How SVB Failed And What Might Happen Next

"Despite the bank being in sound financial condition prior to March 9, investors and depositors... initiat[ed] withdrawals of $42 billion in deposits, causing a run on the bank," California's Department of Financial Protection and Innovation explained, in a filing describing the circumstances behind Silicon Valley Bank's overnight insolvency. The regulator cited SVB's "mid-quarter update" -- which announced a capital raise and detailed the fire sale of $21 billion in Treasurys and MBS at a larg

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19 thoughts on “How SVB Failed And What Might Happen Next

    1. I said this here previously. There will be contagion. It would be ideal if the regulators could arrange a merger over the weekend. For you monetary hawks out there, you can forget 50 BP hike now. If the fomc was smart, they would pause qt and reevaluate their pace of hiking short term targets. The safety and soundness of the banking system now takes precedence.

  1. Maybe I’m missing something really obvious, but I have to ask, why would anyone leave such large uninsured balances in a bank when there short term Treasuries, money markets and such safer alternatives available (often providing, at least for the last year or so, not insignificant yields)?

    1. I may be too old to think, but I can’t see why there needs to be some long chain of failing banks from this situation. Its main assets will survive in tact when taken over. Losses marked to market will be picked up at their reduced value and losses written against the new bank’s earnings, creating nice non-cash tax losses and if recovered, they will create taxless capital gains. The biggest problem is the potential loss to the ventures with cash in the bank. FDIC doesn’t have to pay corporate depositors as far as I know. However, if the government finds a way to bail these guys out then there really aren’t and losing dominoes I can see.

      1. I’m with ya. Famous last words and all, but this doesn’t strike me as anything resembling 2008. We could see a shakeout in some tech companies that likely weren’t long for this world anyway, but any company worth its salt will find the liquidity it needs until SVB deposits get sorted out and I honestly don’t think the Fed needs to do anything other than make it clear that they won’t allow this to become another Lehman Brothers moment. Worst case, I could see them providing the backstop to avoid contagion.

        Frankly, if we can make it through Covid without a massive economic depression, it’s going to take a lot more than this to cause any major damage across the economy.

  2. “Shorts made $500 million in the collapse…” Hmmm, i wonder how many of the shorts might also have been advising friends (or management of portfolio companies with deposits at SVB) to get their money out asap? [I’m not a conspiracy theorist, just cynical out of experience, about ways of the financial world.]

  3. I don’t have a reasoned opinion on whether the banks will start to “zipper” (a rock-climbing term for a very bad thing), although my gut feeling is “no”.

    The Fed should ideally stop tightening when it has carried out its inflation mandate, not based on poor risk management by a regional bank, so I think the federal govt should ideally facilitate a takeout of SIVB/DINB by a big bank. Alternatively, extend credit to address liquidity (how long it will take to sell SIVB’s loans and other less liquid assets) but not solvency (if SIVB’s recoverable assets are insufficient to make uninsured depositors entirely whole, then they get haircuts).

    So what does an investor do while waiting to see what happens? Work on bank stocks? Banks are irritatingly “black box”-ish. Instead of trying to puzzle through FRC or PACB, I spent the day working on a broker that got hammered last week on pre-existing cash sorting concerns plus presumably heightened duration risk concerns. Brokers are less of a black box than full-on banks, even if they share some bank-like drivers, so I think one can reach some reasoned conclusions without having to be a “bank whisperer”.

  4. H-Man, SVB has wiped out all shareholder equity, deposits are another problem. If I have $50M in deposits, it could be $250K depending on the what the assets get in this market. If the assets of SVB are a Treasury/swap portfolio, it is a declining asset as the long term rates compress the short term rates. Like who is going to buy a losing trade? I guess somebody who wants a very large discount. So what are those assets worth when the bank is burning. So when that problem is solved, what do you do with uninsured deposits? I guess you just tell them have a nice day and, by the way, you have no money. Meanwhile $66B of loan commitment goes up in smoke, so no new money for the VC’s and no new money for companies. Time to layoff people, not pay people or suppliers like Etsy. Not really good times for the tech world.

    Problem was borrowing short and lending long. Not a good plan with an inverted curve. How do you make money on the spread when your money leg pays less than your borrowing leg? So who else was playing that game probably tells us how bad it can be. I guess it may be a function of the capital cushion which will tell us who makes it and who sinks. Right now it looks like there could be a lot of burning boats. Time will tell.

  5. For SVB depositors with deposits in excess of the $250K FDIC insurance limit, this seems to boil down to two basic issues. The first is how long will it take to get access to their funds in excess of $250K (for example, to make payroll etc) and the second is how much of their deposits in excess of $250K will they lose? At worse, given the “collateral” behind the deposits is down 10% or so in value vs. cost, then each large depositor’s recovery shouldn’t be any worse than 80 to 90 cents on the dollar.

    But of course, there will likely be a fed gov’t decision to protect the full principal of all depositors if only domestic depositors (to prevent any near term runs on any other banks). I spent some time on the internet trying to find any examples of uninsured depositors in failed FDIC-insured banks getting less than 100% of their deposits, and since early 1990s I couldn’t find any such situations. The FDIC charges insurance premiums to its covered financial institutions based on a reasonably complicated formula that does not appear to exclude deposits in excess of $250K per account. Maybe going forward we can just drop the charade that FDIC insurance is limited to $250K per account (or $500K for a married couple with both names on the account)…

    1. Yep, I’m not an expert on bank balance sheets, but was very curious to dive in. If you look at their most recent 10-k and investor presentation and add up all the assets, apply some generous discounting on their MBS holdings (they even have a fair value listed as of Dec 31), and loan portfolio, they are very close to being able to cover all deposits. The FDIC will distribute the $250k Monday, another dividend by the end of the week at the latest (based on FDIC press release), and likely release another large chunk after offloading the MBS holdings. The FDIC has done this before and will likely be able to move quickly to get money back in the hands of depositors.

      To me, the only real question is how quickly can startups find new sources for credit facilities. Again, I think it’ll be the companies that were likely headed for extinction anyway that will be the only ones impacted beyond a short-term inconvenience. Investors won’t let companies go bust unless they think the companies were headed in that direction anyway knowing that depositors will be mostly made whole in a relatively short timeframe.

  6. “It’s reasonable to assess that SVB’s (ultimately fatal) exposure to interest rate risk was the result of insufficient loan demand relative to deposits”

    Mr. H – Can you explain why insufficient loan demand would have prevented the liquidity issue? If bank is lending out money, doesn’t that still tie up capital?

    1. My 2 c

      Bank loans would have had higher interest rates (4-5%), often floating, and shorter amortization (3-5 year maturity), thus substantially higher cash flowing back into SIVB, compared to the MBS that SIVB bought, which had fixed and low yields (I think I read 1.8% ish on SIVB’s portfolio), long maturities, and negative convexity.

      With more bank loans and less MBS in its portfolio, SIVB might have had a better chance of meeting the deposit outflow from startup cash burn, and would have had lower unrealized losses from rising rates, thus less chance of accelerated outflow from investors/VCs getting worried.

      Negative convexity of MBS:

      I think that to one degree or another, during 2020-22 most US banks faced the problem of absorbing more deposits (liabilities) than they could sensibly deploy into adequately-yielding loans and securities (assets). Money market funds faced similar problems. SIVB had the problem in a big way, because its deposits grew so fast (VC bubble and SIVB strategy) and its customers had so little need for loans.

      SIVB management also seems to have not done a great job controlling risk.

    2. The fortune link I found from hacker news

      What can the bank sell to get liquidity for depositors who want their money right now?

      The leadership at SVB (maybe minus a critical piece Chief Revenue Officer) bought ($80B?) MBS of 10 year duration with 1.8% yield, and nobody now would buy those (or would only pay very little) when right now you can buy a TBill for 4.7%
      Like JohnLiu suggests, it takes work to make loans (at a higher rate of return and shorter duration) to reputable businesses… and those loans are more valuable such that they could easily re-sell them to other banks.
      Similarly they didn’t unwind their position during 2022 as inflation became glaringly high and the Fed obviously raised interest rates a lot. If they want to truly clean up banking I’ll be interested if they search all the SVB emails and personal financial transactions from 2022 to see who there was shorting their own downfall.

      Forbes: “Thanks to Barron’s, most of us learned only yesterday that on February 27, SVB’s President and CEO Greg Becker sold 12,451 shares at an average price of $287.42 for $3.6 million. That day he also acquired the same number of shares using stock options priced at $105.18 each, a price much lower than the sale price. This was the first time that Becker had sold his company’s share in over a year.”

      To finish this mini-essay: FDIC probably ought to find some buyer of last resort that’s willing to hold MBS at 1.8% for 10 years and try to make most of the businesses whole (ironically the majority of startups are doomed anyways and VC, as Softbank taught us, is meant to burn money)…
      If all the paperwork (digital) is in order then a quick orderly return of cash (which the Fed has plenty of) should prevent further bank runs this week.
      (Unless more CEOs are dumb enough to burn $1.8B and announce they’ve sold all their AFS hope no one notices).

  7. I’m going to finish my bottle of Columbia River valley pilot noir (damn autocorrect) and watch The Big Short again. I am really enjoying this since I increased my cash position greatly on Friday, especially selling California biotechs. Great article, great comments. Maybe the domino chain will fail but I bet otherwise.

  8. This guy seems to have the Midas touch in reverse, everything he touches turn to s**T

    Joseph Gentile is the Chief Administrative Officer at SVB Securities.

    Prior to joining the firm in 2007, Mr. Gentile served as the CFO for Lehman Brothers’

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