> The big losses experienced by the bank are directly related to the surge in interest rates over the past year, as the company's US Treasury holdings were bought at a time when interest rates were still relatively low. Bond prices fall as yields rise.
- Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC.
- UST prices fall as interest rates rise
- the fall of UST prices in the last year is abnormally abrupt and deep
- banks are not required to "mark-to-market" their UST holdings if they plan to hold to maturity
- cash crunches can cause banks to sell UST before maturity, turning unrealized losses into real losses
- SVB joins Silvergate as a previously high-flying tech-related bank suffering a cash crunch and forced to liquidate bond holdings at a loss
It's hard to judge the scope of the problem that Silvergate and SVB might point to. What's clear is that unrealized UST losses on bank balance sheets can surface very quickly and lead to very ugly outcomes.
Unpopular and pretty far-out opinion: 2023-2024 is going to be a bigger financial crisis than 2008-2009, and is potentially a civilization-ending event.
The brewing crisis is that the Fed needs to trigger a recession (with job loss) to bring down inflation, because the root cause of the inflation is that there are too few workers for the available roles in the current structure of the economy, and so the economy needs to be refactored to drop non-critical industries and inefficient firms. But that's going to cause a cash crunch, since laid-off workers start pulling cash out of banks instead of making it at their jobs. Plus many consumers are drawing down on their savings and going into debt now because of inflation. And it's going to happen right at the greatest velocity of interest rate increases, when Treasuries are at their lowest. So we're going to see bank failures on top of job losses, right as interest rates hit their highest.
IMHO we're already off the cliff, we just haven't realized it yet. It was going to hit in ~2024-2025 anyway as demographics started creating a labor shortage, but COVID accelerated it with a bunch of early retirements and supply chain snags.
> Banks are required by law to buy US Treasuries (UST)
Yes. But they’re not required to buy long-dated, high-yielding, high-duration Treasuries (or MBS). Silvergate and SVB, out of incompetence or greed, optimised for yield, not liquidity, despite banking flighty depositors.
Excellent summary. The interesting thing to me comparing Silvergate and SVB is that they both got hit by a fall in value of their long-duration bonds, but they had pretty different reasons for the "run on the bank". That is, in Silvergate's case, depositors wanted their money out because people were so fearful after FTX for anything with even a hint of crypto exposure (and Silvergate had more than a hint), and in SVB's case it's because a lot of their tech startups that hold deposits at the bank actually need their money out to spend.
Just to underscore the point here, in the past year, the fed has raised rates a ton, and counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years[1].
You might naively assume a bond fund values would reflect interest rates but there is a lag as you wait to roll over old bonds into new debt at the new high interest rate, and until that happens you don't collect any of the extra interest. Even if you sold the old bonds to buy new good ones, nobody will buy them without a discount to make up for the low interest rate.
This is why you have the weird mark to market rules. A US bond _will_ mature at 100 dollars, but can rationally sell on the market below 100 dollars.
Reading the tea leaves in comments and general reaction elsewhere, I think this tale will have the unfortunate side-effect of people jumping to the wrong conclusion that SVB is getting slaughtered because of defaults in VC debt when in reality this appears to be attributable to poor asset management on the bank's fault by buying into mortgage-backed securities and being long duration in a rising interest rate environment
It's like everyone reads "tech layoffs" in one news article an then "VC bank default", conclude everything one is directly causing the other and there's a new dotcom crash
SVB is inderwater not only because of tech decline, but mostly because they bought huge amount of agency MBS at the generational high prices (during low rates), thus tying lot of capital for a very long time.
If they were to sell those MBS today to get cash, bank’s equity would be wiped out
If you mark the bonds to market, the bank's equity is wiped out, and logically, that's what you should do.
Given that the law allows them not to if they're HTM, you get the same result, just with some delay. Their deposits are short term, and will leave the bank if SVB is not providing competitive interest rates. They cannot afford to pay competitive interest rates if they've loaned out the deposits at a lower rate than depositors now expect.
Once depositors realize this, it's a classic bank run scenario. They know that without help, the bank goes bust, and there's no point in taking any significant risk with bank deposits that aren't even paying any interest, so they take them out. As more people withdraw, the chance of a failure increases, and more people withdraw, etc.
Very interesting link. I found this [1] pretty interesting:
> $SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b...compared to just $11.5 b of tangible common equity!!
> Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10
The wild thing is that the Federal Reserve is suffering from its own asset-liability mismatch due to the rise in interest rates. Income from its $8+ trillion balance sheet of Treasuries and MBS isn't covering its expenses (interest it must pay on reserves+operating expenses). But unlike a normal bank, the Federal Reserve cannot go bankrupt. It just books negative income and pays out by creating new money.
SVB does a lot of venture debt. When venture debt is not repaid, SVB ends up owning the company, and can recover its exposure only if there is a buyer for the company or assets.
In early stage land where valuations are the result of a fairly small consensus, it is plausible that SVB would have over-extended.
I am not an investment or banking guy. And I’m not sure what category of activity this type of lending falls into. But wouldn’t it make more sense to write off the investment losses rather than throw more bags of money on the burning pile?
If the underlying assets (the assets backing the bank), move in value, then they need to provide extra capital from somewhere. This is them securing that capital base that they need due to the change in value of their current assets (largely US treasuries and mortgage back securities- this isn't really about the value of their tech portfolio).
If I'm not mistaken, SVB has a huge venture debt portfolio that presumably includes warrants for companies whose valuations have plummeted. Does anyone know what portion of SVB's market cap is accounted for by these warrants?
My guess is that many startups are withdrawing their deposits due to this news. I wonder if SVB can cope with a significant bank run.
> I wonder if SVB can cope with a significant bank run
since there are legions of bureaucrats whose entire professional life revolves around this, and there are legal stress-tests to measure this, and the banking and finance world has a huge whisper network.. maybe one-off speculation is obviously pointless and also maybe manipulative in some way?
Is the tech-aligned banking sector getting fragile?
Just yesterday Silvergate Bank collapsed. It was the #1 bank in the US for crypto companies. The FTX fallout caused a tidal wave of crypto-related deposits leaving the bank and they were unprepared, apparently having invested the money in bonds that were deep in the red. The Feds stepped in and told them to shut down the bank and repay deposits before things get worse.
(A weird thing about Silvergate is that they bought Facebook's aborted Libra/Diem cryptocurrency tech just last year. It's like there's a curse on Libra.)
I think the real start of it will be after the GPT hype dies down. Everyone is racing to build/add AI things and the hype around that is preventing a freefall in the tech sector, IMO.
Octokiddie|3 years ago
> The big losses experienced by the bank are directly related to the surge in interest rates over the past year, as the company's US Treasury holdings were bought at a time when interest rates were still relatively low. Bond prices fall as yields rise.
https://markets.businessinsider.com/news/stocks/silicon-vall...
More general context:
- Banks are required by law to buy US Treasuries (UST). This regulation came about after the GFC.
- UST prices fall as interest rates rise
- the fall of UST prices in the last year is abnormally abrupt and deep
- banks are not required to "mark-to-market" their UST holdings if they plan to hold to maturity
- cash crunches can cause banks to sell UST before maturity, turning unrealized losses into real losses
- SVB joins Silvergate as a previously high-flying tech-related bank suffering a cash crunch and forced to liquidate bond holdings at a loss
It's hard to judge the scope of the problem that Silvergate and SVB might point to. What's clear is that unrealized UST losses on bank balance sheets can surface very quickly and lead to very ugly outcomes.
nostrademons|3 years ago
The brewing crisis is that the Fed needs to trigger a recession (with job loss) to bring down inflation, because the root cause of the inflation is that there are too few workers for the available roles in the current structure of the economy, and so the economy needs to be refactored to drop non-critical industries and inefficient firms. But that's going to cause a cash crunch, since laid-off workers start pulling cash out of banks instead of making it at their jobs. Plus many consumers are drawing down on their savings and going into debt now because of inflation. And it's going to happen right at the greatest velocity of interest rate increases, when Treasuries are at their lowest. So we're going to see bank failures on top of job losses, right as interest rates hit their highest.
IMHO we're already off the cliff, we just haven't realized it yet. It was going to hit in ~2024-2025 anyway as demographics started creating a labor shortage, but COVID accelerated it with a bunch of early retirements and supply chain snags.
JumpCrisscross|3 years ago
Yes. But they’re not required to buy long-dated, high-yielding, high-duration Treasuries (or MBS). Silvergate and SVB, out of incompetence or greed, optimised for yield, not liquidity, despite banking flighty depositors.
hn_throwaway_99|3 years ago
jldugger|3 years ago
Just to underscore the point here, in the past year, the fed has raised rates a ton, and counterintuitively, AGG, an ETF tracking a bond index fund heavily weighted towards US gov debt (by necessity) is down 15 percent over the past 2 years[1].
You might naively assume a bond fund values would reflect interest rates but there is a lag as you wait to roll over old bonds into new debt at the new high interest rate, and until that happens you don't collect any of the extra interest. Even if you sold the old bonds to buy new good ones, nobody will buy them without a discount to make up for the low interest rate.
This is why you have the weird mark to market rules. A US bond _will_ mature at 100 dollars, but can rationally sell on the market below 100 dollars.
[1]: https://yhoo.it/3Js4bl6
londons_explore|3 years ago
* Withdraw all their holdings, forcing the bank to realise losses in their holdings
* Buy shorts in the stock of the bank
* When the losses are announced, make lots of money from their short position.
airstrike|3 years ago
It's like everyone reads "tech layoffs" in one news article an then "VC bank default", conclude everything one is directly causing the other and there's a new dotcom crash
pphysch|3 years ago
Can you expand on this? What is this regulation titled?
tikkun|3 years ago
slt2021|3 years ago
If they were to sell those MBS today to get cash, bank’s equity would be wiped out
Source: https://twitter.com/ragingventures/status/161582608803847373...
cameldrv|3 years ago
Given that the law allows them not to if they're HTM, you get the same result, just with some delay. Their deposits are short term, and will leave the bank if SVB is not providing competitive interest rates. They cannot afford to pay competitive interest rates if they've loaned out the deposits at a lower rate than depositors now expect.
Once depositors realize this, it's a classic bank run scenario. They know that without help, the bank goes bust, and there's no point in taking any significant risk with bank deposits that aren't even paying any interest, so they take them out. As more people withdraw, the chance of a failure increases, and more people withdraw, etc.
paganel|3 years ago
> $SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b...compared to just $11.5 b of tangible common equity!!
> Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10
[1] https://twitter.com/RagingVentures/status/161582609427121766...
fairity|3 years ago
testfoobar|3 years ago
https://www.reuters.com/markets/us/feds-net-income-turned-ne...
https://thehill.com/opinion/finance/3886002-the-feds-trillio...
https://fred.stlouisfed.org/series/RESPPLLOPNWW
This is a strange world.
CPLX|3 years ago
I mean that is literally the entire point of their existence.
makaimc|3 years ago
resters|3 years ago
In early stage land where valuations are the result of a fairly small consensus, it is plausible that SVB would have over-extended.
morninglight21|3 years ago
unknown|3 years ago
[deleted]
this_steve_j|3 years ago
Quarrel|3 years ago
They have capital ratios to maintain.
If the underlying assets (the assets backing the bank), move in value, then they need to provide extra capital from somewhere. This is them securing that capital base that they need due to the change in value of their current assets (largely US treasuries and mortgage back securities- this isn't really about the value of their tech portfolio).
fairity|3 years ago
My guess is that many startups are withdrawing their deposits due to this news. I wonder if SVB can cope with a significant bank run.
mistrial9|3 years ago
since there are legions of bureaucrats whose entire professional life revolves around this, and there are legal stress-tests to measure this, and the banking and finance world has a huge whisper network.. maybe one-off speculation is obviously pointless and also maybe manipulative in some way?
pavlov|3 years ago
Just yesterday Silvergate Bank collapsed. It was the #1 bank in the US for crypto companies. The FTX fallout caused a tidal wave of crypto-related deposits leaving the bank and they were unprepared, apparently having invested the money in bonds that were deep in the red. The Feds stepped in and told them to shut down the bank and repay deposits before things get worse.
(A weird thing about Silvergate is that they bought Facebook's aborted Libra/Diem cryptocurrency tech just last year. It's like there's a curse on Libra.)
unknown|3 years ago
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pphysch|3 years ago
zippergz|3 years ago
makestuff|3 years ago
candiddevmike|3 years ago
f0ld|3 years ago
unknown|3 years ago
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