Silicon Valley Bank Failure

[yankees60]

As I earlier stated, I believe that local community banks are safe.

I'd expect nothing less than what is here in my local paper, quoting various bank presidents.

Vinny

https://www.recorder.com/Valley-banks-r ... s-50260638

Local banks say they’re well insulated from financial collapse



While local banks operate under a different business model and are fully insured, that doesn’t mean they will feel no effect from the financial upheavals, said bankESB President and CEO Matthew Sosik.

“There certainly will be impacts, though it’s too early to tell what those may be,” Sosik said, citing insurance cost increases and regulatory changes as possibilities.

But local bankers stressed that their situations are very different from those of the failed banks.

“The composition of our deposits and assets is far, far less risky,” Sosik said, observing that local lenders have a “plain vanilla” business model.

“We know our depositors,” Meshako said.

While the FDIC insures all deposits up to $250,000, Meshako noted, Massachusetts is unusual in providing insurance on all deposits up to any amount for state-chartered banks through its Depositors Insurance Fund.

Meshako said it’s also beneficial that Greenfield Savings, like many other area lenders, is a mutual savings bank rather than an investor-owned bank answerable to its shareholders.

[dualstow]

Check the date on this:

Speaking of the wise authors at Forbes, I like this idea from PensionCraft.

https://twitter.com/PensionCraft/status ... 0347991043

[dualstow]

Scott Adams on banks (he was a banker for a few years)
https://www.youtube.com/live/1aSL_nIzvKA?feature=share

[yankees60]

An email received from one of the large local banks in my area.

Again, does anyone know if your state has anything like the Massachusetts bank DIF wherein entire deposits are insured?

Anyone else receiving reassuring emails from their current bank?

Vinny

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[Smith1776]

A per Harry Browne, many of us on this forum embrace the concept of uncertainty regarding the future, especially our ability to predict it.

So normally I don’t like to opine too much about the future. Nonetheless, my general sense is that this debacle isn’t over.

[boglerdude]

You should get 0 or negative rate on instantly available cash. If you want a return you should have to tie up your money for a few months, that would mitigate bank runs. I dont know anyone who needs 250,000 liquidity always instantly available. Business should have to pay for high limits like that

I used to think deflationists like Gary Shilling were cool. but senor Fed can and will print billions with a button push. why not?

https://thesoundingline.com/qt-over-fed ... -one-week/

[Mark Leavy]

...
I dont know anyone who needs 250,000 liquidity always instantly available.

Businesses need that liquidity to make payroll, pay the janitor, pay the rent, suck up the 3 months accounts receivables. $250K is shite.

Business should have to pay for high limits like that
...

Interesting. I don't disagree. You mean like, insurance?
I could get behind that.

[Maddy]

Business should have to pay for high limits like that

Let's see. . . You lend $250,000 to the bank. You get virtually no return on your money and become an unsecured creditor of the bank--subordinate to shareholders and secured creditors. Sounds like a good deal to me.

[yankees60]

Business should have to pay for high limits like that

Let's see. . . You lend $250,000 to the bank. You get virtually no return on your money and become an unsecured creditor of the bank--subordinate to shareholders and secured creditors. Sounds like a good deal to me.

You are correct that most people do not realize that when they are putting money on deposit in a bank .... on the bank's balance sheet is it is a liability ... so people and businesses are effectively "loaning" money to the bank.

[yankees60]

Business should have to pay for high limits like that

Let's see. . . You lend $250,000 to the bank. You get virtually no return on your money and become an unsecured creditor of the bank--subordinate to shareholders and secured creditors. Sounds like a good deal to me.

Thinking about this further. Is this a special case for banks wherein certain debts are subordinate to shareholders? I had thought that in all cases shareholders were last in line. But it's been a long, long, long time since I took my two business law classes.

[Kriegsspiel]

You should get 0 or negative rate on instantly available cash. If you want a return you should have to tie up your money for a few months, that would mitigate bank runs.

Yea, that's something I've thought about for a long time. When I hear "nationalized bank" that's kind of what I picture. Just a place to put cash, with no expectation that you're going to get a return*. The nationalized bank (there's probably a better word for what I'm describing) is just there to accept currency and dispense currency. Not make loans or anything else. It would be more like a bank renting you a SDB for your gold coins. Like a maximalist Glass-Steagall.

I'd imagine that plan would reverse the over-financialization that's been happening for the last few decades, because there would probably be less loans being made. All the risk for loans would be borne by investors. I'm just kind of spitballing here, would this be allowable? Anything obvious I'm missing?

* I could never find it afterwards, but I remember reading an article by Andreesen where he was basically saying, "why should there be a risk-free return?"

[Kriegsspiel]

Let's see. . . You lend $250,000 to the bank. You get virtually no return on your money and become an unsecured creditor of the bank--subordinate to shareholders and secured creditors. Sounds like a good deal to me.

When I was looking at that FDIC document, it mentioned that it had increased the "insurance premium" it was charging the banks due to recent payouts that depleted the fund. The FDIC increased the payments to plump the fund back up to where it was supposed to be by 2028.

Anyways, I mentioned that just to say, maybe the reason banks haven't increased their interest rates on checking/savings accounts, in our current higher interest rate environment, is because they don't have any room to: their spread is going to these higher payments to the FDIC. Speculative.

[glennds]

You should get 0 or negative rate on instantly available cash. If you want a return you should have to tie up your money for a few months, that would mitigate bank runs.

Most of the time, doing things in a panic is not normally advantageous to the investor. So the idea that money would be tied up for even a short period would probably do more good than harm. The circuit breaker system in the major exchanges is probably a good thing for this reason too.

Imagine what would happen in the real estate market, residential or commercial, if sellers could sell a property instantly over their mobile devices in a moment of panic.

[glennds]

My favorite thing that happened this week - High net worth depositors pulled money out of First Republic Bank and moved it to the big banks for safety.
The big banks then got together and sent $30B of excess deposits to First Republic to shore it up.

[yankees60]

My favorite thing that happened this week - High net worth depositors pulled money out of First Republic Bank and moved it to the big banks for safety.
The big banks then got together and sent $30B of excess deposits to First Republic to shore it up.

!!!!!!!!!!!!!!!!!!!!!

[DogBreath]

"why should there be a risk-free return?"

Because the banks make money on that deposit by loaning it out. If there was no return, why would you let them hold it vs "putting it under your mattress"?

[yankees60]

"why should there be a risk-free return?"

Because the banks make money on that deposit by loaning it out. If there was no return, why would you let them hold it vs "putting it under your mattress"?

Because presumably it is safer for them to be holding it than for all of us to be holding it under our mattresses (or any other possibly less secure places than having it in a bank)?

Didn't it reach a point in March 2020 when we were willing to accept negative short-term Treasury bill returns because it was still less negative than the alternatives?

[Tortoise]

Yeah, very few individuals want to handle and store large amounts of physical cash.

So I think most people use bank checking accounts mainly for convenience: Debit card transactions, direct deposit, check-writing, online banking, etc.

And I agree with boglerdude that that convenience should come with a fee, just like any other service does. The bank should only be allowed to lend out CD deposits (time deposits). Lending out checking account deposits (demand deposits) is an institutionalized form of fraud, IMO.

[yankees60]

Yeah, very few individuals want to handle and store large amounts of physical cash.

So I think most people use bank checking accounts mainly for convenience: Debit card transactions, direct deposit, check-writing, online banking, etc.

And I agree with boglerdude that that convenience should come with a fee, just like any other service does. The bank should only be allowed to lend out CD deposits (time deposits). Lending out checking account deposits (demand deposits) is an institutionalized form of fraud, IMO.

I tried to get at my two local banks' financial statements to see on their balance sheets what proportion of their deposits were checking, savings, and CDs. But it seems that local banks don't like to have their financial statements easily accessible.

After a lot of searching for any bank that had its financial statements available (and not one of the huge banks) I finally got to Silicon Valley Bank's Balance sheet from their Annual Report filed less than a month ago (February 23, 2023).

It is on page 95 here: https://d18rn0p25nwr6d.cloudfront.net/C ... 71b386.pdf.

While I am an experienced accountant I am NOT a financial analyst.

Way below is a picture of December 31, 2022 balance sheet.

The key amounts that jump out at me are:

Total assets of $212 billion.

Equity of $16 billion, leaving Liabilities of $195 billion. Don't know where an about 8% equity fits in with other banks of that size.

Cash and cash equivalents of $14 billion.

Investment securities of $120 billion (and looks like they already lost $15 in billion in value).

Net loans of $74 billion.

To finally get to your point.

$173 billion in deposits ($81 billion in non-interest bearing demand deposits and $92 billion in Interest-bearing demand deposits)

Going through the footnotes (#14) found on page 141 the breakdown of the $173 billion:

Noninterest bearing demand (checking accounts?) -- $81 billion
Interest-bearing checking and savings accounts -- $33 billion
Money market -- $52 billion
Other -- $8 billion

Seems like CDs would fit into the second category ($33 billion)?

Therefore under your proposal they'd only be allowed to loan out the portion of the $33 billion that is CDs?

That would certainly be a drastic reduction in how much they'd be able to loan (and a reduction in profits). What do you suggest they do (invest?) with the money that you believe they should not be allowed to loan?

It does seem disproportionate to me that while that they did have that $173 billion in deposits they'd only loaned out $74 billion and invested $120 billion. A bank's goal is to get that money out there loaned and making money on the interest spread between what they are paying and what they are charging.

Seems like they certainly had way more in deposits than they could loan out. Since they were not making making as much on loans as, perhaps, a similarly sized bank might, then they tried to make up for the lost profits from unmade loans by trying to get as much return as possible from their investments?

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[glennds]

"why should there be a risk-free return?"

Because the banks make money on that deposit by loaning it out. If there was no return, why would you let them hold it vs "putting it under your mattress"?

Not to mention that banks "create" money when they write loans backed by the deposits.
The vast majority of the money in our country's economic base is created by fractional banking and credit more so than what is created by the Fed.
If depositors put money under their mattresses or in a private safe, the economic system upon which our society is built would come to a halt.
The money multiplier is 1/r where r is the reserve ratio. So assuming a 10% reserve ratio, the money multiplier would be 10x.

[yankees60]

"why should there be a risk-free return?"

Because the banks make money on that deposit by loaning it out. If there was no return, why would you let them hold it vs "putting it under your mattress"?

Not to mention that banks "create" money when they write loans backed by the deposits.
The vast majority of the money in our country's economic base is created by fractional banking and credit more so than what is created by the Fed.
If depositors put money under their mattresses or in a private safe, the economic system upon which our society is built would come to a halt.
The money multiplier is 1/r where r is the reserve ratio. So assuming a 10% reserve ratio, the money multiplier would be 10x.

If they lend it. What would be that money multiplier be in the case of the Silicon Valley Bank's balance sheet above?

[glennds]

"why should there be a risk-free return?"

Because the banks make money on that deposit by loaning it out. If there was no return, why would you let them hold it vs "putting it under your mattress"?

Not to mention that banks "create" money when they write loans backed by the deposits.
The vast majority of the money in our country's economic base is created by fractional banking and credit more so than what is created by the Fed.
If depositors put money under their mattresses or in a private safe, the economic system upon which our society is built would come to a halt.
The money multiplier is 1/r where r is the reserve ratio. So assuming a 10% reserve ratio, the money multiplier would be 10x.

If they lend it. What would be that money multiplier be in the case of the Silicon Valley Bank's balance sheet above?

It would be considerably lower than if those funds were going into loans. My comment was a supplement to DogBreath's regarding why there are incentives to deposit money in banks, and why it is necessary for the overall financial system.

[boglerdude]

> The vast majority of the money in our country's economic base is created by fractional banking and credit more so than what is created by the Fed

Might be changing accd to Feds balance sheet. A country of 40 year olds doesnt borrow and create new money for cars, college and homes. A country full of 20 year olds borrows like gangbusters. Old population gives no risk-free returns.

[Jack Jones]

And then the unimaginable happened. Rising interest rates. Kaboom.

A lot of regional banks are in the same position.

If the Feds raise rates, more banks go under.
If they don't raise rates, inflation stays high.

Jerome Powell not feeling irie this weekend

[Jack Jones]

So, does this mean that FDIC is now set at infinity? Some clarity needed.

I can't imagine what it was like for hundreds, maybe thousands of entrepreneurs and management who went through maybe the worst 24-48 hours of their careers through no fault of their own. Let's see what this week brings.

Although the libertarian view (depending on your flavor of libertarian) might not be so sympathetic to the depositors. Those entrepreneurs and customers chose to do business with a private bank that chose to mismanage its risk.

Personally I think the government stepping in was the right thing otherwise panic would have spread throughout the system. And because it's obvious no private solution was available i.e. no other bank was willing to come forward and buy SVB. There were probably some discussion that they took the weekend to exhaust before making it a government solution. Remains to be seen what happens next.
Are demolished bond portfolios the new institutional toxic asset?

There is always a cost though, right? What is the cost of the government stepping in here? More inflation, IMO.