2023 Banking Crisis

[konan~]

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.

Very true. They should know the mantra for investing is diversify, diversify, diversify.

 

[milkfish]

if they're solvent, they could've raised funds by borrowing from the Fed's discount window. The issue is they're insolvent, or on the brink, hence the need for BTFP facility (similar to TARP) to loan them money at par instead of MTM.

 

[BBCWatcher]

if they're solvent, they could've raised funds by borrowing from the Fed's discount window.

Yes, in principle, but that doesn’t matter when there’s a bank run. The regulators (FDIC and states in these cases) have to shut you down, take over, and reopen on Monday.

SVB paid out about 20% of deposits in a single day (Thursday), so they obviously had gobs of liquidity whether through the Fed window or otherwise. But that doesn’t matter. The regulators aren’t going to tolerate a bank run for very long, for very good reasons.

The issue is they're insolvent, or on the brink, hence the need for BTFP facility (similar to TARP) to loan them money at par instead of MTM.

Nope, that’s not the issue by all accounts. These are old fashioned bank runs, and the regulatory solutions are old fashioned.

Bank runs can start for ”illogical” reasons, so don’t worry about looking for “logical” reasons. There isn’t one as far as anyone has found yet. These banks sure seem to be solvent, maybe more solvent than most banks. But once a bank run gets going it’s logical for it to continue and grow. There’s an internal logic to a bank run. Hence the regulators stomp on it.

 

[konan~]

"Banks will now be allowed to borrow essentially unlimited amounts from the Fed as long as the loans could be collateralised with safe government securities, a way to prevent financial firms from having to sell a class of investments that have been losing value because of the Fed's own high interest rate policies."
Can this save SVB which has already sold a large bond portfolio at a big loss?

 

[final1]

So, Mr George had $500,00 at SVB, $250,000 is covered by the FDIC.
Where did the other $250,000 come from specifically so as to allow George to withdraw it on Monday US time which they would then go and deposit probably in somewhere else like JP Morgan or BOA etc.

 

[BBCWatcher]

Can this save SVB which has already sold a large bond portfolio at a big loss?

No. SVB has already been taken over by the FDIC, and it will open Monday (tomorrow) as a new corporate entity. SVB’s shareholders are now holding worthless stock, and SVB’s creditors will take haircuts. Depositors will be unaffected and have 100% liquidity on their balances from Monday. U.S. taxpayers won’t owe a penny. Regulators have evidently determined that these banks have plenty of assets to handle all deposits, so the FDIC will simply unwind the assets (over a few years probably) then close up shop. This is all very routine stuff. The only thing that’s a little unusual is that the regulators are providing uninsured depositors with immediate 100% liquidity rather than making them wait weeks to get up to around 90% liquidity (then make full recoveries later) — something like that. But in an effort to prevent further bank runs this decision makes sense and is an old fashioned, routine decision.

 

[BBCWatcher]

So, Mr George had $500,00 at SVB, $250,000 is covered by the FDIC.
Where did the other $250,000 come from specifically so as to allow George to withdraw it on Monday US time which they would then go and deposit probably in somewhere else like JP Morgan or BOA etc.

FDIC funds if necessary. The FDIC is now the bank. It created a new trust entity on Friday, and that business entity now owns and runs the bank.

The FDIC collects deposit insurance premiums, so it has quite a lot of money on its own. It’s then backstopped. It’s assuming the assets and the liabilities of SVB and Signature. In both cases the assets almost surely exceed the deposit liabilities, but the assets need to be managed and liquidated across a few years.

So can the FDIC run a bank? Or two? Of course! It does that all the time. It reportedly immediately offered SVB staff 45 day contracts at 150% of salary. It has its own personnel on retainer, including forensic accountants, auditors, security teams, managers, lawyers, etc. Usually it gets a few weeks to spin up, but it can spin up faster if needed (as in these two cases). And it’s REALLY good at this.

SVB’s and Signature’s previous management no longer have control. That control has already passed to the FDIC’s chosen managers. However, previous management personnel have certain legal obligations that may apply, and the new owner has the option to retain them in some capacity (consulting usually).

 

[final1]

My understanding is that the first $250,000 is from the FDIC.

The other $250,000 of George's money is from?
It seems to be the FED BTFP (Bank Term Funding Program)?
Again, i don't see how this magically creates enough cash to make depositors and at the same time not stick the taxpayer with it.

In any case, SVB collapses. The next day, Signature bank collapses.
I am not sure the US is projecting much confidence either way even with these emergency measures.
It seems more like a hail mary and they are hopeful there wont be more banks under stress.

 

[milkfish]

The way it doesn’t "cost" taxpayers is that it's just "borrowed". Taxpayer front up 150billion today, gets paid back 150billion in how many years. Assuming the SVB assets don't go belly up also. They don't lose money per se, but they lose opportunity cost (interest). Makes it palatable I guess.

It's like saying the government makes profit out of bailing out AIG in the last GFC.

 

[BBCWatcher]

Final1, please assume these banks are solvent. (They are by all accounts, or highly likely so.)

The U.S. federal government can supply unlimited U.S. dollar liquidity. It now owns SVB and Signature. The government can choose how to do this in accounting terms, but there’s no question it can, and it will. (And it’s not unlimited. It’s less than $200 billion in deposits.)

Over the next few years the FDIC will liquidate these banks’ assets. The U.S. federal government keeps all first dollars that went to depositors (plus interest probably and reasonable costs), and then creditors will get any leftovers starting with secured creditors.

It’s very simple, really.

The government also has potential claims and recoveries if there was any fraud or illegal malfeasance, but that doesn’t seem to be essential here.

 

[DevilPlate]

Bailing out "friends and donors"

 

[BBCWatcher]

Bailing out "friends and donors"

I appreciate all the concern for me, a U.S. taxpayer, and other U.S. taxpayers. It's adorable, truly. But in all probability these U.S. federal government actions won't cost us (U.S. taxpayers) even one penny. By all reasonable accounts these banks have perfectly fine asset bases (U.S. Treasuries!), and those assets will now be liquidated over the next few years (and in some cases simply held to maturity).

NOT acting would've surely cost U.S. taxpayers.

I'm not necessarily thrilled that U.S. federal government agencies had to take the actions they took on Friday and Sunday. There are some moral hazard problems at play here, potentially. But it's a reasonable set of decisions in the circumstances, and it's just not going to be any burden to U.S. taxpayers. Quite the opposite. A repeat of the Global Financial Crisis or Great Depression, even partially, would be much, much worse for U.S. taxpayers.

 

[DevilPlate]

Just last week Goldman Sachs price target of SIVB
https://www.marketbeat.com/instant-alerts/nasdaq-sivb-a-buy-or-sell-right-now-2023-03-03/

 

[DevilPlate]

Talking about moral hazard
https://www.washingtonpost.com/technology/2023/03/12/greg-becker-svb-stock/

Greg Becker sold $3.6 million in company stock just days before the bank’s collapse. Pressure from federal lawmakers is mounting to give it back.​

 

[limster]

Just last week Goldman Sachs price target of SIVB
https://www.marketbeat.com/instant-alerts/nasdaq-sivb-a-buy-or-sell-right-now-2023-03-03/

those that watch or read The Big Short know that bank can say one thing to customers, while their prop trading desk can do the opposite. If you look at the top 10 short interest list in Feb, SVB was already on the list.

 

[BBCWatcher]

Hypothetically one or more short sellers of SVB stock could've spurred the bank run. The regulators and U.S. Department of Justice will presumably look into such possibilities if they need to.

 

[Shion]

https://www.theedgesingapore.com/news/banking-finance/hsbc-acquire-svbs-uk-business-gbp1

 

[yiron]

https://www.theedgesingapore.com/news/banking-finance/hsbc-acquire-svbs-uk-business-gbp1

Good deal for HSBC if SVB UK is solvent and merely needs liquidity to tide over. Otherwise HSBC might be in for it.

 

[BBCWatcher]

Good deal for HSBC if SVB UK is solvent and merely needs liquidity to tide over. Otherwise HSBC might be in for it.

It could still be a good deal for HSBC even if SVB U.K. is mildly insolvent. SVP's U.K. client base is somewhat valuable. And SVP U.K. isn't that big.

 

[final1]

https://www.theedgesingapore.com/news/banking-finance/hsbc-acquire-svbs-uk-business-gbp1

UK taxpayers will not be out of pocket. This deal is clear cut and easily understandable as to what is the action taken and why an existing large bank like hsbc would agree to do it. I have no question marks about it.

But as to the US action for SVB USA, I am not so confident to say the US taxpayer will not be out of pocket despite claims to the contrary. The not of out pocket claim only works if a certain set of circumstances line up exactly as what is expected by the fed, treasury and fdic in the future. Unexpected things can happen.