.

Honestly, I'm not an economist, even worse I was not a fully functioning and critical thinking adult before the Thatcher era, you could well be right but I find it really hard to believe.

For example the UK has also had subsequent Conservative victories for the last 12 years or so but every single argument made in 2010 about their approach has been proven true. To the detriment of every person in the UK.

So it doesn't necessarily follow in my eyes that an election win means that what you're doing is the right thing, only that you are popular and you can convince people you will do something to help them.

I can't argue with you on the recent Conservative track record, they're a pale shadow of the party they once were. The only thing that's saved them is that Labour under Corbyn was plainly, obviously such an utter catastrophe in the making the Cons couldn't help looking good.

There certainly was an aspect of that back in the 80s. In the early years Labour was lead by Michael Foot, basically a likeable version of Corbyn but just as unelectable. But then, the Labour Party back then was properly Marxist and had actually pushed forward a programme of nationalisation and unionisation that worked out about as well as you'd expect.

The most egregious example of waste was the coal industry, hence the strikes. The tax payer was subsidizing coal to the tune of £1.3 billion a year which was real money back then, just under 1% of total national GDP, not including the increased costs to power and steel industries that were prevented from using cheaper alternatives. When the mining union leader Arthur Scargill appeared before a Parliamentary committee and was asked at what level of loss it was acceptable to close a pit he answered “As far as I can see, the loss is without limits.” That's what we were dealing with. That's just coal, but swathes of industry had been nationalised and was a horrible rotting carcass of waste and losses dragging the country down. Reforming that lot was incredibly painful but it had to be done.

Maggie is generally portrayed as being incredibly unpopular, and the way she was lampooned by a generation of up coming British comics was cruel though frankly hilarious, but she won resounding election victory after victory. The economy she built transformed the country into the modern nation it is today. Notably when Blair and Brown brought in a Labour government in 1997 they changed essentially nothing substantive because her reforms palpably worked. All the proposed changes reverting Britain towards a statist socialist economic agenda were quietly shelved and never talked about agin until Corbyn came along.

Since then Conservatism on both sides of the pond has suffered an appalling moral and intellectual collapse. The conservative and republican parties are mocking parodies of their former selves. Back in the 80s there were serious, major economic and social problems that desperately needed fixing and economic liberalism had the answers. Nowadays that's just not even vaguely controversial, instead the focus of the right has shifted towards damaging reactionary dog whistle issues like culture wars and blind nationalism. That tendency has always been there, but now it's all they have.

Thatcher is what I like to call a "Marmite politician": either you absolutely loved her, or absolutely hated her. She was a politician of her time, by which I mean she was exactly the politician we needed at the time that we needed it. I doubt that any other politician could have achieved what she did in the UK. Everybody else would be too willing to compromise.

As someone who was born at the start of the 70's, I think you really had to live through the 70's and early 80's to realise how bleak it was. And I say this as someone who grew up on mostly free school meals, had their phone cut off for non-payment etc.

>"The conservative and republican parties are mocking parodies of their former selves. Back in the 80s there were serious, major economic and social problems that desperately needed fixing and economic liberalism had the answers. Nowadays that's just not even vaguely controversial, instead the focus of the right has shifted towards damaging reactionary dog whistle issues like culture wars and blind nationalism. "

The conservatives of the 80's had a problem to solve, stagflation, inefficient socialism, big state. Neo-liberalism solved those problems, but created new ones.

The conservatives today have another problem to solve, mass immigration, rampant crime, loss of sovereignty and ability to reform to foreign bureaucracy, dependency on foreign manufacturing, etc.

Part of these problems are residues of the same economic neo-liberalism that was enacted in the 80s. Reagans and Thatcher's neo-liberalism saved society from the socialist dystopia, but over time it has thrown society in a neo-liberalist dystopian path that few people like, beside the corporate elites.

The conservatives have moved on to new, real problems. You seem stuck in the past.

Where we differ is I just don’t see any of the problems you list as actual problems. I’m in favour of immigration, it does us a lot of good which is why conservative policies actually encourage it, and illegal immigration is a tiny fraction of it overall. Crime rates are down significantly from the 80s. Even in the EU we had all the sovereignty we could ever need, and negotiated opt outs of huge swathes of regulation we decided wasn’t for us.

A friend of mine tried that line about manufacturing on me a few years ago and I asked him what kind of factory he wanted his so. To work in when he grew up. He looked at me as though I’d just shot his dog. We don’t need factory jobs, we’ve git near full employment anyway. That’s why we need immigration to solve our demographic issues with our ageing population. We’ve got plenty of jobs much higher up the value chain, the main problems are around training and education.

If you can't see that immigration is having a negative impact, which so many voters perceive, then yes you have a minority perspective. Crime in the UK is so bad in some areas that Ukrainian refugees were shocked.

They perceive what the media tell them, not what’s actually happening, because fear and xenophobia sells newspapers. On average immigrants are younger, more law abiding, more likely to be employed, consume fewer benefits and make less use of health care than native born Britons. Also Britons who live in areas with large immigrant populations are the least concerned about immigration.

As for the crime rate the perception is divorced from reality, I’ll quote from Wikipedia: “The United Kingdom's crime rate remains relatively low when compared to the rest of the world, especially among first world countries.” Our crime rate is a fraction of that in Ukraine before the war. Their murder rate was three times ours.

> Also Britons who live in areas with large immigrant populations are the least concerned about immigration.

Maybe if you define immigrants with passports as Britons. There's a reason why the BNP, British National Party, won the two seats they ever won in counties most affected by immigration. This effect would also be exact opposite of that in Sweden, which is intriguing, because here the sub-urb ghettos are split between social democrats, which the immigrants vote for, and the nationalists, which the few non-immigrants left vote for.

The fact that you are trying to argue that areas affected are the least concerned, when the case is exactly the opposite across Europe; says a lot about your "reality". Modern leftists are a scourge.

Modern leftism has certainly lost it's way, and frankly so has a lot of the right. I say that as a life long conservative voter. I'm that odd combination, both an economic and a cultural liberal.

> Thatcher won two landslide re-elections for a reason.

Arguably the reason was the war, not domestic policy [0]

[0] https://history.com/news/margaret-thatcher-falklands-war

You're downvoted but I don't think you're wrong. In general it seems to be the case that if you're waging a war and you're not getting completely crushed the electorate (or at least the "undecided" voters") tends to rally around whoever happens to be in charge. And indeed I think it's fairly safe to say that most agree that Thatcher benefitted electorally from a strong response to the invasion.

I should add that as a Scot I'm definitely not a fan of hers (you just grow up there knowing "Thatcher Bad") but I'm not quite at "put a stake through her heart and garlic round her neck"[0] :)

[0] - https://twitter.com/halaljew/status/1294414600566382598

Gulf war didn't save Senior Bush from the bad-economy, neither did the Iraq War help Tony Blair's popularity.

It's a lot more complex than war-helps-current-leader, at least outside the US. It depends on the war and the context.

Fair point, these are actually great counterexamples

They are. That war was also unusual in that it was an attack on a country far away that wasn’t a threat to the US or UK, and there was little to be gained.

It was a strange time.

I think that was the reason for one of them, certainly. But then she and our armed forces did a tremendous job in reclaiming the Falklands from a fascist dictatorship.

Nothing in that article indicates that the war overshadowed her domestic policy, both contributed to her success.

> UK before Tatcher was a depressed society with stagflation

Hardly a problem local to Britain, and hardly something Thatcher solved. It was a crisis that also passed in countries that did not elect viciously anti-state, anti-working class governments.

> crumbling infrastructure; that couldn't even clean its own streets

Bit of an exaggeration, and I'm not sure how Maggie "Minimal State" Thatcher has supposedly helped with that.

> Thatcher won two landslide re-elections for a reason

If it weren't for the Falklands she would have been a one term president.

UK in 2023 is a depressed society with stagflation, rising crimes, crumbling infrastructure

It is, and neither more neo-liberalism nor socialism is the answer.

So that’s how flag waving nationalism and Brexit came to be tried.

It's not over yet, we're yet to see the how the opposite of mass immigration multiculturalism affects a european nation too. Jusging by Sweden and Germany who has applied it the most, it is and ending that goes "no more please"

I wouldn't call defeating communism and winning the Cold War "societal harm".

"Defeating communism" like this: https://www.youtube.com/watch?v=7AfPFlWnww8

No, by outspending them militarily, encouraging Solidarity in Poland, and forcing Gobarchev to realise the inevitable.

Encouraging Solidarity in Poland was the right call, but it's not likely that different leaders would have opposed it.

"Neither the strong nor the weak version of the proposition that American defense spending bankrupted the Soviet economy and forced an end to the Cold War is sustained by the evidence."


I hardly think you can expect an unbiassed opinion from Gorbachev.

I expect Gorbachev to be wildly biased, which is why I don't attach much credence to his statements.

It is funny that all the Experts (TM) have been talking for years how the USSR was an unbeatable giant with colossal strength that can not be defeated and Americans need to seek friendship with them and learn to live alongside them and learn to respect the choice of people in all the communist countries. In fact, the Democrats went the further along this road, actually requesting help from Andropov to fight Reagan (yes, that happened, look it up). Until Reagan came and... the mighty USSR is no more. The Eastern Europe is free. Then The Experts shrugged and proclaimed that it collapsed by itself, through forces of nature that any learned man would easily predict and that they can easily explain, and nothing Reagan did has anything to do with it. Of course.

One thing I noticed is that political thinking tends to come in waves. Not just for countries individually, but globally. Sure, there are plenty of exceptions, but each age seems to have its own zeitgeist in the world's collective consciousness.

Currently, for example, there is Wokeism in general, with particular emphasis on transgenderism. Transgenderism only "affects" a very small percentage of the population, nobody paid it any mind a decade ago, and yet today it's a thing.

Isn’t this just evidence of the Overton Window? The amount of promotion needed to push any particular cause is significantly lower than people intuit. And following on from this, once that cause has hit the mainstream, the amount of coverage it gets leads to people further overestimating its true significance. After that point it just snowballs

I think what we’ve discovered is that, thanks to the Internet, that’s a strategy that’s significantly easier to employ than ever before. In the past ups at least need to have mainstream media outlets onboard. Nowadays you can do that with a hashtag

Someone should have explained it to him … as if he were a small child … or a golden retriever…

You could have been digging ditches all these years Sam!

Im shocked i never heard of that movie until 5-6 years after it’s release.

It’s on par with the Big Short in terms of telling a great story about the economic crisis.

For anyone who’s following this thread and is confused. They’re referring to the movie Margin Call.

Did you know I built a bridge once?

100% true ! They are already gone.

However, not to defend the guy, but as a CEO of this bank he ... has to say something. And whatever he says it will be bad anyway.

Nope. This is the line of thinking that gets people into hot water. He could have said nothing and he would be better off. When in doubt, just say nothing. Nobody asked him about a run on his bank - he just blurted that out in a public call with shareholders on the line. Any bank would be in a bad position if all of its customers withdrew at once. Everyone knows this, but banks that are doing well don't think about this. The fact that it is clearly top of mind does not inspire confidence.

Exactly people would be here saying that the CEO hasn't said anything in the past 10 days or whatnot. Damned if you do and damned if you don't

There are “least worst” options. But it is true that once you get the scent of insolvency on you it’s very hard to shake.

I never thought much of public relations until i had to work with the team.

It’s really an art.

At that point I think he should've just bald-face deny reality: "nobody is saying we're in trouble! You're cherry-picking our enemies"

Representing that you have certainty—when you do not--may well land you in jail. You can only show your measures and sell the story.

What is there to learn? That's not an actionable statement.

A bank can follow a lower risk strategy and accept lower profits, but that's not necessarily what shareholders want. Some risk of failure is acceptable.

The point is not what you’re assuming it to be.

The point is that a bank run is a liquidity event (i.e. we still own more than what we owe, it’s just hard to turn it into cash fast enough).

SVB has a fine balance sheet for now, they’re just running out of easy things to sell.

The quote is referencing liquidity events, where the problem is everyone wants their money because they’re nervous about the bank, but the only thing that can hurt the bank is them taking out their money (because then the bank is in fire sale mode).

A CEOs job in this time (something SVB CEO did not do) is to project confidence. That’s literally all they can do.

> SVB has a fine balance sheet for now, they’re just running out of easy things to sell.

Do they?

If SVB is sitting on a pile of Treasury bonds that mature in 20 years, they can “hold to maturity” and get their principal plus some very low interest rate. But this is useless! In a fantasy world in which all their depositors leave and they keep those bonds for 20 years, they are indeed worth that amount in 20 years, which has a rather lower net present value today, and maybe their investors care and maybe they don’t.

But this is, of course, a fantasy. Those bonds are collateral for deposits, SVB pays 4.5% APY on savings, and that 4.5% doesn’t materialize from the ether. In 20 years, 4.5% multiplies money by 2.4, those T-bonds will not multiply by 2.4, and SVB will slowly but surely end up in the hole. Unless they convince a very large fraction of their depositors to forego interest.

It boggles my mind that banks are apparently permitted to do accounting on a hold-to-maturity basis. Holding a bond to maturity avoids paying a spread and maybe has some tax effects. And that’s it. Otherwise you might as well sell it and buy a new one with the same present value.

(I am not an expert, and I’m going off HN comments for how these rules work. But if the banks really do get to say they plan to hold a fixed-income instrument to maturity and they can value it as something like face value, then I think the system is broken.)

HTM accounting isn't the problem, it's one tool among many and has its uses. SVB's mistake was buying long term paper just as the country was heading into a rising rate environment. This has already put them in a hole they probably can never dig themselves out of (selling stock is clearly not gonna work). I think the only non-disastrous path forward here is an acquisition by another bank big enough to just absorb that paper into its balance sheet. If SVB is smart they'll try to get this done while there's still some value left to sell--if they wait too long it'll turn into another WaMu.

Borrowing short and lending long has been the traditional function of banks for hundreds of years. They profit from the interest rate spread between what they pay on short-term liabilities (mainly deposits) and what they receive on long-term assets (usually business or housing loans).

It's hilarious that banks serving crypto and startup ecosystems aren't failing because their crypto and startup loans went bad, they're failing because of the duration risk from holding long-term Treasurys on their balance sheet.

>they're failing because of the duration risk from holding long-term Treasurys on their balance sheet.

That is the number one reason why banks go bankrupt...

It's not hilarious, duration risk is the biggest risk a bank has to deal with and it gets worse the more and more people keep their money as demand deposits. This is why the Fed does QE, the duration of deposits has shrunk so low, that the banks can't buy treasuries as the duration of the treasuries has become too long in relation to instantaneous demand deposits that can switch from bank to bank. The only solution that the Fed came up with, is to do the duration transformation themselves by buying long duration treasuries and giving instantly transferrable central bank reserves with no duration risk. This works because the system as a whole cannot go bankrupt, but individual banks can. If you take your money out of the bank, the CB reserves just get turned into cash. If you transfer between banks, the recipient bank now holds the reserves.

Also, plenty of crypto specific banks did fail because their loans went bad.

There’s duration in the sense of borrowing short and lending long, and there’s duration in the sense of taking on the corresponding interest rate risk. The US model of fixed-rate mortgages is a bit of an oddity — banks will often lend long with adjustable-rate instruments.

If a bank has $100 of deposits and has lent out $90 on a 30-year adjustable rate basis, the bank is exposed to potentially liquidity issues, default risk, and second-order effects like changes in the yield curve. But if the bank lends that $90 as a fixed rate mortgage or buys a 30-year T bond, they are directly exposed to interest rate changes.

(Also, as I understand it, and this is far outside my expertise: banks usually try repackage their debt and sell it to investors. The banks presumably can’t carry those 30 year fixed mortgages on their books without accounting for interest rate risk. Why are T bonds special?)

> If SVB is sitting on a pile of Treasury bonds that mature in 20 years, they can “hold to maturity” and get their principal plus some very low interest rate. But this is useless!

No it isn't. Any other bank would be happy to write a loan backed by US treasury holdings, at no more than a moderate profit. If you're sitting on that, it has value. But it doesn't have value in literal dollars by tomorrow morning to pay out a withdrawal. That's what "liquidity" is all about.

I’m not saying the T bond is useless. I’m saying that the fact that it’s nominally worth a specific amount in the future if I hold it is useless.

This has nothing to do with liquidity. If I had a 0 interest, $100 T bond maturing in 30 years, I cannot sell it today for $100. But anyone who lent me $90, nonrecourse, using it as collateral and asking for only a moderate profit is nuts because this bond is not worth $90 — not even close. Maybe I can get a loan that is based on my own credit-worthiness, but that’s a different story entirely.

If I have this $100 T bond, and I’m a bank, and that T bond is collateral for a $100 savings account paying 4.5% APY, I am in the hole. If my depositor sticks around, I can gamble and hope I can make up my losses (e.g. by interest rates going way down), or I can try to be such an awesome bank going forward that my profits can make up for my losses, and maybe I’ll get away with it, but I don’t really deserve to get away with it.

> this bond is not worth $90

Not to a retail investor looking at short term returns (and irrationally obsessed with Inflation! due to media consumption), but to a bank with regulatory deposit requirements and a longer term outlook? Seems not unreasonable.

Anyway it doesn't have to be worth the full face value. It just needs to be worth enough to back a short term loan big enough to honor current withdrawal demands.

> regulatory deposit requirements

I wonder if this is the problem.

> to a bank with regulatory deposit requirements and a longer term outlook?

Maybe with some generally accepted accounting principle, but not by any sensible business standard.

If that bond trades for $80, no one would buy it for $90. It’s worth $80. Similarly, if you already own it, it’s not magically worth more.

And if you are a bank with a long term outlook, you expect interest rates to hold near current levels, and you pay 4.5% APY to depositors, your long term outlook of paying 4.5% to deposits where that deposit money is locked up in a very safe bond earning 1.8% APY, you are losing a lot of money, very safely, in the long term. Almost exactly as much as you would lose by booking the loss right away and investing in something else.

Other than tax or regulatory arbitrage, complex accounting is no substitute for actual profits and losses :)

You’re confusing liquidity with solvency.

For most banks, it is fine to assume a 20 year deposit window because deposits are fungible and for most of recent history deposit bases have gone up.

SVB was wrong for not assuming that the 2021 deposit spike was (in hindsight obviously) a short term blip, but you can look at their loan book on page 19 of [0].

It's not immediately clear to me that there's some sort of systemic risk in VCs/PE firms not paying back their loans, but given how circular the tech ecosystem is, maybe we get there.


> For most banks, it is fine to assume a 20 year deposit window

Let me try again. You're still thinking about liquidity -- assuming a 20 year deposit window seems okay to me.

But the problem is solvency. It's not that the assets are illiquid -- it's that they insufficient. If you run a bank, assume a 20 year deposit window, and invest those deposits in safe assets that carry similar interest rate risk to the deposits themselves, then you are solvent. If depositors leave faster than expected, you may be forced to pay a spread or other haircut to sell your long term assets early, but that's a small effect and can be managed gradually as long as you stay on top of it.

This isn't SVB's problem AFAICT. SVB bought assets that were perfectly liquid (T bonds!) and (if I read the filings right) assets that are still fairly liquid (MBSes), but they had interest rate exposure that did not match the deposits. Savings account interest rates (at SVB!) were up to 4.5%, and those T bonds had much lower fixed interest rates. [0]

If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative.

[0] Whether you think about them as paying low interest for a long time or as being marked to market at a loss and then paying current interest rates at maturity is immaterial. You end up with the same number of actual dollars at the same times.

>It's not that the assets are illiquid -- it's that they insufficient.

You are confusing price today with the actual characteristics of the instrument.

A T-bill pays back it's face value always, it just trades below face when interest rates are higher than when it was purchased.

That is the definition of a liquidity problem. You'll get the face value back eventually (it is sufficient), but not if you sell today.

A liquid market is not the only characteristic of liquidity. There's a liquid market for anything at a low enough price...

>If depositors held their money at SVB for 20 years and SVB didn't have a bank run right now, SVB would still be in trouble: SVB would be paying more interest on those deposits than they would receive on their investments, and their portfolio would slowly go negative.

This is a true statement people are making that has nothing to do with what happened here. The point of a bank is interest rate arbitrage, so I agree SVB would have to do their job better over those 20 years, but this thing that happened over 3 months is a liquidity crisis. They weren't running out of money to pay interest on deposits, they were running out of money to give those deposits back and were veering into the problem discussed above - selling things below value to create liquidity.

> In 20 years, 4.5% multiplies money by 2.4, those T-bonds will not multiply by 2.4, and SVB will slowly but surely end up in the hole.

But they wouldn't continue to pay 4.5% interest for 20 years would they? This is just a brief moment of high interest rates, so I think that's the main detractor from this argument. In other words, it's not like 4.5% APY on savings is anywhere close to the norm.

> This is just a brief moment of high interest rates

You are welcome to make that bet for your personal finances or on behalf of your company. You should not make that bet with someone else’s money unless they have signed up for it.

SVB has taken a major impairment due to rising rates already. They might not have to mark the remaining assets to market, but if they have to sell they will take losses, even if these are liquid.

His statement didn't project confidence. My "we are adequately capitalized" shirt is raising questions answered by my shirt is the meme way of expressing it. The right move would be to find a recapitalization transaction and complete it, which they tried to do but issued the press release right after a crypto-focused bank went into receivership due to falling account levels. That did not help matters.

No, you missed the point and that's not what I'm assuming. What you're stating is still not really actionable. Like what else specifically should he have said?

Again, the point is the only thing to say is theres no problem

There’s no deeper point.

No, that's not what a competent leader would say. You obviously don't understand how this stuff works in the banking industry.

Im just explaining the quote that you asked for clarification on.

Especially if that risk is borne by the taxpayers

Or that very simply banks are never 100% liquid.

They'd be lucky to have 5% of their liabilities.

> It seems that PARTICULAR CEOs of banks haven't learned anything since 1873 when this was observed.

I Don't think you can make that call for all CEO's of Banks 1873.


> “Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.”

Is that terribly worded or is it just me? I figure it’s supposed to be poetic but I find it tedious. I think it could be simplified like this:

“A banker who argues his creditworthiness has none.”

I realize it’s a quote but holy shit.

It was 1873. People spoke and wrote differently - usually more verbosely. It also depends what context the quote has been lifted from. I think your version is excellent if you're 'trying' to write a new aphorism or idiom. But perhaps this formed part of a longer passage where its clauses felt more 'necessary'.

I find "creditworthiness" to be an exceptionally inelegant turn of phrase.

Comes quite naturally if you're familiar with German word construction.

That said, it doesn't seem to have emerged into widespread use until well after the 1950s, so would have been a peculiar choice for a 19th century author:


Ok. Why? You could also use credit but creditworthiness works better for both contexts.

I figure you’re just being snarky but still.

> Is that terribly worded or is it just me?

It's just you.

Do you realize people spoke differently 150 years ago than they speak today?

Not exactly a concise rebuttal from you either.

Creditworthiness? This ugly jargonic word is superior to the poetic phrase you are ‘improving’?

Ugh. Give me a break.

The banker has none creditworthiness? For me at least, the original is much more clear.

This is how every bank has always worked since banks were invented

The very earliest banks didn't do fractional reserve banking so it isn't true to say it is how every bank worked since banks were invented. The first known instance of fractional reserve lending was with an medieval Italy but banks have been around since 2000BCE.

You are right that it definitely explains 99.99% of banks in history. But there are a handful of historical examples -- even after "modern banking" began in medieval Italy -- that don't fit. A recent example is The Narrow Bank which was shutdown by the Federal Reserve. But in the past you had things like the Bank of England in 1844 which went to 100% reserves for a period. Or banks under the Louisiana Banking Act of 1842 -- which was why banks in Louisiana were unaffected by the financial crisis of 1857.

> The very earliest banks didn't do fractional reserve banking

I am certain they all did it, but in secrecy. Even when banks stocked grains and not gold.

So did Louisiana banks issue loans?

Yes, they still issued loans. Louisiana banks weren't true "narrow banks" but were much tighter regulated with much higher reserve requirements than other states at the time (or today). This was a reaction to the financial crisis of 1837.

How could they issue loans? 10 x 10$ deposits means you can loan 100$? Where as the modern way is more like 100$ in deposits means you can lend out 1000$ because chances are everyone won’t not pay it back? And then can’t you say that since you’ve lent out 1000$ and chances are you’ll get paid back, you’ve basically got 1104.56$ and so can lend out 10k$? And then you bundle those together and sell them to each other depending on what ratio of income to cash you want?

Apologies if no one was meant to answer that.

Especially in contemporary times banks make money in an immense amount of ways that don't involve touching customer funds: debit transaction fees, international exchange rate "adjustments", ATM fees, the million 'special processing fee' type fees, and so on. In other countries I've even had to pay a fee when depositing, which was quite odd.

Of course this all is going to pale in comparison to the amount that banks make by d̶u̶m̶p̶i̶n̶g̶ ̶c̶o̶n̶s̶u̶m̶e̶r̶ ̶f̶u̶n̶d̶s̶,̶ ̶h̶e̶a̶v̶i̶l̶y̶ ̶l̶e̶v̶e̶r̶a̶g̶e̶d̶,̶ ̶i̶n̶t̶o̶ ̶h̶i̶g̶h̶ ̶r̶i̶s̶k̶ ̶a̶s̶s̶e̶t̶s̶ responsibly investing deposits. But of course banks under '100% deposits maintained' type systems could then engage in more typical behavior with their own funds above and beyond what's made from deposits. Under such a regime no bank would ever be "too big to fail", customer deposits would be 100% guaranteed at all times, and more. In exchange you'd see substantially slower overall economic growth and monetary multiplication, but I'm increasingly convinced that would not have been a bad thing.

The Medicis couldn’t loan money at interest— that was usury—so they made money by charging a fee for allowing customers to deposit at one place and have the money available in other locations. That was not considered usury

It’s amazing how long this goes back. ATM transactions fees are stupid high, and now I have someone to blame.

> In other countries I've even had to pay a fee when depositing, which was quite odd.

That's normal for business banking I think. Trucking cash and coins around isn't free, that stuff is heavy.

I don't believe the claim that non-fractional reserve banking would actually slow economic growth.

Is real economic growth even determined by anything but technological development?

Of course, the economy can be made to "grow" by some slight of hand, like having a high inflation rate while pretending that we don't. Or by depleting natural resources. But that's not the kind of growth we want.

Some loans go to businesses so they can buy a new widget-making machine, employ more operators, and profitably sell widgets. Economic growth in action!

Other loans go to people who were going to buy a doodad after saving up for 12 months, who instead get the doodad immediately and pay for it for 14 months. That looks like economic growth, because in month 1 doodad sales have risen. But if the sale would have happened anyway, the 'growth' is lot more debatable IMHO.

So if no one got those loans, what would have happened to the resources they bought? What would've happened to the resources that went into building the widget making machine? What would have happened to the operator employees? Would they've disappeared? Most likely they would've become available to another investor who did not get the loan but also wanted to build a widget making machine.

Did the loan actually increase economic growth? I think the only reasonable answer is: Yes, if the bank issuing the loan had a better idea than the market about the future profitability of the investment. However, that doesn't seem very likely to me.

>Is real economic growth even determined by anything but technological development?

That is just the end result, the question is how do you get there? How do you organize an economy to reach that outcome in the most optimal way?

Okay, I agree, that's the question. So how does fractional reserve banking contribute to that organization?

Doesn't stop a run

10 people put $10 in your bank. You give someone a loan for $50 and leave $50 in the vault. 7 of your customers take $10 out, you are screwed.

Depends. If they take it out electrically, send it to another bank then it just shows up as debt in a database from bank A to bank B. Cash is dirty and boring nowadays.

This doesn't apply to certificates of deposit as depositors agree to not withdraw their money until a specified point in time.

> Where as the modern way is more like 100$ in deposits means you can lend out 1000$

More like 20,000$, but yes.

It helps if you take a deep breath.

Yes, but it’s pretty much always been problematic when a bank leader has had to make a statement akin to “We’re fine as long as there’s not a run”.

That’s the kind of thing that only gets said when there’s some concern that there will be a run.

They’re selling equity to get capital. That’s pretty dire straits, FTX was doing that before they went under (I’m not saying this is FTX, I’m just saying it can be akin to the nuclear option)

For what reason besides raising cash does a company ever sell shares in itself?

How does your statement make any sense?

(I am assuming that by "capital" you mean cash.)

Because in this case it’s a bank and they aren’t selling equity to invest in new business/products.

SVB had to liquidate good assets quickly, so it sold them at a loss. That means its capitalization compared to liabilities (deposits) could be in “uh oh” territory.

So it sells capital on the open market to shore up its liquid capital. Yes, most every capital raise works mostly like this. But it’s notable here because of what it portends.

> For what reason besides raising cash does a company ever sell shares in itself?

A healthy company doesn't generally sell shares in itself (except perhaps to fund a major expansion). Selling equity is a last resort when you don't have better funding options (retained earnings, debt, ...).

FTX's actions have nothing to do with what is happening with SVB, it's not even close. Why make a bad parallel?

The parallel is selling equity when you are in trouble is not ideal. Different reasons or sectors or whatever...but the principal is the same.

I mean it’s just as bad as buying it at the peak.

Their emergency stock sale was a key sign of their implosion. Healthy financial institutions never do this

except when all of banks failed their stress tests, a) who remembers, b) who cared when it was announced?

All the banks passed their stress test this year


Regulators have been putting immense pressure on big banks to hold adequate capital reserves since 2008 and they have been especially turning up the heat for the last 5 years. Moreover, it is clear that regulators will never allow a US bank to hold more than 3% of assets as crypto ever again.

Those government-mandated, ultra-safe capital reserves look like they're actually the big problem that's going to bring down banks right now. Banks have stuck a bunch of their reserves in really safe, predictable, high quality long-term bonds (particularly government issued ones). Because interest rates have gone up, those bonds are now worth substantially less than they were a year or so ago, meaning that the banks' ability to cope with people and businesses withdrawing their deposits has gone down substantially.

Interest on loans should by increase a banks reserves every year barring massive defaults. The ROI for the actual reserves aren’t particularly relevant by comparison.

Similarly from a reserve standpoint they don’t need to worry about inflation as they need to pay back deposits in nominal terms not what the money is worth when withdrawn.

Higher interest rates decrease the value of long-duration bonds even in nominal terms. Think of it this way: because the interest rate on a bond is fixed at issue, and because newer bonds now have higher interest rates, your existing bonds have to be sold for less in order for someone to buy them over a newer higher-interest bond. This means that the banks' reserves have actually shrunk in value. This is made worse by the fact that the combination of low interest rates and requirements to choose safe investments means that the only way for banks to meet their cost of operations is by picking longer-duration bonds which have higher drops in value, and that they haven't been earning enough interest to really grow their reserves either.

That’s only relevant if you need to sell it or use mark to market accounting.

The US banking system has been given a great deal of regulatory leeway due to recent economic turbulence, including setting reserve requirements to 0%. So market value is only relevant if they need to sell before maturity.

> So market value is only relevant if they need to sell before maturity.

Which is exactly what needs to happen when depositors ask for their money back.

Not typically.

Banks generally have liquid reserves to handle significant fluctuations in deposits. If that’s insufficient they have incoming cash flow and the option to borrow money to make up the difference rather than instantly selling assets.

Thus in practice extracting 5% over a week is fine but there’s a threshold that will kill any bank.

> Similarly from a reserve standpoint they don’t need to worry about inflation as they need to pay back deposits in nominal terms not what the money is worth when withdrawn.

The issue is that the sale value of their reserves has dropped below that nominal value. If you take in $1000 of deposits that you're paying 1% interest on and your reserve against that is a 10-year $1000 T-bill with a 2% coupon, you'd think you're fine, right? But if interest rates go up to 3%, you can't sell that T-bill for $1000 any more; if you can hold it to maturity you're fine, but if your customers start pulling their deposits you're in trouble.

Why would customers be pulling deposits unless you are offering lower than market interest rate? If T-bills are 3%, they can pay depositors 2% now and so whatever condition kept the customers there at -1% risk premium would still keep them there. No run on the bank. And given they are T-bills, duration is minimal, so $1000 might be worth $990 even before coupons. Whoop-de-doo!

There would only be a problem if the bank's credit deteriorated in its risky assets, enough to freak depositors out.

This is incorrect, as we learned from Silvergate. Customers pulled their deposits for reasons unrelated to the bank (in Silvergate’s case, the customers of the crypto exchanges wanted all their money back, so the crypto exchanges had to withdraw their deposits from Silvergate).

As Levine put it, it’s not an asset problem, it’s a liability problem.

It is not unrelated to the bank. They took concentrated callable funding that somehow was not matched to the liquidity of their assets. They took a risk.

This doesn't work either. Remember, the reason that the market value of the T-bills in their reserves has dropped is that the interest rate on them is lower than the current interest rate that people can get by buying them now, so the bank likely cannot afford to pay their customers a market interest rate of 1% below that. The only way for the hold-to-maturity value of their reserves to actually be realised is if customers don't withdraw their deposits and they don't have to substantially increase the interest rates they pay in order to achieve that - otherwise they're likely to run out of money, either quickly or slowly.

You nailed it I think.

Right now there will be a lot of chatter if the root cause was industry concentration, mark to market, junior VCs scaring gulible founders, or as you pointed out: duration risk.

I think in five years the common narrative will be about duration risk.

To spell out what you hinted at: SVB will collapse at some point in the next few years. The only scenario they survive is if they survive this bank run, and then soonsih the fed lowers interest rates by a ton.

Otherwise even without this bank run SVB will still slowly be forced to sell off more and more HTM assets. Core reason being they cannot cashflow wise offer market rate interest on deposits. Clients _would_ move their money to better paying banks, not everyone but too many.

Thus this bank run only accelerates the inevitable. The interest broader note is how other bigger banks have or have not managed their exposure to duration. And special eyes towards the Japanese MegaBanks, double so if the bank of Japan does raise rates.

I was talking about offering it on new deposits. If your old deposits are not duration-matched then yes, you are screwed.

> Why would customers be pulling deposits unless you are offering lower than market interest rate?

Any number of reasons, particularly if all your customers are in the same industry. If you're "Silicon Valley Bank" and there's a downturn in Silicon Valley, well, here you are.

Yeah, this is how it's similar to silvergate. The main issue silvergate had was a lack of diversification of their liabilities, I.e. their depositors were all crypto. So when crypto hit a liquidity crises, it cascaded to silvergate. The same thing could theoretically happen to SVB, although that would look very bad on tech, since tech shouldn't really be an industry unto itself. Ideally, tech is just technology, and its application is across any industry.

This is why there is a difference between a banks assets and their liquid assets.

If the T-Bill has a maturity beyond 90 days it doesn’t qualify as a liquid asset.

The parent commenter is right, and the problem is the mark-to-market rule. This means that the value of the asset must be the current trading value, which goes down as the rates go up. The result is that bank reserves will go down substantially in nominal terms, sometimes faster than they can recoup the value of these investments.

That’s a regulatory rule which can be suspended not the underlying economic reality. “On April 9, 2009, FASB issued an official update to FAS 157[35] that eases the mark-to-market rules when the market is unsteady or inactive.” https://en.wikipedia.org/wiki/Mark-to-market_accounting

We’re currently in some interesting times: “As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.“. https://www.federalreserve.gov/monetarypolicy/reservereq.htm

The key phrase here is "when the market is unsteady or inactive". Apparently this can be used to save banks, but not until there is trouble in the market.

respectfully, I'm not so sure. The decline in bonds applies to all fixed-rate securities. The only alternatives would have been just straight up cash (bad with inflation) or riskier, less-liquid assets (non-tradable loans with floating rates, for example). They are limited on the latter by risk weighting, and I'm not sure having looser risk controls on the asset side would really help confidence in the banking sector.

please feel free to disagree!

Inflation isn’t a concern here. Depositors hand a bank 1 billion and X% inflation hits, well the bank still only owes them 1 billion.

Yeah that's true, it matter more for net-interest-margin / interest income generation in a rising-rate environment. Good point

a depositor isn't going to deposit 1 billion and only expect 1 billion back out months later. that's some poor people shit. Large sums of money like that, banks pay you for the pleasure of holding it. So a bank offering 4.5% APY like SVB offers would owe an extra 3.2 million to the billionaire if they look at their account a month later.

The problem is, the underlying assets that SVB owns will only pay them back at 1% APY, and only in 20 years or whatever, and the billionaire has been promised 4.5%APY and is expecting to have access to one months worth of interest next month. that 3.5 difference is thus a huge problem for SVB.

Could they instead hold short-term treasuries (as short as 4 weeks, I believe) and refuse to honor large withdraws until they mature?

Short term treasuries are definitely pretty common on the asset side, but if you refuse to honor withdrawals on demand deposits you won't have a bank anymore and the FDIC will step in to wind things down

Pardon my ignorance (not a crypto guy) — what is it that you're referencing when you mention a bank holding 3% of assets as crypto? My uninformed assumption is that this is either about Silvergate, or something related to SBF's debacle.

Just curious. As mentioned, I'm pretty ignorant about this and would like to educate myself.

As part of a general crackdown happening right now regulators put any crypto plans US banks may have had on ice.

We're fine as long as we don't hit an iceberg.

The first banks just stored your money and charge you for it, until somebody had a brilliant idea.

Poor move by the CEO. It's like he wanted to be honest with everyone but that wasn't a strong signal.

Also out most of the banks - you would expect that the clients of SVB are a little more sophisticated than your retail bank demographic being start-up companies and all (big assumption).

In the immortal words of Andrew Lahde who closed his hedge fund up 800% in 2008, “I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

Assuming these people have any level of sophistication is what gets us into these messes. It’s good to remember they are betting billions of dollars based on nothing but fomo and don’t know anything special at all.

The secret part is: they (yale guys) still bag big money regardless.

I'd say rather they don't miss losing a big bag or two so much as others do...

They’re a public company with known exposure to startups. If he lies, that’s securities fraud and he could go to prison.

Is that worth it?

"no comment"

No comment is almost worse if someone is asking about your bank’s liquidity.

No comment won’t land you in jail.

Sure but it’s almost certainly the end of your bank. So I guess you tread somewhere in the middle, like he did.

> you would expect that the clients of SVB are a little more sophisticated than your retail bank demographic being start-up companies and all

Sometimes you can be too smart for your own good: in this case the CEO might have assumed that everyone knows that all banks inherently carry a risk in case of a bank run, but all the market hears is the word “risk” and panics correspondingly.

Im pretty sure this can also be an engineered trade for smart money.

I imagine it like this:

1. Place some money in bank.

2. Wait till bank bought bonds, treasuries and all that jazz.

3. Short the banks stock.

4. Withdraw huge amounts of money and cause liquidity crunch.

5. As the bank needs to keep its capital ratio above 5%, it will close positions at a loss, causing a death spiral (the bank run. As more people want to secure what’s left, the bank needs to unwind more positions at a loss. Which will cause even more people wanting to withdraw, which results in even more selling of the bank.

6. Eventually the bank becomes insolvent.

7. Buy stock back.

There might be more variables to it, such as the price of the treasuries itself (you might want to wait for a rate hike, inflation, credit rating change or whatever before you make the bank sell), but generally this is how imagine such a trade.

Conversely, they’re very sensitive to having their capital liquid compared to bigger companies that may have multiple banking relationships or access to credit markets in case of short term issues.

> Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.

True, but isn't it possible that if he omitted this clarification, his statement about "ample liquidity" could be on shaky ground, from a legal perspective?

This is the classic, textbook dilemma that the CEO of a bank/crypto exchange faces.

You can lie, and say everything is great. If enough people believe you, your bank is safe and you live happily ever after. If they don't believe you and pull their money, then you committed fraud and will go to court.

Or you can tell the truth, and say everything will not be great if everyone pulls their money. Then people will definitely pull their money. You will be sad, because your employer has turned into a smoldering crater and your equity is worth zero, and everyone will blame the bank run on you, but you are probably legally safe.

I think the only real thing you can do is make sure no one with credibility ever asks you if you are solvent. That is hard to avoid though, if you are a bank and you have to raise money by selling equity.

If you read the prospectus for almost any publicly listed equity, it will say something along the lines of "our company is a dumpster fire and could implode at any minute." In slightly nicer terms. They will say the exact opposite in the verbal quarterly conferences, but they put that in writing just so they can say you've been adequately advised.

Perhaps I'm overly skeptical, but everyone should know that all banks have the risk of 'if everyone takes their money out, the bank won't be able to make it work', right?

Sure, and everyone knows that their favourite person in the world could just run them over in a car and kill them in seconds, but if your best friend says to you, “you know, I could drive my car into you and you would die… your life could be snuffed out with a moments notice” you may start to question your friendship.

Well, the big difference is that the bank CEO's statement doesn't suggest that he will or could do something awful himself.

It is indeed quite common to hear aphorisms like "live every day like it's your last" which make the same point as your analogy, but remove the suggestion that the speaker could be a murderer and are thus much more analogous to the bank CEO's statement.

Sounds like a normal conversation with my friends.

Sounds like you have a ready-made customer base for a bank in crisis.

This situation isnt like that at all.

The relevant similarity is the *act of making* the statement is what’s problematic. In both cases the statement is true, but the act of making the true statement raises concerns.

Obviously there are important differences between the scenarios, but that critical aspect is what‘a relevant in this context.

This was basically why Saadat Hasan Manto packed up and left India for Pakistan after partition.

waiter, i'd like what they're having

Everyone doesn't need to know or care in many cases. The FDIC insures deposits up to $250k. That covers the vast majority of accounts at most banks. So a run won't occur at most banks. There were hardly any runs in 2008 for this reason - the relatively few "run type things" which happened were where big interbank exposures existed.

SVB's customers are weighted significantly more towards businesses who will have more than $250k in the bank. So, they have to be ready to take action fast, so a bank run on SVB is much more likely.

FDIC insurance is similar in the sense that if the feds ever have to say "don't worry that JP Morgan or <other large consumer facing bank> is going under, most of you will be covered within the FDIC limit", then we're fucked in so many other ways it doesn't matter. That is after all why we invented the term "systemically important".

Your acting as if the FDIC only exists to cover a massive systemic failure. In the event of something like that additional intervention may be need sure.

However, the FDIC covers all banks, and is generally involved with smaller banks fail and they are they to insure whatever balance the bank could not cover with its remaining assets when it failed.

I’m not actually aware though what the last incident they actually had to pay out was though. Looking through their historical data on bank failures every one I’ve seen says the insured accounts were assumed by another bank purchasing up the failing bank.

One of the largest recent FDIC payouts was IndyMac. I'm not sure if this was the most recent one, but certainly one of the most recent big ones. They were so bad that no one wanted to take them over! And the other banks were in such a bad way at the time, the FDIC couldn't force through a shotgun wedding with a semi-willing suitor. So the FDIC got stuck with them.

But worse, thousands of the individual depositors and businesses who banked at IndyMac were over the FDIC limits and they lost, collectively, hundreds of millions of dollars. The FDIC insurance limit at that time was $100k per separately-named account per bank; it is now $250k. And the $250k raise was, in a surprisingly kind move, purposely made retroactive to help cover some of the losses that people had suffered during the GFC under the previous lower limit.

And still, despite all that, lots of people lost lots of money when the bank went under:


> SVB's customers are weighted significantly more towards businesses who will have more than $250k in the bank.

If you have that much money, FDIC is not adequate for you (and isn't intended to be). There are other mechanisms for those sorts of depositors. Surely, those businesses got solid financial advice and are using them, right?

The mechanism is to watch the banks you have money in. A company still has to pay it's bills. To pay bills, you need some money in a bank, it's unavoidable.

So, let's say you are a company with 4 banks accounts. Each has $500k in it. One of them is SVB. You probably just move the $500k into one of the other bank accounts. It's no big deal per se, but you do it. That's a run on the bank if lots of companies do the same thing.

Or just use a Too Big To Fail bank. The government will never allow JPM/WF/BofA to go under, that'd wreck the economy.

Maybe. Smart people assumed Lehman wouldn't be left to sink. It was. And it caused a lot of problems. And the people who realized afterward that it was a mistake are retiring right about now.

Lehman had assets of ~4% of GDP and was a pure investment bank.

JPM has assets of ~15% of GDP and has 66 million household clients.

I'll take the odds that it's too big to fail.

These are logical sounding arguments, and you are going to be right more often than not. But humans make these decisions, they made the decision to let Lehman sink and it was obviously bad in retrospect, and there were many folks who were opposed to the bailouts in 08.

There are better options than playing these odds. Spread across banks, hold short term treasuries etc. Treasury functions at a company exist for a reason.

True, true, but I don't want to take zero risk. I want to take some risk. For example, I do own short term Treasuries, but I want to borrow against them to short some stocks I don't like. And as soon as I have a margin account, my counterparty risk changes drastically due to how brokers work.

There’re always T-Bills…

Your employees don't accept t-bills as payment. Your suppliers don't accept them either. To do business, you need money in a bank account. Not all your money, but a decent chunk of money needs to be there for day to day.

Sure, you need some, but many small businesses leave it all in a bank. It's easy to just set up recurring buys of 4 week t-bills that you can halt at any time, payroll is predictable, and suppliers are commonly on net 30-90.

Yup, and you stop using a bank which is in trouble.

Employees will take risky stuff like equity as payment, but the IRS won't take it for their payroll taxes.

The number of employees who take equity as a significant portion (>50%) of their comp rounds to zero.

I wouldn't want to get paid in equity if the IRS didn't accept it for tax payments either. If you accept 100% of your compensation in equity you are bankrupt because you can't pay your taxes.

This is a chicken and egg situation.

I take 10% of my salary in an equity IOU (ESPP) and I'd do more if they'd let me. But they only let execs into the deferred compensation plan.

Not after hyperinflation

>The FDIC insures deposits up to $250k

Per depositor, per insured bank, per account category.

It’s not that difficult to keep significant excess deposits insured.

Not difficult for the average person. Extremely difficult for a business running hundreds of thousands in transactions per month.

This. Entire companies exist to help try and solve this problem for businesses.

... until you find out the FDIC itself has a weak reserve ratio against their insured accounts, meaning they will be as broke as everybody else in a systemic banking failure.

They've been around almost 100 years now... They went through 2008. The reserve ratio seems low, but when you consider the likely asset coverage for the first ranking creditors across the entire industry, the FDIC doesn't need to cover much.

and that's how you and I will be bailed-in my friend.

> The FDIC insures deposits up to $250k. That covers the vast majority of accounts at most banks. So a run won't occur at most banks.

That's akin to saying my house won't burn down because I have insurance. Don't underestimate the stupidity of large crowds of people.

Pragmatically, the FDIC is very effective at moving things around with minimum disruption.

I still have cheques that say Washington Mutual on them; literally no disruption to my life when they started floating upside down.

Terrible analogy. The insurance in the case of banking deposits changes human behavior to entice them to leave the money in the bank. History shows it. Fire on the other hand isn't aware of insurance, and if anything it makes humans less careful and your house more likely to burn.

This "don't underestimate the stupidity..." might feel like a clever or wise speech to give, but history suggests the FDIC has been incredibly successful at reducing bank runs. Insert "those who don't learn history...." speech here.

No FDIC insured account has ever lost a penny, despite bank failures happening.

Hm? Plenty of them did back in 2008. They were only insured uptm to $100k back then, it's up to $250k now but anyone who has more than that in the bank, which plenty of companies do, is sitting on a pile of risk. So then you withdraw your money from SVB down to $250k and then everyone else doing that - you have your bank run.

I don't disagree with you. Bank runs can still happen even with the (successful) FDIC backstop.

I'd be interested to learn how that insurance fund actually works. Is there a big stockpile of cash somewhere or is that invested in (gulp) "super-safe bonds"?

FDIC insurance can also take time to recover your money. If you need cash tomorrow, you also may need to participate in the bank run.

That FDIC thing is so laughable to me because it's purely symbolic. Even the feds would have some serious trouble absorbing bank-run losses.

The FDIC does in fact insure up to 250k per account/bank. You can get more insurance by spreading your deposits between banks, a service some financial institutions will do for you.


It’s not symbolic, it’s literally an insurance company that the banks pay premiums to.

The problem isn't insuring the losses, that they can do. The problem is will you even be able to buy anything after the chaos if a systemically important financial institution goes under? The banks that hold the most ordinary customer deposits aren't like Lehman Brothers and the fallout from one of them going under would be catastrophic on a level far beyond something like 2008.

FDIC was invented for the great depression when banks were not as large or concentrated, nor were they as globally connected and intertwined with day to day business. The reality is that FDIC is far from being sufficient insurance to calm down a collapsing market, that's why we had to do bailouts in 2008, because of what was coming down the road in that regard if the contagion were to spread further.

It's true that all banks have that problem, but for most banks it is not necessary for the CEO to remind everyone of that fact in a press release. The fact that they feel the need to make this statement makes it clear that SV bank is having much higher withdrawals than normal right now.

>... everyone should know...

I'm going to go out on a limb and say that that might not be common knowledge.

Yes, but if a bank has to remind people of that, it may be a signal it has already lost.

Yes and at that point the boss of the ECB shows up, calmly does a press conference at which he says "whatever it takes" and everyone goes back to sleep knowing the Germans are on the job.

That's why depositor insurance laws were passed. Bank runs for retail-facing institutions are rare in developed countries. Even when they happen, retail deposits are made whole up to the insurance limit, which tends to be well above the national median.

A run might be more likely for investment funds like Questrade and Fidelity if their customers liquidate their holdings en mmasse and move to cash deposits and CDs, which would be covered by depositor insurance.

If the Bank is federally insured, it's not a problem that the bank won't be able to make it work. That's why generally speaking bank runs only happen on uninsured banks in the US. SVB is not, as far as I can see, insured and should definitely be careful in their choice of words.

They've got an FDIC page, https://www.svb.com/fdic, and they show up in the FDIC bank finder https://banks.data.fdic.gov/bankfind-suite/bankfind/details/...

Although the Assets, Liabilities, and Capital reporting available if you click "create financial reports for this institution" estimates 5.69% of deposits are insured. Is a corporate account limited to $250K of deposit insurance? If so, I imagine many of them may have much more than that, and the reporting does show almost 75% of the deposits are in accounts with greater than $250K, assuming I'm reading the report correctly.

> Is a corporate account limited to $250K of deposit insurance?


Also investments aren’t insured by FDIC, but by SIPC.

That’s true however there is a limit.

> The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. [1]

1: https://www.fdic.gov/resources/deposit-insurance/brochures/d...

You’re kidding right? There’s a limit of like $250k

An individual could easily have that much let alone a startup with millions.

In a bank? If you have that much you really should invest in something better than a bank account. Banks should be petty cash that you spend in a couple months.

That’s not quite how payroll works

Right, but gp was talking about people not businesses

no i wasn’t. i said an individual could easily have $250k in cash to show you that it is not a significant amount of money from a business perspective. nothing about what i said referred to keeping $250k in a non interest bearing account as being a smart decision for an individual

I'm confused then. What individuals keep 250k in cash? How does individuals have any bearing or relevance to businesses?

SVB is likely mostly business accounts.

i’m not talking about what the savvy thing to do is, just taking issue with the assertion that “it doesn’t matter if a bank fails cause it’s insured” when there’s a limit that the OP either failed to mention or didn’t know about

and not that it matters but this is specifically about a startup or business not talking about personal finances of an individual

It's crazy to me there aren't banks with 100% reserve ratio fully insured for a nominal fee of 0.4% or whatever (gold/silver storage with full insurance is ~0.4% so this probably isn't far off).

I'd much rather lose 0.4% of my money than lend it out at +0.01% to whatever checking accounts pay nowadays while they lend out to some asshole that does business with the bank.

FDIC only insures up to $250K

Per account.

Edit: It seems I am incorrect.

> The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank.

> Per account.

Per account "type" and structure. For DDAs if you are married it will be:

You: $250k

Your+your wife: $250k

You POD your wife : $250k

Your wife: $250k

Your wife POD you: $250k

What's POD in this context?

Payable on Death...

What @htrp said - payable on death.


Demand Deposit Account - the kind of account that allows for cleared funds to be withdrawn without advanced notice. Probably 99.999% of accounts such as checking and savings one can write checks/do ACH payments/send wires/transfer money from fall into this category.

>The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category

My understanding is that this might cause an unwelcome surprise to (for example) someone with a personal account at Bank A, and a sweep account at Brokerage P that sends its funds into accounts at Banks A, B, and C.

Washington Mutual and Wachovia were both insured

Washington Mutual and Wachovia were both taken over without touching the FDIC insurance funds.

FDIC insurance is worthless for companies, as most would need more than $250k monthly just to make payroll.

> Pro tip: if you're CEO of a bank that's facing a bank run, don't tell the press that you'll be in trouble if everybody takes their money out.

I don't think this is damning in any capacity. It's well known that all banks in the world keep part of their reserves in other vehicles. If a bank run happens, they'll have liquidity issues.

Meanwhile, Peter Theil is openly encouraging everybody to tell each other that SVB is sinking and to pull their money [0].

What a guy.

[0] Thiel Fund, Venture Firms Advise Companies to Pull Money From SVB

Yup, it was Theil who started the bank run [0].

[0] https://www.fastcompany.com/90864395/silicon-valley-bank-an-...

Will only drive the stock price down so that another bank will buy them up. :Not sure if that's what he's aiming for.

Is he wrong?

He could be attempting to create a problem so he can take advantage of it.

Entirely possible he shorted SVB.

If the company goes into liquidation before the short seller closes their position, what happens?

You win but you may get stuck paying the borrow costs still for a while until either the stock is tradable or whatever happens with the resolution of the bankruptcy settles out (the residual shares potentially have _some_ value). In practice, before that, your broker or whomever you borrowed the shares from will probably just declare it a loss and close it out. They'll then get a little something from the bankruptcy, maybe.

That's assuming a traditional short, and not something like selling naked calls. In the latter case they just expire worthless.

Probably selling short

they aren't publicly traded

Wrong, they are, ... um were, publicly traded under the symbol SIVB. [0]

Trading Halted. They were down 66% on the day before halt

On 08-March-2023, they were trading at $267.90, by the end of the 9th, 106.08. By trading halt today, $39.49. Now, it's worthless. Imagine thinking you got a bargain at $106, or $39...

[0] https://finance.yahoo.com/quote/SIVB

Most if not all banks would have trouble paying out if there was a run. It is called fractional reserve banking.

In the end they're not, because if there isn't outright fraud, some other bank will just buy them. If Silicon Valley bank is in trouble, I'm sure one of the bigger ones would want to buy them. Their customer base is worth something and they'd get it for next to nothing. And for JP Morgan or Citi, a run on Silicon Valley bank hardly touches their cash reserves..

Not exactly - ‘fractional reserve banking’ only happens in textbooks, it doesn’t actually describe how real banks work. But it is true that basically no bank could immediately pay out all their deposits without running into liquidity issues.

To be fair, he is dealing with a slightly more sophisticated clientele than the masses that typically make a run on a bank who would (hopefully) realize that their shared success is contingent upon rational, pareto-optimal behavior; which is to say — if folks make a run on SV Bank, it’s pretty much going to be a shit show as to who comes out on top/who doesn’t.

I agree and said something similar elsewhere but i think whats becoming clear is that a bunch of VCs are so selfish (and clearly not that thoughtful) that this behavior might undermine the collective of the bank.

Why would the clientele be slightly more sophisticated?

Classic tragedy of the commons.

It's like the prisoner's dilemma.

It is. And sadly the Nash equilibrium solution does not favor SVB.

i wonder if this is the accidental downside we have to pay for the incredible speed of information these days. not just information in the sense of journalistic report, but also information in the sense of acknowledging and processing transactions. the older i began the more i come to be wary of speed, just for the sake of it (i'm looking at all of you performance engineers). latency might as well be an extremely cheap security/life-sustaining feature (i'm looking at its reincarnation in cryptography/security as constant time algorithms).

Brb, I'm going to go start a bank run on TikTok


its the most cynical response ive seen in a long time, to basically reiterate a fundamental limitation of modern central banking in response to the very event thats occurring.

If you have to convince people you're liquid, you've lost the argument. Similar to if you have to convince people you're sane, you've already lost

What a strange game, the only winning move is not to play.

you'll be in trouble if everybody takes their money out.

Every bank would be in trouble if everybody took their money out

Every bank would be in trouble if everyone took their money out

Every bank is screwed if everybody takes all their money out. And everybody already knows it.

Literally any business is screwed if all of their customers leave.

There is a nuance here - the business in question (bank) holds customers money !

Can't someone open a bank that takes money and just keeps it like a well-behaved child and doesn't secretly mess with it?

Well then customers won't get any interest. And therefore you will have no customers. And therefore no deposits.

People aren’t keeping their money in Chase accounts for the 0.01% interest, given that the risk-free rate is currently >4.5%. So you may want to rethink that.

Yeah there are precious metals demand deposit vaults that do exactly that. The cost to have that fully insured and also audited to make sure your exact serial numbers are actually stored and not secretly being loaned, etc, it works out to roughly ~0.4%/yr cost to store money in a bank like that. Which compared to ~0% interest rates in a saving account isn't that bad I guess.

Cool ... I guess you could vlog about the precious metals and get 1%/yr from Youtube to make up for it ... Keep saying "my precious" and you'll probably get a few million followers on Tiktok

Doesn’t seem like you can get a banking license for that. Look up “narrow banking.”

Wouldn’t that just be a storage facility?

Essentially yes, but presumably one that’s safer than your home safe or under your pillow.

If it becomes an internet meme/viral story however, which it looks like it’s becoming, they’re especially fucked. He should have never said this, this is very concerning

> if you're CEO of a bank that's facing a bank run

Or just don't mess with money that belongs to customers. Be the world's first reliable bank.

The Narrow Bank proposed a structure like this, where they would take deposits from customers and just park them at the fed, passing along the fed rate minus a small cut. This is more or less perfectly safe: the Fed basically defines what a US dollar is, and cannot be insolvent.

But the Fed won't let TNB open an account. The basic reason seems to be that they worry that this model is destructive to the US economy, which relies on banks making loans so people can buy houses and cars, and businesses can operate. If everyone banked at a narrow bank, the economy would seize up from lack of capital.

Whether or not you agree with this take, the reality today is that you cannot run a bank like you've described in the US.

(This is all covered in more detail by Matt Levine: https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...)

Not a finance guy but I think that would literally be the opposite of how banks work. They have to lend out customers money in various forms, including giving that money to other customers in the form of loans, loaning it in huge chunks to companies for larger percentage rates than they give customers who keep their money in said bank, and so forth. Not sure how a bank that kept every customers money on hand all the time would work.

A "narrow bank" could work, but the Fed currently denies them banking licenses, since (presumably) the social function of banks lending out deposits is considered useful.

Well, there are banks that charge you money to hold onto your cash for you.

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