Silicon Valley Bank Collapses

[tooki]

I think the key thing to remember in this instance is that SVP had not actually lost anything. It was strictly a liquidity issue — plenty of assets (more than enough to cover their liabilities and deposits), but far too little cash. If they’d been forced to sell the bonds prematurely (which they had bought instead of holding onto cash) they would have created actual losses. HSBC has now bought SVB, so HSBC’s liquidity can cover whatever deposits SVB’s customers want to withdraw, and once the bonds mature, HSBC will more than recover that.

As I understand it, the only real losers are SVB shareholders. I have no idea what HSBC ended up paying for the shares, but I’m guessing it won’t have been at a premium.

Also, at least for USA: yet another reason to use your local credit union! Better conditions, in my experience better service, and they’re not for profit (account holders are actually shareholders). At the Maryland credit union where I do my U.S. banking, there used to be a nice teller who remembered me. One time I had my dog in the car so I ran inside to grab a a form, and she happened to be at the front and saw me. I apologized that I had to be quick due to the dog, and she instead came outside, said hi to the dog, and then gave me curbside service (not a service they actually offer). That and other examples show me it’s a far more trustworthy place to put my money than commercial banks.

Another bonus: credit union deposits are government-insured, but not by the FDIC, but rather another fund. That means that if a commercial bank failure should wipe out the FDIC, credit union deposits are not affected.

[tom66]

I have no idea what HSBC ended up paying for the shares, but I’m guessing it won’t have been at a premium.

AFAIK, HSBC has only purchased the UK division so far.  They bought the bank for £1, I would expect this includes the shares, so they effectively bought the whole business for f-all.  I think it was a case of HM Government panicking and wanting to avoid a bank run, and HSBC put together a deal which was along the lines of, "we'll cover the liquidity but we're not paying for anything", and they accepted because it was the first/best offer.  I'm not sure exactly how much influence the UK government has here over forcing a sale, because the UK arm may have been solvent if the US arm had been bailed out sufficiently.

[dave j]

AFAIK, HSBC has only purchased the UK division so far.  They bought the bank for £1, I would expect this includes the shares, so they effectively bought the whole business for f-all.  I think it was a case of HM Government panicking and wanting to avoid a bank run, and HSBC put together a deal which was along the lines of, "we'll cover the liquidity but we're not paying for anything", and they accepted because it was the first/best offer.  I'm not sure exactly how much influence the UK government has here over forcing a sale, because the UK arm may have been solvent if the US arm had been bailed out sufficiently.

Report on the efforts to save SVB UK. There were several companies considered for the takeover and it seems a big part of HSBC being chosen was because it had enough cash reserves to meet ongoing liquidity requirements without having to raise more capital.

[coppice]

AFAIK, HSBC has only purchased the UK division so far.  They bought the bank for £1, I would expect this includes the shares, so they effectively bought the whole business for f-all.  I think it was a case of HM Government panicking and wanting to avoid a bank run, and HSBC put together a deal which was along the lines of, "we'll cover the liquidity but we're not paying for anything", and they accepted because it was the first/best offer.  I'm not sure exactly how much influence the UK government has here over forcing a sale, because the UK arm may have been solvent if the US arm had been bailed out sufficiently.

Report on the efforts to save SVB UK. There were several companies considered for the takeover and it seems a big part of HSBC being chosen was because it had enough cash reserves to meet ongoing liquidity requirements without having to raise more capital.

That's worrying. In 2008 people like Barclays were in their bidding to scoop up some US failures cheaply. If they were not head to head with HSBC trying to get SVB UK what does that say about their current state? Simply burned last time, and not interested? Less well positioned?

[Rick Law]

... ...
The people that clients interact with may be both nice and smart, the people making the decisions in the back may be neither. If they're as large a bank as it sounds like, they probably have (had) thousands of employees.

(bold added)

Yeah they are pretty big, 16th largest.  I assume 16th only within the USA, but that would still make them a sizable hulk.  The impact is not just because of the raw size but their core business.  From reports I've seen on the web, a sizable amount of their business is on tech-startups and media.  So those two industry (tech and media) is going to be hit worst than other industries.

[bdunham7]

I think the key thing to remember in this instance is that SVP had not actually lost anything. It was strictly a liquidity issue — plenty of assets (more than enough to cover their liabilities and deposits), but far too little cash.

I can tell you from experience that almost every insolvent person or company starts out thinking they have a liquidity issue.  If you have assets that are difficult to value and sell, that narrative can allow you to get in pretty deep before you are faced with the fact that the issue is actually insolvency.  However, when assets can be valued precisely, then it is much easier to tell the difference.  And if your assets have an active, liquid market like treasury securities do, then the problem is their actual current value, not your inability to sell for the correct value.  The fact that the current value has dropped far below some future value, no matter how certain that future value is, does not really make it a liquidity issue. 

The reason many are still clinging to the idea that all someone needs in a situation like SVB is some 'liquidity' in the form of cash to be returned later when their securities mature is that is just hasn't sunk in that money isn't free any more.  ZIRP is dead!  A cash bridge to cover the 6.2 years of duration of SVBs portfolio would cost ~30% even at the Fed funds rate.  The new BTFP facility is essentially a special program to extend ZIRP/LIRP just to banks with treasury or agency securities to avoid having the ZIRP withdrawal from killing them.  Sort of like giving methadone to a heroin addict for a while.  I haven't heard what the cost of this facility will be to the banks.

[dave j]

That's worrying. In 2008 people like Barclays were in their bidding to scoop up some US failures cheaply. If they were not head to head with HSBC trying to get SVB UK what does that say about their current state? Simply burned last time, and not interested? Less well positioned?

HSBC have always been relatively conservative compared to other banks. During the 2008 banking crash, the UK government called in the heads of the UK banks to explain how they were going to meet the UK's new bank liquidity requirements. Most of the banks needed government loans/bailouts. Barclays said they preferred to raise the money on the markets rather than be subject to government involvement in the business (a condition of a loan/bailout). HSBC didn't bother sending the head of the company as asked but instead sent someone with a note that said 'we have transferred some cash from our global bank and are now in full compliance with your new liquidity requirements'.

Scooping up US banks post 2008, Barclays would have had time to raise the capital. With SVB UK, the government needed someone to buy it immediately, not in a few days time. HSBC had the cash available. Barclays, presumably, didn't.

[SiliconWizard]

Who on Earth really thought our global banking system was sustainable anyway?

[coppice]

The reason many are still clinging to the idea that all someone needs in a situation like SVB is some 'liquidity' in the form of cash to be returned later when their securities mature is that is just hasn't sunk in that money isn't free any more.  ZIRP is dead!  A cash bridge to cover the 6.2 years of duration of SVBs portfolio would cost ~30% even at the Fed funds rate.  The new BTFP facility is essentially a special program to extend ZIRP/LIRP just to banks with treasury or agency securities to avoid having the ZIRP withdrawal from killing them.  Sort of like giving methadone to a heroin addict for a while.  I haven't heard what the cost of this facility will be to the banks.

Low interest rates have persisted for so long a generation has grown up that doesn't realise what the world is like when money is expensive. I wonder how they will adapt. Its really annoying to hear young people complain how easy it was for their parent's generation to buy houses with the lower prices of the past, ignoring how interest rates made a mortgage on even those low prices crippling.

[themadhippy]

HSBC had the cash available. Barclays, presumably, didn't.

if barclays couldn't raise a quid id be pretty worried

[tom66]

I think it's funding the $6.7 bn or so in customer deposits that's a little more important.

I've often wondered about these £1 nominal sale things.  Does someone actually wire a pound to the SVB UK arm?  How do you divide that £ between all of the shareholders?    Or is it just a legal fiction for convenience?

[coppice]

I think it's funding the $6.7 bn or so in customer deposits that's a little more important.

I've often wondered about these £1 nominal sale things.  Does someone actually wire a pound to the SVB UK arm?  How do you divide that £ between all of the shareholders?    Or is it just a legal fiction for convenience?

I think someone would be very sure to get that pound paid and receipted. If the business is turned around without the sale being properly receipted there would be battles in court.

[tooki]

I think the key thing to remember in this instance is that SVP had not actually lost anything. It was strictly a liquidity issue — plenty of assets (more than enough to cover their liabilities and deposits), but far too little cash.

I can tell you from experience that almost every insolvent person or company starts out thinking they have a liquidity issue.  If you have assets that are difficult to value and sell, that narrative can allow you to get in pretty deep before you are faced with the fact that the issue is actually insolvency.  However, when assets can be valued precisely, then it is much easier to tell the difference.  And if your assets have an active, liquid market like treasury securities do, then the problem is their actual current value, not your inability to sell for the correct value.  The fact that the current value has dropped far below some future value, no matter how certain that future value is, does not really make it a liquidity issue. 

What exactly is your point? Mine wasn’t to explain SVB’s thinking, but rather to elucidate that the bailout isn’t high-risk for the buyer of SVB, since the bonds will more than cover the deposits once they mature. (And indeed, that it’s not really a bailout in the traditional sense of dumping money into a company to replace actual losses.)

[james_s]

The thing that annoys me about this whole thing is that it reflects a fundamental part of irrational human behavior that has always irritated me. If everyone pulls all their money out, a bank will fail, any bank. If people continue on as usual it's unlikely to fail, and it is insured by the government up to a value that no individual with any sense should have sitting in their account. People get worried about a bank collapsing, fear spreads and then these same people cause the bank to collapse in the rush to get their money out.

[themadhippy]

what gets me is the bank expect the government to bail them out when things go bad,but try every trick in the book to keep every penny in there pockets when times are good

[Sal Ammoniac]

"All we have to fear is fear itself" -- FDR

[Sal Ammoniac]

what gets me is the bank expect the government to bail them out when things go bad,but try every trick in the book to keep every penny in there pockets when times are good

Privatizing the profits while nationalizing the risk is a common theme for business in the States.

[bdunham7]

What exactly is your point? Mine wasn’t to explain SVB’s thinking, but rather to elucidate that the bailout isn’t high-risk for the buyer of SVB, since the bonds will more than cover the deposits once they mature. (And indeed, that it’s not really a bailout in the traditional sense of dumping money into a company to replace actual losses.)

You're proving my point by insisting that getting paid in full 6 years from now is effectively not taking a loss.  That was maybe sort of true during ZIRP, but it isn't true at all now.  Getting paid in full 6 years from now represents at least a 30% loss.  That's why nobody rushed in to buy SVB even though by your rationale it looks like has positive value.  It doesn't, it is completely and unequivocally under water. 

[tooki]

You know that bonds pay interest, right? (But only if allowed to mature.)

[iMo]

..If people continue on as usual it's unlikely to fail..

That would also allow that Ponzi_schemes/Airplain_games/Pyramid_schemes work fine forever.. 

[m k]

So you give us some millions as savings or something like that.
We pay high interest but you can't pull out annually more than say 10%.
We then put your millions to work by riskin'em highly.
If we fail feds will bail you out, win-win.

On the other hand, if feds are not bailing everybody out,
all big cash piles must be in non investing money parks.
It's a waste says a banker.

[vk6zgo]

WaMu's problems were tied to property lending, i.e. subprime mortgages, but SVB's problem is different.

SVB actually choked mostly on MBS (mortgage backed securities) but the the problem wasn't credit quality, it was duration/interest rate causing the current (market) value to drop.  Because they had opted to designate these as HTM (hold to maturity) they weren't required to account for the interim drop in value on their balance sheet.  Once they had to sell them to cover the deposits, the manure hit the spreader tines.

There's an nice explanation from JP Morgan along with a comparison showing that SVB is(was) an outlier regarding losses in held securities (they had an unusually large amount) but that sort of glosses over the fact that lots other banks may have similar issues with their own internally-generated loan portfolio and none of them have to attempt to mark those to market.  The picture from the .pdf shows their capital ratio from the balance sheet (blue) and then their capital ratio taking into account unrealized losses on HTM securites. 



https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/silicon-valley-bank-failure-amv.pdf

A really very silly "News" outlet in Oz says it wasn't any of those things-----it's because they were "woke"! 

[bdunham7]

You know that bonds pay interest, right? (But only if allowed to mature.)

Yes actually, I was aware that they paid interest.  Were you aware that some bonds pay larger coupons (interest) than others? 

But 'allowing them to mature' makes no sense--you have no control over that and they pay their coupon as per their original terms no matter what you do. 

[tooki]

You know that bonds pay interest, right? (But only if allowed to mature.)

Yes actually, I was aware that they paid interest.  Were you aware that some bonds pay larger coupons (interest) than others? 

But 'allowing them to mature' makes no sense--you have no control over that and they pay their coupon as per their original terms no matter what you do.

Of course it makes sense: if you wait for it to mature, you make a predefined profit on it. If you redeem it prematurely, you lose big time.

[bdunham7]

Of course it makes sense: if you wait for it to mature, you make a predefined profit on it. If you redeem it prematurely, you lose big time.

What I meant was that including that quote makes no sense when discussing treasury bonds.  You can't 'redeem' them at all, you can only sell them to someone else.  These don't work like savings bonds or retail CDs.  They are going to pay their coupons according to their terms and no matter what action you might take, they return the principal at the end of their term and no sooner.