There Was No Money Left For Silicon Valley Bank

‍SVB

The Federal Deposit Insurance Corp. closed Silicon Valley Bank on Friday, March 10, because it was out of money. Of course, a bank running out of funds is a horrible thing. But, it is also a little difficult to comprehend how a bank like SVB might have experienced financial trouble in the US in 2023. The contemporary banking system's architecture is meant to prevent such, and in some ways, SVB seemed like a bank that was especially unlikely to run out of cash. Still, it did.

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The extremely simplified facts regarding SVB are that it had deposits totaling around $190 billion and put a large portion of that sum, let's say $120 billion, into a portfolio made up primarily of Treasury and agencies bonds. The remainder was invested in more complex, riskier, conventional banking assets (loans, etc.), but SVB really held a lot of safe bonds and did relatively little lending for a bank.

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The bonds naturally turned out to be dangerous as well, given that interest rates increased, the market value of the bonds decreased, the bank lost its ability to operate on a mark-to-market basis, account holders became aware of this, and a run on the bank occurred.On March 9, SVB's worst day, around $42 billion in deposits departed, leaving the bank with "a negative cash balance of roughly $958 million," and it shuttered the next day. Fine. But even when rates rose and the bonds lost value, SVB had invested roughly $120 billion in elevated liquid bonds; their estimated market value was therefore still around $100 billion. Yet, losing $42 billion in deposits caused the bank to fail. Notwithstanding the fact that these figures are not exact and do not take into account withdrawals made before that Thursday, 100 is still much more than 42. You can probably spend $100 billion in Treasury securities to buy far more than $42 billion in cash.

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For instance, you could sell them, though it might take some time. But more importantly, you can use them as collateral when borrowing money from a lender. In particular, modern banking systems allow banks to borrow money from their last resort lender, this same central bank (in the US, the Federal Reserve), by posting Treasuries as collateral. Since the Fed can simply create money, lending billions of dollars against strong collateral is no problem for it. The Federal Home Loan Bank system, a "lender of next-to-last resort" in the US, will also lend money to banks with Treasury securities as security. It could have been difficult for Silicon Valley Bank to borrow $42 billion against those loans to pay back fleeing depositors if it had had $190 billion in deposits and $190 billion in strange, customised, hazardous small-business loans. Nonetheless, it possessed over $100 billion in straightforward, high-quality Treasury and agency bonds, so it is puzzling that it was unable to locate $42 billion. 

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I've hazarded a guess that this is why SVB couldn't get the money to pay out its deposits: "sure, it lost $42 billion of deposit accounts that day, but still it lost billions in the past days too, and if it had been capable of borrowing the $42 billion, it would have lost a lot of money more on the following day, so the Fed and FHLB pulled the plug because they thought it was hopeless."

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I don't actually believe that the recent banking crisis, which saw the failure of SVB and Signature Bank of New York as well as the teetering of other US regional banks, the extraordinary support of the Fed and FDIC for the banking system, and the weekend disappearance of Credit Suisse Group AG, might have been avoided if the Fed had said, "hmm, normally we do a transhipment first, but you appear to be in a rush and it's getting close to closing time so we'll just threshold for transfers.

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Even so! Man! Why the Hell not? Many articles have discussed how SVB was a bank run for a more rapid, modern era. Now you may hear a rumor on Twitter or in a group chat, use an app to withdraw cash instantaneously, instead of hearing it at the coffee shop and rushing to the local bank to wait in line. A tech-savvy bank with a group of depositors who are very linked to the internet can lose 25% of its money in a matter of hours, which was unthinkable in past bank run times.

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The lender-of-last-resort structure on which all of this depends, however, is still mired in a slower, more sluggish era. As a result, depositors can panic more quickly and bankers can give back their money more quickly. Customers can act more quickly than the bank can respond when the interface improves more quickly than the core system, according to Byrne Hobart. You can panic in a second and use an app to withdraw your money, but the bank cannot obtain additional funds without making a series of phone calls and test trades, which can only occur during regular business hours. Hence, occasionally a bank with a lot of theoretical liquidity can simply run out of money.

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As a result of this crisis, there will be several suggestions for modifications to bank regulation, supervision, deposit insurance, and Fed facilities. It's unlikely that "make the lender-of-last-resort procedure for issuing loans and going to post collateral a bit more automated" will be at the top of the list because, as I've said before, I doubt it would have saved SVB and because I lack any particularly insightful technical knowledge about how it should be improved. But wouldn't it be a good idea, I dunno. Wouldn't you have more faith in the financial system if banks with significant assets could access capital as required?

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The holding company, SVB Financial, has a number of non-bank assets that the FDIC has seized that can be used to make payments to its creditors in the event of bankruptcy. But, SVB (the bank) has $2 billion in accounts as one of those assets, and the FDIC controls the bank and does not wish to return the deposits. This is presumably due to the following reasons: (1) the FDIC believes the bank may have claims against the holding company; (2) it is always preferable to litigate those claims while you're holding the money; and (3) there is a general philosophical objection to paying holding-company creditors while the bank is insolvent, there isn't enough money to pay bank deposits, and the FDIC must make up the difference. It's not technically the law, but you understand why that could be the FDIC's preferred policy, and right now they have the money. "When a bank collapses and can't pay depositors, its retaining bondholders get nothing,"

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The interest rate increase and the decline in portfolio value of safe held-to-maturity bonds held by regional banks appear to be the main drivers of this month's American bank runs. Since accounting regulations permit banks to mark expected to hold bonds at their purchase price, these values were not mirrored in the banks' financial statements. However, they were mirrored in the explanatory notes to those declarations, and eventually experts and depositors read those footnotes, became alarmed, and withdrew their funds. SVB and Signature therefore failed and were confiscated.

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Yet, such banks have also loans, and given that they were often created in circumstances with considerably lower interest rates, those loans (1) may have some credit issues and (2) likely also have some interest rate issues. But, the loans are more difficult to appraise and sell; also, there isn't a table detailing the precise market value of a loan portfolio at the back of the income statement. Most likely, the loans did not cause the banks to fail. Yet, since the FDIC now owns these banks, this can sell the bond portfolio with relative ease because they are only bonds. However, it turns out that a few of the loans are unwanted, leaving the FDIC with them.

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There is conflict present. The second-riskiest bank will struggle to raise equity, making it more likely that it will fail and require its own rescue if the riskiest bank is taken over and its shareholders are given nothing as a lesson. If the riskiest bank gets bailed out while maintaining a high level of shareholder value, (1) the second-riskiest bank will be slightly more at ease with its own risks, and (2) the equity didn't really accomplish much.

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The same holds true for extra tier 1 capital securities. We have discussed how Credit Suisse Group AG's AT1 bonds was wiped off during its forced merging with UBS Group AG over the weekend, despite the fact that Credit Suisse's stockholders received around $3 billion in value from the transaction, during the past few days. Indignant that they fared worse than shareholders, AT1 holders at Credit Suisse as well as elsewhere raced to reassure the market that non-Swiss banking regulators would never treat AT1s in such a manner. I have maintained that zeroing the AT1s was appropriate and beneficial, even if it meant paying some dividends to shareholders, but forget about that.

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The key takeaway is that UBS is receiving asset guarantees, liquidity backstops, and other assistance from Swiss authorities in this rescue, which is taking place at taxpayer expense or taxpayer risk regardless of whether the common stock received anything or whether the AT1 causes were met strictly speaking. And Credit Suisse had 16 billion Swiss francs worth of AT1 securities that were created specifically to prevent that, to bear losses before to taxpayers, and to go to zero in the event that a bailout appears to be required. Hence, the AT1s were zeroed by the Swiss authorities.

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Companies that are currently environmentally friendly can't often become significantly greener even if you cut their cost of capital. 4 Companies who are currently fairly polluting could be able to adopt a longer-term perspective and invest in energy-transition programs, new manufacturing techniques that consume less energy, etc. if you lower the cost of financing for them. Nevertheless, if you increase the cost of capital for businesses that are already fairly polluting, the long term becomes less important, and they are more motivated to continue polluting as much as they can while they can.

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Things occur.

While it raises rates by a quarter point, the Fed claims that US banks are sound. Wall Street trading is changing drastically thanks to the zero-day options boom. Concerns regarding bond market liquidity are widespread. what UBS's acquisition of Credit Suisse entails. With the post-deal surge, UBS Shares Storm Returns to Pre-SVB Levels. To allay worries about the risk of the deal, UBS offers a bond buyback. Employees at Credit Suisse are suffering more from deferred pay due to the Swiss ban. Concerned About the Effects of the Credit Suisse Acquisition Are Swiss Commodities Traders. Paris defeats London in the battle of the equity markets. Carvana's restructuring proposal calls for a $1 billion debt exchange. Greg Becker, of SVB, spent 30 years as Silicon Valley's money man before all of a sudden ceasing to be. Prior to it, SVB's loans to insiders tripled to $219 million.

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