The 2022-23 Economic Crisis Megathread

[crazy canuck]

Thing I find striking about the SVB thing is that it's reminiscent of British pension funds' LDIs which interacted with Kwarteng's budget so disastrously.

The worry I have from a regulatory/system perspective is that there are these areas of the financial system that require bonds etc - many of which were purchased at a time of far lower interest rates (and expectations). It's not surprising that rising rates has an impact on those bits of the system. Both were dealt with relatively easily and relatively simply.

But I'm a little disconcerted by the fact that regulators seem to be a bit suprised/caught on the hop when this happens. It feels like with rates rising for the first time in about 15 years that should be a risk that regulators are very interested in and monitoring really tightly. I'm not sure about the Fed rate - but for the BofE I think it's been 10 rises in a row with clear expectation setting. I think the markets have been adjusting to that - I'm a little concerned that maybe the regulators (here that means another bit of the BofE) haven't?

Why would regulators care much about a bank that was not regulated? 

[garbon]

Isn't it per person per financial bank?

I don't think so - but I'm just going off what I remeber being told when I was opening a savings account. I wasn't paying much attention because it's very much not a problem for me

Yeah so it is per institution. I recall what the banker said when my husband and I got a joint account at bank where I had my own account.

Bank of England says this on their site:

People with eligible deposits that add up to more than the deposit protection limit may wish to take steps to keep their deposits fully protected (eg by splitting their deposits across different PRA-authorised firms).

[garbon]

also, is the limit per person or per bank? Could I have my money in 10 banks and have 10 times the insurance?

Yes. You don't have to have your money exposed simply because of limit for accounts at one bank. Works that way in US.

[Sheilbh]

Yeah so it is per institution. I recall what the banker said when my husband and I got a joint account at bank where I had my own account.

Thanks - sorry

Still think I'm right on the tax relief - but again, very much not an issue for me...

[HVC]

Isn't it per person per financial bank?

I don't think so - but I'm just going off what I remeber being told when I was opening a savings account. I wasn't paying much attention because it's very much not a problem for me

Yeah so it is per institution. I recall what the banker said when my husband and I got a joint account at bank where I had my own account.

Bank of England says this on their site:

People with eligible deposits that add up to more than the deposit protection limit may wish to take steps to keep their deposits fully protected (eg by splitting their deposits across different PRA-authorised firms).

Sheilbh you've failed me for the last time! 

So now thank you garbon

[Sheilbh]

 

[The Larch]

Forbes, maybe not to be trusted in the future. 

[The Larch]

Tweet from a former SVB customer wondering how could a bank run have happened while simultaneously emptying all his accounts at the bank.

https://twitter.com/torrenegra/status/1634573234187407369

Alexander Torrenegra
@torrenegra

Silicon Valley Bank was the main bank for two of our companies, my personal savings, and my mortgage. This is how things unfolded for us:

Between 2013 and 2023, all good.

Thursday, 9 AM: in one chat with 200+ tech founders  (most in the Bay Area), questions about SVB start to show up.

10 AM: some suggest getting the money out of SVB for safety. Only upside. No downside.

10:50 AM: I read the messages in a bathroom break. Immediately cancel the meeting I had. Ask my wife, Tania, to wire all of our personal money out to other banks. Call my teams. Ask them to do the same. One of them, at the dentist, has to stop the procedure and run home.

11:10 AM: We can't get the money out of any of the accounts. For our personal savings, we don't have other bank accounts readily available. For one of the companies, the permissions are not set up to allow such a significant exit of money. We can only get half of the money out. We wire it to Ameritrade, as we don't have any other bank account set up. For the 2nd company, the banking credentials had been changed. I cannot log in.

11:15 AM: Tania gets a hold of another bank we were already talking to, UBS. Ask them to open a bank account pronto.

11:20 AM: I change the permissions for the 1st company. We request another wire out to Ameritrade for the remaining money from that company. We have to wait for the wires to get out.

11:25 AM: After a long wait, I get a hold of an SVB agent. They reset my credentials for the 2nd company.

~12:00 PM: All of my chats with tech founders in the US light on fire with what's happening. Obviously, we have a bank runoff. Surreal.

12:30 AM: We request two wires for all the money from the 2nd company to Mercury.

12:38 PM: Wires to Ameritrade clear. The 1st company is safe.

12:45 PM: We sign dozens of documents -without reading them- and complete the opening of a personal bank account with UBS.

12:50 PM: Tania requests SVB, via their website, to wire all of our personal savings to UBS. Given the permission settings in place, they tell us that they have to call us.

1:30 PM: SVB is a solid bank. I know their CEO, Greg Becker. Great guy. I figure this is a temporary issue caused mainly by people panicking. They'll recover. I buy shares of SVB at what I consider significantly low prices.

2:09 PM: One of the wires for the other company clears.

~3:00 PM: My chats with tech founders from Latin America start to catch up.

4:05 PM: SVB calls us. Tells us that our savings will be wired the same day, as requested.

4:10 PM: We jump on a plane to fly back to San Francisco.

11:50 PM: We land. We learn that the 2nd wire for the 2nd company hasn't cleared yet. Worst, the wire to get our personal savings out of SVB is still in the queue.

2 AM: Go to bed.

Friday 7 AM: Wake up. Nothing. SVB stock is 60% down overnight.

7:30 AM: Cancel all morning meetings to focus on the problem.

~8:00 AM: Learn that SVB is now controlled by the government. The shares I bought the day before are now likely worthless. I made a mistake.

9:00 AM: Host a town hall with my team. Explain what's happening. Answer questions.

All day long: Wait and cope with the anxiety. Help other entrepreneurs. Share what we know. Answer questions from investors.

~4:00 PM: Figure that the money for the company with the pending wire is safe. It will be available as of Monday. Unfortunately, for our personal savings, only a portion is safe. We may recover most of the money. The percentage, however, remains unclear. It may take years.

5:00 PM: Play with the kids. They help me forget about the material world.

At night: Reflect. "What did I do wrong?". "Am I good enough to do what I do?" Hug Tania.

Saturday: Figure there is nothing of value by focusing on the topic. It's an externality. We shouldn't invest too much time thinking about them. Or trying to predict the markets. Time to go back to what we can control: the execution of our companies.

Continue pushing forward. Persist. Persist. Persist.

[garbon]

Ugh at that man. Ugh.

[The Larch]

This part would crack me up if it wasn't such a serious thing.

Thursday, 9 AM: in one chat with 200+ tech founders  (most in the Bay Area), questions about SVB start to show up.

10 AM: some suggest getting the money out of SVB for safety. Only upside. No downside.

10:50 AM: I read the messages in a bathroom break. Immediately cancel the meeting I had. Ask my wife, Tania, to wire all of our personal money out to other banks. Call my teams. Ask them to do the same. One of them, at the dentist, has to stop the procedure and run home.

(...)

~12:00 PM: All of my chats with tech founders in the US light on fire with what's happening. Obviously, we have a bank runoff. Surreal.

No, of course there's no downside whatsoever if plenty of company owners start withdrawing all their money from a bank. No, of course this wouldn't cause a bank run. Who would have thought it?

[The Minsky Moment]

Joan, what can you tell me about these large deposit holders? 

I saw reports that 93% of deposits at SVB were over the 250K limit.
Signature Bank in NY - with which I am more familiar is probably similar.  Because their main clientele is/was smaller and mid cap businesses that are going to keep seven or eight figures on deposit.

Making depositors who had balances above the FDIC insured limit whole is the kind of bail out I object to

Sure as a matter of principle.

But the problem is what is a substantial business supposed to do?  They need to keep millions of working capital in a bank to process regular transactions, like making payroll, buying supplies and equipment, collecting A/R etc. It's not feasible to handle this by e.g. opening 100 separate accounts of 250K at 100 banks. 

OK so caveat emptor.  The business depositor should exercise care and pick a safe bank, and pay the price if they don't.

But what does a "safe" bank look like?  Decent levels of capital and safe asset base.  And what are the safest assets?  Government securities and agency bonds.

Huh - that kind of looks a lot like SVB, no?  See the problem?  Caveat emptor doesn't always work.  Because the very nature of the banking business involves taking on maturity mismatches and thus assuming liquidity risk.  All banks, even the "safest", are exposed to this risk.

In the old days, traditional commercial banks - let's call them TradCom bank - would take business deposits and make business loans.  I.e. the classic bank functions of maturity transformation, capital allocation, and transaction facilitation.  Arguably TradCom is a riskier model than SVB, because business loans involve a lot more credit risk and are a lot less liquid than government securities.  But there is an important but subtle offset to that risk: the same business community that forms the deposit base for TradCom also uses and relies on TradCom for capital.  So there is a strong collective interest to hang together and discourage runs.

But TradCom while it still exists is a dying model and in places like Silicon Valley they can't exist.  Because Valley companies wouldn't be caught dead with a bank loan.  Early stage companies do equity rounds with VCs or maybe sell notes in a private placement.  More developed Valley companies finance investment from ample profits or also go to the capital markets if they need more.

But even the fanciest cutting edge techco needs to make payroll and pay for paper reams.  They still need a fuddy duddy bank to do basic money transactions. Ergo, SVB.  But how does SVB make enough money to support that transactional infrastructure, pay their own employees, and have something extra left over for their own shareholders?  Not business loans to the local companies - no market for that.  So they have to plow their deposits into yield generating assets.  And if they are minimally responsible, they will presumably pick "safe" assets like government securities.  Which they did.  And . . . we are back at square one.

Now to my mind this raises a bigger point, which is what economic function an institution like SVB serves and whether it would make more sense for business to keep accounts directly with the Fed. But that's a whole separate line of discussion.

[The Minsky Moment]

This part would crack me up if it wasn't such a serious thing.

Seems to me nothing can top this one

1:30 PM: SVB is a solid bank. I know their CEO, Greg Becker. Great guy. I figure this is a temporary issue caused mainly by people panicking. They'll recover. I buy shares of SVB at what I consider significantly low prices.

As the same guy is pulling his money out of the bank. 

Just wow.

[Admiral Yi]

Thanks.

I am aware of the moral hazard.  I guess I'm still steamed about Rolling Stone et al bitching about a bailout in 08 when this is much purer bailout.  Maybe the solution is to increase premiums and lift the insurance limit.

One thing I don't get though, maybe you can explain.  If all their assets were Treasuries and agencies, why the sudden crash in asset value?  I understand the inverse relationship between bond price and market yield, but if they were in fact holding to maturity, par is par, right?  I mean their balance sheet only looks bad if they mark to market, right?

[Richard Hakluyt]

Rumours led to withdrawals and they had to sell bonds at a loss to cover this apparently.

[Richard Hakluyt]

Explainer from Reuters :

https://www.reuters.com/business/finance/what-caused-silicon-valley-banks-failure-2023-03-10/