2023 Banking Crisis

[fr33d0m]

Why? I don’t follow your logic, especially considering that there are many forms of debt besides mortgage debt including floating rate (and near floating rate) commercial and government debt.

Would you argue that the Singapore dollar must fall (relative to the U.S. dollar) because the Monetary Authority of Singapore issues 50 year bonds and the U.S. Treasury only goes out to 30? Because that sure seems like the same logic, and it doesn’t make any sense to me either.

The mortgage rate in US is depressed by the collective wills of the Fannies and the Freddies. The borrowers do not have the credit rating anywhere near the federal government of the United States or the backing of the federal governments of the United States, why would the ordinary mortgage rate be anywhere near it just because the Fannies and the Freddies have the backing of the federal government of the United States.

The United States dollar is partly diluted by the unworthiness of the house borrowers in a continual fashion. There is nothing wrong with it. Investors just have to accept that the USD will continue to fall in value, observable by better-managed currencies, such as the SGD.

 

[revhappy]

The mortgage rate in US is depressed by the collective wills of the Fannies and the Freddies. The borrowers do not have the credit rating anywhere near the federal government of the United States or the backing of the federal governments of the United States, why would the ordinary mortgage rate be anywhere near it just because the Fannies and the Freddies have the backing of the federal government of the United States.

The United States dollar is partly diluted by the unworthiness of the house borrowers in a continual fashion. There is nothing wrong with it. Investors just have to accept that the USD will continue to fall in value, observable by better-managed currencies, such as the SGD.

I don't think Freddie and Fannie can depress mortgage rates. It is just that US is extremely financialised. In other countries banks directly own the mortgage loans and the risk of rising rates is hedged by floating rates. In the US they have fixed rates but the banks dont keep it on their books, they sell those to other investors via Freddie and Fannie. So US always has boom bust cycle due to this extreme financialisation.

 

[fr33d0m]

Gregory invested too much in treasury bonds. Hope there are no other banks in the same situation and unable to hold the bonds to maturity.

You may be mislead by the news report that the realized/unrealized loss on US treasuries/MBS caused the downfall of SVB. That could not be further from truth. The larger banks hold far more treasuries in value, however, you don't see them short of capital because of that.

Actually, the US treasuries/liquid MBS stopped it from failing much earlier. Any realization of its illiquid assets would have driven it to the ground far earlier.

 

[fr33d0m]

I don't think Freddie and Fannie can depress mortgage rates. It is just that US is extremely financialised. In other countries banks directly own the mortgage loans and the risk of rising rates is hedged by floating rates. In the US they have fixed rates but the banks dont keep it on their books, they sell those to other investors via Freddie and Fannie. So US always has boom bust cycle due to this extreme financialisation.

of course the Freddie and Fannie depress mortgage rates. They use the full backing of the federal government of the United States to guarantee the MBS issued with underlying assets of ordinary mortgage from ordinary people, which is financed by the ever increasing current account deficit of the US.

 

[BBCWatcher]

shutting down a bank is costly. The FDIC/Fed/whatever does not just shut down the bank simply because of liquidity issue.

This was an old fashioned bank run, but it occurred faster because depositors now have Internet, mobile, AND branch banking channels. The FDIC usually has a few weeks to prepare a bank closure. Not this time.

IndyMac is the closest recent parallel, but it’s an imperfect one. IndyMac was similar in the sense that the FDIC didn’t have the warning time they usually have to pick their Friday (within a few weeks of time) for closure. SVB’s pre-4 PM closure is VERY unusual. If the FDIC pounces it’s always at 4 PM on a Friday unless exigencies require otherwise. They did with SVB.

”The Fed” doesn’t run banks. The FDIC, a completely different agency, does run banks. Sometimes the FDIC runs banks for years. They’re doing it right now (they created the new SVB with a new corporate entity), and “New SVB” will be open for business Monday morning. They’re really good at this stuff.

Oddly enough U.S. banks are really safe at least within deposit insurance limits precisely because the FDIC and NCUA have to do their jobs periodically. There are nearly 5,000 banks in the U.S. (and roughly the same number of credit unions), and a very small nonzero number of them fail. That’s perfect, really. The deposit insurance agencies get regular practice.

42 billion is a lot, but the money does not just leave the system.

It left SVB, which is all that matters for these purposes. (A lot of it probably went to Wells Fargo, the Tier 1 national bank based in that area.)

Also, 42 billion happened after the bank wanted a 2+ billion capital injection. That's the reason why it failed, not the 42 billion after that.

$2 billion was about 1% of its deposit base for a bank with better Tier 1 ratios than DBS’s. And SVB would’ve had no trouble getting that $2 billion. But the crypto-burned VCs freaked out, hopped onto Slack and Twitter and iMessage, and the rest is history.

I’d rate the odds of full deposit recovery as high, but it’ll take time unless an acquiring institution wants to take over this bank today (Sunday).

The bank had a short of capital of 2+ billion. Unless someone was willing to give it 2+ billion, it would have failed anyway. 42 billion just made fail faster, fail early.

$42 billion in one day! That’s over 20% of its deposit base! IndyMac was something around 8%.

 

[konan~]

The problem with SVB is holding too little treasury bonds while holding a lot of illiquid security as collateral.

I read a few factors brought the SVB down:
1) SVB bought huge amounts of bonds (more than half its assets) more than a year ago and kept a small amount of the deposits on hand
2) High interest rates dry up venture capital funds resulting in its clients needing to withdraw their savings from SVB
3) The classic interest rates up, bond prices down that forced SVB to sell off its investments at a loss of nearly $2B to meet the withdrawals by its clients.
4) Panic

 

[BBCWatcher]

I’m seeing media reports now that uninsured SVB depositors are likely to receive dividends worth anywhere from 30% to 50% of their uninsured balances as soon as Monday. I assume that’ll be skewed to the lower balance depositors, meaning they’ll get the 50% while the biggest depositors get 30%. If true they’ll be only the first payouts. However, U.S. Treasury Secretary Janet Yellen has ruled out a bailout, so unless there’s a “white knight” these uninsured deposits will be subject to liquidity restrictions for a while. But 30% or more liquidity certainly would be a lot better than none.

 

[d5dude]

I read a few factors brought the SVB down:
1) SVB bought huge amounts of bonds (more than half its assets) more than a year ago and kept a small amount of the deposits on hand
2) High interest rates dry up venture capital funds resulting in its clients needing to withdraw their savings from SVB
3) The classic interest rates up, bond prices down that forced SVB to sell off its investments at a loss of nearly $2B to meet the withdrawals by its clients.
4) Panic

5) Their loan book was also impaired. Roughly 30% of their loans were made to low quality risky startups.

Banks really shouldnt be allowed to do this, there are firms that specialise in venture debt for very good reasons.

 

[888888888888]

https://edition.cnn.com/2023/03/12/investing/svb-customer-bailout/index.html

 

[BBCWatcher]

Lots of developments…

1. Signature Bank has failed. Regulators closed it Sunday.

2. Regulators are guaranteeing uninsured deposits at both SVB and Signature. These banks are by all accounts well capitalized and solvent, so the U.S. Federal Government and taxpayers will not be out of pocket. This is really a 100% liquidity facility. Shareholders will be wiped out, and unsecured creditors will have to take haircuts.

3. PNC Bank passed on acquiring SVB.

 

[limster]

I'm hoping that fear will spread and XLF will drop 10%. Getting ready some money to punt.

Govt will announce that it is not a crisis of fundamentals as the economy is fundamentally sound.

Therefore, since it is purely a crisis of confidence, Govt will announce that it will be acting as a backstop and XLF will rally.

Yellen was in the Fed with helicopter Ben, she knows the playbook.

https://edition.cnn.com/2023/03/12/investing/svb-customer-bailout/index.html

But there have also been extensive discussions about the legal authorities tied to providing a federal backstop for the bank’s uninsured deposits

Wow govt backstop announced on a Sunday, why Yellen working so hard... at least let market crash on Monday first so got some cheap shares to buy ...

This is the same playbook as GFC where regulators, including MAS and the ones in HK, guaranteed 100% of deposits to prevent bank runs.

 

[BBCWatcher]

PNC Bank was on my shortlist of institutions that could potentially acquire SVB. So why did PNC Bank pass? Only PNC really knows, but my hunch is that there’s no value (or even negative value) in acquiring a customer set that’s mostly only a few Slack messages away from panicking when a bank starts to raise 1% more in capital (a perfectly ordinary event actually). Who needs that headache?

Notice that the big news happened before markets opened in Asia. That’s not an accident. I suspect Australia made an informal phone call, for example. Not that they really needed to. I like this U.S. economic team in government.

Is this a bailout? It depends on your definition, but during the Global Financial Crisis governments started bailing out shareholders. That’s not this announcement. SVB and Signature Bank’s shareholders will be wiped out. As they should be IMHO. We’ll have a debate about whether uninsured depositors should be getting 100% liquidity since there are obviously moral hazard problems in that, but the cascading bank runs (Signature Bank) settled that question.

I think the regulators might be considering doubling or quadrupling the FDIC and NCUA deposit insurance limits. That’s usually on the table in this sort of situation.

For those of you (like me) dollar cost averaging across this turmoil, congratulations, this should be great. For those of you who are speculators you may have some extra entertainment in Monday’s markets.

 

[fr33d0m]

This was an old fashioned bank run, but it occurred faster because depositors now have Internet, mobile, AND branch banking channels. The FDIC usually has a few weeks to prepare a bank closure. Not this time.

IndyMac is the closest recent parallel, but it’s an imperfect one. IndyMac was similar in the sense that the FDIC didn’t have the warning time they usually have to pick their Friday (within a few weeks of time) for closure. SVB’s pre-4 PM closure is VERY unusual. If the FDIC pounces it’s always at 4 PM on a Friday unless exigencies require otherwise. They did with SVB.

”The Fed” doesn’t run banks. The FDIC, a completely different agency, does run banks. Sometimes the FDIC runs banks for years. They’re doing it right now (they created the new SVB with a new corporate entity), and “New SVB” will be open for business Monday morning. They’re really good at this stuff.

Oddly enough U.S. banks are really safe at least within deposit insurance limits precisely because the FDIC and NCUA have to do their jobs periodically. There are nearly 5,000 banks in the U.S. (and roughly the same number of credit unions), and a very small nonzero number of them fail. That’s perfect, really. The deposit insurance agencies get regular practice.

It left SVB, which is all that matters for these purposes. (A lot of it probably went to Wells Fargo, the Tier 1 national bank based in that area.)

$2 billion was about 1% of its deposit base for a bank with better Tier 1 ratios than DBS’s. And SVB would’ve had no trouble getting that $2 billion. But the crypto-burned VCs freaked out, hopped onto Slack and Twitter and iMessage, and the rest is history.

I’d rate the odds of full deposit recovery as high, but it’ll take time unless an acquiring institution wants to take over this bank today (Sunday).

$42 billion in one day! That’s over 20% of its deposit base! IndyMac was something around 8%.

LOL.

The question is why it can't borrow 20 billion or another 100 billion from the Fed to stop the run on the bank. Why would depositors lose confidence just because someone else is panicking? The bank failed to raise capital from the market. And the bank failed to sell itself to stop the run. The larger peers have no difficult to buy it if it is worth of it, after all, the money went somewhere.

Is this a simple attack on a well-run bank? LOL. SVB was a piece of **** and the sharks smelled blood. There are banks smaller than SVB, which would not take 20 billion for it to fail, but why does it not happen to the other banks.....Or should all small banks in the US start to worry attack on them?

On the loss of billions on treasuries/MBS, we are after the great financial crisis. Asset-Liabilities Mismatch should not be the biggest problem for any bank. Credit risk still is, but credit risk did not cause SVB to fail. That speaks a lot about how badly SVB is run....

 

[d5dude]

https://www.reuters.com/article/glo...ow-to-help-banks-bloomberg-news-idINL4N35K0LE
This is also on the cards. They are probably thinking of taking in long duration treasuries at/near par value, that way banks can solve the duration mismatch problem without actually liquidating their treasuries at huge losses.

 

[fr33d0m]

I read a few factors brought the SVB down:
1) SVB bought huge amounts of bonds (more than half its assets) more than a year ago and kept a small amount of the deposits on hand
2) High interest rates dry up venture capital funds resulting in its clients needing to withdraw their savings from SVB
3) The classic interest rates up, bond prices down that forced SVB to sell off its investments at a loss of nearly $2B to meet the withdrawals by its clients.
4) Panic

1) every bank, big or small, only keeps very small amount of reserve in the bank to fulfill day-to-day cash related operation. That's not a problem for any bank. The Fed is always there to lend given quality assets and treasuries and high quality MBS are quality assets for repo with the Fed. The question is why a bank wants to invest in large amount of treasuries/MBS which does not match the interest/term paid on deposit. To match asset with liability in both yield and maturity is Bank 101.

2) is it news? SVB should have known long before this. It did not lose 2+ billion in a day. it is over a period. I forgot how often the banks have to report its liquidity position to the regional Fed. Is it still weekly?

3) bond price fell a lot for every bank holding treasuries/MBS. But you don't hear a lot of them making huge loss and requiring capital injection.

 

[boringLife-]

This is also why not to do businesses with well informed customers from one segment only.

Other banks have depositors from all walks of life, but SVB have just a narrow group. They are also the kind who will pull the plug whenever things get a little bad.

Maybe as a business, SVB is destined to fail all along.

 

[BBCWatcher]

Why would depositors lose confidence just because someone else is panicking?

You've never heard of an old fashioned bank run?

The bank failed to raise capital from the market.

I suppose you could say that, but in reality SVB never even had the chance to raise the $2 billion (~1% of deposits!) SVB announced its intention to raise capital (a perfectly ordinary event, easily accomplished for a bank as well capitalized as SVB). But many of its VC "whale" depositors freaked out. There probably isn't any bank in the world that could've survived a bank run of this magnitude. $42B (~20% of deposits) on Thursday alone!

And the bank failed to sell itself to stop the run. The larger peers have no difficult to buy it if it is worth of it, after all, the money went somewhere.

It's not that they failed to sell themselves, not really. They never had the chance. This bank run was fueled by Slack and WhatsApp messages. It was a "flash mob" bank run. I don't think there's ever been a bank run in history that's been this big and this quick. It only took about 48 hours for SVB to collapse.

Is this a simple attack on a well-run bank?

It was an old fashioned bank run, yes, just on a hugely compressed time scale.

SVB was a piece of **** and the sharks smelled blood.

No, it really wasn't. There's absolutely no evidence of that. On paper this bank was better capitalized than DBS is. (Yes, I know, they had 2% of lending to wineries. That's fine! It's California, and the wine business is a good business. It's actually less cyclical than many other businesses. There's no evidence SVB had a nonperforming loan problem.) It's not a problem that SVB has low interest rate U.S. Treasuries that they were holding to maturity. Virtually all banks are doing that. The fundamental problem is that they catered to a skittish clientele of "whale" depositors that freaked out when SVB announced a ~1% capital raise, a perfectly ordinary event in an interest rate cycle.

There are banks smaller than SVB, which would not take 20 billion for it to fail, but why does it not happen to the other banks.....Or should all small banks in the US start to worry attack on them?

Huh? Which other private sector bank could've survived a ~20% deposit flight in one day (without government assistance)? Name one. DBS wouldn't survive that.

All banks lend long and borrow short. This bank lent a lot of money to the best creditor (the U.S. Treasury), and that's not a problem. (Although TIPS would've been better in hindsight.) But their short borrowers (depositors) were the problem. They picked some really bad depositors as it turned out and had too many of them.

This is also why not to do businesses with well informed customers from one segment only.

Bingo, that's the whole lesson here, or 90% of it at least. In the Singapore context keep your grandparent depositors reasonably happy, the ones who need wheelchairs, walkers, and canes to visit a branch to withdraw money and who often let fixed deposits rot at board rates. If instead your bank is accepting too many too big deposits from "crypto bros" (and sisters) then don't be surprised when their deposits vanish in a flash.

Other banks have depositors from all walks of life, but SVB have just a narrow group. They are also the kind who will pull the plug whenever things get a little bad.

Yup, that's exactly what happened.

Maybe as a business, SVB is destined to fail all along.

Could be.

The "tech bros and sisters" still need banking services, but by their own behaviors they're not terrific depositors. If you read between the lines they're already howling about the loss of SVB. "Where am I going to go?" Well, there are nearly 5,000 other banks and about the same number of credit unions in the United States. There's no shortage of deposit taking institutions with deposit insurance. But nobody sensible is going to go out of their way to cater to them. No more free coffee, metaphorically and actually.

 

[final1]

No depositor will lose their money from what i hear? Obviously, shareholders will be wiped out.

How do they accomplish this without US taxpayer funds?
I did read it but it seems dubious.

https://www.cnbc.com/2023/03/12/regulators-unveil-plan-to-stem-damage-from-svb-collapse.html

 

[rest1ess]

No depositor will lose their money from what i hear? Obviously, shareholders will be wiped out.

How do they accomplish this without US taxpayer funds?
I did read it but it seems dubious.

https://www.cnbc.com/2023/03/12/regulators-unveil-plan-to-stem-damage-from-svb-collapse.html

Posiive reaction from the markets.

 

[BBCWatcher]

No depositor will lose their money from what i hear? Obviously, shareholders will be wiped out.

Correct.

How do they accomplish this without US taxpayer funds?

Both SVB and Signature Bank are extremely highly likely to be solvent, meaning the total value of their assets (loans, securities, office buildings, etc.) exceeds their total deposit liabilities. So the U.S. government will almost surely end up providing only liquidity to uninsured depositors, not anything more. It's just bringing forward the full recoveries that these uninsured depositors would've almost surely made.

There are two basic ways a business (or household!) can fail financially:

1. They have a cash flow problem. That's the problem here. These banks experienced especially big and quick bank runs.

2. They have a solvency problem. That's not the problem these banks had.

DO NOT FORGET PROBLEM #1! If for example your household ends up "property rich, cash poor" then you could easily experience Problem #1. Property equity is not very liquid, especially for HDB flats.

I did read it but it seems dubious.

Nothing dubious about it. It's a bet, but it's not a risky one. It's certainly far less risky than the risk of contagion. SVB alone didn't require any special action, but the run on Signature Bank (and probably a couple other large banks not publicly named, although I can guess) meant special action is merited.

By the way, I cannot think of a more perfect U.S. Treasury Secretary than Janet Yellen in these circumstances. President Biden and the U.S. Senate picked well.