Silicon Valley Bank SIVB - $270 to $30 in 48 hours

[njhowie]

That raises another question. Is the FDIC limit per institution or can you have more than one $250k accounts across different branches of the same bank?

Either retail branches or via broker CDs?

Per institution both retail and brokered combined is $250k (or higher with some of the other workarounds), not individually.

You can go to FDIC website and look up the FDIC number of any institution. If there are different FDIC numbers then you can have the limit at each. If you find only one FDIC number, then you can only max out at the one.

 

[matjung]

I'm expecting Yellen to come out now and tell us again how well capitalized and healthy the banking sector is these days.

You won't need Yellen for that.
There is a difference between banking sector and individual banks.
Banks with a poor / risky management team / governance structure / business model - are always at risk of failure.
At least your country understands how to organize a proper bank run .
Some zombie banks in Europe are still online.

 

[njhowie]

I expect Yellen and Powell coming out on Monday to update Wall st on the situation. Is a contagion possible with the bank run. Is there systemic risk. Are more banks going broke with the sudden shock of higher rates. Will banks dump bonds. Will the Fed stop the rate hikes now. Terminal rates is expected to be lower now. Will the Fed inject liquidity.

At the end of the day, the banking system works only to the extent that the public has faith in it. If there is a run on any bank, as a result of fractional reserve banking, it can be put out of business within days...any bank.

 

[MichaelB]

Indirectly from Bloomberg: "Roku says its deposits with Silicon Valley Bank, totaling nearly $487 million or 26% of its cash and cash equivalents as of today, are "largely uninsured,"."

That money is not lost. SVB still has lots of assets and one would expect to see a recovery of a high percentage of those funds.

Makes one wonder if any US bank could meet a sudden run on deposits ?

The monetary system has good options for banks to raise cash on the spot, assuming they have the collateral.

I meant the Wall st. media outlet - Bloomberg, CNBC, etc..
They do have an obligation to tell the public if the banks need to be bailed out or not.
Wrong. FDIC is not enough, if there is system risk and the possible start of a contagion.

There is no reason to expect systemic risk from this incident. Bank failures are individual events. In the case of the 2 banks that failed this week, both were highly specialized, neither was a typical retail bank, and both relied heavily on non-traditional funding for much of its assets.

 

[DrRoy]

I heard about the bank yesterday, but when I saw SIVB in the title, I first thought of S-IVB, which is the designation of the third stage of a Saturn V rocket.

 

[matjung]

I expect Yellen and Powell coming out on Monday to update Wall st on the situation. Is a contagion possible with the bank run. Is there systemic risk. Are more banks going broke with the sudden shock of higher rates. Will banks dump bonds. Will the Fed stop the rate hikes now. Terminal rates is expected to be lower now. Will the Fed inject liquidity.

Some Europeans (from Germany, Switzerland, Ireland) see a systemic risk not at the banking sector, but real estate sector.
Plenty of owners/operators of commercial property like shopping malls, hotels, factories, logistic halls are not able to cope with interest rates that doubled.

It hits the companies when it gets time to renegotiate finance.

Some properties will change hands. Some property funds will collapse.

Smaller retailers and restaurants will move the location to a cheaper address.
We think poorly funded property owners will cease to exist.
For the last 10+ years money for those owners was often not coming from banks, so it won't hit banks. It may hit pension funds that funded property funds that funded overpriced properties. The valuation of REITs and real estate companies is already going down.

Banks will not dump bonds. The interest rate at deposit accounts will remain close to zero. Once the bulk of property is refunded, rates for saving accounts goes up.

Will the above make inflation go down?
Probably not, better funded real estate owners will try to pass on higher interest rates to tenants. Well funded tenants will pass on higher rents to services/goods offered. Demand for services/goods may go down while inflation stays high.
Poorly funded tenants shut down.

Yellen needs a better concept to fight inflation than gambling with interest rates.
Another controversial thought is - why would a central bank be able to maintain inflation? Do they have a track record in doing that?
Banks control money supply, not its demand.

The last time they hiked interest rates, it has not done much good, has it.
The root cause of the last crisis was also the real estate market

The off topic is, what governance is able to manage the risk appetite of real estate owners.

 

[frayne]

Throwing out the $250K FDIC protected deposits, I wonder how much of a haircut some of these depositors will have to take when all is said and done? And the bigger question, did the rise in interest rates really precipitate this event and if so, aren't some other banks in similar situations? If Pete Thiel saw this coming and encouraged others to take their money out of SVB, why didn't Treasury step in sooner? Don't stress tests take into account this sort of thing? Still too any unanswered questions in my mind.

 

[pb4uski]

Throwing out the $250K FDIC protected deposits, I wonder how much of a haircut some of these depositors will have to take when all is said and done? And the bigger question, did the rise in interest rates really precipitate this event and if so, aren't some other banks in similar situations? If Pete Thiel saw this coming and encouraged others to take their money out of SVB, why didn't Treasury step in sooner? Don't stress tests take into account this sort of thing? Still too any unanswered questions in my mind.

I think not. From what I'm reading one of the unique aspects of SVB was that it had an unusual amount of uninsured deposits and when questions arose with respect to SVB's financial strength there was a run in many of those uninsured deposits, which caused the implosion. Most banks don't have the extent of uninsured deposits that SVB had, therefore they would not have the run on the bank that SVB had.

Stress tests only happen once a year to my knowledge.

 

[Gumby]

Throwing out the $250K FDIC protected deposits, I wonder how much of a haircut some of these depositors will have to take when all is said and done? And the bigger question, did the rise in interest rates really precipitate this event? If Pete Thiel saw this coming and encouraged others to take their money out of SVB, why didn't Treasury step in sooner? Don't stress tests take into account this sort of thing? Still too any unanswered questions in my mind.

Silicon Valley Bank was closed by its secondary regulator, the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. The FDIC took over the bank assets and created a new bank to pay insured depositors.

SIVB's primary regulator is the Federal Reserve Board (FRB). Both FRB and the FDIC are independent agencies created by Congress, neither is part of the Department of the Treasury.

 

[gromit]

Throwing out the $250K FDIC protected deposits, I wonder how much of a haircut some of these depositors will have to take when all is said and done? And the bigger question, did the rise in interest rates really precipitate this event and if so, aren't some other banks in similar situations? If Pete Thiel saw this coming and encouraged others to take their money out of SVB, why didn't Treasury step in sooner? Don't stress tests take into account this sort of thing? Still too any unanswered questions in my mind.

The Dodd Frank bill, that was passed after the credit crisis, was revised in 2018. The changes included raising the threshold for requiring stress tests from $50 billion to $350 billion in assets, which is larger than SVB.

SVB's deposits were 89% uninsured. The FDIC has commented that SVB asset sales will totally cover the expense of paying insured depositors, so the FDIC is off the hook and won't have to use FDIC funds in this failure. It'll be interesting to see what the % haircut, (mentioned in above quote) will be for uninsured depositors. Early next week FDIC is going to pay uninsured depositors a partial 1st payment, that they know will be recovered.

 

[Spock]

Interesting timeline.
SVB was about to be downgraded by Moody's due to raising interest rates lowering the value of SVBs portfolio.
The idea was:
1. sell 21B in low yields to reinvest in higher yields.
2. this would generate a 1.8B loss
3. sell 2.xB in additional stock shares to patch the hole in step 2.
4. avoid or soften the downgrade.
Step 3 couldn't be done fast enough as no prep work had been done.
Fidelity link to a Reuters article...
https://www.fidelity.com/news/article/top-news/202303110611RTRSNEWSCOMBINED_KBN2VD05T-OUSBS_1

 

[street]

Silicon Valley Bank Stock Drop 60%

Kind of a scary thing that is happening.
"Silicon Valley Bank shares plunged 60% Thursday after disclosing that it needed to shore up its capital with a $2.25 billion equity raise from investors including General Atlantic. The company’s stock was down another 60% in premarket trading Friday."

Was the bank asking their investors to invest more in the company, and that made the investors nervous, and they pulled all their money out?

https://www.axios.com/2023/03/10/silicon-valley-bank-collapse-customer-money

 

[MichaelB]

Threads merged

 

[Rianne]

Silicon Valley Bank Failure

Big news in the banking industry. This puts into perspective the risk of long-term bond funds. This news caused the markets to plummet. Now waiting to see how this affects the rest of the banking industry.

https://www.cnn.com/2023/03/11/business/svb-bank-collapse-explainer-timeline/index.html

"Why did it fail?
In short, SVB encountered a classic run on the bank.
The longer version is a bit more complicated.

Several forces collided to take down the banker.

First, there was the Federal Reserve, which began raising interest rates a year ago to tame inflation. The Fed moved aggressively, and higher borrowing costs sapped the momentum of tech stocks that had benefited SVB.

Higher interest rates also eroded the value of long-term bonds that SVB and other banks gobbled up during the era of ultra-low, near-zero interest rates. SVB’s $21 billion bond portfolio was yielding an average of 1.79% — the current 10-year Treasury yield is about 3.9%."

 

[statsman]

Thank goodness the executives cashed out a lot before the bottom fell out. /s

 

[latexman]

This puts into perspective the risk of long-term bond funds.

and bonds.

 

[audreyh1]

Big news in the banking industry. This puts into perspective the risk of long-term bond funds. This news caused the markets to plummet. Now waiting to see how this affects the rest of the banking industry.

They didn’t hold bond funds. They held long term bonds directly.

 

[Spock]

Thank goodness the executives cashed out a lot before the bottom fell out. /s

As pointed out in the other thread, the execs "cash out" was pre-filed and scheduled on auto-pilot long before the crash as their options matured.

 

[Rianne]

They didn’t hold bond funds. They held long term bonds directly.

Yes, I stand corrected.

 

[pb4uski]

Big news in the banking industry. This puts into perspective the risk of long-term bond funds. ...

The problem was that they had demand deposits that the depositors could withdraw at any time... on demand... and they invested that money in bonds that were longer maturities and subject to interest rate risk. The increase in interest rates caused the bonds to decline in value and depositors got nervous, especially depositors that were exceeding the FDIC limits and had deposits at risk, and once they started withdrawing the FDIC asked them for the keys.

So it isn't really that long term bonds are risky, it is that it is risky to use long term bonds to back demand deposits.

But if a poster came along and said that they were planning to invest their emergency fund in BND I think we would point out the interest rate risk and that the money might not all be there if they needed it because of an emergency. Same thing but on a much larger scale.

 

[Sunset]

Both my old 401K and my rollover IRA at Fidelity are way over 250K each... Should I worry?
Not that I can do anything about it except to liquidate, as I don't think I can open a new account at a new firm as this point as I live in Canada now...

No Worries.. as long as you have your 401K and IRA invested in a mix of stocks and bonds and CD (where each CD amount totals $250K or less per bank).

Your ownership of stocks for example, means even if Fidelity went bankrupt, you would, still own the stocks of companies and could (after regulators delay) sell/transfer your holdings to a new brokerage.

If you actually own stock of SVB then yes, worry

 

[Montecfo]

The problem was that they had demand deposits that the depositors could withdraw at any time... on demand... and they invested that money in bonds that were longer maturities and subject to interest rate risk. The increase in interest rates caused the bonds to decline in value and depositors got nervous, especially depositors that were exceeding the FDIC limits and had deposits at risk, and once they started withdrawing the FDIC asked them for the keys.

So it isn't really that long term bonds are risky, it is that it is risky to use long term bonds to back demand deposits.

But if a poster came along and said that they were planning to invest their emergency fund in BND I think we would point out the interest rate risk and that the money might not all be there if they needed it because of an emergency. Same thing but on a much larger scale.

The interest rate risk played a large role. Were they not underwater, they could have sold them and continued on without the secondary offering.

But clearly there was mismanagement.

 

[Freedom56]

Big news in the banking industry. This puts into perspective the risk of long-term bond funds. This news caused the markets to plummet. Now waiting to see how this affects the rest of the banking industry.

It should put more perspective on risk management and hiring more qualified people to manage risk in corporations. Long term bond funds invested in low coupon debt or longer term treasuries invested in low coupons should not be used a source for liquid funds. Both are doomed to earn low coupons for the their duration. Both are subject to duration risk. The "Chief Risk Officer" left the SVB Financial in April 2022 and the company did not replace the officer until January 2023. The original risk officer who created this mess is out of the picture with a golden parachute. When the rates started to rise early last year, they had to have known what would happen to their low coupon long duration debt but failed to act. Rather than cutting losses or hedge future losses, they adopted a buy and hold mentality that led to the compounding of losses.

Make no mistake, a 3.79% yield today on a 10 year treasury is still too low from a historical perspective. In a 2% inflation economy, the 10 year normally trades at a yield between 4.3-4.6% yield. If we use the government CPI calculation, we are nowhere near 2% inflation.

 

[FREE866]

I like this summation. Thoughts?


https://theirrelevantinvestor.com/2023/03/11/a-reverse-minsky-moment/

 

[MichaelB]

I like this summation. Thoughts?


https://theirrelevantinvestor.com/2023/03/11/a-reverse-minsky-moment/

I think his conclusions are mostly hyperbole. The Fed isn’t “breaking things”, the Tech industry isn’t broken, housing is reacting in a normal way to the increase in interest rates. If by “breaking” he means substantial loss of value, that is happening to high risk assets, and that’s a good thing.

We might be experiencing a reverse Minsky moment where instability leads to stability. The Fed has been trying to break things. Mission accomplished. They broke tech and housing and startups. How much more damage do they want to do? We’re starting to see cracks in the commercial real estate market too. If that goes, forget about it.