Silicon Valley Bank has failed and been taken over by the FDIC
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- FDIC Creates a Deposit Insurance National Bank of Santa Clara to Protect Insured Depositors of Silicon Valley Bank, Santa Clara, California
- Word count
- 360 words
There's a bloomberg wire earlier today that the FDIC is auctioning SVB, with bits due Sunday afternoon. That also seemed like the most probably thing that would happen when the FDIC took over (e.g see the Levine column).
On a meta level, I suppose this always happens, but it really feels like "the internet" (as a euphemism for your Reddits, Twitters, and so forth) is basically in a serious debate over what can only be described as fan fiction? There's all this talk about bailouts and whether the banking sector is going to fail if we don't, but we shouldn't bail them out, or we should bail them out and and nationalize it, and it's like wtf are any of you talking about? And on one hand it's easy to dismiss Twitter, but like, congresspeople are part of it? And they're also tweeting about it as everyone else is?
Most likely what's going to happen is that the FDIC cuts a deal with a large bank who will buy SVB, the depositors will be made whole with the big bank's liquidity, the big bank holds SVB's assets to maturity and makes profit, SVB stockholders take a fat L, and it's basically the end of it. The FDIC, fully funded by member banks, by the way, does their job.
Yes, people will often talk about "bailouts" generally and don't make distinctions.
Stockholders losing everything is what you'd expect in a bank failure. That's what stockholders are for. Repaying the stockholders would be a bailout.
Depositors getting their money back (or at least most of it) is generally a good thing and is what a bankruptcy is supposed to do.
Matt Levine wrote about this:
(It's not stated, but it sounds like business loans usually have variable interest rates, and therefore have less interest-rate risk for a bank?)
Thanks for posting this, it's a great look at the why of what's going on while remaining clear and readable.
In terms of the business loans, since I was reading with your question in mind, I noticed this passage - but it's quite easy to miss in a fairly long article:
[Edit] Also, this is bang on:
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From Monday's column:
From Matt Levine's Tuesday column:
(There is more about what to do about other risky banks, but I've quoted enough.)
Not to be confused with the Silvergate bank failure, which happened on Wednesday:
Crypto-focused bank Silvergate is shutting operations and liquidating after market meltdown (CNBC)
So, am I understanding this correctly that, nutshell, the bank ultimately failed because it couldn't find enough people to lend money to? And so, was forced to invest primarily in long-term, low-interest ("safe") investments?
As I understand it was a profit maximisation strategy more than an existential necessity. Nothing’s ever quite that simple: having customers is an existential necessity, and for that you need to pay somewhat competitive interest rates on deposits, but the market cap of the bank itself (i.e. what the business was worth over and above the money they were holding for others) peaked at $40B so it’s not like they were pushed into that decision as a desperate measure or anything.
It’s also interesting that many commentators believe they actually were still solvent, and not just in some bullshit subprime mortgage “this random derivative scribbled on a napkin is definitely worth a billion dollars” kind of way. Their assets likely did cover or come very close to covering total deposits, although that $40B of additional valuation for themselves was indeed wiped out.
The collapse happened because they weren’t liquid - the money was (apparently) safe, but locked up in fixed term instruments that they couldn’t reasonably access right now - and even a sniff of that fact led to everyone‘s quite rational self interest kicking in and causing them all to pull their money out just in case. Which massively exacerbated that short term cash problem, became self fulfilling, and the whole thing snowballed.
None of that is to say they or the system that incentivised them were right, especially given the driving forces behind their decisions - just maybe that they were also a bit less wrong than the dramatic collapse would suggest.
My understanding is that people disagree about whether they were solvent because it depends on the price of the bonds. There are different ways to price them.
The strictest way is based on whatever the market price is now. That’s called “mark to market.” Apparently the largest banks are required to do their accounting that way. When interest rates go up, the bond price goes down and that’s accounted for as a loss in the current quarter. It’s a temporary loss if they hold it to maturity, though, because from now on the bond will be considered to be earning a higher interest rate. Even though it’s a fixed interest rate bond, it’s sort of treated as having a variable rate, where the principal varies too.
Small banks are apparently allowed to do accounting based on holding the bond to maturity with a fixed rate, and Silicon Valley Bank did it that way, so according to their own accounting, they were in better shape than they would be with the “mark to market” method.
You can argue about which way is more realistic. For a bank that doesn’t have a bank run, is an interest-rate loss a real loss, or is it just on paper? If they have to sell the bond, though, it’s definitely real.
Coinbase Pauses Conversions Between USDC and U.S. Dollars as Banking Crisis Roils Crypto
Here's a chart.
It’s free money if you believe the peg will recover. I believe it will, but not enough to bother putting in my own cash.
First Republic is getting hit pretty bad by the ripple effects.
HN comments (1000+): https://news.ycombinator.com/item?id=35096877
My bank! Yeah, what a clusterfuck.