Banks lose billions in value after tech lender SVB stumbles

34 points by jasong 2 years ago | 9 comments
  • roseway4 2 years ago
    • VinLucero 2 years ago
      It feels like this will spark a much broader discussion about accounting principles and the danger of infrequent “mark to market” and liquidity issues.
      • nblgbg 2 years ago
        They follow the rules AFAIU. It happened because they lost deposits much faster than they expected. Also the reserves are held in long term treasuries and they lost value recently. If they held these securities to expiry then there is no issue but they have liquidity issues in short term.
        • beezle 2 years ago
          Classic asset management duration mismatch failure. And even ignoring the duration issue, their treasury holdings should have been hedged - everyone knew which way rates were going, the only question was how far the Fed would take them.

          Unfortunately, hedging of any kind would cut into their margins and we all know what happens to executive bonus pools and reported earnings when you do that.

          • dnadler 2 years ago
            Well, to be fair, by the time 'everyone knew' it was too late to hedge.
          • blippage 2 years ago
            I can't remember who said it, but someone argued that banks are inherently bankrupt. Their business model is to borrow short and lend long. The reason is that if you're a sensible business then you'll have cash reserves to smooth short-term cash-flows. So if your aim is to maintain reasonable liquidity, then someone else has to take the other side of that "trade". That "someone else" are the banks.

            There are also other problems. Cheap and easy money. Banks have one tool to increase returns: leverage. So they lend to other institutions where they can get an interest rate differential. As too much money chases too few opportunities, the inevitable happens: instruments appear to cater for the demand. But they will be of lower quality. As the bubble continues, returns go down and the quality worsens. On paper, everybody is coining it in. UNTIL. The credit markets tighten for whatever reason, someone defaults, sending dominoes toppling throughout the entire industry. When things turn sour, the situation doesn't degrade gracefully, but collapses catastrophically.

            Rules can help only a little because the basic model and drive to make profit are both the same. The payoffs are also asymmetric due to agency risk. The people making all these deals have no skin in the game. They get huge bonuses for making the big deals, but they don't lose their houses if everything collapses.

            What's the fix for all this? Well, it's probably endemic to the system, but not necessarily a lost cause. As someone one sense "a business that is too big to fail is too big to succeed." It may seem like a trite slogan, but there's merit to the argument. Our local building society (I guess it's what in the US they call Savings and Loan) sailed through past crises unscathed. They just didn't invest in all that subprime nonsense. So if there is a fix, it probably amounts to breaking up the big banks into lots of regional ones. Maybe. Although noboy is going to do that.

            • jfengel 2 years ago
              Most banks don't experience runs. If they did, there is a federal agency to ensure that customers don't lose their money. That gives depositors sufficient reason to think that they don't need to have a run on the bank.

              There are limits to that insurance, and apparently SVB in particular had a lot of people exceed that limit (due to a large concentration of very wealthy people in Silicon Valley). So when a loss of confidence happened, there was a run, and the bank failed. The federal agency is going to ensure that depositors don't lose their money... at least, the first $250,000 of it. Anybody with more than that may be at a loss.

              I'm not sure there's really anything more to do than that. There may be a need to review the marketing of SVB to ensure that depositors understood what they were getting into. There may need to be a review of the rules of what things called "banks" are allowed to invest in.

              But the overall proposition of banking seems sound. They owe more than they have on hand, but that's a reasonable thing to do. It accelerates the economy overall, by letting individuals and companies make investments faster than they could if the available money were constrained by keeping it locked up.

        • ArtWomb 2 years ago
          I've heard YC-backed Levro named as an alternative. The idea of multi-currency holdings from one seamless account is tempting, even just for FX speculation ;)

          https://www.ycombinator.com/companies/levro

          • hall0ween 2 years ago
            I wish I knew more about finance but I was too busy learning about biology…