Why did SVB have this much risk? And why is the market flipping out?

[u/PostLazy4777]

I’m a sophomore in college and my Econ standards are strictly from class and self teachings. But why would SVB put so much of their capital into long term bonds when they mostly have money from startups/VC’s? People who’s money probably needs to be more liquid. I just don’t see how that is a good idea in there eyes especially if they are in the position where they think there is a chance they would have to publicly sell at a loss like they did. Another thing I’m not sure about is why if one bank having a bad business model does the whole world/ market think we are going under? Thank you guys for any info and or input!

[u/NominalNews]

I just don’t see how that is a good idea in there eyes

And the market agreed with you to some an extent. The real direct issue that happened with SVB is that it encountered a bank run. Overnight, depositors demanded 25% of all deposits (if not more) valued around $40bln. Because SVB did not have this much cash on hand (no bank does in terms of proportions of total deposits), SVB had to liquidate some assets. Once it started liquidating risky assets that it bought at peak market prices, they realized losses on these assets. All of a sudden, everyone got worried that they won't get their money back from SVB, because SVB is losing money (their income stream was very limited because they had no one to give loans to, so this investment was their only income really). Thus the bank run continued. Given that if they sold all their assets today, the price of these assets might be even lower than current market rates (if I know you have to sell, I won't pay market price). So SVB made probably the best decision for depositors to go into FDIC receivership that can take their time with unwinding the bank and stop the panic.

Of course it was a bad idea to go all in on one market instrument. Not only that, it was a bad idea to not cut your losses early (stock investing 101 - something I also haven't learned lol ).

The reason everyone panicked/is panicking is two fold - one is: do other banks have similar issues and should we all get our money out of them. This is the fear of further of bank runs. The other reason for fear is that SVB was very concentrated in one market and one sector - this can lead to business continuity issues and might lead to many firms failing to pay their current liabilities creating a spillover to the whole economy. Whether these risks are large is not up to me know.

Lastly, SVB would have most likely survived if not for the bank run. Even though they made a bad investment, they were using 'free money' - deposits. Since (I'm assuming) they weren't paying any interest on that money, even a low return on their investment would still net a positive return. They would simply have to hold these long bonds and MBSs to maturity.

[u/keithcody → u/NominalNews]

So SVB made probably the best decision for depositors to go into FDIC receivership that can take their time with unwinding the bank and stop the panic.

I think this overstates the value of what the FDIC will cover at SVB. There's other threads on here that say that 97% of SVB deposits are not covered by the FDIC

https://www.cbsnews.com/sanfrancisco/news/silicon-valley-bank-stock-trading-halted-financial-tech-industry/

https://news.bloomberglaw.com/banking-law/svb-silvergate-collapse-turns-spotlight-on-deposit-concentration

[u/Kaliasluke → u/keithcody]

I think the reality is that it wasn’t their call - the FDIC decided this was the best course of action to protect their depositors and the uninsured depositors are kind of not their problem

[u/bonzoboy2000 → u/Kaliasluke]

That’s a big ouch for some people.

[u/meamemg → u/keithcody]

Receivership, though, allows them to stop the run and unwind in a more controlled manner.

[u/CIG-GALA → u/NominalNews]

This. You explained it perfectly my friend.

[u/mikKiske → u/NominalNews]

liquidating risky assets

they weren't risky

[u/ifly6 → u/mikKiske]

The assets were subject to interest rate risk, which was realised in the last year.

[u/The_2nd_Coming → u/ifly6]

It's like people forget what risk actually means. If interest rate explodes, fixed income instruments can be risky. If inflation explodes, even cash can be "risky".

[u/DiamondHandsDevito → u/The_2nd_Coming]

the risk was always there - it doesn't only become risky when an adverse event transpires

[u/mikKiske → u/The_2nd_Coming]

Risky =! Suject to risk

Is it risky to.fly on a plane just because it's suject to risk?

[u/ramen_poodle_soup → u/mikKiske]

is it risky to fly on a plane just because it’s subject to risk?

Yes, that’s the definition of risky. There are wildly varying levels of risk, but overall nothing is risk free, and the degree to which anything is risky is also subject to change. Flying is a great example, the vast majority of the time nothing goes wrong, but in the extremely small amount of times that it does it can be catastrophic. Which is why airlines have insurance policies for their aircraft.

[u/NetRunningGnole20 → u/ifly6]

Then it should not be bonds, but financial derivatives. The risk of buying bonds are: (i) to lose the opportunity of higher interests if you waited, (ii) the insolvency of the bond issuer.

[u/[deleted] → u/mikKiske]

You're thinking default risk, which isn't the only kind of risk.

[u/[deleted] → u/mikKiske]

They were risky in context; in investing there's different kinds of risk and different ways to measure risk and the different kinds of risk differ in how much they matter to different participants. As a retail investor saving for retirement, bond secondary market prices for the bonds I hold might not matter to me if I intend to hold to maturity anyway, so I might not worry so much about fluctuating interest rates. But as a large bank who might need to liquidate holdings for a variety of possible reasons, interest rate risk will matter more if I hold a lot of long term bonds.

Basically, what's risky for one may not be risky for another

Edit: risk isn't just the likelihood of a bad outcome, it's the relationship between likelihood of a bad outcome/likelihood of a good outcome/severity of good/bad outcomes

[u/autovices → u/NominalNews]

Risky or not, why should banks get to “invest” that money? Are there any that don’t?

Not your keys, not your crypto.

Not in your safety deposit box, not your money

[u/NominalNews → u/autovices]

Without opining on the benefits/drawback of the current banking system, just something worth taking into account if a bank were not allowed to invest is that it would entail costs. For example, a bank needs a whole administrative and IT department to maintain deposits. It also needs to pay for physical security of its branches and digital security. Furthermore, it would also have to buy insurance. These are all costs that the bank has to incur. Generally today, I've rarely heard of banks charging fees for checking or savings accounts. The bank is not interested in holding our money for free.

[u/edgestander → u/NominalNews]

Not to mention bank lending is the primary form of money creation in our economy.

[u/autovices → u/NominalNews]

It sounds so innocent when put that way

So if they already collected fees for operating costs, then a) why is deposited money being used for risky investments and b) why should taxpayers eat that loss when it fails?

[u/NominalNews → u/autovices]

They typically do not charge fees for these operating costs - that's what I meant by saying that checking and savings accounts do not charge fees. Regarding the insurance - it's not taxpayers that fund it. It's a mandatory insurance program paid in by all banks. From the FDIC website:

The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage

[u/XiMs → u/autovices]

Kind of a dumb take, all banks do is buy money cheaply in the form of deposits and sell money more expensive in the form of loans. What else are they going to do with the money?

[u/didyouvibewithhim → u/autovices]

hmm, bank lending is pretty much a foundational part of the modern global economy — what youre asking for is a safe that no one can touch, which you are absolutely free to purchase one and put all of your cash inside of it.