Curious as to the take of learned people on this opinion about SVB…
Excerpt
[The bank was technically solvent and depositors had no immediate need of their money, so the bank run was a crisis of faith]. Once you hear one person has withdrawn all their cash, you think there will be none there by the time you turn up. So you join the crowd rushing for the exits.
And boy, oh boy, did some of the tech bros scream loudly they were withdrawing all their cash. The panic began, at which point investors wouldn’t touch SVB, causing its share price to crash and the regulators to step in. At that point, it took a higher authority to restore everyone’s belief in the system. Fearing that a widespread loss of faith would lead to a collapse of the regional banking system, the U.S. Federal Reserve and government acted together to assure everyone that they would provide all the money needed to keep the banking system solvent.
But this is where it gets really tricky. These repeated assurances they will backstop everyone’s money, which the Fed has been doing for more than 30 years now, has required the Fed to keep offering lots of money. That money is circulating in the economy. And with the money supply rising much faster than the supply of goods and services, people’s faith in money itself is starting to falter. That takes the form of inflation. It’s that loss of belief in the dollar that has driven the value of the cryptocurrencies that some of SVB’s clients traded in to the stratosphere, as buyers began looking for alternatives to a currency in which they hold less and less faith.
So the Fed faces a dilemma. It can restore faith in the banking system, or it can restore faith in the dollar. Right now, it doesn’t look like it can do both. Markets are already pricing in an expectation it will reverse its tight money policy, slash interest rates, and (presumably) let inflation rip. And if that happens, get ready for an even bigger crisis down the road.
It is the last paragraph that seems to me an oversimplification. It is clear that faith in banking has been slightly shaken and inflation to some degree reflects uncertainty and money from quantitative easing and pandemic issues.
I wouldn’t call myself learned but it’s hard to really see the logic with this point. The fed bailing the financial system out of a crisis by creating money has been happening for decades, and inflation is sometimes high, sometimes low and doesn’t seem to correlate with how much money they create.
Also I could be wrong but it seems like the article is implying that the fed might cut interest rates because of lack of faith in the banking system caused by the SVB crisis? That seems like a massive leap. I’d think if the fed cuts rates it’s because they think that inflation will continue to decline even with a rate cut. Regardless of if they’re right or wrong, it’s hard to believe the SVB crisis is factoring significantly into their decision.
If there is any talk of a rate cut, my guess is that there is a lot more exposure out there to low-interest bonds. Every rate increase drives the price of existing bonds down.
About a year ago I posted about us being flown into an ‘economic coffin corner’ in which anything you do to fix one problem makes other problems worse. That’s what’s happening now. The government went on a huge low-interest bond spending spree for a decade (remember how everyone said we should borrow lots because interest was low?)
Now all those low interest bonds held by banks are cratering in value every time interest rates go up. But if we lower rates, inflation will spike. In the meantime, as those bonds mature and clear the system, the government’s interest charges on the debt are going to skyrocket as they re-issue the debt at much higher interest rates. And if they respond to that by priinting money to pay the debt, it will just make inflation worse and exacerbate the other problems.
And yet, all this supply destruction from COVID restrictions has killed economic growth, and we are likley heading into a recession this year. But we’ve run out of options to deal with that. You can’t stimulate your way out of a debt trap with borrowed money.
Back to SVB, my understanding of what happened is that they took what should have been liquid assets and put a lot of them into 10-year bonds. Then when bond prices crashed, they no longer had enough capital in those bonds to backstop their liquidity requirements. When depositors discovered that, they started pulling money, leading to a run on the bank. But I’m no banker, so I could have some of this wrong. Banking is pretty arcane.
Signature bank was also closed by Regulators. That’s another large bank. One irony of that one is that Barney Frank, one of the aurhors of Dodd-Frank, sits on their board. To be fair, I don’t know if that bank did anything wrong at all, but it was still at risk.
Every time something like this happens the institution is/was solvent but can’t/couldn’t meet their obligations because they aren’t liquid enough. Their money is in some weird long term shit they can’t access. It’s not their fault. The “It’s a Wonderful Life” defense… “Your money’s in Jimmy’s house…”
The reality is usually that they’re up to their asses in semi legal, high risk investments. Running pump and dumps scams where everyone with a 401k is the mark and the goal is to use rehypothecated Chinese commercial paper as A+ rated collateral to keep the bank afloat long enough sell the golden parachute.
They are as risky as possible because the feds will never prosecute and the feds have always paid out. Privatize the gains. Socialism for the losses. It’s a no lose situation as long as you start in the correct in-group. I believe Wharton has a school to help find that group.
Carrying mark-to-market losses of 15 billion on a 16 billion equity base and never having to explain or show your loses until the CEO collects his 10 million and Moody’s comes knocking a year later. People buying your stock, investing in your bank. It’s legalized Enron. The last prospectuses was filed Feb 28, 2023 saying they have 212 billion in assets and only 189 billion are client funds. They were looking to commit fraud/sell stock. A week later and we are finding they really only have 30 to 50% of clients funds after the assets are sold? I guess the assets weren’t worth 212 billion?
I wonder how many of these “bonds” were just other peoples dog shit. Cleaning other peoples toxic assets for 1% interest.
Reports were that SVB losses are from market risk (interest rates going up), not credit risk (bad loans). There was a $15 billion mark-to-market loss at year end on their bond portfolio, largely covered by wiping out equity capital. Interest rates last week were no higher than at year end (they are now much lower).
So I’ve seen nothing to indicate that their assets fall significantly short of their deposit liabilities. Is there new information?
There’s a pretty simple way out of this conundrum - banks that hold enough short-term treasury bonds won’t be at risk to fail the way SBV did in an environment where interest rates rise at roughly the levels they do now.
SVB is a bank that did not know how to hedge against interest rates rising. This is a core function of any bank. It should be no surprise to any bank that interest rates at effectively zero had only one way to go, and anyone paying attention to the Fed knows that interest rates are arising. Pathetic
Also the weakening of Dobbs Frank allowed SVB more leeway than it should have had.
Me, I think the federal government should bail out the depositors say 95 cents on the dollar. Depositors, over the FDIC 250k, were effectively assuming Uncle Sugar would give them a “free put option”, and they were correct. Shareholders are wiped out as they should be. Not sure if there are SVB bondholders, and too lazy to look this up. But those idiots that put all their corporate cash into one bank instead of practicing prudent risk management should lose 5%, 10%, dunno how much, to make it hurt but not be catastrophic. And all those bonuses paid out to SVB employees last Friday should be clawed back to the last penny.
I worked in investment banking for 7 years. How the hell could a bank not know how to manage rising interest rates is beyond my ken. It’s no wonder that at least one of the SVB execs was from Lehman Brothers.
Sorry, doesn’t seem to accept a gift link. But it’s a short opinion piece from a political economist and the meat of it was already summarized (much by direct quote) in the first post.
Seems to me like whatever policy the FDIC is actually going to adhere to should be something they are explicit about it. If for all practical purposes there is no deposit cap and $1B sitting in the bank is money good, they should make that the policy. They clearly aren’t willing to let people (or businesses) hang out to dry past 250k so they should come up with what the rules actually are and make them explicit.
This is a more detailed account, not opinion. It argues. ”And yet other risks may lie just around the corner. The Fed is expected to continue raising interest rates this year in its campaign to thwart inflation, which could subject other banks to the same challenges.”
I’ve not seen any analysis that suggests that the Fed will actually cut interest rates in response to the banking issues. Maybe the Fed will raise rates less than previously anticipated, but not cut them.
Banks are supposed to hold a lot of assets that are viewed as roughly as safe/stable as cash and to have assets that are nearly as liquid as cash. One of the most important of those assets is a treasury bond. SVB was holding a lot of long-term treasury bonds, which essentially amounts to betting that interest rates won’t significantly rise - if they don’t then even if the bond is long-term you’re holding a bond that still has a competitive interest rate compared to new bonds being issued. Which also means the bonds can easily be sold for a reasonable value if you need cash to cover depositors. The problem is if rates do go up you’re stuck with bonds with a comparatively crappy interest rate and if you want or need to sell them you may have to take a significant loss. So the way to hedge is to hold enough other assets likely including shorter term bonds. And to have reserves of actual cash.
You want a system where the calculation that betting on one outcome and risking it to have the best rates isn’t a major calculation for an ordinary bank account. Account holders who expect high risk and high yields should be putting money into other investments.
In practice, as long as an account is FDIC insured, it’s definitely safe for most individuals and realistically probably safe even for account holders with more money than the insured threshold. As a result, there isn’t a whole lot of reason for depositors to evaluate how safe their bank is. So as a result it’s mainly down to regulation to make sure FDIC insurance comes with safe money management. That or since I believe (could be wrong) that the FDIC uses money from the solvent banks to rescue an insolvent one theoretically the safe banks could decide to pull out of the system if they think all they do is bail out unregulated gamblers - but I have to imagine we’re still nowhere near that point.
It’s easy to hedge against rising interest rates using swaps or futures contracts.
You are correct that the hedge will cost money if rates don’t rise. This is the moral hazard problem with bailing out banks that don’t manage their risk sensibly. It’s a problem with the whole FDIC system. Banks are effectively penalized for being prudent.
In the current regulatory environment, there’s just not enough information available. Bank’s aren’t required to mark to market. The regulators should change this.
Until they do, don’t use a small regional bank, use a bank that’s clearly much too big to fail.
The consensus among many financial professionals was that inflation was transitory, because that’s what the Fed and the Biden administration were emphatically saying.
In fact, I believe the sales of the 2% ten year treasury was used on this very hoard as evidence that inflation was temporary, because the market wouldn’t make such a large error.
So this bank made that bet, and even very recently got top marks from Moody’s. And now everyone is paying the price.
This isn’t over. The last fifteen years of, “Spend as much as you can! This is the best time to borrow ever! Stimulus!” has left our financial system clogged with debt. Not just government debt, but personal, corporate, real estate…Some 60 trillion worth. Commercial real estate could be the next mess that craters financial institutions awash in it.
Remember at the peak of the pandemic when homes were impossible to buy because unnamed large firms were buying them sight-unseen, often at huge premiums over the market price? Yeah, those are now losing value and are locked up in mortgage-backed-securities held by gigantic hedge funds that are Too Big To Fail™ and by the Fed.
The Fed holds huge amounts of bonds and MBS’s (2.6 trillion in Mortgage Backed Securities alone). The government borrowing that much money pretty much required the Fed to get creative in financing. It’s possible that the fed could actually lose money this year, like the Bank of Canada did for the first time ever. And with high interest rates they can’t sell their mortgages without taking a big loss.
We are going to have to learn the lesson that there are no free lunches the hard way. Again.
The lesson depositors should take from this is to put their money in one of the designated SIB (Strategically Important Bank) banks that have been declared too big to fail and will be fully backstopped. The feds have created a two-tier banking system now. Make sure your money is in the right tier. One of the top 4 banks would do it.
Disclaimer: Don’t take financial advice from a rando on the internet, including me. These are just my opinions.
I agree that this idea that debt can be ignored (if not too high a percentage of GDP compared to other spendaholics, ignoring the provinces and cities, and changing accounting systems) is very short-sighted. The reality is epidemic black swans do happen and that central banks have few tools at their disposal even when they have not overleveraged them. I have had several financial advisors tell me the Bank of Canada is done with rate hikes. Sure, they would like to minimize them. But this ignores events and happenings, often outside of one’s control. It is as bad as when they pretended the Canadian economy was not linked to the American one, though we still sometimes catch cold when they sneeze.