Basel III was introduced to force banks to be more conservative, and thus more safe. Downside: this also means bank is going to be less profitable.
European banks were forced to implement Basel III, while the US bankers managed to lobby a loophole for certain types of banks. And sure enough, SVB leveraged this loophole.
For those interested, FT Alphaville describes this in ample detail:
Silicon Valley Bank is a very American mess https://on.ft.com/3ywMURD
SVB was not small, but an order of magnitude smaller than the large money center banks (Citi, BofA, JPMChase).
That being said, nearly every other bank of that size submitted Dodd Frank Stress Test results to the Fed in 2022.
https://www.federalreserve.gov/publications/files/2022-dfast...
Somehow SVB avoided this. I don’t see this as systemic at all. The FDIC will make depositors whole and the owners and managers did a bad job and they lose. The worst possible response would be a bailout of any sort beyond ordinary FDIC receivership.
Really?
That is interesting. Why? How? Who else?
My money market fund (VMFXX) is composed of Fed Repo notes with 13 _DAYS_ of maturity average (https://investor.vanguard.com/investment-products/mutual-fun...)
A bank holding customer deposits in lol 30 _Year_ or 10 _YEAR_ treasuries is anything but safe. That's called duration risk, and congrats, they just got burned by duration risk.
What are the downsides to society if banks are less profitable? They invested in T-Bills, I don't see how that investment served society in any way.
They invested in T-Bonds (10Y or longer) and MBS (mortgages) it seems like, not T-Bills (1Y or shorter)
The distinction is extremely important in this case. If they were trading T-Bills, they would have survived. Instead, they took on much riskier T-Bonds (probably hoping to make more money).
The minimum viable size of a bank increases. Small, community banks can't implement Basel III. That's why they were exempted. How SVB was in a bucket with the Bank of Jackson Hole, however, is another question.
Because they touch money they have all sorts of woo-woo respect. Really they are just service providers like lawyers, gardeners, and doctors.
The whole public perception of the finance sector (and its own sel-regard) is backwards.
The exemptees just need to be fucking careful with this advanced mode of operation.
The exemptees just need to be f**ing careful with this advanced mode of operation.”
This sounds tongue in cheek I know, but SVB’s situation has created real world consequences even for me, someone who has no money tied up with them. My go-to for bonded cellular networks (so i can run a livestream for my employer, a small tech start up) had to tell all of us who use them to pause payments immediately today as this unfolded and are not taking new rentals in the meantime. They’re literally not getting paid right now. This is not a holding pattern that can last long and is highly disruptive for them and, consequentially, me. A video content guy at a small start up on nearly the other side of the country.
How many times will we get burned until we learned that banks will not be careful if they are given an opportunity to not be.
You mean “need to have sheer luck in their gambling”.
I don't know much about US bonds, but Brazil issues 3 types of bonds: fixed rate, inflation-indexed floating rates and interest-indexed floating rates. It's common sense between investors you need to hold a mix of the 3 to hedge against macroeconomic changes, that way the term does not really matter that much: if inflation skyrockets, it's likely the government will increase interest rates to compensate, and so on.
Is it that much different in the US or has SVB simply failed to choose the bonds they bought carefully?
This kind of thing is bank risk management 101. For example, in Europe, banks tend not to lend out long term at all at a fixed rate, precisely for reasons like this.
Broadly this is called "duration marching" IIRC, duration being the name of sensitivity to interest rates. Ideally a bank would have no duration risk - they don't care if rates are going up or down. You can achieve it with a variety of tools: IR swaps, issuing long-term deposits/bonds, floating rate loans etc.
You're right, if SVB in 2021 just bet the farm that interest rates will stay so low for a decade, this is basically moronic.
No, it’s smart! If it works out, you cashout and go on the speaking circuit patting yourself on the back for your ygenius. If it doesn’t, you’ve limited your own liability and someone else comes in and cleans up your mess.
You can, however, buy bonds with varying maturity times. That's generally OK, since there's a liquid market in those bonds. They appear to have been caught flat footed by a sudden run.
You're thinking of I-bonds, but that's not the only inflation indexed bonds out there. There's also TIPS https://treasurydirect.gov/marketable-securities/tips/
But people do love buying them, exactly because they never lose nominal value.
1. https://www.schwab.com/learn/story/treasury-inflation-protec...
This is not "the economy". This is a giant sucking leech attached to it. A parasitic fungus that has attacked the minds of an alarming number of susceptible people. But not everyone is a mindless zombie.
Among other things, the parasite needs "zero" interest rate borrowing to survive.
"The economy" is not synonymous with Silicon Valley nor the SV mind virus.
I don’t know about you, but I come to HN for discourse that I could not get on race-to-the-bottom social media sites.
Even if the hyperbolic claim you made was true (it's not - see below if you want), why should we all be polite, pious disciples of Silicon Valley? It's ok to critique things, even when they provide some good.
N.B. I think it's more accurate to say the actual majority of tech we use is born from government funded research à la the entrepreneurial state. One should not confuse R&D with commercialization.
It would be very prudent to not have more than the FDIC insured amount in especially smaller regional banks that may have made same errors as SIVB while avoiding Basel III regulations [1]
[0] https://twitter.com/TOzgokmen/status/1634329176554520576
The only reason the boom/bust cycle is implemented thus in the west is so the banks can periodically redistribute assets of their least successful borrowers to other people. In China, the reorganizations are more market priced since the ownership and control of distressed assets is written down by the central bank and they are resold for pennies, while in the west it tends to go through bankruptcy court, which is a slow complex bureaucratic process and tends to destroy what was left of the company.
They did not raise "suddenly". The move away from ZIRP was well telegraphed. Once they did the first hike the only question was how fast and how far. Most in the market initially expected an end rate around 3% (ie, 100bp over their target inflation rate of 2%). As it became increasingly clear that the inflation was not just about supply chain disruptions that end rate target went to 4% and higher.
Further - every bank has a team with one responsibility - asset and liability management. They are responsible for not just the product choices (ie, MBS vs Treasuries, etc) but also matching durations. The Treasurer of the bank is also responsible for oversight, including whether or not any of these positions should be hedged and to what extent.
This is entirely on the bank staff and management.
The Fed funds rate was 9% in July of 1980 and 19% in December of 1980.
No. That is a fact. But it does not collapse properly run banks.
The problem is that SVB, knowingly, took on "interest rate risk" by buying long-term bonds (average 6.2 years, I read) that lock in an interest rate. The money to purchase those bonds came from deposits, which can be withdrawn at any time. When everyone started withdrawing their money SVB had to sell the bonds, and they took a loss because interest rates have increased and the bonds they were selling were not longer worth as much.
The dump trigger wasn't even an action/attack it was the lack of additional influx of VC/private equity/sovereign money, probably mostly from foreign markets that slowed or stopped, that tripped them up.
Then larger investment groups filled with startups like Founders Fund and Union Square Ventures doing a margin call across all their funds/investments caused a big enough dump that it was over. The run was started at this point and days later the bank is over.
Ultimately this is SVBs fault, but also regulators because concentration like this where they are responsible for so many companies and one type of money VC/private equity, is an attack vector just sitting there. It wasn't wise for investment groups to run the bank either because now this harms companies across the board, but may also be a consolidation move, shaking out companies they don't back.
HBS is even realizing too much optimization/efficiency is a bad thing. The slack/margin is squeezing out an ability to change vectors quickly. This is happening from supply chain to credit to food and more.
The High Price of Efficiency, Our Obsession with Efficiency Is Destroying Our Resilience [1]
> Superefficient businesses create the potential for social disorder.
> A superefficient dominant model elevates the risk of catastrophic failure.
> *If a system is highly efficient, odds are that efficient players will game it.*
It is CLEARLY time for some anti-trust busting at the funding level.
You can do the same thing to yourself. Take your life savings and emergency fund and put it locked up into 10 year treasuries bought direct from the treasury. Now go have an emergency. Good luck, have fun.
A casual look at the regional bank index ETF will show that starting about two weeks ago, the price started to steadily decline and then a sudden drop with SVB. I’m not sure if this decline is well correlated with the total market index over the same period, but if not, it suggests that some people “saw this coming” a couple of weeks ago and the other shoe may still need to drop. Was it just good analysis? Was there some whispering going on? If so, I hope the SEC is watching.
This might be just the beginning of a large hunting campaign, let's wait and see.
Also worth noting that SVB was not the only one to belief this. The market, in general, was supporting insanely high valuations whose only justification was near-0 rates well in to the future.
>And they bought safe assets with that money.
The point is that you can't buy 100B of bonds and say "oh bonds are safe". When you buy low yield bonds with a 10 year maturation you're inherently betting that rates aren't going to rise since their valuation will go down if rates rise.
When you're a bank risk management does not involve hoping the fed doesn't raise interest rates. Sometimes you make the wrong bet but you recognize your mistake, take the loss and sell those T-Bonds earlier. Then you plan your communication to clearly explain why so that a bank run doesn't happen.
It seems the one of the pieces in the chain is that there was a big disconnect between the internal perception of the magnitude of the problem and what was communicated. Silicon Valley VCs and startups are twitchy right now and they tried to exit this position too late with too little explanation and got hit with a very old and very traditional bank run.
1. Covid stimulus vastly increased the amount of cash at the bank.
2. Artificially low interest rates plus the cash infusion caused inflation.
3. While inflation was beginning, the Fed somehow got it in its head that inflation was “transitory” and rate hikes weren’t needed.
4. The Fed waited too long to raise rates, so they needed to spike rates as quickly as possible once they changed their opinion on inflation.
Basically the government gave banks hundreds of billions of dollars to lend via stimulus spending, and then made those loans worthless by spiking interest rates less than a year later. Whose fault is that really?
I disagree that the Fed set an expectation for indeterminate 0% interest. I'm sure that's what sugar addicts in the market told themselves, but I think the Fed was clearly, if gingerly, trying to dig themselves out of a 0% hole, having started to raise rates again in 2015. As they should have been!
And yeah as a bank it's an extremely stupid move to put 40% of your money into an entirely unhedged bet that interest rates will not go up for 10 straight years. Maybe the Fed didn't handle things as well as they could, and similarly maybe VCs exacerbated the problem unnecessarily, but I don't see how the lion's share of the blame doesn't go to SVB here.
Just because the tech community is just now discovering interest rate risk and maturity matching problems doesn't mean any of this is new to the rest of us.
That was the first domino to fall, but that was survivable. The real problem was that the banking system had a suicide pact in the form of credit default swaps on each other that they couldn't cover. The MBS stuff was bad, but that wasn't what caused 2008.
Now I'm just waiting to find out if some other bank is going to need to pay out credit default swaps for SVB in excess of their market cap...
But mostly this was because they bet the farm on long duration bonds just before a period of rising interest rates. It's not like nobody saw that rising rates were on the horizon.
Is this going to end with similar results as 2018 by affecting the whole financial system? If yes I hope there will be no bailouts using public money and the financial system will start to be properly regulated and supervised.
In 2022-23: “Bond convexity”.
This word is still not on headlines yet, so maybe more loses has to come.
Did we? So what the hell is it?
Just one note for those that aren't fully aware, the treasuries were only down approx 20% because they were forced to sell before the 10yr maturity. If they could have held the entire term they would get back 100%.
So in effect, as the fed raises interest rates, they are destroying the principle of every existing bond on the market. That’s a big problem for anyone owning bonds, especially if they are using them as collateral for leverage.
What principle are they destroying? Bonds are not, and never were, immune to economic changes. They're just less volatile and react differently than stocks and, if you hold them to maturity, will pay what what they promised.
It seems to me that the problem is that a whole bunch of people made investments assuming that there was effectively no risk in doing so. Like the good times would last forever or something.
*T-bills are up to 52 weeks maturity.
With regards to safety, I noted that I think there are two types of safety to note here:
1. Default risk. 2. Asset price volatility.
Ultimately if someone is willing and able to hold to expiry, they aren't subject to #2, but this clearly wasn't the case with SVB and may also be the case with other institutions. I think it lacks nuance to not consider the middle states between the purchase of a bond and the full return of the bond upon expiry.
100% back in, say, 9 years at 1.5%. Or take the 20% hit today, buy back bonds giving 4% yearly and end up with the same amount. I mean: it's literally how the price drop is calculated right?
First off - it is not a 10Y T-bill. T-bills extend to 52 weeks. From that point through 10Y are "notes" and everything longer are bonds.
Second anyone involved professionally in the markets understands the duration (not maturity) of bonds and how coupon rate and market interest rate will effect the price of said bond. [those interested can google terms like 'modified duration']. So there is absolutely no shock that the price of 10yr paper with a 50bp coupon would be near 80 in the current rate environment.
You’ll get that money back come 2041, it just won’t be able to buy you much.
Yes. But those "100%" wouldn't be worth as much, due to inflation. There's also an opportunity cost to consider: if you sell now with 20% loss you get a chance to invest that money wiser.
So, yeah, these MBS will probably pay out when held to maturity, but their customers didn't buy MBS, they deposited their money in a bank.
What counts is the real, not nominal, value
Looking at the comments here, it's possible that this may trigger a run on banks.
What am I missing?
It's nice that he took time from his busy schedule decimating Twitter to share his views. But in my opinion VCs can't simultaneously claim to be such financial geniuses that they deserve lower taxes (via the carried interest loophole) but such babes in the woods that they need Uncle Sam to bail them out for a bad financial decision. Pick a lane, buddy.
I saw it as a promotion for gambling. Listening to them talk about it made me sick
Americans love for gamlbing and alcoholism is beyond my comprehension. Like all bad things it's very bad in the long run
My money at VMFXX is almost entirely composed of safe Fed Repos with average maturity of 2-weeks. VUSXX is mostly Treasury Bills, again of maturity averaging like 2-weeks. My money at SWVXX is composed of AAA-rated bank notes, of similar 2-weeks-ish maturity average.
The idea of a bank, like SIVB, being composed of largely 30-year mortgages and 10Y or 30Y Treasury Bonds is insane. The bank deserves to die after taking such high duration risks. There should be _NO_ bailout. I can barely believe a bank was so stupid to keep customer deposits backed by something so risky.
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We've been preparing our financial system for the last 15 years (since 2008) for the next financial storm. We've got "stress tests" to see that various banks have severed contamination between each other, at least in theory. Lets see how good our preparations have held up.
No point giving up and bailing things out before we've even tested our new financial system regulations. We can afford to let some banks go under. Only if the contagion has a chance of spreading everywhere should we consider the last-ditch effort of a bailout.
There is a good chance that depositors will be made whole regardless, but even if it does require some intervention it is probably worth it to prevent this from spreading to other banks. There are very valid reasons why certain organizations would need to keep more than $250k in an account, and if everyone of them started transferring their money to a handful of the safest institutions, then things could quickly get out of control.
We should also consider the moral hazard at play here. How are future tech CEO's going to go into work every day and completely crush it 200% if they know that the government will bail them out if their monkey jpeg startup fails? A bailout will only breed lazy entrepreneurs, taking hard-earned tax dollars away from America's job-doers.
just stick with selling directly to collectors and you already have enough money
I get that the FDIC insurance is supposed to make you whole as long as you have less than $250K in a bank. But then you have to ask if the FDIC can actually cover that for several banks at a time - particularly at a time when the debt ceiling has not been raised and so Treasury can probably ill afford additional unplanned spending.
If SVB really failed because it misstepped and believed it would make more money off of government bonds and didn’t, I don’t really see there being a risk of the major banks collapsing. If lots of smaller banks banked on (no pun intended) doing the same thing though…
https://twitter.com/TheyCallMeTarz/status/163431641123228877...
