I am Mark Humphery-Jenner, a finance and banking researcher following the Silicon Valley Bank collapse. Ask me anything about the SVB collapse and what it means for global finance.

Using a spectrum of “ this is an isolated anomaly event“ to “ this is the first step in a long walk of problems ahead”, how significant do you think this banks collapse is?

The catalyst for the collapse was mostly isolated. SVB itself has its own somewhat unique set of problems. These are not exactly replicated at other banks. For eg, SVB’s depositors were mostly startups and VC funds, giving a very concentrated deposit base. But, if SVB went under, it would create a lot of concern elsewhere.

The collapse could have been a broader disaster. It could have triggered more bank runs at small banks. And, it could have prevented companies from paying their own suppliers and employees.

But, because the government has stepped in to ensure depositors are made whole, this will stop the situation from cascading.

• Mark

This might be a dumb question but I know nothing about finance. I understand that a bank collapse is pretty intense but to what extent will it impact America? Or even outside of America?

There are no silly questions =)

SVB’s collapse could have been a broader disaster. Without government intervention, It can have two major follow-on effects: 1: the depositors risk losing a significant amount of money (or losing access to their money). This stops them from paying their suppliers, employees or their other debts. This can create a cascade. 2: confidence in the financial system will be shaken. This would especially be so for smaller banks. And, this could trigger a broader bank run at other smaller regional institutions. This worsens the whole situation.

Currently, the Federal Reserve and the US treasury have stepped in to intervene. They have guaranteed ALL deposits. And have indicated that people will have access to their money on Monday. This helps to reassure people at other financial institutions. It also enables those depositors to pay their own obligations.

Importantly, the government is not bailing out SVB. Shareholders are likely to be wiped out. And, the deposit insurance is coming via what is called the “Federal Deposit Insurance Corporation”, which effectively gets funding via imposts on banks.

Outside of the US: the impact is likely relatively limited, especially since deposits have been guaranteed. However, relatively few non-US companies had accounts with SVB. For those companies though, if they could not get their money, it would have be a significant issue. It likely would have required their own investors to step in and support them.

Mark.

Are you able to provide a 3rd grade level explanation of what caused the bank to collapse for the many of us that don’t understand to reason or implications this has?

Sure thing. The collapse was due to a few factors, which all compounded.

1: SVB had a risky bedrock. Its deposits primarily came from one sector (tech/startups/VC) and this sector was susceptible to economic shocks and higher rates. Further, in this sector, there can be herding due to VC funds having significant input into the companies they invest in.

2: Add onto this what SVB did with the deposits. It invested the deposits in various loans of various types. This is normal. Banks do this. However, there were two possible abnormalities. (a) SVB invested in many long-term treasuries and mortgage-backed securities. These had rather low interest rates. As interest rates increased in the economy, these old loans reduce in value. (b) SVB did not ‘hedge’ or ‘insure’ against this risk. Thus, when SVB had to sell these assets, they lost money and could not recover it via ‘insurance’ or ‘hedging’.

3: People had warned about this problem. However, the catalyst for the bank run was that SVB revealed it had sold all its “available for sale” securities (these are securities that are designed to be held until maturity). They had incurred a loss in so doing. And, they that needed money. This was the catalyst for the bank run.

Mark

Do we know the size of their loan book and the impact of their default on lending syndicates?

The plus side of many banks is that even if the bank defaults they cannot simply demand their money back from borrowers. This means that if SVB goes under, then all those loans are ‘sold’ to another company which then becomes entitled to the loans’ cash flow stream.

For their loan book, they report net loans of around 73 billion (in their latest annual report). It appears that they invested much of their money into ‘bonds’ (these are a loan, but are a specific type of loan). And these bonds included ‘treasuries’ (I.e., loans to the government)

SVB going under is unlikely to impact existing borrowers too significantly other than the confusion about to whom they pay money, assuming the transition arrangements are properly managed. It certainly could impact companies who had locked in borrowing facilities as now they would need to find an alternative form of trade-type credit and this might be easier said than done in the current environment.

Mark.

Who's next? Big Short guy said we may have found this period's Enron, so what will be the WorldCom this time around?

Michael Burry’s analogy is certainly interesting. And, when he tweets, there’s often some solid value. His tweets can also be opaque, requiring a Rosetta stone to translate.

In this case, if he is suggesting that SVB is similar to Enron or Worldcom he might be off-base. SVB did not seem to involve accounting fraud. At present, there are no allegations of fraud. However, there might have been imprudent decisions.

For eg, their decision to have a highly concentrated depositor base AND lock up their money in long-term treasuries (paying low yields) might not have been the best one. This ultimately created a perfect storm of being highly sensitive to a vulnerable deposit base while also having a worsening asset portfolio.

I wonder whether FTX might have been the better Enron analogy in his tweet. SVB seems to have repeated some of the mistakes from the financial crisis.

Mark.

More related to the current state of finance than the SVB collapse, but what's your take on Federal Reserve Chairman Jerome Powell stating (basically) that layoffs were necessary to fight inflation, which resulted in a bunch of Fortune 100 companies laying off thousands of employees despite posting record profits the quarter prior?

Also, to any lawyers reading this, since Jerome Powell's position is not supposed to be related to talking about his opinion on the job market, and is only related to the operations of the Federal Reserve and monetary policy, could laid off workers conceivably win a class-action lawsuit against Jerome Powell and/or the Federal Reserve for making a statement like this, resulting in them losing their jobs? I understand an official working in official capacity is immune from lawsuits stemming from their official actions, but using the official platform for something not covered by his mandate as Federal Reserve Chairman probably wouldn't be immune. (Yes, this is a long shot, but I'd love to see someone weigh in on it anyway.)

He is correct, unfortunately. The Federal Reserve’s sole goal is to reduce inflation, currently. Their main tool to do this is interest rates. But, as interest rates increase, growth decreases. This causes layoffs.

From the Fed’s perspective, they have two options:

1: They can let inflation continue. This risks inflation becoming entrenched and people expecting higher future inflation. This encourages more spending. In turn, this creates a vicious cycle: people spend more because of inflation expectations, which causes inflation, which causes people to spend more. Purchasing power decreases. The standard of living decreases.

2: The Fed could hike rates and reduce inflation. This causes ‘short term’ pain via lower growth and unemployment. However, it prevents inflation from becoming entrenched. Thus, The Fed has a difficult decision. With the tools they have, it would be difficult-to-impossible to reduce inflation without job losses. Unfortunately.

Mark

Why do you think the risk management / rebalance was such poor for the mortgage-backed securities? Can't the banks best smell when interest rates are going to be raised, and accordingly trade the poor-interest MBSs to buy better ones?

That’s a very good question!

There were probably a few issues. It seems that they had invested in many of these instruments all the way back in 2021 (at least judging from their balance sheet https://www.sec.gov/ix?doc=/Archives/edgar/data/719739/000071973923000021/sivb-20221231.htm#ibb4dd73a1d3f4bff944b5d35fd2c5e2a_184 ) This suggests that they did not expect the Fed to hike so aggressively, and they locked themselves into assets that were destined to fall.

The question is then even if they locked themselves into ‘bad’ assets, why not rebalance and go into cash (or something with variable interest rates, or another instrument that would be less vulnerable). It is not clear why this is the case, but we can speculate.

SVB might have wanted to avoid realizing a loss on those securities. For ‘held to maturity’ securities, they need not mark them to market. That is, they need not show a loss as it occurs. By contrast, if they sell the securities, they must then recognize a loss. They likely wanted to avoid this and hoped they could hold on so long through the downturn that the situation would resolve. This is akin to a trader who keeps a losing position even when that position ceases to be a good trade.

It is also possible that the risk management team (or the executives overseeing what to do with risk management reports) dropped the ball. However, we do not yet know (and may never know) where the weak link was there.

Mark.

What does this tell us about the wider structure of our financial systems?

There are reports that the US (under the Trump Administration) eased some of the post-GFC regulations: https://www.reuters.com/article/us-usa-trump-dodd-frank-idUSKCN1IP2WX

This suggests that some good policies have been relaxed. This is not exactly ideal.

Some of the banks for whom rules were made “easier” are small banks, which are some of the ones coming under pressure right now.

That said, SVB had its own unique problems: A highly concentrated depositor base (I.e., of mostly tech and VC related firms) and some odd decisions about what they did with customers’ deposits. These include locking those deposits in very low-interest ‘bonds’ or ‘treasuries’, which lost significant value as rates increased.

Within SVB, this created a perfect storm of a very vulnerable depositor base, coming under pressure from high rates, and an asset base that had also declined. At present, the bigger banks – which are subject to more stringent regulation – appear to be solid. And the broader financial system appears intact. This is in large part due to the Fed and the Treasury stepping in to guarantee deposits (preventing a major cascade).

Mark

What are some things you think people are getting wrong about the SVB collapse / information very few know about?

The first one is about the ‘bail out’. There are some suggestions that SVB has been bailed out. However, the situation is that depositors are being protected via an extension of the FDIC (the deposit insurance program). Shareholders are likely to see their investments disappear.

The second is that many point to there being just one reason for SVB’s collapse (I.e., it was the high-interest rates, or the concentrated deposit book, etc). But, in reality, it was a confluence of many factors that impacted a bank with an already shaky foundation.

The third is that a bank – such as SVB – failing only impacts ‘wealthy’ people or Silicon Valley. However, many startups are small businesses with employees, suppliers, landlords (etc). And, if these companies lose their deposits, it creates a cascade effect.

The fourth is just how widespread this crisis could have become. Several companies in Australia had accounts with SVB (I.e., Canva, around 25% of Airtree’s portfolio companies, etc). This could have spread outside the US and highlights how interconnected the banking system has become.

The fifth is that there were some regulations that might have gone some way to mitigate (though maybe not preventing) this. However, they were wound back in 2018 as people often have short memories about crises and what caused them.

Mark.

If they were aware of a huge MTM losses in their books, would hedging still make an impact or was it really too late for them? The tone of Fed never changed in terms of further interest rate hikes. I wonder why they kept their exposure naked. Would you say this is purely a case of huge risk poor risk management?

In hindsight, they should have considered the impact of higher rates on their asset portfolio and hedged in advance. But, by the time they realized there were major losses, it was too late to hedge.

SVB would have been better off managing the messaging far in advance. When SVB realized their assets were declining (due to rate hikes), it would have been better for them to pivot and raise equity before the situation became dire and it was too late.

It is quite possible that it was poor risk management or excessive optimism that the Fed would pause hikes. Alternatively, they might have (erroneously) believed they would never need to sell their ‘held to maturity' assets, and that hedging was an unnecessary cost. However, this ultimately was the wrong call.

Mark.

Do you think this collapse will be historic or is this something that's set to become more common place?

Bank collapses have certainly proliferated. We have had three recently. Two of them were crypto-focused (or crypto-friendly) banks. SVB was more of a startup/tech/VC-focused bank.

SVB will likely signify the importance of a few things:

• Proper risk management. It will highlight the problems that highly concentrated banks can face. This applies whether the concentration is in depositors or in lenders.
• The importance of marking-to-market assets on firms’ balance sheets (SVB reportedly had not – and needed not – do this for assets it aimed to hold until maturity, such as some bonds; these bonds had fallen significantly in value)
• The collapse suggests a future path for resolving banking collapses. Protecting depositors while also (likely) wiping out shareholders.

Mark.

Does the Federal Reserve Bank print money at will, and what effects does this have on the economy?

What does it mean in laymans terms when we say that the US is 31 trillion dollars in debt?

The Fed doesn’t per se print money in the physical sense. But, it can have a significant impact on the money supply.

The way this works is through quantitative easing (QE) and quantitative tightening (QT).

Quantitative easing is where the Federal Reserve buys bonds. Bonds are a right to receive a future cash flow (I.e., they’re an IOU). One of the major types is government bonds. Government bonds are popular because the US government is unlikely to default.

The Fed often buys government bonds. This has a few implications. First, the purchase injects cash into the seller (often a bank). Second, this then creates more demand for government debt, thereby lowering the interest rate the government must pay. This then filters into other borrowings in the economy.

The question is then how the Fed can pay for those bonds, and this can involve money creation (I.e., money printing). And, the Fed can do this quickly, but it must be in line with their QE (or QT) program.

Mark.

What are the effects of the investors losses?

The extent of the losses will depend a bit on whether and when SVB is acquired. SVB has been put up for auction (https://www.wsj.com/articles/regulators-to-hold-auction-for-silicon-valley-bank-9c05701f) and buyers are circling for several divisions.

At present, we do not know precisely how valuable SVB’s assets are. They hold many treasuries and mortgage-backed securities. These have fallen in value (potentially below the value of SVB’s deposits).

Thus, it is likely that shareholders will collect pennies on the dollar (if anything). Lenders might recover some money. The Fed and The Treasury were at pains to note that they were not taking any steps to protect shareholders.

Mark.

If the Fed is supplying liquidity out of the DIF, which is supposed to be in Treasuries, what is the mechanism for converting Treasuries to liquidity for the banks to use? Wasn't SVB's main issue the fed rate hike driving down the value of their Treasuries on the secondary market? Also, how is the same fund, the DIF, going to be used to both provide liquidity to banks who can now access cheap capital with things like MBSs as collateral and insure depositors' accounts? Won't executive teams and boards have a duty to obtain said liquidity and put it to use trying to originate loans for customers affected by hicups in the banking sector?

The Fed has indicated that it will make additional funding available (the announcement is here for those interested: https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm )

Part of the purpose of this is to prevent companies (such as SVB) from needing to sell treasuries at a steep discount. Further, the facilitate values the banks’ treasuries at par. This suggests that the Fed might well be ‘overvaluing’ those treasuries (I.e., in SVB’s case, those treasuries have declined, but for the purposes of this facility, they will be treated as if they have not).

The issue is whether this might be open to abuse. For example, banks might simply see this as a source of cheap capital, lever up, and then undermine the whole point of hiking interest rates.

It appears that banks will need to apply for access to this fund. Presumably, they will scrutinize whether the additional capital is necessary and reject banks that simply apply for seemingly cheap capital.

Mark.

The Fed announcement implied all deposits would be covered and all account money would be available Monday. This is an incredible leap beyond the $250,000/account FDIC insurance. Is this the statement the Fed is making, and does this imply the Fed would take similar steps in a future collapse (all deposits made whole)?

That’s right: the Joint Treasury/Fed statement indicated that all depositors would be safe, not just those up to the prior 250k limit.

This does suggest a significant expansion of the FDIC coverage with any additional costs being recovered via a special adjustment (I.e., levy) on banks.

This appears to be a significant extension of FDIC insurance. They have not explicitly said that they will cover all deposits in the US banking system. But, that seems to be what they’re implying.

Mark.

Did the bank try to make coffee at home?

Maybe they’re listening to Graham Stephan’s money-saving tips.

That might be how they saved the money to give themselves bonuses just before the collapse (https://www.cnbc.com/2023/03/11/silicon-valley-bank-employees-received-bonuses-hours-before-takeover.html).

Mark

Do you prefer smooth or crunchy peanut butter while researching the SVB collapse and what does that mean for global finance?

Crunchy is the obvious choice. Crunchy peanut butter eaters are more optimistic, according to what I’m sure is a highly reliable survey: https://autos.yahoo.com/creamy-crunchy-peanut-butter-preference-172712880.html

Mark

It seems like everyone is putting the blame on SVB, but it seems to me that a lot of the blame ultimately lies with the investment firms that provoked the run on the bank.

To what degree do believe that to be an accurate assessment? And do you have thoughts as to the legality of the investment firms' actions, and whether regulation is needed?

I would say ultimately we cannot blame the people who clamoured for the exits. After all, stopping people from withdrawing money from deposit accounts would further undermine trust in the banking system.

From what we know, the VC funds requested that their startup portfolio companies find other banks. Which created more negativity and a cascade into a bank run. This appears to be legal as there is no prohibition on removing money from a bank or suggesting that others do so as well.

Illegality could arise if they made false or misleading statements about SVB. However, I haven’t seen allegations of that.

The blame really lies with SVB for putting themselves in a position where this could happen. They were heavily exposed to one sector: startups/VC. And, within this sector, there is a significant risk of large deposits leaving all at once (I.e., if a VC fund sours on the bank, then possibly many startups will also leave the bank). And, it seems that SVB did not properly account for this.

Mark.

Why do you think other banks like First Republic were affected? They don’t seem to have nearly the same business and yet their stock had to be halted Friday. Do you see further risk there?

The concerns mainly seem to focus on companies that have concentrated client bases and/or large deposits above the traditional FDIC insurance ceiling. Either scenario could cause depositors to move towards one of the bigger banks for safety. Smaller banks (with sub 250 Billion in assets) also face more lax regulation and this creates concerns about precisely how safe they are.

Similarly, depositors are concerned. And, they would rather withdraw their money than face an uncertain limbo about whether the Fed will guarantee deposits and/or how long it would take to retrieve even guaranteed deposits if a bank fails.

However, First Republic does not appear to have the same conditions as SVB. First Republic has indicated additional liquidity via JPMorgan and the Fed (https://www.cnbc.com/2023/03/13/frc-tells-cnbc-the-bank-isnt-seeing-that-many-depositors-leave-jpm-funding-working.html) .

It seems that investors are simply scrutinizing smaller banks to see which – if any – have the same types of problems.

Mark

Do you think the public has dried up any of their empathy for a bunch of crypto bros losing their money?

Certainly: the general public has no appetite to bail out crypto bros (or really the finance industry in general). People struggling with the cost of living pressure don’t have much sympathy for VCs in silicon valley.

For SVB, it seemed to have modest crypto exposure, but still, public sympathy simply isn’t there.

It’s likely why the treasury and the Fed moved to support SVB’s depositors in the way they did (and were at pains to specify that “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer”

Mark.

Do you have a personal opinion as to whether these types of bailouts incentivize risky behavior by high net worth individuals/those that control significant assets (something about moral hazard, not sure how to use that term in a sentence yet)?

A bailout can incentivise risky behaviour.

Here, SVB was not per se bailed out. The government has supported depositors who are overwhelmingly businesses (as opposed to individuals). Shareholders and lenders are likely to be wiped out (but this will depend on whether SVB is sold and how this occurs).

That said, in general, There are several groups we probably need to address though:

1: Depositors are unlikely to be incentivised to do high-risk things via a bailout (or FDIC insurance). They might be incentivized to put their money into a riskier bank. However, if the government does not support those banks, it will have a more concentrated banking system. This could exacerbate banking concentration, which might not be ideal.

1. Workers at banks: Many ordinary workers at banks have little to do with the risky behaviour leading to the bailout (or intervention), but nevertheless might suffer the downside if the bank goes under. Given that they are not really being saved from personal actions (cf. Another person’s actions) the bailout is unlikely to drive risk.

2. Lenders to banks and shareholders: If there is a bailout, lenders and shareholders are the main beneficiaries. They would be incentivised to invest/lend more in risky/bad banks (or to price them too high) if there is a bailout. Note that for SVB, the Fed and treasury have specifically said they will not be bailed out.

3. Management: Managers might be slightly insulated from risk in a bailout. But, managers often retire after a corporate collapse, so the actual impact might be minimal. There are reports of a Lehman “CFO” working in the c-suite at SVB. But he was CFO of a division that seemed unrelated to what caused Lehman to fail.

So in short, bailouts basically underwrite some risk for shareholders. But, other people at the institution still lose and lose so much that they probably would still rather avoid being in a situation where a bailout is necessary.

Mark.