I think we’re too accustomed to startups here to recognize that SVB was actually assuming quite a bit of risk.<p>We acknowledge most banks don’t want to touch startups and that startups will have a harder time banking in the future. Yet I don’t see much consideration for the fact that there is a good reason most banks see startups as risky. It’s just explained away as “they don’t understand .”<p>Also consider the past 10 years have probably been the friendliest 10 years to startups ever.
"The liabiity issue: extreme reliance on institutional/VC funding rather than traditional retail deposits While capital, wholesale funding and loan to deposit ratios improved for many US banks since 2008, there are exceptions. As shown in the first chart, SIVB was in a league of its own: a high level of loans plus securities as a percentage of deposits, and very low reliance on stickier retail deposits as a share of total deposits. Bottom line: SIVB carved out a distinct and riskier niche than other banks, setting itself up for large potential capital shortfalls in case of rising interest rates, deposit outflows and forced asset sales..."
This is rather silly explanation of what happend, especially from JP Morgan...<p>Everyone who have ever managed bond portfolio knows that he must hedge interest rate risk. And every bank is doing that. SVB didn't.<p>Since April 2022 till January 2023 SVB had vacant position of Credit Risk Officer.. And the explanation is simple - SVB's former head of risk, Laura Izurieta had left after 1Q2022 when looses from bond portfolio started to grow. She has probably already realized the final outcome as this is ABC of risk management (and in April 2022 the path of rate increases had been already set in motion by FED).<p>Now look at the timing of insiders selling shares of SVB...
This really sheds clarity on the situation. SVB was in bad shape long before the run, and there is no apparent next domino to fall. FDIC limits are very well understood and relatively easy to work with (despite the rampant FUD about “who’s going to use multiple bank accounts”, deposit sweep programs are highly available and convenient). This is a risk management failure by depositors (in addition to the bank of course), and should be treated as such.
I am surprised they show JPM in all their comparison charts (typically research doesn't cover their own employer). By showing JPM as an outlier on the opposite of the spectrum to SVB, it feels a little bit like a marketing document.
the irony of this whole situation is VCs and startups pouncing on the chaos to encourage people to move their money into even more opaque neobanks eg Mercury/Brex/Ramp as if they don’t have the same issues with relying on VC funded startup deposits but even worse in that their balance sheets are hidden.
Maybe a stupid question: if banks can collapse from a bank run, shouldn’t the entire model be questioned? A bank run is simply when a threshold number of customers decide to withdraw their cash, with every right to do so. With social media + frictionless mobile banking, the entire notion of teetering your model on mitigating the risk of a “bank run” seems anti-customer, regressive, and unsustainable.
The chart titled “Impact of unrealized securities losses on capital ratios” really shows just how inadequate the tier 1 capital ratio is (what regulators use). Ignoring the impact of unrealized losses in assets marked as held to maturity is crazy. Seems like a regulator problem to me, no bank taking deposits should be able to make high duration and negatively convex (from high MBS holdings) without hedges.
An important stand out quote to me here: “ It’s fair to ask about the underwriting discipline of VC firms that put most of their liquidity in a single bank with this kind of risk profile“.<p>I really don’t understand why these firms didn’t use at least two banks for their deposits. Surely these tech firms have heard of single points of failure being problematic?
What I find most disingenuous in this whole saga is the conflating of small business payroll depositors with all depositors. Circle & USDC rely on the interest rate earned on the stablecoin deposits for their business and SVB was providing that with poor risk management. With a $3B deposit (or more since they likely moved money out and partially caused the collapse), Circle should have been doing additional risk management beyond SVB, not just collecting interest. Now taxpayers are supposed to cover that failure?
The other thread was wild and the conclusions in this memo disagree with many of the assertions that commenters have been throwing around–accusing depositors of recklessly banking at SVB to chase higher yields and accusing SVB of playing fast and loose with risky investments.<p>JPM says neither of these were the case:<p>> “At the end of 2022, SIVB only offered 0.60% more on deposits than its peers as compensation for the risks illustrated below; in 2021 this premium was 0.04%.”<p>> “The irony of SIVB is that most banks have historically failed due to credit risk issues. This is the first major one I recall where the primary issue was a duration mismatch between high quality assets and deposit liabilities.”
Good analysis. Everyone should be very worried about these charts. In short, a lot of banks are sitting on assets that have significant unrealized losses, which is very similar to the situation leading up to 2008. If there is some event down the road that forces the banks to dip into their HTM assets to cover withdrawals or losses, then we could be looking at yet another systemic crisis. The cause will be different. But the banks are in a precarious position. Perhaps more importantly, this puts a ceiling on what the Fed can do to fight inflation. If they keep jacking rates the magnitude of the unrealized losses will increase.
> The liabiity issue: extreme reliance on institutional/VC funding rather than traditional retail deposits<p>Unsurprising how the bank failed due to the VC driven mania and now that the pyramid scheme collapsed right in front of everyone; taking the majority of startups in the tech industry with it.<p>Now we will see how unprofitable these startups really are and have been fully dependent of constant VC cash. A very big lesson to learn about risk.
Not quite sure how much to look into but the operating of the UK side seems flawed. One Director left in Jan, and the particular Director has previously had 35 businesses all of which were lending companies and paid significant dividends. There seems to be a trend. I dont think this is poor risk management, I think this was very intentional.
Does any one knows if VCs have contracts with startups where they have to deposit X amount weekly or monthly? Now if they can't because of the SVB debacle, can the startups sue them? This would put these VCs in even worse situation - not only they could be out of their money deposited at the bank but now they owe even more money to the startups.
A child-like regulatory question: Why aren’t HTM portfolios for retail banks frequently marked to market? Wouldn’t this force more accurate accounting in the event a bank needed to sell bonds in a capital crunch?
On reflection, one wonders why <i>all</i> bank deposits don't have insurance.<p>I'm guessing the answer is: something something make more profit...<p>E.g. my businesses are required to carry liability insurance. I have to do that because we have big company customers who made it a condition of doing business with them. So why do big companies hand $nB over to another company for safe keeping but not require insurance?
It is important for banks to always have a balanced portfolio and regulations to force them to have it.<p>Otherwise, it’s weakness will soon be recognized by some billionaires, Thiel in this case, and they will take advantage of this weakness to become even richer.