A classic run on the bank exposes harsh realities hiding in plain sight
I’m still shocked that people will openly admit this. This is not an excuse.
“ Punit Soni said startup founders like himself don’t usually have timeto think about diversifying bank accounts. They are pulling all-nighters trying to build their product or service, raise capital, hire new engineers or accomplish dozens of other tasks required to build their nascent business. ”
Good WSJ op-ed today:
How SVB ‘Profited’ From Interest-Rate Risk
An accounting rule created an incentive for the collapse.
Thank you for the insightful and informative article. Maybe an article on potentially similar issues (HTM unrealized losses) at select regional banks, such as Western Alliance, some online banks (including Marcus at GS), would be interesting to the readers
Thank you for this artlcle.
The WSJ opening paragraph from an article posted this afternoon. This paragraph boiled things down very simply.
Silicon Valley Bank’s failure boils down to a simple misstep: It grew too fast using borrowed short-term money from depositors who could ask to be repaid at any time, and invested it in long-term assets that it was unable, or unwilling, to sell.
Well written and easy to understand. Thank you.
Ravi, one of your best and most timely pieces! Thanks!
Thanks for your analysis!
As an ALM actuary it always amazes me when bank regulators tell life insurers that banks do ALM better. All could improve. In today's environment too many are relying on rules of thumb that are no longer appropriate. Risk teams should all be running scenarios based on cash flows and market value in addition to those based on GAAP. Finance 101 gets forgotten as you get more sophisticated.
No one forced SVB to buy long dated highway yielding HTM bonds back when interest rates were much lower. Berkshire chose lower yielding short dated bonds because of such a risk (not the only reason Mr. Buffett chose such a strategy). Maybe Berkshire can keep SVB afloat in return for a 10% preferred?
SIPC is more than FDIC. Some firms even have supplemental insurance on securities. There are money market mutual funds yielding over 4%.
Bank customers are bound to put pressure on banks.
I wish I had seen this tweet from Bill Ackman before posting this article… the idea that (sophisticated) depositors with over $250K in a bank didn’t realize what they were doing seems crazy to me. Bailouts cannot be the perennial answer.
“By allowing @SVB_Financial to fail without protecting all depositors, the world has woken up to what an uninsured deposit is — an unsecured illiquid claim on a failed bank.”
Excellent post. Not everyone appreciates the accounting nuances. Thanks!
I appreciate the cogent explanation!
Interesting that banks don’t have to mark to market their portfolio yet other companies (like Berkshire) do? Is this to try to provide stability to bank financial statements or something?