Counterpoint: This WSJ Article [1] and their latest 10Ks confirm that:
- Their actual assets market-to-market (sold on the fair market) is about $26 bln less than the amount they're carried at on their books. This is as of year end 2022, probably more today.
- This would wipe out all their equity, loans, and start hitting depositors.
- If there was a bank run, First Republic probably would not be able to meet all depositors.
- First Republic in some ways is in worse shape that SVB. SVB had all their assets in medium duration (10 year) treasuries. First Republic has a lot more 30 year mortgages they gave people at ultra low 2% interest rates. Today 30 year mortgages are 6%, which means if they tried to resell these loans they'd get more than 50% off.
- Personally, I know of at least a couple of HNWIs who pulled funds other than $250K today. Who can blame them -- what's the upside if you have more than $250K in? First Republic relies on wealthy deposits, and these are not insured.
All true, but they have a $60b debt facility to draw down on before they'd consider liquidating their HTM bond portfolio. Given that they have $120b in uninsured deposits diversified across a disparate client portfolio, it seems like they're truly in a much stronger position than SVB.
I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.
SVB was only able to borrow $15B from their FHLB debt facility, before they got cut off. The FHLB total capacity is ~$60 billion. Is First Republic stating actual numbers they are guaranteed to have access to?
Their shareholders are already panic selling (FRC down 36%), their bonds appear to be sinking, and few private parties wants to throw good money after bad. When you have to put out an emergency statement to reassure everyone of your creditworthiness, it's already gone.
I do agree that First Republic is in a much better situation relatively to SVB, but illiquidity and insolvency risk is real. I don't really see a reason why any business or individual with more than $250K shouldn't be wiring funds out ASAP, unless you're feeling extra charitable and want to be the bail-in to those who run before you.
There is nothing to lose, other than setting up new accounts.
Sure but that takes time. Time that you have to spend that money as quickly as possible on valid business expenses in order to be indemnified from the claw back.
>I feel like a very likely outcome on Monday is that the FDIC announces a buyer, SVB depositors realize they're going to be made whole, and all the panic subsides.
Everyone saying "they will be made whole" is completely missing the fact that money has a time value. There's nothing "made whole" about getting access to your money weeks or months from now.
A likely outcome is everyone is going to be made whole on Monday. The feds will find a buyer to take on the deposit accounts and people are going to wake up consumers of Goldman or whomever instead of SVB.
Look at history and for example what happened to WaMu. It was literally one day.
I agree this seems very likely. A bunch of people will be having interesting phone calls this weekend, but it's the weekend and it's pretty useful.
Then again last time I thought this I had a contact text me joking he was preparing to learn Korean because his bank was probably going to get bought by Koreans. Seemed like it was just a matter of time to wait until Monday to see what the higher ups had decided.
You can guess where this contact was working. Until that Monday.
If a bank’s portfolio of long-term fixed income instruments has a mark to market value that is $27bn less than their hold-to-maturity value, and the bank borrows $27bn at market rates to cover the shortfall, they will pay approximately, wait for it, $27bn (present value) in net interest while waiting for maturity to happen.
If the bank can manage to borrow the money in the form of non-interest-bearing deposits for the entire term of these instruments, then, sure, they’ll end up okay, because they will effectively make enough money on these deposits to cover their losses.
But the whole industry of non-interest-bearing deposits is a bit odd. When interest rates are around 2% and banks are offering maybe 0.75% interest, it may not be worth their clients’ time to try to earn interest. But when FDIC-insured banks are paying 3-4.5%, convincing a client to keep holding $2M in a non-interest-bearing account instead of spending an hour a week shuffling assets between checking and savings is a much harder sell, and much of those $27bn of required profits may well end up in the pockets of a bank’s customers. Which makes the effective value of the bank’s equity look bad, and maybe negative, and the bank may be toast.
Put another way, if you are actually insolvent, credit at market rates cannot make you solvent unless you have some other source of profit.
> - If there was a bank run, First Republic probably would not be able to meet all depositors.
That's true for all banks, even JP Morgan Chase. Every single one of them has some withdrawal limit, past which they are screwed. And that limit is definitely lower than 100% of deposits.
FYI, all major banks switched off of fractional reserve banking more than a
decade ago and have moved to another system that uses a multitude of different variables.
No reserve banking, like fractional reserve but the fraction is zero. Instead the banks have to be able to pass stress tests which requires that they have reserves which in effect will be a fraction of deposits. It’s more complicated, less transparent, open to gaming, and there is huge incentive not to fail a bank. Also they often allow the use of cash-like instruments which are often riskier and less liquid and probably misrated by compromised rating agencies. The standards were lowered so that the banks would inflate the economy.
Institutions deemed relatively safer (e.g. JPM Chase) are the banks that people withdraw to. Nobody is taking out $20M in cash, they're moving it to the "too big to fail" banks.
That got me wondering why anyone leaves amounts over 250k anywhere else.
If you have 5m are you going to open 20 bank accounts? If there's a wobble you'll need to dig out a lot of credentials to move your money, and you'd end up moving it to a TBTF anyway.
If you have that kind of money in cash you pay someone to do that for you. If you want access to your money you don't juggle credentials, you call your banker and ask.
Actually even if you don't have millions you can use sweep accounts that automatically spread money across multiple bank accounts. Fidelity has one that anyone can use.
>If everyone knows this, why keep your money there?
Because that applies to literally every single operative bank, and given FDIC insurance and other refulation, the risk of deposit losses for average joe is so small that they do not need to care.
Not really the money can and will be clawed back if a bank is placed into bankruptcy or receivership. The legal system disincentivizes runs on the bank by enforcing a 90 day look back period where withdrawals have to be repaid so that funds can be distributed more broadly and fairly.
It’s not always 90 days, but the American federal bankruptcy system does allow for clawbacks on payments made immediately leading up to a filing.
Meaning, the bankruptcy administrator will absolutely file and get a judgment on your assets, which will be forcibly collected, if you received a payment from a bankrupt entity within the window established by the court.
Bank insolvency is not handled by courts. FDIC has sole and complete control of bank insolvencies. FDIC is the receiver or conservator for handling bank insolvencies by law.
FDIC doesn't claw back bank transactions that have "settled". So if you wire cleared, you are good for the money.
Search for "FDIC Discretion Without Ongoing Judicial Oversight" in the document below
No ongoing judicial oversight Pursuant to Section 11(d)(13)(D) of the FDI Act, except
as otherwise provided, no court has primary jurisdiction over any claims or action for payment
from, or actions seeking a determination with regards to, an institution for which the FDIC has
become a receiver. Further this provision also limits courts’ ability to engage in a review of any
claims relating to acts or omissions of the institution or the FDIC as receiver. Under Section
11(d)(13)(C) of the FDI Act, no court may issue an attachment or execution over the assets that
are in the possession of the FDIC as receiver.
Check out the Madoff documentary on Netflix, there are interviews with people who had exactly that happen as they clawed back funds to try to make everyone whole.
Not sure if this type of cynicism is more Reddit than HN, but somehow I suspect the rules are more likely to be written by the guy with the 5M deposits and his even richer friends.
The correct term is receivership but that is confusing for most people and the general principle is the same. When you go bust, the court/trustee/receiver combs through transactions and claws back assets as part of gathering/selling all assets to pay creditors
It really isn't your money is it. I used to think these "get your money out of banks" folks were kooky we-didn't-land-on-the-moon conspiracy nuts. The more I read this thread, the more I think they are right.
That's not why there's a tech bank run. The reason there's a tech bank run is because VCs, and the companies they own are like geese. They fly in a triangle.
Thiel tells his startups to bank-run SVB, and they bank-run SVB, and all the other VC start telling their firms to follow suit. It's all herd mentality among an undiversified group of customers (startups all of which are hit hard by raising interest rates), which is perfect for a bank run.
I have to imagine that if you have enough money in First Republic for your withdrawal to actually be a problem for them… you at least have a dim awareness of, say, the WSJ front page.
Why would they sell the mortgages now? Why not just hold them. When they originated and funded the loan they did it with deposits or fed funds, why not just hold and collect the payments?
If there is a run, then selling is actually the worst thing to do because theoretical losses become irreversible actually losses. It’s highly likely interest rates will go down in a year or two but.
If there is a run, they become forced sellers, because they don't have enough cash on hand to meet withdrawals. That's the whole story. They must prevent a bank run.
No, the inverse. Banks are required to keep a % of deposits available in cash, another % in easily sellable assets, etc (lots of regulations here, esp post 2008 crisis, though the US exempted community banks from the new rules, which contributes to the current crisis) in order to reduce the risk that a bank run puts them out of business.
But a big run can exceed those safeguards, as appears to be the case here. The bank can’t offload enough investments to meet withdrawal demands.
Sorry, I meant is there a law preventing limiting withdrawls. If not, I don't see why banks don't just do that, when subject to a run, so I guess there must be. In other words, the government says that deposits must be always withdrawlable immediately on request, which seems like a surefire recipe for runs.
IANAL but my layman’s understanding is no, there is no law preventing them from halting withdrawals and a temporary suspension can on rare occasions stop a bank run. Problem is, clients can sue to get their withdrawals and the judge in charge of the case can force the business into involuntary bankruptcy proceedings (without the protection of voluntary bankruptcy) if they think the bank can’t meet the withdrawals in full, to get a valuation of its assets so that the plaintiffs can be made whole. This won’t happen over the weekend because courts aren’t in session but can happen on a week or two timescale, in which case the business is basically frozen for months while everyone fights over a half dead carcass. It’s a relatively catastrophic outcome for everyone involved.
Normally contract law. You select an account offering with different procedures for liquidation.
A demand deposit or checking accound has little or no notice. A money market may take a day or so for underlying assets to be exited. CoD's and such typically don't even have the option for withdrawal. You just have to wait for maturation.
Point is, you know this when you open the account. They should take great pains to ensure you understand the instrument... And to manage things appropriately, which apparently, SVB did not.
As rates go up, those mortgages will become less valuable (because they pay a lower interest rate than new loans will). At the same time, rates going up means the bank is going to have to pay more in interest to depositors, meaning they will need to offload assets to maintain their margin requirements.
This is why commercial banks tend to not hold on to the loans they originate any more, and instead sell them to funds. There is correlated risks for the banks, where their assets become less valuable at the exact time they need to sell them. Banks don’t like to hold mortgages for this reason.
I assume they sell these loans if the amount withdrawn outpaces what they have cash on hand. Since their mortgages are mostly mortages from the low interest era, they're less valuable to buyers.
If there is a run, it's a question of whether they have enough liquid cash. If they run out they have to start selling things unless they can somehow get some other kind of cash injection.
> This is about as strong as a signal they could put out to stop a possible run.
Or a desperation signal, which might actually trigger a run. Like what happened with SVB.
The minute the CEO of SVB tried to reassure investors and told them everything would be ok if they just kept their deposits with them, immediately everyone started withdrawing.
Are the “safe” banks all putting out statements about the strength of their financials? They probably don’t feel like they really need to say anything. They feel safe, and that’s what keeps them safe. The moment they panic, their clients panic.
Another interpretation is that this is generally how the FDIC likes to do things: take over on Friday and reopen on Monday. Not sure that will happen in this case but the regulators get two days to prepare to reopen, which at least in recorded US history is seamless and without risk for retail depositors.
The 2-day shutdown is hence critical for the functioning of the financial system. Same for reporting earnings afterhours. Those calling for 24/7 trading are aloof of how entrenched systems need change management
matt levine has a tongue in cheek post from ... march 2020 (jesus, nearly 3 years ago to the day) that the markets should only be open for 30 minutes. do your research in the other 23 hours and 30 minutes, and trade in the small window.
Won’t we see “24hrs platforms to prepare trading” where transactions would get ranked and bet upon, until the auction-of-the-day, so, the platforms would act as the stock exchange and the actual auction be relegated to clerk approval of existing transactions?
The $42B that depositors pulled out of SVB has to go somewhere. FRB is the next-best-choice for many startups; they are also startup-friendly, have plenty of branches in Silicon Valley, make it pretty easy to open an account, many of these companies may already have accounts or banking relationships with them, etc.
This is one way in which the current crisis is self-limiting. It was brought about because SVB took lots of deposits when rates were low and invested them when bond prices were high, and now they don't have liquidity without taking a loss. But if banks take lots of deposits now and invest them when bond prices are low, their average cost goes down and it's much easier for them to satisfy customer withdrawals without taking large losses.
It becomes a crisis again if all the banks start failing at once, because then the likely consumer behavior is a flight to hard cash or crypto rather than another bank.
The title is mine; given that this is an 8-K filing, there is no built-in title. First Republic Bank, a San Francisco regional bank that's seen its stock affected by the Silicon Valley Bank collapse and is often compared to SVB, filed this with the SEC today (Friday) to reassure investors (and clients) that its situation is different from SVB's.
In general, if anyone wants to go through all the recent 8-K filings, this is what SEC EDGAR is for. Here's a link that'll bring up all recent 8-K filings by date and time, descending:
In general, I would expect a ton of 8-Ks on Monday the 13th for companies to release information on their exposure to SIVB, particularly if their exposure is minor or non-existent.
Thanks for that. I find it interesting that so many of the companies filing SVB-related 8-Ks (even if to say "we have no/minimal deposits with SVB") are biotech/pharma. Traditional tech gets most of the attention, but SVB has been the Bay Area's biotech banker as much as anyone else, and thanks to its specialized wine practice is probably even more dominant in that sector.
Same with startups. If you are an investor and not that company’s first call, then one of two things happen: email saying not exposed, or silence as they work through things.
IANAL, but I don't think fiduciary duty requires you to disclose SVB exposure. If anything, disclosing it might trigger another run on an otherwise easily survivable state.
Sure you can. I'm sure you'll do integrations with 9001 different legacy systems and the other endless bullshit that comes with software dev in the public sector. All by yourself. Let there be no doubt that you had it all planned out in your head already in the 10 seconds it took you to think up that comment. Because you're that good.
1. I don't have much to gain from such a thing, but someone in the know might have tremendous amount to gain. Hence the `if anyone wants to fund it`. It would have to be worth my while.
2. Yes, I am that good and could certainly build it. My tech is magic. I can turn any complex domain into the simplest form possible.
I’m not super well informed about this space, but my understanding was that SVB’s issue wasn’t that its depositors were from the tech sector, but rather that it had put a ton of capital into investments that are significantly less valuable (on the open market today) now than they were a year ago due to increasing interest rates.
I’m curious how the tech sector matters here specifically?
The tech sector has been withdrawing money in aggregate (because they continue paying payroll and rent but haven't been raising as much money recently) which increases liquidity pressure, and furthermore tech depositors are more skittish due to experience with FTX and thus prone to panic bank runs. They also have larger average account sizes, way beyond FDIC limits, which makes them more likely to need to withdraw money to protect their cash.
SVB did have some issues with losses but they likely were still solvent; the bigger issue was just a lack of liquidity and a sudden bank run - 45 billion (out of ~175 billion in deposits) was withdrawn in a single day before they ran out of liquidity.
It’s possible to void past transactions, but usually due to fraud, favorable preference, or insiders. I think the preference rule only applies if it is the borrower (the bank) who decides who is getting paid. Making good on transaction obligations in the order they occur doesn’t seem like a decision of the bank.
Having a 90 day window before insolvency to void transactions would probably smooth out the insensitive to make a run on the bank and give the bank time to find funding. More people would keep money in on the belief they already missed the window, perhaps enough for the bank to to stay solvent. But if that money was used to pay salaries you’re now forced to extract it from people living paycheck to paycheck. Incurring an instant debt for the depositing company would be worse than losing access to cash and even more companies will be sent insolvent.
Instead I think banks should have to get full deposit insurance, if the risk premium is too high then maybe they should consider restructuring to be less risky. Instead they get a free ride by shunting risk to depositors which incentivize the banks to leverage up to the max risk they can get away with.
The bankruptcy code provides guidance for a 90 day look back period from the date of insolvency where transactions can be clawed back or must be repaid. The FDIC will talk to the recipient bank and get a court order to deposit the funds in to a trustee account so that all available assets can be distributed evenly and fairly.
They are very unlikely to do that to normal individual account holders. It would undermine the purpose of providing the deposit insurance in the first place.
I would bet many accounts had balances well over the $250k cap and had larger withdrawals that, if left completed, would reward the first movers in the run on SVB to benefit to a greater extent than account holders that waited.
I agree that people below the threshold won’t see claw backs.
I might be wrong here. I think I'm confusing it with their ability to claw back executive pay. Under bankruptcy the court can absolutely claw back withdrawals, but an FDIC takeover isn't exactly a bankruptcy.
The tech sector isn’t an issue in itself, it’s that (1) all their deposits all came in at once because it’s one sector, so there was a huge demand surge for deposit interest, leading to a supply shortfall of loans they could issue and hence kinda desperately parking the money somewhere, which ended up putting their risk balance off kilter (bonds with interest rate risk); (2) all of their depositors (aka creditors) talk to each other and listen to the same people, so bank runs happen really fast. Compare this to First Republic bank: demand for deposit interest does not surge dramatically because there is finite liquid cash needing to be deposited and so one sector getting a cash infusion comes at the cost of another. It smoothes out. Plus their customers don’t all talk to each other and behave like worst-case bank runners.
All sectors are pretty highly correlated in the cash they have on hand and how they behave with it. It would be equally risky to be a bank that only deals with oil companies. Nevertheless it offers efficiencies for acquiring new customers and new business, so banks do it.
The big concern is the contagion spreading. All banks are vulnerable to failure if deposits are taken out quickly, especially in this market where assets have taken a huge hit over the last 12 months.
FRB wants people to believe the contagion is limited to tech and that they have limited exposure to it, so that folks don’t take deposits out en masse. If people start to think that it’s unstable, then they’ll take money out and it’ll be a death spiral like SVB.
If people don’t get their access to their cash by Monday (or a week later at latest), then any rumor of liquidity issues at any bank will lead to a bank run. Once you know / experience it, bank runs feel like a legit thing to do.
I know people who had their checking and savings at Washington Mutual when it failed in 2008.
The FDIC arranged for Chase to take it over. Nobody lost any money, and nobody I know had any problems with checks clearing or withdrawing cash at ATMs or paying their rent or mortgages.
I think the demise of Washington Mutual is still considered the biggest bank failure in US history, it happened while quite a lot of other bad things were happening, yet depositors ended up being totally fine. The systems in place for this are actually really good, and the FDIC is fast and competent.
The FDIC almost always pays insured depositors within a few business days of a closing, usually the next business day. Payment is made either by providing each depositor a new account at another insured institution or by issuing a check to each depositor.
FDIC says SVB customers will have access to insured funds on Monday, so seems like the answer to your question of how long it takes is “next business day”.
No rational reason, however during bank runs rationality tends to go out the window and even banks that are perfectly safe on paper can find themselves in trouble.
If First Republic could say they could meet all depositor demands, they would have. But instead this is the most they can say to stave off a run.
And to their credit, the fact that they're not tech heavy means the tech firms pulling from SVB aren't likely as scarred and pulling from First Republic. But First Republic has a ton of HNWIs too who are not insured.
This isn't Bank of America serving mom and pops, it's rich people who will pull and are uninsured by FDIC.
Matt Levine reports that the reason they had to buy those low-yield investments that plummeted is because it’s tech-sector customers had too much money in the boom times. Too much deposits means they need to buy a lot of something, and in the boom times that was low-yield stuff.
Sort of the other way to handle it would be to say “we can’t find risk-free yield for the volume of cash we just had deposited, so deposits now get 0.8% instead of 1.0%”
Which is kinda fine? Means you might lose some business as others chase yield. But I feel like most startups don’t actually have that much cash in the bank so they shouldn’t really be chasing yield anyway.
It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
> It didn’t take a genius to predict interest rates were going to rise. Locking cash away for 10yrs in very low % return vehicles seems stupid?
Everyone is a genius in hindsight. You could have made millions out of a few thousands if you were able to predict an interest rate regime change. But where are your millions?
I locked in a 30yr fixed mortgage at 2.49% right before the spike because it seemed obvious? Not sure if that counts, but that should be enough cred that I made a large bet on my prediction when it mattered.
Yeah plenty of folks I know felt similar, myself included. I bought a home during the pandemic. Prices had increased a fair amount in my area which worried me, but the ability to lock in such a low rate for 30 years more than offset that concern.
you don't need a to be a genius to have known that the 2.4% interest rate won't last for ever. Everyone in america with a mortgage knew that and rushed to re-finance. So why did bank managers not know. i think its more like, they had no other good options to park their cash. So they took the best of a bunch of bad options
They would've had to go to 0%. As cormacrelf mentions, short-term treasuries in 2021 were yielding < 0.1%. That's a pretty hard sell when inflation is running 8-9%.
Some banks did exactly that. Even now, when SVB is advertising 4.5% rates on business checking [1], First Republic Bank is offering 0.01% on Business Interest Checking [2]. But note that SVB's failure impacts all sorts of household names like Roku, Roblox, Coinbase, Stripe, while FRB reports that tech is only 4% of their business. Companies that don't offer yield lose out to companies that do in the yield-chasing competitive marketplace.
We're observing some form of anti-survivorship bias, where risky behavior was incentivized by the market, so market participants had to engage or get pushed out of the market, and so now we hear about the risky behavior because that's what failed. We're not talking about banks like FRB or Wells Fargo that offer 0% on their bank accounts.
That’s a sign of mismanagement if true. Commercial/retail banks (as opposed to investment banks) usually make basically all their money on lending. Deposits (as liabilities) need to be so low risk that they basically don’t do much more than break even.
Back in 2021 short term T-bills gave you less than 0.1% yield, hitting an all time low of 0.04% for some timeframes. The bonds they bought gave them 1.5% annual return. The banking regulations didn’t prevent them buying the ones they did. So yeah. That’s why.
I'd rather have a bank do that, than go and invest in subprime packaged mortgage loans. Except SVB got punished for investing in long-term maturation US Treasury
I'd also like to point out that VCs were telling all their portfolio companies "Pack it in and conserve cash as you're not getting another round." That caused a lot of companies that would otherwise have put their cash into an investment vehicle to instead hold it in their accounts.
It will also be interesting to see if someone is going to wind up in jail for initiating the bank run. Someone shared confidential info that started this whole thing.
Was it confidential info? The public earnings call was three days ago, investors didn’t like what they saw and the stock went into free fall, then the run started yesterday.
I think insiders might not even have realized how bad their balance sheet looked. On the earnings call the CEO was talking about how much he likes cycling to de stress, etc
It matters because recent underperformance in the sector led to the initial deposit outflows in the first place. If you’re concentrated heavily in a single sector, you’re likely to see higher correlations in the behavior of your depositors.
Every asset is a risk. Banks should have right to do exactly two things. Keep their customers saving and issue loans. There's plenty of risks even in that activity. Every other thing bank does is just piling up risk to unreasonable levels.
The difference is, who created the risk. When you buy asset from someone else you are buying the risk someone else has created. So you have more risk. Banks are very unique institutions that are allowed to do things no other business is allowed to do. They also should be equally severely restricted so they can't acquire any additional risk they themselves didn't create.
Banks are risk sources in the economy, the risk of "what if borrower doesn't pay in full or at all", the law should do everything to prevent banks from being risk sinks in the economy. Because in current setup banks just buy more an more risk and they eventually collapse one way or the other when risk is en masse converted to cost to the people and the economy.
Issuing a loan is buying an asset. You give the borrower money and in exchange buy their promise to pay it back with interest. And in fact that’s what SVB did, except instead of originating the loans themselves they bought them from the original lender.
To buy good loan you have to check whole supply chain. To issue a good loan you need to check only the borrower and you have every incentive to do so if you can't offload the loan to someone else after it's created.
Exactly. And it's a work that bank has to put in if it can't sell the loan. But if the bank can sell the loan it becomes "check the borrower or bullshit the buyer" and the banks decided latter is less work. And that's why 2008 happened.
> What's really the difference between issuing a loan and buying the same loan issued by someone else?
Risk. When you are issuing a loan you, yourself are in control of the risk you have created. When you buy, you can easily buy massive amounts of risk someone else have created and you can easily be overwhelmed even when you try to do industry standard, responsible, "safe" thing.
I think this was a weird thing where deposit demand was so much greater than loan demand. They had too much money and thought they were doing a safe thing. But failed to consider the time aspect and how rapid interest rate increases nuke them.
Banks do provide a valuable service and having them reject deposits isn’t a solution.
Glass-Steagall only prevented commercial banks from owning non-investment-grade securities - from what I have read, SVB’s portfolio (of Treasuries and MBS) would’ve been entirely consistent with pre-repeal Glass-Steagall.
SVB would have failed even it held only Treasuries on its book. Those are literally used to define the risk-free rate of return. The assets were not risky. It was their duration mismatch that was the problem.
That’s also totally wrong. What do you think the financial difference between originating a loan and buying a bond is? You pay out a principal sum, then (as long as the borrower is creditworthy) you get back the principal and interest.
Unless you only make floating rate loans (which is extremely rare outside of revolving lines like credit cards) then you have exactly the same duration risk problems and you’re actually exposed to much greater credit risk with a loan than you are with a government bond.
To issue a loan you need to individually check the borrower, and that's it. With bonds you put your trust in the whole system that banks apparently (as SBV debacle shows) don't understand (bacause they can't or because they have incentive not to understand).
Also, floating rate loans and mortgages are super common. Maybe not in US.
Or open at two of the 2big2fail - the chance that both go t-bills up at the same time is very low (and the one that doesn’t go bankrupt can provide the liquidity until the other resolves).
"Trading in Pacific West, Western Alliance, and First Republic were stopped due to volatility after they all initially fell 40 to 50 percent. Trading was also briefly stopped in Signature Bank after its shares fell nearly 30 percent. Several of those banks sought to reassure the market by putting out statements highlighting their differences from SVB in terms of asset and depositor base."
I'd really like to know where people are withdrawing their money from these banks to. They're not taking suitcases of cash, so it must be flowing to some other financial institutions. Is it going to traditional big banks (BofA, Wells, Chase, etc.)?
Yes -- all the people I know withdrawing from small banks are going to Chase or Morgan Stanley. These largest banks have to mark-to-market their losses and have a lot of cash (short duration) assets, and are literally too big to fail.
Confusingly, the two banks you named are JP Morgan Chase, and Morgan Stanley. JP Morgan Chase is the biggest bank there is, but Morgan Stanley is far smaller (but still ginormious) and doesn't rank in the top 10 banks. The top 3 banks are JP Morgan Chase, Bank of America, and Citigroup.
Within JPM Chase, the "JP Morgan" or "JP Morgan Private Bank" brand is used for (V)HNWI banking and the "Chase" brand is for retail (although Chase does have a Chase Private Client arm for almost-HNWIs). Due to the nature of catering to VHNWIs, "JP Morgan" of course offers wealth management services.
Morgan Stanley is a completely different company with no (current) ties to JPMC.
The reason JPMC and M-S share the name "Morgan" is because the investment and retail sides of the bank were split during the Great Depression due to Glass-Steagall, almost 100 years ago.
And, more importantly, are national banks regulated by the occ so they can't do the same kinds of risky things that svb & co can do. (They can do other risky things that they come up with historically, especially pre dodd-frank, but not this)
idk how many companies are doing this right now, but recurring investment on 4 week T-bills are safe, can absorb arbitrary amounts of cash, and yield much more than the large banks. But it can take a bit to set up a TreasuryDirect account.
Everyone and their mother aping into T-bills will also have the effect of lowering the rates on Treasuries, making 1.5% bonds a reasonable choice again.
I’m thinking our diversified stock portfolio is safe (in that the number of shares we hold should not change, and it’ll go back up before we need the money decades from now).
I’m hoping that’s not naive.
I’m curious about Wealthfront’s strategy of spreading savings across many partner banks to get $2M in FDIC insurance per account though.
I can't speak to Wealthfront specifically, but what you're describing with them is very commonly called a sweeps account. They are explicitly understood under FDIC's rules as automated balance accounts.
Where you can run afoul is if you personally have accounts at the same banks that your sweep accounts use. And you might not even know it. E.g., Mercury isn't a bank: they use Evolve Bank and Choice Financial Group. So if you also had an account at Evolve bank, you're capped at 250k across the total of both accounts.
Note that the limit is $250K per person per ownership category per bank, so if your sweep account is in a different category (single vs joint) than your direct account, your ownership in both is insured up to $250K.
I'm sorry buddy, but this is no longer about tech or bonds. This is more about whether you can survive a withdrawal storm. This is more about whether someone will back you up with credibility.
It’s whether or not they have HTM assets that will bring them under if they have a run on the bank. A lot of the depositors are rich Silicon Valley residents and they may get spooked and pull their money. That’s the issue in this phase of the contagion.
Ahhh yes. History doesn’t repeat, it rhymes. And, this limerick reminders me of the post-1985 S&L crisis. But, no banksters go to jail anymore. Thing is, once it’s no longer politically tolerable through threats and fear mongering and some blackmail, eventually the government will bail them out again for another rinse - wash - repeat cycle. The schedule is likely as prior. Warnings. Government involvement. Followed by a market crash (a la 1987), and maybe even both a stock market and bank holiday for a time in the hopes back door dealings can paper over the concerns until they re-open. It’s either a cliche or a trope at this point. Not sure which. The FED knew what its rate increases would do to its member banks. If you don’t think the regulators have direct knowledge of balance sheets of its members, there’s this oceanfront property in Arizona you might be interested in purchasing. It also knew which banks could withstand it (either through no or private or public or both private and public assistance) and voted in favor of the chosen winners, result will be greater consolidation with the majors always coming out on top in the end and the smalls and mids either bellying up or taken over / bought out at pennies on the dollar. Double win for the majors. It’s an old playbook and publicly available script given the data (deemed mildly trustworthy). Good luck all.
Contagion. People are nervous that other banks are as insolvent as SVB. And even if those banks aren’t, nervous people making a bank run could replicate this. And if another bank falls, then another it would increase velocity and spread more rapidly until every bank is wiped out.
Only if you have more than 250k in the account - the first 250k is insured by the government and if the bank fails is typically paid back in less than a week.
Thank god, a single source of good news is better than none. Does anyone have an aggregate view of the LCR / NSFR metrics across U.S. banks? I'd love to see the risk trend here at a wider scale than single bank disclosures like this one.
Why? Because I'm really nervous that SVB was in no unique situation -- after all VCs / Startups share a lot of low confidence and low cash traits in common with other investors.
It's trippy to see my own tiny contribution to tidal waves like this:
> First Republic’s funding relies in large part on wealthy individuals who increasingly have a range of options to seek higher yields on their cash at other financial institutions as interest rates have risen.
Over the last year I kept my FRC checking account at 100 (not the real number). A month back or so I dropped it down to 50 and moved the other 50 into T-Bills.
Depends who is asking and when they ask. When there's a run, 2% is clearly bad for depositors wanting their cash back. When times are good, the banks investors want capital working as hard as possible to low available assets (usually) means more profit.
As a long time customer of First Republic, I know them to be sound and very well managed. They are not Silicon Valley, which is also a good bank with a very valuable franchise I expect money center banks to be vying to acquire from the FDIC shortly, with some undertakings from FDIC, and all depositors to be protected. These two banks are very different in their balance sheets. As to First Republic, the concern is way overblown and I'm going to buy some First Republic stock tomorrow, as this price is ridiculous now.
I'm a customer of FRB and they are definitely a "rich person's" bank (I'm probably their poorest customer" but their customer service is so flippen good. They assign you a banker that you can email day or night, weekend or weekday and they'll usually help you within a few hours. I've asked mine to set aside some currency for travel to a country or to wire some money and they handle it all with white glove service. I really hope they stick around. They're my favorite bank in the world.
They also have delicious homemade cookies and free umbrellas for when you visit.
FRB expanded their business by catering to the HENRY population (high earner, not rich yet). So they've got a lot more customers now with medium-large deposits. This should actually make them less vulnerable to bank runs. Some techie with $40k in their account is well protected by FDIC.
As a customer of FRB, I know this to be a very sound and well run bank. They also have strong relationships with customers. This is not a Silicon Valley Bank story. I am going to buy some of their stock tomorrow, as it is an amazing buy at this price.
Their balance sheets says $17B assets more than liabilities, but $120B of those assets are in consumer loans and only $4B in cash... What kind of liquidity is that? $42B was just pulled from SVB. What are these banks doing?
This is all the fault of the fed and ZIRP. It's the S&L crisis all over again. Any bank that has not hedged their interest rate exposure is a lot of trouble right now. I don't want to claim zero big banks are in trouble, but I would claim that zero big banks are in trouble due to unhedged interest rate risk.
This might be downvoted due to the FED finger point, but that aside it is exactly right. A responsible banker would have invested in floating-rate securities or hedged the fixed-rate risk via interest rate swaps. SVB was certainly sophisticated enough to know this.
The mortgage is one of the assets seized by the FDIC and sold off to meet bank liabilities. On your end little should change in the short term, and you may have a different owner for the mortgage at some point (and as I understand it, your mortgage changing ownership is a fairly common occurrence in general). As far as payment and servicing goes, there should be continuity in how that is handled.
In short, you'll still owe somebody, it just won't be a bank that doesn't exist anymore. Over the short run, the FDIC or an acquiring bank will take over the back-end of the payments, which will be made much the same way as they are today.
- Their actual assets market-to-market (sold on the fair market) is about $26 bln less than the amount they're carried at on their books. This is as of year end 2022, probably more today.
- This would wipe out all their equity, loans, and start hitting depositors.
- If there was a bank run, First Republic probably would not be able to meet all depositors.
- First Republic in some ways is in worse shape that SVB. SVB had all their assets in medium duration (10 year) treasuries. First Republic has a lot more 30 year mortgages they gave people at ultra low 2% interest rates. Today 30 year mortgages are 6%, which means if they tried to resell these loans they'd get more than 50% off.
- Personally, I know of at least a couple of HNWIs who pulled funds other than $250K today. Who can blame them -- what's the upside if you have more than $250K in? First Republic relies on wealthy deposits, and these are not insured.
[1] https://archive.is/QuOSD#selection-335.147-335.315