The Fed and the Treasury Department have announced a plan to make sure that all depositors at Silicon Valley Bank are made whole. Whatever the ultimate cost turns out to be, it will be funded by a levy on banks. Thus, there's no cost to taxpayers.
There's a little more to the plan, mostly to make it a little easier for other midsize regional banks to borrow money if jittery depositors start a run. On the upside, this is a fairly aggressive response which sends a message that financial authorities were concerned about contagion and wanted to put a hard stop to it. On the downside, it also sends a message that financial authorities are always going to bail out depositors regardless of whether their deposits are insured.
Without commenting on the justice of either of these messages, I want to add a couple of notes:
- I strongly suspect that after a weekend of looking at SVB's books, both the Fed and the Treasury Department concluded that SVB was essentially solvent and could make its depositors whole with its own assets. In other words, this is going to be a very small bailout—and maybe not a bailout at all.
- A lot of people are complaining that SVB is being treated like a SIFI—a Systemically Important Financial Institution. SIFIs have stronger government guarantees of a bailout if they face collapse, but in return they have to maintain higher capital levels.
.
So did SVB get the SIFI treatment even though it didn't deserve it? Not really. SVB arguably should have been made a SIFI years ago given the size of its asset base, and in any case it maintained capital levels that rivaled most actual SIFIs. So treating it like a SIFI isn't really all that far out of bounds.
Finally, as an aside of sorts, people sometimes wonder how it is that Fed interest rate hikes slow down the economy. Sending big banks into receivership isn't the textbook answer, but it's not all that far away either. Lots of things are sensitive to interest rates—hurdle rates for new investment, home loans, auto loans, etc.—and higher interest rates slow them down and have a ripple effect throughout the economy. A bank that made a big bet on interest rates staying low is just a somewhat more dramatic example of this.
"No cost to taxpayers" is rubbish. If there's a levy on banks, the banks will pass the cost along to depositors, in the form of higher fees or lower interest rates. That's a tax. Any time the government requires you to pay money, directly or indirectly, it's a tax. Who do they think they're fooling?
Fair enough, that should be "no *direct* cost to taxpayers," then. If SVB ultimately has enough assets to cover deposits, which looks likely, FDIC will be bearing whatever costs are involved for handling the mess, as it does with all the insolvent banks it's been winding up over decades. FDIC is insurance that's paid for by banks that are part of that system. Banks don't have to be in it, though, and rumor has it that some aren't, so anybody willing to assume the risk can avoid whatever the insurance fees amount to by seeking out those banks.
FWIW, there's a lot of what you're pointing to out there. My city doesn't collect trash-- they had to stop that a long time ago to save money, and any council members who voted for enough new taxes to do it would lose their next elections-- but it also says I have to have my trash picked up (and they randomly send inspectors around to make sure it's being done).
A lot of people are pleased as punch that their direct taxes aren't going up, which is a major social value here. In fairness it's a low-income area with a lot of retirees, but that doesn't explain all the tax resistance because they're still paying haulers. They have to.
The head-scratcher for me is that anybody who itemizes can deduct all their local taxes, but they can't deduct a penny of what they pay their haulers. The loudest anti-taxers tend to make enough that they can itemize, so I guess they must be monetizing satisfaction.
If the bank is actually solvent, just not liquid, then it won't cost the taxpayers much. But it still makes a difference that the depositors can get access to their money immediately instead of when the bank's assets become available, even if it's only a small difference in the long run.
I don't mind if the FDIC has to make good on insured deposits, because that's what we've been paying for all along. Uninsured deposits are another matter. If the government is going to make sure that no depositor ever loses money in a bank failure, regardless of the amount, it should say so rather than deceiving us.
It probably costs more to have your trash picked up by a private company than to pay taxes to have the city do it, and as you say, you can't take a tax deduction. But for some reason people don't see that.
Indeed, most recent review rather suggests that there may be no net cost at all...
Additionally one should consider potential cost of a bank panic which while rationally should not happen, as most people are fundamentally clueless about banks, is regrettably quite potentially foreseeable (notably if one takes into account the scaremongering headlines from Fox and their ... well I don't know what to call it, idealogical agitprop masquerading as business news)
If the bank's assets have a real value sufficient to cover their liabilities, there was no need for a bailout at all. Just lend the bank money, at a penalty rate of interest, to allow them to pay their depositors. They can repay the Fed when their loans come due. After that, the bank can go out of business or recapitalize, I don't care which.
The people who put their money into SVB aren't "most people." They are venture capitalists who are expected to understand the risks they're taking. The claim is that they are entitled to great returns because they are taking great risks, but in reality they get the returns while we the taxpayers are taking the risks that we were never asked to accept.
Keith, I see two interesting things in your sensible reply:
(1) SVB is NOT undercapitalized, nor are they guilty of the kind of high-risk investments that caused so much ruination last time around. Quite the opposite, what they are "guilty" of is putting so much money in Federal bonds, which are 100% safe against loss in the long run, but nevertheless have significant fluctuations in their sales price in the short run. Normally, this is not a problem; nobody questions the credit-worthiness of those bonds. Apparently though, external factors over which SVB has no control have caused a run on the bank. Usually a run is caused because depositors doubt the solvency of the bank. This one was totally different--the depositors simply wanted to reallocate their assets, thanx to the Fed's "over-correction" to combat inflation.
(2) But your suggestion of how to solve the problem seems to me to be the essence of simplicity. Why should the bank be forced to sell its assets at a loss to satisfy its depositors, when it could simply borrow the money they need, using the Federal bonds as collateral. There can hardly be any collateral stronger than that. I'm amazed that nobody came up with that solution in the first two hours after the run began.
There are various reasons why an open window is not a generally excellent idea, which are not easily discussed in a non-specialist site in this awkward format. However as a market calming measure against panic, it's a good move.
It is not something you set up in a couple of hours, however.
As for the Run, that is not a particularly correct summary.
The run began because of real liquidity concerns (not solvency, liquidity) and such concerns were in many ways indeed the ultimate fault of the SVB management (as it has been now reported that they had lost their Chief Risk Officer early 2022 and did not replace until Jan 23... which is really, really... not competent when already by end 21 one could see that interest rate risk was going to be grow and certainly by Q2 22 was not a trivial issue (as indeed Drum's whinging on reflects)
As the fact set emerges, indeed SVB Sr. Mgmt. does look incompetent in the area not of their lending, but of the funding risk management which as a highly specialised entity with highly concentrated risk should have been on top of their minds. I was earlier reluctant to call SVB management incompetent versus unlucky, but afraid the emerging fact set trends to Avoidable Own Goals.
See FT:
https://www.ft.com/content/63dc908c-d5cd-4b04-b51a-9a9ba3e38b31
" 3. Hedging
For a bank, unwanted risk number one is rates. Banks naturally get rate risk on their balance sheet, because it is filled with bonds. So you hedge that, usually with swaps. SVB did that for a while, but appears to have taken them off. Not a good idea generally, and for sure not a good idea in a rising rate environment.
4. Marking to market
You want to know what the current value of your portfolio is. So you reprice your assets based on their current market price. But SVB didn’t have to re-mark their Treasuries unless they sold them. So the balance sheet impact was not known until the tremors of the crisis hit. Also not marked to market: the valuation of the companies in their VC clients’ portfolios. This is hard to do, but you can do better than zero.
5. Risk management oversight
If you are a $250bn bank — well, almost $250bn, and I’ll get to that in a bit — you should have professional risk management. SVB had one, but only until April 2022. They hired a new one in January, too late to have helped them out of the mess."
Lounsbury, your points numbered 3 and 4 are certainly germane, and are surely responsible for the resulting "panic." In particular, marking-to-market should be required on all publicly-traded financial assets every day. After all, it's not a complicated problem involving expert judgment; a computer program can do it unassisted every day.
After reading your responses here, I am coming round to the view that the SVB problem is NOT just bad luck; it's bad luck exacerbated by bad judgment and bad management. And then there is one other "bad" involved--the weakening of the federal controls created in the Dodd-Frank legislation. This column by Elizabeth Warren is very explicit on that last point:
Elizabeth Warren: Silicon Valley Bank Is Gone. We Know Who Is Responsible.
https://www.nytimes.com/2023/03/13/opinion/elizabeth-warren-silicon-valley-bank.html
But SVB’s immediate problem was the bank run created by this Peter Theiel guy and his gang of “founders”. No bank could survive a bank run of the magnitude that he and his gang caused. He should get the blame for this mess.
It is worth noting that Thiel & Co are not getting love amonst the VC managers (FT: https://www.ft.com/content/7ef8afbe-4bf0-4d0d-b831-6acb0206eeb4)
Recriminations fly as venture capitalists contemplate Silicon Valley Bank’s collapse
VCs accused of betrayal after triggering a run on the bank that has left a gaping hole in the tech scene
As the article outlines a number of VCs in run-up tried to band together in a more JP Morgan 'our broad interest' approach but the narrow Randistas of Thiel ilk fucked everyone - including themselves in part.
So yes, agreed, they should not escape blame - as there are signs SVB could have avoided (by skin of its teeth) this with a bit more time (of course they put themselves in excessive risk)
too frequent marking to mark for non-trading assets is not healthy nor useful, one can easily generate unneeded costs and burden. Rather like the unforeseen consequences of quarterly reporting, it easily generates negative unintended consequences.
However, yes, indeed, while initially I had a view that this was more Bad Luck and Bad Actor (the Founders Fund crowd generating a bank run where it could have easily been avoided), there is enough data to indicate that for the period 2020-2023 SVB did a poor management job on the risk side and they deserve to have a black eye there.
Warrens opinion piece is not useful, it is populist posturing - only accidentally being right in some aspects.
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Indeed. It looks like the regulators are doing what they need to do. But it seems more than fair to tell Powell that a failed bank is what he wanted and has worked hard to get. But now he doesn’t want it.
No, not really, not at all
SVB failure as has been pointed out comes from a really eccentric position, which left it doubly exposed to interest rates in a one-way bet on low rates, with both an unusual near total dominance of fixed rate lending to borrowers, a large and extremely unusual asset base ex-loans and claims on clients that also was low fixed rate, and on the flip side from their deposit base, an extreme ratio (97%) of corporate jumbo deposits that are extremely rate sensitive (as in seeking higher rates) and foot-loose contrary to retail deposits.
That is not how general commercial lenders are set up, as financial sector observers have noted. Most commercial lenders attempt to achieve a broad core-deposit base - even other VC exposed banks in California that are Regional (thus of same regulatory profile) have 30% plus of core deposits, versus SVB 3-5%. Core deposits are low cost and do not track rising rates quickly, giving margin as well as stability so long as there is not a general panic (thus the US Federal Regulators move to stave off a general if ill-informed panic).
They also have variable rate lending (contra the profile of SVB) which tracks up generally instantantly to Fed reference rate (a comment I have made on Drum's innumerate claims about US Fed rate commentary where he has incorrectly claimed the Fed reference takes a year to take effect, a misunderstanding on his part), which in a rising rate environment generally benefits them as their margins improve.
The well known - discussed now for a decade - problem of the extreme low rate environment over the past 15 odd years is the rate compression (and of course negative rates - not even negative real, negative normal rates), which has compressed all kinds of margins.
If there is a lesson in the end, it is once inflation is actually stabilised - not fitted line foolishness stabilised - the global central banking reference should not return to a 2% inflation target as the target is dangerously low and as everyone discovered in the 2010s, one can get trapped in a perverse world of zero-bound QE and weird disortions, that are not good for general public, not good for retirement savings - although were exploited by high-finance zones as Hedge Funds and VC world... This is not an unknown observation, it's been widely discussed, however presently until inflation is cooled politically impossible.
This is spot on. Creating conditions designed to reduce asset values, slow sales and increase unemployment will result in predictable macro situations while giving plausible deniability for each unique, indivudual outcome. The Fed was pretty clear that they want to lower price pressures by creating negative outcomes for wages and asset values.
Lounsbury makes the correct but meaningless point that this bank is somewhat unique...and this same argument will be used ad nauseum to explain almost all individual negative outcomes (you wouldnt be unemployed if you had better skills, your business would be fine if you hadnt done X, rinse and repeat).
Its hard to make decisons that will harm people....but its important to be honest in assessing the cause of actions. I think we can say that this was the point of the Feds actions without saying the actions were bad or were a mistake. But pretending that the Fed isnt responsible isnt really helpful.
It is not a meaningless point, the SVB is radically different than other commercial lenders.
If this were a standard regional bank it would not be a point that stands, but it is not
The Fed is not "responsible" for a frankly incoherent asset-placement decision that structurally made no sense.
Usefull Forbes contributor analysis with good data based review
https://www.forbes.com/sites/mayrarodriguezvalladares/2023/03/11/warning-signals-about-silicon-valley-bank-were-all-around-us/?sh=130842591e10
"To blame SVB’s woes on the Fed is simply absurd. Anyone who does not take interest rate risk sensitivity analysis and stress tests seriously as part of a Gap Analysis does not belong in banking. These interest rest exercises are essential for risk managers to analyze day in and day out at what point could a bank have more assets or liabilities or is in the case of SVB more liabilities than assets.
By the fall of 2022, SVB had almost $100 million in losses due to valuation declines as well as realized losses when it sold $1 billion in Available for Sale (AFS) securities"
So far as I can see, the only way to keep the prices from rising even more at the grocery store is to reduce buying pressure by taking money away from the consumers. Alexis Leondis at Bloomberg did a piece on this recently and cites Lending Tree when he states that rates hovered around 16% for most of the last 5 years but are in the low 20s as of last January. He also says this:
"As of the end of last year, about 46% of cardholders carried debt from month to month (meaning they were assessed interest) compared with 39% a year earlier."
Anybody know if the federal interest rate hikes are connected to the rising credit card rates?
Of course they are for God's stake, it's half the point of the Fed reference rate hikes. It's literally how the Fed effects rates, via commercial lending - as credit cards, as adjustable rate working capital lines, etc. etc.
All USD rates in the end directly or indirectly benchmark off of Fed rates.
Commercial lenders directly or indirectly via derived rates benchmark off of Fed, and where there are Variable Rates that adjust easily or automatically, that feeds through right away.
That was my impression but I hadn't seen it in writing. To summarize: the way to curb inflation at the grocery stores and the hardware stores and the restaurants - you know, the places normal people spend their money - is to take money away from the people who can't pay off their credit cards and give that money to the credit card banks. Reducing the buying pressure means the retailers quit raising their prices, though we are stuck with the new price floor.
The textbook mechanism by which higher interest rates tame inflation is through capital investment rather than consumption; it gets more expensive to invest in new productive capacity so less gets done. Of course, as you pointed out there's a significant consumption component as credit card debt gets more expensive, not to mention people laid off from capital-intensive industries are going to spend less.
Yes, that is what all the news outlets say: "OMG, it'll be harder to buy a house with the higher interest rates!" which is true but has nothing to do with inflation. When a normal person (who probably lives in a rental) hears "inflation" they think "the price of the stuff I buy is going up." How do you get those prices to quit rising? By taking money away from the people who buy that stuff, which is what the credit card companies are doing.
As such contrary to Drum's statements since 2021 re Fed rate rises, in fact the impact of such rates rises began immediately on each rate rise via the various benchmarks for variable rates. Longer feed-through occurs on fixed rate loans which, well, being fixed only rebase when they are refinanced or otherwise new ones are taken on. That is a clear delay factor.
Deposit rates are much slower to track and give deposit taking bank margin in such environments.
An issue for the lenders can be the extent to which they have a large book of long-term fixed rate loans (as in mortgages) and the extent to which they face any liquidity squeeze like deposit run and had to do a fire-sale of such portfolio - versus holding them. If they hold them and the loans are serviced (being low rate, reasonablely yes unless extreme recession) they are perfectly okay, if weak on profit. And so long as the bank has a decent asset-liaibility risk management with diverisification, they should be benefitting on their Variable rate lending. Of course long-term will be tightened up.
Prices at the grocery store have been rising because of supply constrictions, not because the (world) economy has been running "too hot" and eating and drinking too much. These constrictions work themselves out sooner or later - as price goes up this tends to increase supply of commodities. The Fed has no influence over bird flu, Ukrainian grain trade or oil price (which affects everything), but by reducing investment it can actually slow the growth of supply.
The price of roses at a local grocery store last Valentine's Day was $60, up from the usual $15. This had nothing to do with supply constrictions. The stores charge whatever they feel they can get away with.
"The price of roses at a local grocery store last Valentine's Day was $60"
I suppose if you add a hundred more anecdotes to that one, you might have yourself some data.
My point is that the prices in the grocery stores didn't go up because there was a supply chain problem with the chips that go into new automobiles.
I think I recall seeing an article about problems among South American rose growers that may have contributed to an actual supply problem. But I agree that in general there's an awful lot of price-hiking just because it can be done, like Ajax going from 2.09 to 2.99 a bottle over about a year. No reason I know of, except that they can do it.
It's anecdotal, but people's real cost of living is made up of all these different anecdotes across different products.
" but people's real cost of living is made up of all these different anecdotes across different products."
Which is exactly my point about *data*. Exclaiming that you saw a price for something, and that it's higher than you dimly remember the price maybe being at some other time in the past for a (hopefully) similar good, is not really evidence of much of anything.
but the prices of some commodities did go up because of supply issues: eggs and chicken, for example, because of avian flu outbreaks.
One aspect I haven't seen much about in domestic media is that this is international in scope and the feds wanted to move decisively before any of the world markets open Monday morning. SVB apparently has tech depositors housed many countries, not just in Silicon Valley, and they were all anxious about what might happen once their business days began. Couple that with another failed bank just this weekend-- almost certainly unrelated, but coincidence can be powerful-- and presto, you need to tell the world you're big-footing it ASAP. So it wasn't just about getting this settled before the Oscars went on.
The international exposure is in VC backed tech (not just anyone foreign can easily open a corporate account in USA given your regulation), which one can expect to be essentialy Anglosphere - India and UK really I would expect.
As for UK, Bank of England has already found a party (HSBC) for take over
https://www.ft.com/content/216b193d-62b3-4e5e-8f67-e8eb3d96ebf1
Reporting indicates there was strong fire-sale interest, which is in keeping with known situation for USA SVB, that other than the bank-run liquidity crisis (arising in USA from yes stupid bone-headed excess deposit placement policy) not a 'bad bank' on the lending assets side even in the face of a tech downturn.
'British banks OakNorth and the Bank of London also submitted bids, with the latter leading a consortium that includes private equity groups, according to people familiar with the matter."
Apparently many depositors in Israel too, where the tech sector has already been seriously panicked over Netanyahu's proposed moves on the courts.
I had not given Israel thought but given American-Israeli tech connexions this in fact should have been in my mind.
If this incident does nothing else, I hope it prompts some of these VC startup companies to keep their funds better protected and not in one bank unless it is also insured. Seems like we need depositors who are better at risk management too.
One point made in a few places is that most banks are not all that interested in startups and their VC hot money. And what happened to SVB is part of the reason why they are not.
I doubt there are many banks that will refuse to take a few million dollars in deposits as long as the money is legit.
Yeah, but not all "few million dollars" are the same. All else being equal, startups are more likely to suddenly and unpredictably need to withdraw more/all of their funds than established businesses would be. Since banks make money by planning that very few depositers will actually want withdrawals at any given time, there are definitely situations in which a bank might not want a lot of startup clients.
Which is why a bank that *specializes* in startup clients ought to be more careful.
Will the people who man these startups and the guys who fund them engage in a bit of instrospection because of this? Possibly realizing that maybe, just maybe they're not the smartest guys in the room at any and all times?
Of course not.
From what I've seen, many or most of the startups didn't really have much choice since their angels told them to stow the money in SVB. It's really hard for me to see any startup jockeys defy their major (and maybe only) investor and try to be responsible about the funds. Money management isn't likely to be either a focus of their efforts, or a strong point for these techies.
I just read that because of this turmoil, people are flocking to t-bills. So SVB's portfolio just got a shot in the arm.
Funny how the libertarian boys' club went running for help...no money in Shady Galt Gultchland?
Well, yes, they did go running for help. But only because they didn't want to see the little people get hurt.
"it maintained capital levels that rivaled most actual SIFIs"
But that capital level dropped because of its investment in long-term bonds which were devalued by the Fed and then by what was essentially a panic in its stock.
If other banks' capital levels are comparable to those of SVB this implies that other banks may be liable to the same kind of catastrophe, although they hopefully have not made the mistake of so much investment in long-term bonds.
No it does not.See https://www.ft.com/content/9ee5edda-a038-4992-863f-242bd69c8b79
The capital profile of other banks does not resemble SVB in the least.
Long term bonds were not "devalued by the Fed" they lost value in the market - which would be irrelevant had SVB not had an extremely eccentric and high-risk funding profile being at once highly industry concentrated and highly 95-97% in jumbo uninsured corporate deposits, is extreme and unusual.
You frankly don't understand the subject nor the fact set.
"Feds save SVB, bail out crypto"
"Bitcoin up 14% on fed move"
Crypto start-ups were big customers of SVB. Signature, also part of the fed bailout, was a crypto-friendly bank ($10B+ in assets).
The promise of crypto was that it would replace fiat money when governments fail. Seems like what's happening is just the opposite.
I'm not sure what role crypto had in causing the problems at SVB and Signature. At the least, the crash in crypto prices was a factor in increased risk at Signature when its assets lost value.
Seems to me that banks ought to have some tight regulations about holding crypto assets. It also seems to me that crypto ought to be regulated itself. There was talk about that when FTX failed a few months ago. Maybe Congress is working on it, but I doubt it. The consensus seemed to be that crypto was going to fail on its own and we should all stand back and let it die.
Crypto is NOT about to die. It is a highly speculative asset with a highly volatile price that is attractive to certain individuals and institutions and we ought to like any other asset that is part of the financial system. Regulate it. Especially if government bailouts are needed to protect bank depositors from drops in asset prices.
Bitcoin up 18%!
Risk on, baby!
At least the equity holders will get fried, along with all or most of the bond holders who have funded these banks. Note that all regulations on any industry could be considered a tax since they increase operating costs. Making railroads and airlines safer will add cost to their operations, potentially requiring an increase in pricing. Raising the equity requirements on banks reduce their ROE, which will result in lower equity returns and/or higher fees, interest rates, etc.
SVB should have been required to hold equity against their investments in long T bonds due to potential interest rate volatility. They should have been required to hold more equity against their loan portfolio due to sector concentration.
There is a cost if you want safer banks, crypto exchanges, airlines, mines, factories, buildings, cars, air & water.
SVB did argue it was a key regional bank that needed SIFI status given its role in the Silicon Valley economy BUT it also lobbied hard that it was a small-to-mid-sized regional bank for not needing a close-out plan or doing stress tests for EXACTLY this type of scenario. So, like all libertarians, it talked a big game in public (not that big a bank! save us from regulations!), contradicted itself in private (SIFI status, please?), and ran home to mommy government at the first sign of danger.
Is that wise? No. Is it common? Incredibly. Should management and bank investors (not depositors) take it in the shorts? Yes. Should limitations on lobbying efforts, no executive bonuses for 2023-onward, and what I'll call "Anti-preferential liquidation of stock options" (i.e. insider stocks get liquidated first) occur? Yup. WWLSTGD-DTO: What would Larry Summers/Timmy Geithner Do-Do the Opposite.
D-Day, Atrios, and Baker all assert that it is a bail out any way you look at it. At the very least hopefully, they'll claw back the bonuses the bank's principals gave themselves while their bank was burning down last week. They should also probably attach their assets and send them all to jail.
Interest rate hikes slow the economy mainly through housing. House affordability is mainly a function of the monthly mortgage payment, not the sticker price, and higher interest rates = higher monthly payment for any given sticker price. This pushes house prices down, which discourages new construction and gives homeowners less equity to tap, which contracts the economy.
Business loans, auto loans, credit cards, etc. seem to be less sensitive to interest rates than mortgages and house prices.
That is completely nonsense and wrong
Credit card rates are constantly rebased floating and respond immediately. Business working capital (under 1 year lines or revolving lines) lines also are constantly rebased and respond immediately (etc)
"Less sensitive" does not mean "totally insensitive". Highly credentialed economists seem to agree that housing is the main channel through which Fed rate hikes affect the economy.