Everyone now knows that SVB's depositors will be bailed out by the federal government, but SVB's shareholders will not. Given that SVB's losses exceed its equity capital, it's likely that SVB shareholders will get... nothing. By implication, the common stock of all other banks in a similar situation are also worth... nothing.
Baseless speculation, but I wouldn't be surprised if some withdrawals are just moving money around to spread risk. High confidence, but high withdrawals?
Why wait for something to get given back when you can take it back right now? Dealing with insurance is always a bitch, especially if they have to pay. They'll drag it out years.
I think the point still stands: why keep your money in a bank known to be insolvent? What is the upside? Especially if you already have an account at a bigger bank.
Not a lot of upside, but on the other hand you don't have to deal with all the hassle to switch banks. Even as a private person, I don't relish the idea of switching my bank. I have quite a number of autopayments set up. My salary also goes automatically in my bank account. If I switch it would take me days to set up everything again. I imagine a small/medium company would go through this, but times 100. If you are short on manpower (and who isn't nowadays?), then you have better things to do.
The upside is that the bank you keep your money in doesn’t go out of business. Why keep your money there in the first place if you don’t get some kind of service you like from the bank?
I feel the exact opposite as you. Now that essentially 100% of deposits are guaranteed indefinitely, there is only downside to withdrawing.
For the same reason people went to SVB in the first place: better deals. JP Morgan won't give you the same below-market home-financing deals in return for you working with them exclusively at your startup.
It's not clear what was meant by "other banks" above. If "other banks" means a large percentage of all of them, the FDIC doesn't have the cash on hand. Sure there may be appropriations from somewhere else, but that could take awhile.
a “run” can simply be a wake up call to wealthy people with hundreds of thousands or millions in some 0% earning checking account to funnel that money into a money market or t-bills earning 4-5%.
that would alone create some outflow even if the reason is not panic
I happened to check what my citibank savings account pays these days...0.12% interest. Not that I keep any significant amount of money there, anyway. I would if they would pay remotely close to competitive interest rates, but I guess they're banking on most people being too dumb to realize that they can get 4-5% more on their money if they take 5 min to open an account elsewhere.
That dynamic, known as cash sorting, had already been going on for several months, and appeared to be stabilizing.
If anything, I think the events of the last few days could reduce it somewhat. Better to have your funds safe earning little in a Big 4 bank than somewhere else with higher rates but now perceived to be risky.
There doesn't need to be a run, a bank will be closed by FDIC if it is insolvent.
And in SVB's case, a very small amount of withdrawals was enough to trigger insolvency. (As it forced the bank to sell, and thereby mark-to-market it's long-term treasuries.)
SVB had $45B withdrawals on their $175B deposit base. That is not a small amount of withdrawals.
JPM has $500B of cash and cash equivalents on their $3T deposit base. Of which only ~$34B is in actual cash. Even JPM would fall (without Fed backstop) if JPM had that much withdrawals as a percentage of deposit.
> SVB had $45B withdrawals on their $175B deposit base. That is not a small amount of withdrawals.
Almost all of those withdrawals happened after the bank was insolvent.
SVB had to sell all of their available securities to cover day-to-day customer withdrawals (The problem with being the bank of choice for startups is that they aren't making any money, aren't getting any new investments, but are still spending money.)
The bank run started after SVB started dipping into its underwater long-term securities, and borrowing money, and doing emergency fundraising.
A more diversified bank (Like any of the big four) would avoid this problem, because their regular day-to-day activity would be a ~net-zero balance of withdrawals and deposits. SVB was uniquely vulnerable because of its undiversified customer base, where normal customer activity pushed it towards insolvency.
But one of the new facilities announced yesterday is designed to keep that from happening to the other banks... If they have this liquidity problem due to long-term bonds, they can now turn those into cash for a year without paying interest.
Seems like there won't be that many banks with such large average account sizes (which is probably one component of being in a similar situation). First Republic touts their large average account sizes though.
Most community banks aren't in a similar situation though. This is mostly caused by panic, not reality. If people didn't panic about SVB eating a loss, even it wouldn't have likely failed. Now people are not using logic and causing panic across the board. Mostly caused by VC tech bros going around stirring up things in a hope to get a bailout. That's why the Fed/Treasury/FDIC stepped in this morning to hopefully instill confidence.
This is mostly caused by panic, not reality. If people didn't panic about SVB eating a loss, even it wouldn't have likely failed
That's not "reality" though. The phenomenon of people "panicking" (ie acting sensibly when their savings are at risk and getting them out while they still can) is a fundamental part of the crisis-process of any bank when it is badly managed.
Saying "well if people just ignored history and group psychology and hope nothing bad will happen and risk all their savings by doing nothing, then nothing bad will happen" just isn't remotely realistic.
> people didn't panic about SVB eating a loss, even it wouldn't have likely failed
Silvergate, SVB and Signature were insolvent. This wasn't a fire sale prompting a decline in their asset values, i.e. classic illiquidity. It was their assets being worth less than their liabilities. If it were purely a liquidity issue, they could have borrowed at the Fed's discount window. (As First Republic appears to be doing.)
SVB was literally insolvent though. Not only that, but they couldn't put together a rescue stock sale - it fell through. This was not a bank run caused by panic, but a run caused by an already failed, insolvent institution.
"Most community banks aren't in a similar situation though. This is mostly caused by panic, not reality."
Nothing prevents panic from overriding reality at other banks.
Of course, but the underlying books aren't the same, the SVB problem was fairly unique. Once the panic is over, most all other regional banks will be fine. The only way they will fail is if the mob creates additional panic for either a false perception or a political gain (bailout.) That's basically what happened on Friday.
Isn't the fact that people are panicking part of the reality of the situation? Or do we exclude human behaviour from financial calculations. Am I stupid for predicting other people will panic?
SVB shares are worth $0 because there was a run on the bank and the US Government did not step in to save the bank, only the depositors.
If the same thing happens to other banks - everyone withdraws, they shut down and the government steps in - the assumption is that their equity will eventually be worth $0 too. So, everyone sells at >$0.
> SVB shares are worth $0 because there was a run on the bank and the US Government did not step in to save the bank, only the depositors.
And there was a bank run because the investors panicked and caused the share price to plummet. Depositors saw stock plummeting, got nervous and pulled out. If this type of thing spreads to other banks we'll have a bad time.
Hence, the US government stepping in to ensure both depositors are made whole, and (more importantly) saying that the banks can redeem their underwater treasury bills at par (up to some limit under some circumstances obviously).
Hopefully this isn't too little, too late. There are already a few regional banks with share prices getting hammered in the market this morning regardless of the intervention.
Is there any parallelism between SVB's fall and Lehman's in 2008, in terms of contagion effects?
I am sure that there are many people in my position holding a bunch of index funds trying to figure out if this is the beginning of something bigger or just a mouse fart that will be absorbed by whoever is SVB's creditor in the near future.
This was just added to the top of Bloomberg's article:
Some potentially soothing comments here from Brad McMillan, chief investment officer at Commonwealth Financial Network.
"This situation is something to keep an eye on, but it is not the start of the next financial crisis. Unlike in 2008, the government has stepped in early and stepped in hard. While we can certainly expect market turbulence — and we are seeing it this morning — the systemic effects will be limited. We are not set for a rerun of the Great Financial Crisis. This is not the end of the world."
Right this second, the S&P 500 is actually up by a very small amount.
If other big or small banks were also holding long-term, illiquid assets that have rapidly declined in value along with the increase in Fed rate increases, then they have the same problem.
SBV bought 10-year term mortgage backed securities to earn yield on their cash holdings. When the risk-free interest rate started to exceed the yield on these assets, the MBS value declined. As a result SBV became insolvent.
Either it was an isolated, stupid move by a big bank who expected that interest rates would not rise, or they didn't care because of moral hazard.
You can see some comparative data in this thread [0] (the author is also worth a follow). It looks like SVB was mostly an outlier but there are a few other banks with possibly similar issues.
My understanding is that the FED also announced they will loan money to banks that need to cover a shortfall due to haircuts to bond values caused by rate hikes, but that's just according to a tweet [1] from Thomas Massie an hour ago. I don't know the details of that arrangement.
> My understanding is that the FED also announced they will loan money to banks that need to cover a shortfall due to haircuts to bond values caused by rate hikes, but that's just according to a tweet [1] from Thomas Massie an hour ago. I don't know the details of that arrangement.
This was covered by a statement yesterday I think, as I read it in the FT this morning (on GMT).
> If other big or small banks were also holding long-term, illiquid assets that have rapidly declined in value along with the increase in Fed rate increases, then they have the same problem.
Except the Fed announced a liquidity loan program for banks in such situations based on the par value of the assets, which prevents them from having to firsale them at reduced value, take the markdown, and risk insolvency.
Sadly, that's not true. There's a menu of options right now and they all have steep costs and large potential benefits. There is no simple, easy, correct answer they can simply choose without any risk. That door closed a long time ago.
(If you want to predict which of the things they will do, I would suggest paying attention to who bears the costs and who gets the benefits. The various choices differ most in that area. This is not entirely determinative, but it's been a pretty good guide for most of my lifetime.)
The collapse of Lehman wasn’t contagious. Everyone already had the same disease. The situations aren’t similar because everyone was fucked before Legman’s collapse.
SVB wouldn’t have collapsed if people didn’t lose faith and start withdrawing. Lehman collapsed without withdrawals.
What the Fed isn't doing is assure the greater market that the fundamentals of why the banks failed will be fixed. The Fed screwed up by raising interest rates too quickly. Don't just assuring depositors that their money is safe, assure everyone that the money in their 401ks (which invest in banks) is also safe. Publicly come out and pause interest rates. Admit that there is a strong possibility of lowering interest rates in the short to medium term future. There are massive ripple effects of moving cash, and retirement accounts. The Fed MUST get off their high horse, admit they made mistakes, and be transparent about getting help from industry experts. Without eating humble pie, the Fed will capsize the economy.
Let's hope not, that would be a disaster. Inflation is far more pernicious than regional bank instability. The fed is acting appropriately in response to a spendthrift Congress, and in the process, stressing the system. There's not a good alternative, especially from the Fed's seat. I'm not trying to make it a political argument, but you're really pointing the finger in the wrong direction. The fed has two mandates when it comes to monetary policy - price and employment stability. That price stability is about market wide inflation, not bank stocks. Banks come and go. If you expect the Fed to prioritize something other than those two mandates, I do believe you're kidding yourself. Rate hikes will continue until the labor market or the inflation data indicate they should stop.
Employment is a lagging indicator. Waiting until bank failures cause employment to crater is too little, too late.
I agree that many of the bank stocks are probably over valued. They're not going to rebound quickly.
The Fed can't control inflation. They can try to influence demand of goods and services by controlling interest rates, QE, etc. They cannot make up for the commodities supply deficiencies cause my Russia/Ukraine conflict. (Reduced supply of grains, oil, metals, etc.) Reduced supply also increases inflation.
We just had a run on the deposits of several banks. Next is a run on the stocks for the banks. (Financial institutions make up 7% of GDP) There are many institutions and retail investors who just received a message from Yellen and Powell that their investments are not safe. Even the big banks are falling. Migrating deposits to large banks will not stop the run on financial equities. It is already having a cascading effect on the broader market.
Yes. Unemployment below natural level and inflation still high single digits. They will raise rates. They have no choice. It's literally their dual mandate to do it.
Only need 5 banks now. All the benefits of a regional bank (“local knowledge”) can be replicated digitally. Clearly there is no loyalty on the customer side, as VCs told their portfolio companies to exit SVB immediately. Just have JPM, BoA, and pick your favorite other 3 and let’s nationalize this already. Government wants an iron grip on access to financial rails anyway so we can speed this along.
I'm in Canada, originally from Europe; and to simplify, I never really "understood" regional banks. I was an exchange student in Minnesota and banked with... "Bank of Fairmont". Tiny city of 11k people, and it had its own bank. Seemed horribly inefficient and weird; and then when you left your home town you were in a load of headache. Of course that was 25 years ago, but still, when I hear there are 4,000 banks in USA (not branches; separate independent banks), I cannot help but ask... why?? Until recently, USA seemed way way way behind on convenience and efficiency; and the "fintech innovations" that are happening now seem built on ridiculously sketchy framework.
Understood that small regional banks exist and it'd be senseless and disruptive to kill them off now, but if we take them as a historical artifact that we must live with, what actual advantages, in clean-sheet model, do they have, that would counter-act the poster's main point?
Because in before times, when you used to want to start a business or expand a business, or buy a home, and needed a loan, you had to go convince a bank employee to make that loan to you.
In those cases, a relationship between bank employees and the local residents mattered to establish trust between both parties.
Nowadays, a lot of high quality databases can do a lot of the work figuring out a borrower’s credit, so there is less need for those personal interactions, especially for something as simple as home mortgages.
These days a regional bank will have robust online and call center services and probably refund any ATM fees.
Unless you need a ton of cash real quick (which is rare and getting rarer) it's perfectly convenient to keep using your regional bank even if you've moved across the country. If you do need the cash you call them and have them raise your ATM limit for a day. The overall amount of inconvenience per year is equal or less than dealing with some big stodgy national chain.
Canadian but also lived in the US. Have not lived in the EU.
For Canada, while geographically large population wise it’s very small compared to the US. The big Canadian banks are targeting a similar sized demographic to California.
I’m less familiar with Europe, but I’m guessing most nations still have prominent national retail banks, with some having an EU wide market? Those national retail banks would effectively be regional in the US.
They're historically related to having shareholders which are also local, or backed by local foundations, or have special relationships with the local businesses (like the ones in Italy that will take a wheel of cheese or balsamic vinegar as collateral). Not "bank of $city" tho.
Credit unions will survive. Let banking regulators deal with the fallout of not permitting narrow banks.
“No narrow banks so we can encourage fractional reserve lending, but be responsible!” “Okay, fine, we’ll cover everything.” “Systemic risk!” “Narrow bank now pls?” “No! Fractional reserve lending responsibly!”
There are still credit union failures but less compared to bank failures.
Credit Unions are owned by the members instead of shareholders and are non-profit but yea seems very similar to a regional bank. What else are different?
I do wonder though, why SVB became so large compared whereas a credit union like First Technology Credit Unit which manages 15 billion in assets. Wouldn't a credit union be a better fit since they are local at its core. And credit unions serve the financial needs of a specific group of people who share a common interest or affiliation (in this case Tech/VC firms in Silicon Valley).
There's also the 250k insurance but by NCUSIF instead of FDIC
What is the counter argument to this? If banks cannot actually fail, and can profit wildly regardless of their performance and risk aversion, aren’t they already nationalized in the worst of times? Seems only fair that the taxpayers also share the gains in the best of times.
Savvier investors not prone to uninformed panicking pick up a bunch of bank stocks on the cheap. Nobody else was making the dumb interest rate bets that SVB was.
I think the counter case is investors putting themselves into the shoes of a CFO at a company with >250k in cash. Why would they choose to park it at a regional bank rather than one of the big banks? Sure, FDIC made depositors whole this time, but does it have enough to continue doing that? If not, is there enough political will to push a taxpayer funded bailout through (especially this close to an election year)? And even then, how long would that take?*
*This excludes banks that are primarily dealing in consumer deposits, who I assume will be fine.
