SVB collapse

dale_cotterill

darren23

Keep seeing this argument that SVB is somehow unique because it 'wasnt diversified.'. Its completely incorrect. Sure, SVBs customer base may have had a higher than usual percentage of business customers with > $250k accounts. But I guarantee there are other banks with varying percentages of these customers where those customers are, quite rightly, going to be wanting to move their money in the upcoming days. The point is that, of the two factors I identified, (1) has affected the entire market and (2) is probably about to.

dale_cotterill said:

Spectacular failure of risk management across the whole tech industry, not just in the bank itself. SVB basically just made a huge bet on interest rates staying low, rather that managing it's capital and liquidity properly.

In December 2020, the Fed stated that inflation was 'transitory' and that interest rates in 2023 would be 0.1%. The current interest rate is 4.75%. Throughout much of 2021, interest rate rises and predictions were muted. The Fed is both the body that both predicts rates and sets them. A business taking that advice on board and acting on it isn't 'making a huge bet on interest rates staying low.'

This is mismanagement by the central bank.

SVB's diversification issue wasn't exclusively about number of depositors over £250k. It was the fact that all of it's deposits were basically the same. The VC's seemed to hold all of their money there, the companies ther VC's lent to all kept their money there, and far as can be determined, no-one else really used the bank. The whole 'ecosystem' as they like to call it was entirely incestual, and the moment one firm started worrying about it, then everyone was going to behave in exactly the same way.

If you're lending a lot of money to someone, do you really want them all to bank with the same institution you've got your money in?

While I have some sympathy for the argument about central banking policy failures, though I'd mainly refer to maintaining low interest rates for so long, rather than the spike now, absolving blame from SVB for this is laughable.

The basic function of an asset and liability department in a bank is to manage interest rate risk, and ensure that is has sufficient liquidiy and capital to meet it's requirements, even in a stressed environment. Using depositor money to buy long term bonds at record low rates, where the value can at best can remain static over the long term.

Even basic stress testing and scenario analysis would show the high level of interest rate risk they were running, and having 95% of deposits over the limit should immediately indicate in a stress they probably wouldn't be that stable, particularly from the narrow slice of base they had depositors from. Instead they just took a massive punt that rates would never go up.

User232002

The casual user of this forum probably couldn't explain what T-Bill is. So, yes, it stands to reason that they aren't aware of accounting practices around long duration assets.

No sums involved, big or small, regardless by the way.

Sea_Shell

I thought FSCS protection was just for private individuals?

wmb194

Sea_Shell said:

I thought FSCS protection was just for private individuals?

It seems it can also cover businesses and charities. £85k wouldn't mean much to any company I've ever worked for, though.

"Your small business, limited company or charity will need to meet certain eligibility criteria to claim compensation with FSCS. We assess eligibility on a case-by-case basis and it varies for different types of claim. Legal status will affect eligibility, e.g., if you’re an individual or incorporated entity (such as a corporation or limited partnership). Charitable status is never relevant to eligibility.

...

We generally protect companies’ deposits, regardless of the size of the company. We assess eligibility under the PRA’s Depositor Protection Rules, in particular rule 2.2. Most types of regulated financial services company are not eligible though.

If a UK-authorised bank, building society or credit union fails, we'll automatically compensate each eligible company depositor up to £85,000."

https://www.fscs.org.uk/making-a-claim/claims-process/small-business/

aaj123

Sea_Shell said:

I thought FSCS protection was just for private individuals?

Incorrect. It's applicable for businesses too without any size test. 

Band7

aaj123 said:

Sea_Shell said:

I thought FSCS protection was just for private individuals?

Incorrect. It's applicable for businesses too without any size test. 

It's not a free-for-all though. https://www.fscs.org.uk/making-a-claim/claims-process/small-business/

aaj123

Band7 said:

aaj123 said:

Sea_Shell said:

I thought FSCS protection was just for private individuals?

Incorrect. It's applicable for businesses too without any size test. 

It's not a free-for-all though. https://www.fscs.org.uk/making-a-claim/claims-process/small-business/

Deposit protection universally is. That page is being nuanced about other FSCS claims. 

Sea_Shell

Ok, so many businesses may have their deposits protected, but what of amounts over £85k.?

Bailouts?

Swipe

https://www.cnbc.com/2023/03/12/treasury-secretary-janet-yellen-says-us-government-wont-bail-out-silicon-valley-bank.html

No bailout from the US Treasury. Just the $250K FDIC protection.

Eye2021

The systematic problem in the banking and world finance industry is that everyone has got used to easy money through quantative easing and low interest rates. As interest rates rise, narrow minded and high risk banking investments become exposed and may fail.

In a way, what happened to SVB was similar to the huge losses from UK Pension Funds following the mini budget last year.

There was also another major bank failure in the US last week - SilverGate. This has been totally ignored by the UK press as far as I can see, as they are more concerned about who commentates on TV football.

Each bank failure increases sytematic risk as losses have to be absorbed elsewhere. Especially dangerous as other banking and business models come under stress from fiscal tightening and sudden interest rate increases.

Politicians and journalists at the moment will have no detailed knowledge from who else is exposed by losses from SVB, and from fiscal tightening. Rishi 'rich' Sunak has said there is no systematic risk from the failure of SVB. How can he be sure ? Well I am sure he could equally have said that SVB was secure only 4/5 days ago.

Andrew Bailey I don't think has said anything so far on this - no change there, he gets every major call wrong anyway and seems very behind the curve.

Are we heading for another credit crunch ? I don't know but I wouldn't be surprised.