SIVB Bank Failure

[SHDL]

That was quite a weekend!

 

Some thoughts:

 

1. The government (FDIC/Fed/Treasury) won't let depositors at other banks lose their money after this. If they do, that would be like a perfect replay of Lehman. And they have the money ... or the money printer to be more precise.

 

2. But yes, depositors will probably move their deposits en masse this week regardless. As @changegonnacome pointed out, this shouldn't topple any bank immediately but some may be required to raise capital soon. The lending facility will give them the time to do so in an orderly manner if nothing else. 

 

3. A mild recession could actually strengthen the balance sheets of many banks as interest rates will probably go down in that event and make treasuries and MBS more valuable. Of course a severe recession would be no good.

 

4. The FDIC limit will almost certainly be increased (and the FDIC will charge a higher price for it).

 

5. Speaking of which, I don't quite understand why private insurance companies do not sell deposit insurance...

[Spekulatius]

I think the bailout for depositors was done to prevent sudden deposit flight like the one who did SIVB in. There were likely many request from depositors the last few days to move fund away from banks that looked like they are having issues. With financials, perceived issues can very quickly become real issues due to reflexivity. Things can become much viral much faster than even 14 years ago during the GFC and it’s also a bit easier to move funds out. These frictionless systems can move very quickly in a herd like fashion even with many small participants as the GME short squeeze and similar events have shown.

[changegonnacome]

3 minutes ago, SHDL said:

5. Speaking of which, I don't quite understand why private insurance companies do not sell deposit insurance...

 

Buffet suggested this many moons ago.......that a bank account would come with FULL mandatory deposit insurance coverage.....that insurance being provided by a private entity incentivized to assess the risk of each bank model when providing coverage fee quotes......the rational of which would say that deposit account insurance premiums would rise on banks displaying riskier or more flawed business models......and reduced for those whom were very likely never to have to call on said insurance. The FDIC system, to my understanding has some small differentiation of risks in its premium calcs, but in reality it has a bit of free rider problem.........imagine pretty much everyone getting charged the same for car insurance.......your DUI saddled uncle & your aunty who never goes over 40mph paying pretty much the same.

[SHDL]

13 minutes ago, changegonnacome said:

 

Buffet suggested this many moons ago.......that a bank account would come with FULL mandatory deposit insurance coverage.....that insurance being provided by a private entity incentivized to assess the risk of each bank model when providing coverage fee quotes......the rational of which would say that deposit account insurance premiums would rise on banks displaying riskier or more flawed business models......and reduced for those whom were very likely never to have to call on said insurance. The FDIC system, to my understanding has some small differentiation of risks in its premium calcs, but in reality it has a bit of free rider problem.........imagine pretty much everyone getting charged the same for car insurance.......your DUI saddled uncle & your aunty who never goes over 40mph paying pretty much the same.

Right, it sounds like a perfectly good idea so why the government “monopoly” is the question… It’s like saying you can only buy auto insurance from the government and you can only get up to $5000 coverage per car. 

[Viking]

The challenge might be knock on effects. The stuff that is likely out there but needs a match to set it off. Or its like a pressure cooker… pressure just keeps building until it blows. Can’t see it looking forward. Makes sense looking back.

My guess is high interest rates have created lots of problems. We just don’t see it clearly yet. The next couple of weeks will be interesting. My guess is more weak links will be exposed. The short crowd are like a pool of piranha. 

[Castanza]

1 hour ago, LearningMachine said:

 

 

FDIC didn’t commit to saving all depositors over FDIC limit in all banks yet.

 

I wonder if some depositors in other niche banks will still try to get their deposits out before others based on the rationale that FDIC might not be able to save all depositors over FDIC limit in all banks.

Hmm the more I think about this situation, the less I like it. As @changegonnacome said the metrics and guidance for all these banks is going to be jacked if there is any serious movement of capital. Index play on regionals might be the safest bet should it get low enough. Maybe a basket of the big boys….something tells me that opportunity might not be as sweet as we think. Either way, it will be interesting to see what happens!  
 

The Bank of Castanza does not need any runs of its own. 

[Spekulatius]

The failure of Signature Bank ($SBNY ) is scarier from a bank investors perspective than SVIB’s. SBNY had issues, but they weren’t insolvent even accounting for losses in their security portfolio. it was simply the liquidity shortfall from bank run that did them in. The bank run was caused by reputational  damage from crypto and liquidity strain because crypto deposits were leaving, then came the know können on effect from SIVB. This wasn’t a bad bank per say,  it neither was SIVB.

[TwoCitiesCapital]

3 hours ago, Spekulatius said:

I am a bit surprised that Signature bank is shut down. They clearly were on the ropes, but that was awfully quick.

 

Maybe we should tax crypto to pay for this mess.

 

I'm confused. Other than their involvement in the crypto space, what does crypto have to do with any of this? 

 

It's not like these banks went under because of bad loans. These banks went under due to liquidity mismatches and depleting capital from forced treasury sales. It's not like they were investing in Bitcoin - they were investing in treasuries.

 

Blame the Fed, regulatory requirements, accounting standards, and fear for these failures. Not crypto. 

[Viking]

46 minutes ago, TwoCitiesCapital said:

 

I'm confused. Other than their involvement in the crypto space, what does crypto have to do with any of this? 

 

It's not like these banks went under because of bad loans. These banks went under due to liquidity mismatches and depleting capital from forced treasury sales. It's not like they were investing in Bitcoin - they were investing in treasuries.

 

Blame the Fed, regulatory requirements, accounting standards, and fear for these failures. Not crypto. 

What did Signature Bank in was its involvement with crypto. Banking is all about confidence. Crypto is blowing up everywhere. So lack of confidence in Signature (caused by its past involvement with crypto) put it out of business. Would any of this have happened if it never got involved with crypto? No. It would still be in business. 

[John Hjorth]

Federal Reserve [March 12^th 2023, 6:15 P.M. EDT] Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors .

 

To me, it reads like : If you need liquidity tomorrow monday, just give us all that crap you have on your balance sheet as collateral - we will value it at par and give you the money [..., and later we must  see if we by that have solved one problem by creating a new one - then we will to solve that, too].

Edited March 13, 2023 by John Hjorth

[changegonnacome]

2 hours ago, Castanza said:

As @changegonnacome said the metrics and guidance for all these banks is going to be jacked if there is any serious movement of capital.

Yeah the way I think about it they turned a bank run into a bank walk……but they haven’t saved banks with shitty biz models & screwed b/s forever forever…they will shrink/die over time….this funding window is for a year….think of it like a controlled detonation as opposed to a dirty bomb.  

[Parsad]

On 3/11/2023 at 8:35 PM, Spekulatius said:

This gal wasn’t the head of risk management. Looks like she was head of risk management for the UK sub which had little to do with the blowup. Head of risk management was Laura Izurieta, which came from Capital One and apparently had a carrier in banking.

 

Thank you Spek for the balanced and factual response!  With members like you, I have less work!  Cheers!

[Parsad]

12 hours ago, Gregmal said:

This is the right move if true. Good on Janet and Jerry and Joe. 

Starting out my career at the tail end of GFC…I was a naive but loyal capitalist and die hard “they all should have known better and not been greedy with their mortgages” in response to the banks vs the people taking out mortgages argument. I’ve somewhat evolved over the past 10 years…and giving life the opportunity to present to me different viewpoints has also helped. At which point I think it’s easy to arrive at a conclusion that there are just certain limitations to the amount of due diligence or effort a normal person should be expected to endure. Going through a mortgage process…I’ve done it over a dozen times, is rigorous. Sure, we should all have $500 an hour lawyers to review the docs line by line. But it doesn’t work like that and a slick salesman or banker can easily dupe a normal, well intentioned person. Extending this to bank deposits, I think it’s even more true. How can you have a stable banking system, let alone one that isn’t a duopoly/oligopoly(more so than it already is) if average folks need to do hedge fund level due diligence to ensure the money they deposit or have direct deposited in the checking accounts is going to be available? It’s crazy and just not viable and should be guaranteed in far higher amounts than the F.D.I.C. limits. 
 

As for the bank itself, it should fail. Shareholders and bond holders should meet their fate. But that’s the difference, some parties entered this engagement with the expectation of something beneficial … others, just figured hey this is where people in my hood keep their cash. Big difference.

 

I agree!  But you also want to create the right incentives.  The bank executives should have their bonuses and options scrapped.  Maybe even a partial clawback of the last year's salaries for the top executives, risk officers, etc.  Directors should have all their director's fees for the last year clawed back.  And probably tighter scrutiny of regional banks, brokerages, insurers, pensions on the same level as too big to fail institutions.  We've seen this movie too many times in the last 15 years!  Cheers!

[Parsad]

10 hours ago, Spekulatius said:

This is not Joe Sixpacks bank. Joe is protected  anyways up to $250k and not many average people have more than that in a single bank account. These are corporation and VC firms who have CFO’s who made decisions. It was also Peter Thiel who literally cried fire and  instigated a bank run here. are is well known as a libertarian. So, I am not sure sob stories  “we couldn’t have known better “ are appropriate here. Feels a bit like trying to buy insurance after you had a car crash.

 

In any case, the depositors will probably lose 20% or thereabouts above 250k. Everything  below  250k is insured and can be paid out, so it’s not like Mondays payroll for a small form is in jeopardy here. Since liquid assets (even after haircuts ) are a bit more than 50% of the balance sheet, about 50% of deposits should be available very quickly (next week) with probably the other 30ish percent being paid out in weeks or so, all without rescue package. It’s not quite as catastrophic as it’s made out to be.

 

The FDIC is government sponsernd but works like a Mutual insurance cos that banks need to pay in. If coverage is increased, then the contributions need to increase too, there is no free lunch.

 

Yup.  FDIC fees should increase.  I disagree on the bank not being a Joe Six Pack bank.  Since corporations provide jobs...if the corporations suffer, jobs suffer, pension income suffers, health insurance disappears, etc...the repercussions make it a lot more than the wealthy learning a tough lesson.  Cheers!

[Parsad]

4 hours ago, Spekulatius said:

The failure of Signature Bank ($SBNY ) is scarier from a bank investors perspective than SVIB’s. SBNY had issues, but they weren’t insolvent even accounting for losses in their security portfolio. it was simply the liquidity shortfall from bank run that did them in. The bank run was caused by reputational  damage from crypto and liquidity strain because crypto deposits were leaving, then came the know können on effect from SIVB. This wasn’t a bad bank per say,  it neither was SIVB.

 

I think that's why the government had to step in and backstop the banks.  Contagion and fear go hand and hand, and when you start to have a run on the banks, it is a very scary and delicate thing! 

 

Anyone who remembers 2008-2009 knows exactly what I'm talking about.  A lack of liquidity is what exacerbated The Great Depression when the market collapsed and the run on banks began.  While I'm not a fan of government bailouts, they are a necessary evil to prevent a greater systemic failure. 

 

Cheers!

[Parsad]

5 hours ago, Viking said:

The challenge might be knock on effects. The stuff that is likely out there but needs a match to set it off. Or its like a pressure cooker… pressure just keeps building until it blows. Can’t see it looking forward. Makes sense looking back.

My guess is high interest rates have created lots of problems. We just don’t see it clearly yet. The next couple of weeks will be interesting. My guess is more weak links will be exposed. The short crowd are like a pool of piranha. 

 

+1!  Mini bubbles popping everywhere.  The government has been busy and will remain busy for another year or two.  Cheers!

[Parsad]

Expect more failures:

 

https://finance.yahoo.com/news/silicon-valley-bank-failure-going-183638370.html

 

Cheers!

[formthirteen]

1 hour ago, Parsad said:

Expect more failures:

 

https://finance.yahoo.com/news/silicon-valley-bank-failure-going-183638370.html

 

Cheers!

 

I saw one cockroach bank failure, should I be worried?

[giulio]

memories? anyone?

[Spekulatius]

7 hours ago, TwoCitiesCapital said:

 

I'm confused. Other than their involvement in the crypto space, what does crypto have to do with any of this? 

 

It's not like these banks went under because of bad loans. These banks went under due to liquidity mismatches and depleting capital from forced treasury sales. It's not like they were investing in Bitcoin - they were investing in treasuries.

 

Blame the Fed, regulatory requirements, accounting standards, and fear for these failures. Not crypto. 

SBNY wasn’t technically insolvent. They had losses from treasuries of about ~$2.5B, if I see this correctly, with $6.4B in equity. They had issues with liquidity (mostly large business accounts that are uninsured) and a taint from their crypto involvement that lead to a bank run.

 

They have a liquidity problem, not a solvency problem. There are a lot of banks that can fail as well now, after SBNY fails.

 

What we are seeing here are large scale viral nature bank runs. Game stop time for banks.

Edited March 13, 2023 by Spekulatius

[TwoCitiesCapital]

6 hours ago, Viking said:

What did Signature Bank in was its involvement with crypto. Banking is all about confidence. Crypto is blowing up everywhere. So lack of confidence in Signature (caused by its past involvement with crypto) put it out of business. Would any of this have happened if it never got involved with crypto? No. It would still be in business. 

 

I think that is far too simplistic. If that was the case, you'd have expected these things to fail after the FTX fall out, or the Terra Luna failure, or the bankruptcies of Voyager and Celsius, or when crypto was making new lows. 

 

Not several months removed from negative catalysts when most crypto is up significantly off its lows. These were bank runs driven by panic over access to deposits - not fear of their involvement in crypto. That business was profitable for all 3 banks even after the 70-90% declines in Bitcoin/tokens and the multiple bankruptcies rocking the space. 

[Gamecock-YT]

You know things are screwed when the president has to give comments on the banking system. 

[Valuebo]

Lol the panic is real, both here and elsewhere. Funny. 

 

I'll get my wish and get to buy more. Shitty banks doing more than FED could in a year for overheating economy. Meanwhile rates dropping hard so now banks like bac that are beyond well capitalized, diversified and got sticky deposito's, and that fell 20% in a few weeks on HTM losses are gonna... fall further? Okay. Maybe get it straight to $20 and let me put a third of my net worth in leaps. 

[mike_3772]

Does anyone have an idea of the top 2 or 3 conservative, well-run, gold standard regional banks?

[Gregmal]

All I can think of with these crypto crap banks getting busted was the times I’d see offers to stake your dogecoin for 8% or how you could margin bitcoin to by cardano or whatever. I just couldn’t help but laugh because offering margin meant that someone was lending against this stuff.
 

But it didn’t stop there. Then we had waves of crypto “hedge funds” and I couldn’t help but think “what kind of scam is this? It’s all one big game of musical chairs…what do you need a hedge fund for?”….

 

So many people got rich off this and good for them. I’m generally happy for the success of other people. Because end of the day the success will be fleeting if it generally isn’t acquired in a way that is unique. But there is an irony of tech and crypto being the main casualties of the east money hurricane from 2021. And of course, the banks….who are just always the bystander who gets hit by a bus.