Silicon Valley Bank
- Thread starter deema
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The money was deposited by the start-ups, so they could draw on it to fund product development and pay salaries. If the start-ups had failed because their product/business model didn't work then fair comment, the venture capitalists lose their gamble.
But for a start-up to fail because the bank where they deposited their funding couldn't give them their own money when needed is not "just the risks of doing business". A good proportion of the start-ups would have gone on to be successful businesses providing jobs for a lot of people. Hence HSBC taking on the UK are of SVB.
I've now got the horrid vision of Katie Price sealing round the bath using a ****.
Terry - Somerset
Established Member
The bank took a risk which did not pay off.
It accepted deposits from start up companies who expected to be able to draw down the cash as required together with any interest earned.
It invested the money received in an inherently risky asset whose value could rise or fall. As the value fell they would not be able to meet their obligations to the start up companies.
This is entirely analogous to the failure of energy companies in the UK who entered into fixed price supply contracts with customers, but had to buy energy at increasing prices on the spot market. They simply did not have sufficient money coming in to meet their energy supply obligations to customers.
It accepted deposits from start up companies who expected to be able to draw down the cash as required together with any interest earned.
It invested the money received in an inherently risky asset whose value could rise or fall. As the value fell they would not be able to meet their obligations to the start up companies.
This is entirely analogous to the failure of energy companies in the UK who entered into fixed price supply contracts with customers, but had to buy energy at increasing prices on the spot market. They simply did not have sufficient money coming in to meet their energy supply obligations to customers.
ajs
Established Member
This is the most accurate summary I've seen here but it's still inaccurate.
Firstly I'll go through the basics of what a bond is, for the buyer it isn't a fixed term of fixed interest in any meaningful sense of the term. A bond has three key metrics as part of the deal - the face value, the interest rate, and the redemption date. None of those mean what you suppose they might. The face value is the amount that will be paid to the bearer of that bond on the redemption date. The interest rate is the proportion of that value paid to the bearer as interest each year before the redemption date. Assuming the bond issuer is creditworthy that will (generally) be a fixed amount each year for the lifetime of the bond. So a £100 bond at 5% dated 2030 pays the holder £5 each year until 2030, when they get £100 and the bond expires.
When bonds are issued they don't necessarily get sold at face value, they are essentially auctioned off and buyers price them according to the interest rates they can get elsewhere for the same level of risk. If everyone was completely creditworthy but the interest rate on the bond is 5% vs 2% on the wider market they sell for more than face value to reflect the additonal interest that would be paid over the life of the bond. Similarly if they were at 1% they would go for lower than face value to reflect the loss of interest over the term. In essence the market adjusts the value of the bond to ensure the return is equivalent to elsewhere with the same perceived level of risk.
However, during the lifetime of the bond most can be freely traded on the market. As interest rates go up the return for holding the bond stays the same (it's still £5 a year in our previous example) because it is a fixed interest rate As a result its value when sold on the market goes down.
That's one side of what killed SBV, but ultimately both are two side of the same coin. Most of their (business) customers were/are considered high risk to the point most high street lenders wouldn't invest in them. Instead they got their funding form Venture Capital (think Dragon's Den on TV) who expect a higher return in exchange for the higher perceived risk. As wider interest rates go up VC becomes less attractive to investors - after all, why risk your money when there are safer returns elsewhere? As a result the drip feed of funds to their customers dried up, but each customer still had their regular expenses to pay - staffing, rent and so on. As a result the companies were drawing more on their deposits than they were paying in.
SVB didn't in the main lend to their customer base, they were too conservative for that. They instead put the money into US Treasury Bills (T-bills) - the US equivalent of HM Government Gilts. They're considered an ultra-safe investment. The problem was when they needed to draw on those investments interest rates had risen - again as above, that makes the market value less. T-bills they had bought for (say) $110 they could only sell for $90. The market got wind they were having to sell investments at a loss so confidence in the bank was lost. Anyone with funds in there tried to pull it out immediately and that is what caused the bank to collapse.
No it wasn't reckless wheeler-dealing, this time at least.
You should have put a content warning on that, not sure I will be able to rid myself of that image now
It might just be me, but as an engineer you are trained to look at risk assessment, what happens if questions. Now, for a bank to invest such huge amounts in government bonds on the assumption that interest rates would stay at abnormal low levels were either stupid or completely incompetent in my view. Nobody, and I absolutely mean nobody who had taken even the slightest interest in what happens over time to interest rates could not have considered it a relatively high risk that the bonds would devalue significantly due to a sudden increase in interest rates. What has happened to SVP was both highly probably, absolutely predictable and down right criminal that it occurred. Having said all that, the junk products that brought the financial system to its knees in 2008 are still being traded, sub prime mortgages are still bundled and sold.
I see the same, you get so used to looking at all sides of an equation and getting an objective understood and fixed before looking at achieving it. The bit we are missing is the gambling factor, we don't take a gamble because we know it can be engineered out but for finance it is all about the gambling because far to often they are playing with someone elses money. It is also true that people with an engineering background make lousy salesmen because they are honest so when buying tools buy from someone with an engineering background and you should not get the sales pitch.
So it's a "virtue" to have a leadership team composed of superficial fools and incompetent villains? That's lucky - it's exactly what we have now....
Blackswanwood
Still Learning
No, of course it's not a virtue and that's not what my comment said if you read it in the context of the post it responded to.So it's a "virtue" to have a leadership team composed of superficial fools and incompetent villains? That's lucky - it's exactly what we have now....
I'd say that both the context and the meaning of what you wrote were perfectly clear. There may have been a disconnect between what you wrote and what you wished to convey, but expecting someone to guess your meaning isn't much of a way of getting a point across...
Blackswanwood
Still Learning
Sorry. I didn't realise I'd wandered into the Oxford Union. I mistakenly thought it was a woodworking forum where a bunch of blokes were having a discussion. I'll aspire to your high standards in future.
In fairness to the SVP management, they didn't have a lot of options. There was a huge rise in venture capital investment generally and SVB's deposits for the year increased by over 100%. They had too much cash on deposit to lend it all, but they still had to pay the depositors interest. They decided to put some of the funds into Government bonds expecting that as part of a mix of investments they would keep the money "safe".
Then one of the big venture capital funders put out a missive to the start-ups they had invested in with a recommendation to move their deposits somewhere else to get more interest. That caused the run, and suddenly SVB needed to sell the bonds to give deposits back.
My understanding is that SVB's main problem was their narrow client base. They had less than 40,000 clients (miniscule in banking terms) but each had a large positive balance, so it only took a relatively small number of clients to withdraw all their funds to start a significant run. Once the word was out that the bank was in trouble, everybody wanted their money back and no bank can withstand that. In fact SVB had more than enough funds on paper to cover their deposits, but no bank keeps everything in liquid assets.
I do agree that the lessons of 2008 have not been learned by the banking sector, but I don't believe SVB's failure is due to mal-administration or incompetence.
@JBaz I would agree with you wholeheartedly if a product called a swap wasn’t available. This would have allowed them to hedge against the potential value change. Ie they could and should have in essence insured themselves against the loss / change in market and they wouldn’t have been in the mess they have self generated.
Jameshow
Established Member
Maybe they have a case against the lender for giving out doubtful financial advice causing the run....?!
Blackswanwood
Still Learning
I may be biased in my opinion as I’m on the Risk Committee of a major financial institution and on the Investment Committee of a large pension scheme. I struggle to see how incompetence was not at the heart of this - both with the board of SVB and the US regulator.
The UK banks are subject to stringent stress tests that would have flagged up the issue.
@deema is correct. If they couldn’t hedge they shouldn’t have taken the deposits.
They could hedge against rising interest rates and actually did up until the end of last year, but then changed their focus, believing (correctly) that interest rates had probably topped out, so dramatically reduced their hedging and crystalised the profit from those instruments they closed out. Entering 2023, SVB had very little hedging on their investment portfolios. This was a bad call because they had relatively few but mostly high worth depositors, so a change in sentiment that led to just a few customers withdrawing their funds created a cash flow issue which led to the run - any institution known to be in a fire sale is vulnerable. For a bank with a more "normal" customer base - millions of relatively low value investors - SVB's hedging strategy would have been fine... except they weren't a "normal" bank...
Interesting article about this from the Financial Times here: Register to read | Financial Times (*)
FWIW, I've spent the financial services part of my career as a senior developer, then architect, then CTO for hedge funds and other financial institutions in the UK and overseas, so although not making trading & investment decisions myself I've been heavily exposed to FX, equity & fixed income/bond markets for about 30 years. I also spent nearly 5 years of that designing and implementing complex derivative trading algorithms for what was at the time the second largest commodities exchange in the world. What always astonished me was how few traders actually fully understood the potential consequences of complex derivative trades and when you got to exotics, e.g. implied synthetics , almost no-one, even in the exchange itself, really understood what was happening, how pricing was set and the potential up/downsides. We had the concept of "Implied Nirvana" which is what happened when you finally "got it" regarding what implied liquidity really was. Only a small handful of folk ever achieved those heights...
(*) Edit: really annoying - that link was a public article, now isn't...
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selectortone
Still waking up not dead in the morning
In these times I'm often reminded of the novel 'Black Mischief' by Evelyn Waugh (not very politically correct nowadays, but written in different times). At the end of the book the young western-looking king Seth of Azania, a fictional newly-independent African country, is left with a collapsed economy and wondering why his cupboards-full of freshly printed Azanian banknotes are worthless.
Or I'm reminded of that picture of the man in Weimar Germany with his barrow-full of deutschmarks.
I sometimes think that we aren't far away from that now, when the solution to money problems seems to be to create more if it - from thin air as far as I can see. It used to be different when I was a kid - money supply was dictated by gold reserves.
It's all based on a very thin veneer of faith in a hugely complex system where, as we've seen with SVB, it doesn't take much to bring down the house of cards. What a world.
Or I'm reminded of that picture of the man in Weimar Germany with his barrow-full of deutschmarks.
I sometimes think that we aren't far away from that now, when the solution to money problems seems to be to create more if it - from thin air as far as I can see. It used to be different when I was a kid - money supply was dictated by gold reserves.
It's all based on a very thin veneer of faith in a hugely complex system where, as we've seen with SVB, it doesn't take much to bring down the house of cards. What a world.
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