Fear Is Contagious

The collapse of Silicon Valley Bank dominated financial media coverage on Friday, overshadowing an update on the US labor market that might've otherwise engendered good vibes thanks to a favorable mix of robust job creation, cooler monthly wage growth and better participation. SVB's undoing unfolded over less than 48 hours, a testament to how quickly things can go awry for banks which, at heart, are all insolvent. If everyone comes demanding their money at the same time, banks will collapse due

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12 thoughts on “Fear Is Contagious

  1. Don’t kid yourself. There will be contagion. And financial conditions are tightening rapidly. Svb is the second largest bank failure in the US. There are more skeletons out there, no doubt

  2. At $8 trillion, (46% of all U.S. bank deposits), uninsured deposits are double the level of bank reserves at the Fed. If uninsured depositors flee the banking system, the banks may have to “run” on the Fed by withdrawing their reserves to make up the shortfall. Uninsured deposits are nearly four times the level of bank equity capital ($3.35 trillion). With so little capital, is there a first mover advantage for uninsured depositors who “run”?

    1. Run to where?

      Most likely is to break up an un-insured deposit into multiple insured deposits at multiple institutions – no impact on aggregate reserves.

      Have armored car deliver $ millions in paper bills to one’s basement – this happened occasionally in GFC, but not for long.

      Buy T-bills – there’s a reason why the depositor previously chose not to do this.

      It is very hard to flee the banking system.

  3. Ironic to say the least, SVB’s deposits tripled in the last couple of years, just in 2021 they bought Boston Private and had what looked like a thriving wealth management business, but in the end they just had too much duration, gone in 2 days. This is what happens when banks gamble depositors cash by buying unsafe speculative securities like US sovereign bonds…

  4. Out of curiosity, do we know the total deposits at SVB as of March 1? I was a former customer, when I was riding a 2010 wave of Youtube access to international ‘1% nation of’ tech enthusiasts without a job and interested in spending some low interest dollars on ‘something new, evolving and exciting’. With 100% yoy growth we got our coveted SVB account/line of credit based on our bootstrap revenue multiplier. However around year 5 of the adventure, we were plateauing (at 1000ish% revenue vs year one but 5ish% yoy).. and in need of a cash for a major R&D investment for 3rd product line. The SVB didn’t want to help with new vehicles, we had to move on to a regional that would..

    1. Thanks d-con. Your story points out that are or were providers of cash to some lucky startups. In the past, a lot went to fund stupid things, but not all.

      I worry about what promising genomics research is being dropped as funding from SVB dries up, accelerating what is already happening.

    1. Personally, I would put all the market moves on uncertainty. Nobody actually knows what will happen or to whom in the next fortnight so they sell stuff. Fortunately, there are a few folks out there in the dark behind the stairs, who, although they don’t actually know anything either, except that this was all an overreaction creating chaos and there is always money in chaos so they buy the other side and settle things down.

  5. Thanks for the stark reminder, H. I was a bank consultant for three large country banks and wrote many grad papers about this business. One I help save was a savings and loan with a negative $13mil in capital. It was the last S&L in our community and the feds wanted it to be saved so we converted it, were given a forbearance agreement to ignore the capital problem and raised new capital of 2% of a reduced stock of assets. Over the next three and a half years, we recovered over 90% of all loan losses previously taken off the books, cut our taxes to zero, got in three new businesses, doubled deposits and sold the bank for 7 times the new capital we had raised. That job showed me just how close to nothing banks are worth. I think the feds were forced to see that in spades in 2008-09. Many larger banks were closer to the edge than we knew then.

    Two of the ironies of the past couple years include the essential exit of Goldman from the consumer bank business and the dismantling of WFC. GS is supposed to be the real brains on the St and they couldn’t making consumer banking work. The other irony is that among the biggest banks, only one saw a stock rise yesterday, Wells. This bank, once the premier consumer bank in the country, and the biggest mortgage lender with the lowest loss ratios, is now essentially the leper of the industry. The new CEO has really done nothing except start the process of exiting the banking business. No mortgages to non-customers, other business lines completely shut down. As far as I can see Warner’s victim now has no competitive advantage of any kind. Their stock went up because they had no connection to SVB, venture capital, or anything innovative and SF is their home base. Shocking.

    One other aside here is that changes in bank stock prices cause no change to bank capital or to a bank’s solvency. Market value is not connected to the bank’s assets, cash flow, loan values, reserves or any other aspect of “bankness.”

  6. Goes both ways.

    FOMO – dotcom, bitcoin, recent tech “innovation” and “disruptors”

    Then the other way – Bank runs, illiquid credit runs, stock selloffs (Dec 2018, Mar 2020, etc etc)

    Behavioral finance, Reflexivity. Add it to fundamental analysis and that is the edge of great investors and a huge advantage for retail. A failure of most pros and investment firms.

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