What caught my eye this week.
This might be a Mini Budget moment for the US. Its regulators moved yesterday to shut down Silicon Valley Bank and to take control of its deposits. It’s the biggest US bank failure since 2008.
Silicon Valley Bank’s shares had already been pummeled this week as the Californian lender tried to secure extra funding to shore up its balance sheet. But in the face of a bank run, its regulator cited “inadequate liquidity and insolvency” and pulled the plug, taking control of its $175.4bn in deposits.
Financial shares sold off on fears of contagion – even here in London – but this doesn’t look like a ‘Lehman moment’. However that doesn’t mean the failure is not significant.
Silicon Valley Bank was the dominant lender to the US venture capital industry, was the 16th biggest bank in the US, and it was valued at over $44bn at the end of 2021.
It’s failure is probably not systemically disastrous, except in exactly why Silicon Valley Bank got into trouble and what it reveals (again) about the state of the financial system.
Because its failure isn’t really due to troubles in the venture capital ecosystem that it serves – despite the well-documented collapse in tech and start-up valuations over the past 18 months.
No, it has been undone by our old and now clearly not so risk-free friend – fixed income.
On the run
At the height of the post-pandemic growth mania, everyone was throwing money at the venture capital sector.
The biggest VC companies ballooned. Some began to pivot their strategies to become permanent owners of the companies they funded. Meanwhile at the other end of the spectrum, VC newsletter writers and podcasters launched one-man firms and raised real money.
One way or another, much of this froth ended up on deposit at Silicon Valley Bank. As the FT explains, the bank then decided to park $91bn of these deposits into low-risk but – crucially – long-dated assets, such as mortgage-backed securities and US government bonds.
Well we know what happened next. But in case you’re still oblivious to the regime change, central banks around the world hiked interest far faster and further than anyone predicted. This crashed everything from blue sky tech firms to Amazon and Apple to the 40 in your 60/40 portfolio.
It also saw Silicon Valley Bank’s portfolio of safe assets that stood behind its customer deposits fall $15bn underwater.
Which wouldn’t in itself have been a problem – the assets have a positive yield-to-maturity, and will pay out their face value in the long run – unless sufficient depositors got scared and began to demand their money back in droves.
Which is what happened this week.
As economist Noah Smith explains in a comprehensive piece, the US FDIC scheme – the equivalent of our FSCS guarantee – was beefed up after the financial crisis to try to stop this happening:
Because everyone knows the federal government will cover their deposits, they aren’t worried about losing their money in a run, so they’re never in a rush to pull it out. And because they never rush to pull it out, runs can’t even get started.
For a normal bank, about 50% of deposits are FDIC insured.
But there’s a but:
But 93% of SVB’s deposits were not FDIC insured. So SVB was vulnerable to a classic, textbook bank run.
Why did SVB have so many uninsured deposits?
Because most of its deposits were from startups. Startups don’t typically have a lot of revenue — they pay their employees and pay other bills out of the cash they raise by selling equity to VCs. And in the meantime, while they’re waiting to use that cash, they have to stick it somewhere.
And many of them stuck it in accounts at Silicon Valley Bank.
Smith gives an excellent summary of how the run got started. It was down to the usual alchemy of initial lemming-like behaviour transforming into rational action once everyone else is at.
Just as we saw 16 years ago with Northern Rock.
We are gonna make it…
The consensus of opinion this weekend is that Silicon Valley is an outlier that over-served a concentrated customer base. And so that the rest of the financial system isn’t very exposed.
I imagine US regulators are pulling all-nighters to try to ensure that narrative holds over the weekend. Ideally they’d probably want to get the bank’s business shifted into bigger and safer hands by Monday.
However the episode is another example of the rapid ascent from near-zero interest rates leading to a mild calamity. We previously saw it with the Mini Budget-provoked pension crisis here in the UK, and I’d argue with the collapse and bankruptcy of much of the cryptocurrency infrastructure.
The more of these blow-ups we go through without a system-wide meltdown, the more confidence we’ll have that the financial system was sufficiently shored-up following the dramas of 2007-2009.
I mean, just imagine what would have happened to bank balance sheets following the collapse in fixed income asset values last year if they had still been levered-up like in 2007.
On the other hand, the more of these blow-ups we see, the more we might fear that one of them is going to get us eventually. (My best bet would be something connected to the global housing market.)
So let’s hope inflation calms and rates can stop rising soon.
Have a great weekend!
From Monevator
Stocks and shares ISAs: Everything you need to know – Monevator
The Annual ISA allowance: How it all works – Monevator
Is cash a money maker for you or for your broker? – Monevator
From the archive-ator: How should you invest for your age? – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
‘Cut stamp duty to boost UK stocks’, brokers urge [Search result] – FT
Spring Budget 2023 rumours: what could be announced? – Which
Why the chancellor wants this budget to be boring – BBC
FCA urges banks to consider cutting mortgage payments for those struggling – Guardian
Gary Lineker: a stand-off with no clear exit strategy – BBC
The UK’s housebuilding crisis [PDF] – Centre for Cities
Products and services
Zopa and Tandem launch new best buy savings rates – This Is Money
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
A new solar offering from Ripple Energy – DIY Investor UK
When do lockdown-era airline credit notes and vouchers expire? – Which
Open an account with InvestEngine via our link and get £25 when you invest at least £100 – and an additional £100 if you invest at least £10,000 into an ISA before 2 May (T&Cs apply. Capital at risk) – InvestEngine
Fears pensions are being overlooked in DIY divorces – Which
Could you afford your home at today’s mortgage rates? – This Is Money
Homes with film connections, in pictures – Guardian
Comment and opinion
Putting guardrails around your retirement spending – Humble Dollar
Active versus index funds: latest results – Mathematical Investor
Dying with millions – Best Interest
Is it easier for investors to forecast the short or long-term? – Behavioural Investment
Morgan Housel has started a podcast [Podcast] – via Spotify
Bonus – Indeedably
How to make a fortune out of secondhand furniture – This Is Money
Backtests are unemotional. Humans are not – A Wealth of Common Sense
Priceless possessions that cost next to nothing – Humble Dollar
Things important and unimportant – JL Collins
Commodity investing and its role in a portfolio [Nerdy, PDF] – Vanguard
Naughty corner: Active antics
Why Tim Ferris wouldn’t do as well starting angel investing today – Tim Ferris
Private company valuations defy fall in listed stocks, adviser says [Search result] – FT
Enough: the forgotten lesson of Ben Graham’s life – Neckar Substack
Jeremy Grantham’s market meat grinder [Podcast] – Bloomberg
Why you shouldn’t launch a hedge fund – Russell Clark
Kindle book bargains
Antifragile: Things that Gain from Disorder by Nassim Taleb – £1.99 on Kindle
Bank of Dave by Dave Fishwick – £0.99 on Kindle
Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle
Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle
Environmental factors
Do fund managers really believe in ESG? – Klement on Investing
Hunt’s Budget to announce £20bn funding to cut carbon emissions – Guardian
How to stop cigarette butt litter – Hakai
AI, minds, matter mini-special
You are not a parrot – Intelligencer
What plants are saying about us – Nautilus
In AI, is bigger always better? – Nature
Off our beat
Staying alive – Humble Dollar
Psychological paths of least resistance – Morgan Housel
Gold old times, innovation edition – Klement on Investing
Peak TV is over. Welcome to Trough TV – Slate
Productivity and bullshit – Dror Poleg
A ‘claxonomy’ of Mexico City’s traffic [Multimedia] – Allegra Lab
Infinite games – Young Money
Lang Lang gigs on the St Pancras concourse – Guardian
And finally…
“When you have more words to describe the world, you increase your ability to think complex thoughts.”
– Yeonmi Park, In Order to Live: A North Korean Girl’s Journey to Freedom
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Given how much concern has been expressed in the last few months re bonds and the protection they provide in a bear market, it was pleasing to see my bond funds rise in value yesterday in counter to the decline in equities. It reinforces the message that you and the Accumulator have given about how bonds are still a useful diversification. Consider yourself vindicated.
This is the shoe that dropped closer to home.
Lifestyling into inappropriate fixed income funds:
https://www.theguardian.com/money/2023/mar/11/pensions-retiring-losses-ftse-aviva-value
For once I do think the pension investors have been mis-sold here.
spelling: Gary Linekar
@neverland I quite agree I’ve been saying for years, I thought the fact alot of legacy company pensions are still lifestyling employees into bonds close to retirement is going to be the next misselling scandal
@neverland @4Fatbritabroad If lifestyling into bonds is inappropriate, what asset allocation is appropriate for someone approaching retirement? More cash?
The lifestyle funds should have come over here and checked out TAs updated defensive assets suggestions?
History doesn’t repeat but it rhymes…
That a major bank could blow up like this is a sign of poor risk management and regulatory oversight.
Truss’ govt created a gilts and pensions crisis that was only quelled because the BoE was prepared to throw the equivalent of a few % of GDP at the problem. True to form, the new lot of chancers and ideologues are planning to *repeal* City regulations.
We’re back to assuming that MBS are safe, while the housing market is in a precarious state in many countries.
It’s time again to factor in systemic risk. Have some real assets outside of the financial system. Own some USTs. Carefully select the banks for larger deposits (if any). Only invest in what you really understand, which for me rules out money market funds and active bond funds, most of which hold opaque forms of debt.
In the 2000s “ABS” funds were touted as a safe higher-yielding alternative to cash. They are backed by real assets and safe as houses, they said. Shortly after, those toxic constructs nearly brought the whole system down.
Not as convinced that this is a one off. Partly because that seems to be the consensus “wisdom”. More importantly because most banks run the same, fundamentally crap, business model, lending/investing long, borrowing short, creating duration mismatch in their assets and liabilities. There is rarely only one cockroach in a kitchen.
Over the past 30 years in a deflationary environment, central banks have had room to lower interest rates in each financial crisis, thereby propping up the market value of long duration assets. However, if inflation stays high, but markets sniff out that the Fed’s resolve to fight it is wavering, due to the financial stability concerns, markets may push long rates higher themselves. Reducing the value of those long bank assets further. Rock meet hard place.
Alternatively, banks could raise the interest rates they pay on savings accounts to match the yield on short term government bonds, to compete and retain deposits. Reducing the need to sell their long assets to cover withdrawals and take mark to market losses. Though in the process they would reduce/damage their net interest margins.
Ironically, a few more banks collapsing would probably help knock consumer and business confidence enough to reign in spending and aid the inflation battle.
Might be slightly less of an issue for UK banks due to our mortgage market being mostly made up of short 2/5 year fixed, adjustable rate, products. However, there are probably plenty of long duration Gilts on UK bank balance sheets too (after all government bonds are risk free….right?).
Re: Lifestyling in pension funds. In 2008 my employer made me redundant and a year later the company pension fund wrote and told me that they had sold off some of my funds at the bottom of the market due to the default “Lifestyling” option.
I rapidly educated myself and removed all Lifestyling from my own and my husbands pensions. I have never found colleagues to be interested in discussing the company pension, they all have blind faith in the system.
I eventually favoured choices that reflected Monevator’s Slow and Steady Portfolio, so all went well until Liz Truss…… but it could have been worse, I guess.
That archiveator piece from 2014 – if I had followed its advice I would have been 90% in nice safe government bonds last year. So I am glad I didn’t.
@John Kingham
“If lifestyling into bonds is inappropriate, what asset allocation is appropriate for someone approaching retirement?”
Short dated bonds, obvs.
UK gilts have one of the longest maturity profiles of any gov bond market.
Average maturity of US treasuries is about 5 years I think. According to the OBR average maturity of UK gilts was like 15 years at the end of 2021 and I’ve no reason to think it changed much.
Interesting paper from Vanguard on commodities. Their conclusion?
Our analysis indicates that incorporating commodities can provide diversification benefits to a strategic balanced portfolio as well as outsized protection against unexpected inflation.
Yet they do not offer a commodities fund to UK investors. Across the pond, the do via their Vanguard Commodity Strategy Fund…. Go figure!
Thanks for the concise summary of the SVB run. I was wondering where I could find one that gave me a good understanding of what happened and why!
@Curlew — True, but of course this is still a very short term. A well-diversified portfolio is for life, not Christmas… 😉
@Neverland @FBA @Rowan Tree @John Kingham @B. Lackdown — It’s an interesting one. We have to beware hindsight bias. Obviously lifestyling looks incredibly dumb given what happened to bonds last year. But nearly everyone — including most of the people paid millions to manage fixed income, and who are presumably at least not awful at it — didn’t see last year coming.
If it was a no-brainer that bonds would crash like that, they would have crashed BEFORE they crashed, if you see what I mean. It was pretty much a once-every-three generations crash for bonds.
I also think their argument about annuities will probably take them quite far in a legal situation.
On the other hand, as @Neverland says here and as @TA warned way back in 2016, long duration index linked gilts did look an accident waiting to happen and money perhaps had to go into them regardless of what those well-paid smart people thought of the market, due to regulator direction / the shift to LDI, etc.
So two sides. Perhaps it will be tested in court.
@BeardyBillionaire — Many thanks, fixed now.
@Sparschwein @JABA — It’s certainly possible there are many more shoes to drop, and I did say ‘probably’ (not to cover my arse but because I don’t know for sure and I don’t think anyone else does). Certainly the ingredients for more implosions are on the balance sheets of far more institutions than just SVB. But I do think we’d have to see a pretty full-on cascade into, as we all suggest, property in particular, for the biggest financial institutions to be really in trouble again in the near-future. Given Central Banks would surely stop hiking rates in such a dire situation, we’d need inflation to persist too (so bonds continue to sell-off regardless of what central banks want them to do in the near-term).
It’s definitely possible to construct scenarios. I wouldn’t describe them as the likeliest. I think we blow up in 2007-2009 and most of what has followed has been the bumpy consequences of deliberately (and probably rightly) kicking many of the cans down the road so time can heal a bit. We probably would have got away with it too if it wasn’t for Covid and *its* consequences.
Perhaps the big US bank stress tests need to make a come back, at least once.
@Jim McG — Welcome, though I’m definitely not an expert on bank balance sheets so do please keep reading around.
@all — Cheers for comments!
@TI
2 or 3 years ago I put a lot of money into indexed gilts – INXG or whatever it is called. Then I read that very @TA article from a later link to it on here, and took half of it out again. I owe you.
Check out the first chart on page 2. Very telling.
https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/silicon-valley-bank-failure-amv.pdf
Curlew’s point is interesting-I have noticed the same effect in my portfolio
Is it possible to see again through the fog of war the two companions of the stockmarket riding once again towards assuming their “normal “ roles ?
Human beings love to tamper -politicians and money men are amongst the finest exponents but verities will out
Equities are for growth and volatility.Bonds are for stability and wealth preservation-in normal times diametrically opposed roles
Investors probably should never lose sight of these facts whatever shenanigans the politicians and their acolytes indulge in
As long as these so called leadership types do not actually destroy the whole system investors have to believe and cling to the different roles of equities and bonds -there seem to be no alternatives out there
Sooner or later -not too much later I hope reversion to the mean will occur and off we will go again till the next time!
xxd09
I am by turns amused and horrified that I learned about SVB via a kickstarter project drumming up liquidity after their established startup was caught up.
I’m surprised not to see more positive comments re: gilts etc!
If equities had just had their worst year in recent memory, everyone would be talking about buying them.
My knowledge of the world of gilts and linkers was close to zero but the truss and kk debacle prompted me to have an urgent closer look and that crash course resulted in me purchasing some gilts (vanillas) of various durations during that disastrous budget week to about 10% of my portfolio (I have also seriously topped up my Lifestratgey 60 allocations since)
If held until maturity, the gilts I bought directly will yield between 4.75% and 5,50%. That now means that for a lump of my portfolio, I can drawdown my target of 5% per annum without any depreciation if I so wish (retire later this year).
Yes, I hear the noises about inflation and therefore interest rates staying higher for longer but if that happens, then general equities (the rest of my portfolio) will probably struggle to beat those yields to maturity mentioned earlier. Plus, let’s not forget that when interest rates have peaked, the value of those gilts will move up very quickly.
P.S. I max out our ISA’s (more recently in cash of course) each year and the best one we have is a 5 year fix at 5.05%.
Interesting I was talking more about the fact that most people are going to be continuing to invest in to retirement and therefore the lifestyling approach ready to buy an annuity isn’t as relevant as it once was. That may well have changed with the interest rate rises however
Ps to be clear the above is definitely my opinion only not stated as ‘I’m right and you’re wrong’.
I am more asking if my thinking is flawed? Still very much in accumulation so I don’t currently(rightly or wrongly) use bonds, gilts or anything none equities just a low cost global equity tracker for all my long term investments with 12 months cash mostly in premium bonds . Currently torn on that between the certain interest of higher yield savings accounts and the hope that I may strike it lucky !
Somewhat related to this discussion about the bond market Annus Horribilis, Physics World published an interesting article last December about the similarities between the dynamics of ultra-long bonds and the physics of rollercoasters. Terms beyond duration and convexity, of course, become increasingly important the lower interest rates are and the longer the maturity of the bond. Here’s the link to the article:
https://physicsworld.com/a/crash-bang-the-rollercoaster-physics-of-ultra-long-financial-bonds/
@Eddie — That’s a hugely revealing chart, cheers for sharing!
Lifestyling will probably start working again now that QE and ZIRP policies are over and we are returning to some semblance of normality in bond market behaviour. Maybe people should fire any IFAs that advised the strategy going into 2022 though, when inflation was already climbing and bond funds offered reward free risk.
I’m certainly going to be increasing my bond allocation significantly over the next 5 years, although will be sticking to shorter to intermediate only.
And I may even look into building a gilt ladder to cover the first few years of drawdown and smooth out lumpy dividend flows. Failing that maybe something like iShares IGLS plus a year or so of cash.
As LP says if you can drawdown just the coupon without selling any then happy days. 4% as ever being the magic psychological yield for me. If gilts exceed or even match the yield on the FTSE100 that is another nice indicator.
All the above assuming they ever get inflation anywhere close to 2% again…
Another SVB link: https://www.livewiremarkets.com/wires/why-silicon-valley-bank-sivb-died
The lifestyle strategy articles were interesting – thankyou!
Seems like everyone is piling into short term treasuries; see:
https://www.msn.com/en-us/video/money/etf-edge-february-27-2023/vi-AA180tin
I don’t have an equivalent data point for gilts, but lots of ETF money is chasing 6 month treasury paper (and being pushed heavily on finance media). Sign of a bubble?
“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm
@Eddie Interesting that they don’t actually say what measures they are taking to protect depositors. Sure, in the immediate short term taxpayers aren’t be called upon to bail out the bank, but they will pay in the long term with increased debt, or higher inflation. They always do
Interesting developments over the weekend, particularly in the US. The authorities are moving to protect depositors, but explicitly letting shareholders go to the wall. They are trying to say they have the tools to keep the system ticking over smoothly, separately from letting banks fail, and separately from protecting depositors.
In other words they are saying “this is big but it is not contagion”.
There is still some moral hazard introduced, in that a new program introduced (BTFP) enables banks to (as I understand it) basically swap ‘qualifying’ under-par assets (e.g. government bonds) at par. This facility is set to run for a year, and is designed to enable banks to meet depositors withdrawal requests without having to realize marked-to-market losses on government bonds. (Even the biggest safest banks are sitting on big mark to market losses on such assets due to last year’s bond rout).
Why a year? Because the whole thing is really a show to try to stop depositors worrying enough to make significant withdrawals. I’m sure they’d extend it if they needed to.
There’s lots of echoes here. As I wrote in my piece there’s echoes of LDI (rate rises / market yield rises = potentially disruptive / spiraling asset losses, with the authorities responding by trying to delineate what they’re de facto bailing out and what/who not) and also even with Draghi’s ‘whatever it takes’ speech in the Euro debt crisis.
Draghi never had to do ‘whatever it took’ because the market believed him. Yellen will be hoping for the same.
US bond yields in particular have fallen a lot. Some are saying this because it takes rate hikes off the table. I suspect it’s more a flight to safety, but at the margin this probably does curb the Fed’s enthusiasm (and other central banks) as (a) things are fragile and (b) animal spirits will be dampened, which should curb liquidity, lending etc and do a bit of the central bank’s job for them.
Some are spinning the US move as massively easing today; it’s true in that if you swap something valued at 80 for 100 and then repay a depositor then I guess you’ve put an extra 20 into the system that wouldn’t otherwise be there. But as I say my suspicion is this won’t happen much, if things go according to plan.
It all still seems to be in flux. First Republic (another Californian bank very familiar to tourists in San Francisco) shares are selling off hard, as is Credit Suisse in Europe.
I think this is containable, as I wrote. I believe the opacity that was at the heart of the credit crisis isn’t there now. (Remember even distressed mortgage-backed securities in the credit crisis eventually mostly paid out etc. The problem was that nobody was sure who held what when banks started to fall. Plus there was FAR more leverage and FAR weaker balance sheets wrt to the big banks).
All just my two cents worth, I am not a banking analyst, I’m an anonymous blogger on the Internet.
p.s. I forgot to add that HSBC has bought the UK wing of Silicon Valley Bank, for £1. As per my article I thought something like this would happen, and it’s interesting the US authorities didn’t find any takers in the US for that part of the business too. Maybe everyone remembers what happened to those burned by speedy takeovers in the financial crisis?
https://www.bbc.co.uk/news/business-64937251
Imagine buying a bank in a weekend! I’ve taken longer to decided to put £500 into an EIS startup that’s crowdfunding.
Interesting regarding HSBC purchasing the UK arm of SVB. Is it really like you say that they are now committed to buying it, even if there might be some bombs hidden in the balance sheet? Or is it like Dragon’s Den where they invest at face-value based on the initial pitch (for the cameras), but have the option to withdraw once some proper due-diligence has taken place?
Never just one cockroach.
They have stuck a plaster over it for now. For anyone that wants a laugh search on YouTube for the South Park clip Margaritaville bailout.
No one can know what all the fallout from this will be, but the new Fed facility which lends against impaired bank assets at par does sound like more backdoor QE. This is in addition to the other backdoor QE they are running by paying more on excess reserves than they earn on their QE portfolio thereby running at a “loss”.
Not sure about the moral hazard issue. The US Fed and Treasury (like the BoE a few months ago) intervened because the issue risked spiralling into a systemic one. But it feels like they are playing wack-a-mole to keep a fundamentally unsound system afloat, (alternatively maybe there is some secret central bank competition to see which one can come up with the biggest number of acronym “facilities” :P) because nothing was really resolved after the financial crisis. They just found themselves in a set of fortunate circumstances where inflation was low so interest rates didn’t rise.
Northern Rock was the beginning, not the end, so what breaks next?
All eyes now on the inflation data.
Intresting developments and no doubt stock markets will be volatile for a while as a result, but there really is no comparison to the GFC. Back then risk was being incorrectly priced, the banks were carrying massive losses and banks could not trust other banks. SVB by comparison looks straightforward, but the statement from the Fed glosses over a lot of the details.
I have had a quick look at their accounts for year ending 2022. At that time they reported deposits of $173. In addition they had about $15B in FHLB advances. I am not sure whether those classify as unsecured creditors or secured. If secured, they will have to be paid from assets as well. If not, then presumably they get bailed in, but if so what happens to the banks that sit behind the facility? SVB also issued about $4B in bonds, mostly senior unsecured, which the Fed announcement has said need not be made whole.
On the asset side, they had bonds and cash “worth” $120B, except $91B is sitting in what is known as “Held-to-maturity securities, at amortized cost and net of allowance for credit losses”. Accounting speak for these bonds are not worth what we say they are. A practise that really should not be allowed. At least not for banks. Anyway, $120B is clearly not enough to pay off the depositors, even with a BTFP facility prepared to hand over more cash than the bonds are worth in the market. The rest will have to come from the loan book of $74B and other assets of about $5B. Unless BTFP will take the loans, these will need to be sold and/or managed down over time.
All-in though, with the BTFP, this looks to be doable without inflicting much pain on other banks, via a levy to bail out the Deposit Insurance Fund. A levy which the Fed announcement has said will be applied if the bail in of everything other than uninsured depositors is insufficient to pay back all depositors.
In some respects, the SVB looks similar to what happened to B&B and Northern Rock, back in the GFC. They did not have much in the way of mucky assets, but had a liquidity problem. Those banks were not actually bailed out. Instead they were forced to shut up shop, deposits transferred out and the assets run down over time. An interest bearing loan had to be supplied to cover the deposits, which I think came from the FSCS, but in the end all creditors were paid and the taxpayer made a profit. Shareholders were wiped out.
@JABA “They just found themselves in a set of fortunate circumstances where inflation was low so interest rates didn’t rise.”
Well no, the GFC would likely have resulted in deflation had it not been for QE. Low inflation was no accident.
@Tom-Baker Dr Who, that was an interesting link thanks, but a few things are not quite right there. Back in the 1980s and early 90s I spent a great deal of my time speeding up pricing of various securities, options, etc. where we had to do large numbers of them for Value at Risk calculations. It was indeed common practice back then to approximate a change in bond price using a quadratic involving duration and convexity, but even then only for shorter duration bonds (definitely not for 100 year bonds!). By the early 2000s though this sort of thing was discarded as computing power had advanced so much.
So nice in theory and yes, higher order terms matter, but in practice nobody actually uses duration and convexity in that way any more – the pricing is always done by discounting the cashflows.
563!
https://yarn.pranshum.com/banks
Thanks for the writeup on the bank crash. I heard news of this on the radio driving back from a trip at the weekend. I’d just had a pension transfer complete resulting in a large amount of cash deposited in my SIPP – it had me wondering what bank my broker uses for cash deposits! The answer looking at their website is across several banks but they don’t say which ones. Anyway, now invested in some more low cost ETF trackers according to my plan. For some reason, it feels safer to have it invested in “risk assets” rather than cash on deposit. I know FSCS covers temporary high balances, but who wants to put these things to the test…
Looks like it’s all kicking off at Credit Suisse today, and the waves spreading to the rest of the sector.
Here we go again…
Another one down
First Republic
There’s never just one cockroach in the kitchen… (H/T JABA and WB)