How will the Silicon Valley bank mess Change the Industry?

[cliff]

High rates are great for existing companies that have most of their assets paid for. Keeps the new competition out.

 

[Paul2]

High rates are great for existing companies that have most of their assets paid for. Keeps the new competition out.

It's never flat out like that. There are average market rates floating above government rates, and there is quite a significant difference to what rate a business will get in real life.

For factories, and other substantial real world businesses, last decade been quite hard, as they were getting unfavourable rates to less risky, and "borderline free money" companies in IT, real estate, bitcoin, and other high finance trickery driven bubble companies.

 

[semicomposer]

Does anyone know or seen an estimate for how what % of start up companies' deposits went into SVB?

 

[count]

High rates are not an intrinsically bad thing, and we absolutely should have a positive real interest rate. How we get there is important.

There is a certain amount of duration risk in all banks, where assets tend to be longer duration and liabilities tend to be shorter duration. When short term and long term rates rise at similar rates, there is no problem to having higher rates. Also longer term assets are more sensitive to interest rates. If rates rise gradually, banks have time to adjust their balance sheets, letting longer term assets roll off and making new loans at higher rates. When rates rise suddenly, short term interest expenses on liabilities increase dramatically at the same time that longer term assets lose value. This puts all banks in danger, not just SVB.

Personally I think Fed should have raised rates more gradually and instead unwound the balance sheet a little more quickly. But then again I am not and do not claim to be an economist. Easy to say these things in hindsight.

 

[tooLongInEDA]

My thoughts:

Shareholders and unsecured debt holders will most likely see a total loss. Uninsured depositors will probably get most if not all of their money back. At worst I could see a 10-15% haircut. At best the bank will be bought by a larger institution or consortium and depositors won’t be impacted at all.

However no matter what it’ll make it even harder for startups to raise capital in the future.

For the broader banking system it’s hard to evaluate the scope of the impact. There are likely other banks out there with similar balance sheet issues, but perhaps not as acute. This could be the canary in the coal mine in terms of exposing the systemic risks of raising rates too quickly.

Disagree about the implication that the Fed should change its interest rate policy to save badly run banks who choose not to manage their risks properly (I heard that SVB operated with a risk officer for 9 months in 2022). Incompetent and badly run businesses need to fail and be seen to fail. That's capitalism. We expect around 90% of start-ups to ultimately fail. No one questions that. What's this rule that no bank can ever fail ?

 

[blueone]

Disagree about the implication that the Fed should change its interest rate policy to save badly run banks who choose not to manage their risks properly (I heard that SVB operated with a risk officer for 9 months in 2022). Incompetent and badly run businesses need to fail and be seen to fail. That's capitalism. We expect around 90% of start-ups to ultimately fail. No one questions that. What's this rule that no bank can ever fail ?

I agree with you in principle. In the SVB case it has become very obvious what happened. A bunch of VCs got rattled when they saw SVB trying to raise capital by issuing more stock, so the VCs started making phone calls to startup CEOs who started wire transferring funds out of the bank. Corporate depositors transferred out $42B in a single day. What did these people think would happen? That's a classic run on a bank. Yes, SVB was less run-proof than some other US banks, but the problem was instigated by the VC and startup communities themselves and it is difficult to feel sorry for those groups. While I understand why the Fed and the FDIC went down the path they did, it annoys me that the people who caused the problem got a pass on suffering the ramifications of their pre-meditated actions. Instigating a bank run apparently isn't illegal, but it does smell like a conspiracy by the clueless.

 

[cliff]

Mr. Blue, you guys really think that depositors should not be protected by the USG? Jamie Dimon and the other huge banks will be the big winners.

I guess I need to hire an economist to investigate where to disperse payroll funds. Companies need to have a 6 bank payroll rotation program.

 

[blueone]

Mr. Blue, you guys really think that depositors should not be protected by the USG? Jamie Dimon and the other huge banks will be the big winners.

I guess I need to hire an economist to investigate where to disperse payroll funds. Companies need to have a 6 bank payroll rotation program.

If the USG starts guaranteeing all deposits of unlimited size the banks will essentially just be wards of the state. It'll encourage too much risk-taking behavior by the banks. I also think this mark-to-market valuation banks like SVB used to value government securities that have really fallen in value as interest rates rise is just plain dumb beyond a certain point. I know why they did it, to keep banks from having to increase their available capitalization every time the bond market falls, but in times of fast-rising interest rates like now there should be low water-mark levels when the banks have to increase reserves. I disagree with Elizabeth Warren regarding just about everything she says, but in the case of increased regulation for midsized banks I agree with her. (That hurts just typing it.)

For small businesses it is impractical to have multiple accounts at multiple banks. For the time being it does seem like more due diligence into a bank's reserves is warranted. Or just pick huge ones, like you're implying.

 

[cliff]

Pocahontas: I feel your pain. I tried once, but I just couldn't get myself to type it.

The US benefits by showing our stability. It is a very tough problem, but I think we need to do it.

This will be beyond the scope of semiwiki, unless Pat pushed Intel corporate bonds as the safe sanctuary for banks to store their long term funds. Oops, I should not give him these ideas.

 

[blueone]

This will be beyond the scope of semiwiki, unless Pat pushed Intel corporate bonds as the safe sanctuary for banks to store their long term funds. Oops, I should not give him these ideas.

Even the worst bank execs are smarter than that...