If a “healthy” bank had a run, would it still survive?
In other words, are any banks solvent if a run happens to them?
If not, then at what point are banks considered solvent.
Also, if no bank can survive a bank run, would the CEO be at fault here for kind of inciting one (by essentially saying in the call “we’ll be alright, as long as you guys don’t run”)?
Even a healthy bank had a run they would not survive, because fundamentally banks borrow short (deposits) to lend long (loans, bonds, etc). The old Bagehot quote comes to mind: "Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone..." Anything that would cause depositors to worry and demand their money back quicker than the banks' investments mature would run into this problem.
You're asking more about liquidity, than solvency. All banks in the US that are following regulations should be solvent. But, most banks in the US would not be liquid enough to survive a run.
> If not, then at what point are banks considered solvent.
Solvency is basically: "does the long-term value of your assets exceed your liabilities". Liquidity is: "can you sell assets right now to meet your outgoing liabilities right now".
The problem for banks is, in almost all cases some loans will have longer-term time-frames, while almost all depositors can theoretically ask for their money back at any given time. So, for almost any bank a strong enough run will cause them to fail a liquidity test (even if they are solvent).
Genuine question: If a bank invests all customer deposits in 10y treasury bonds, and then interest rates rise, is it solvent? It seems this is essentially what made SVB insolvent.
At least in the modern economy, people aren't running to withdraw cash. They just transfer it to another bank. So the strongest major banks are probably impervious to runs, because if there is a general panic (rather than a panic at a specific bank), it will result in a dilution of funds between a number of major banks, rather than a net exodus of funds from the banking system.
From the point of view of an individual bank it doesn't matter if the money stays "in the system."
The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes.
For any large bank, there is an amount of withdrawals that can take it out. And that amount is nowhere near 100% of deposits.
> The only thing that matters to that bank is that they have enough reserves on hand to cover the amount being withdrawn on a given day. It doesn't matter where that money goes.
As I specified in my original comment, a systemic panic, rather than a specific panic at a single bank would result in mass withdrawals, but a roughly equal number of deposits (from panic withdrawals from other banks), because we live in a largely cashless society. That is the point. The system isn't crashing down.
A niche bank like SVB was always more liable to have a run and should have been better capitalized than a normal bank. This is because probably close to 100% of their clients had other primary bank accounts that they could instantly transfer funds to, whereas an exodus from something like Wells Fargo would require tons of people to set up a new bank account.
Silicon Valley bank was a healthy bank so you have your answer there. It is well known that no bank can survive a run on it, even if it is healthy. That is why the FDIC was started.
Regarding the CEO, one has to keep in mind that the CEO is responsible for being honest towards the shareholders as well as for keeping his bank solvent. He also has to disclose any material risk to the shareholders in a timely manner. Well it is easy to see this was a material risk. It is difficult to say what the CEO could have done better. If he said the bank is absolutely fine and it was impossible for it to fail to pay depositors, and the bank still failed, then the shareholders would have sued him.
I think he got in trouble when he tried to call on the community spirit of silicon valley. When he said that his customers should support the bank as the bank has supported them. He should have known that kind of call for community spirit and non-contractually obligated decency would ring alarm bells in the minds of a bunch of silicon valley CEOs. And Peter Thiel.
I think the lesson to learn here is that perhaps the FDIC insurance limits should go up. The FDIC has done a great job in ensuring ordinary people that their bank accounts are safe, as ordinary people usually keep less than 250K in their accounts. But, businesses tend to keep much more. And some venture funded tech businesses tend to keep even more. And silicon valley bank was unique in that most of its deposits were from venture funded tech businesses.
So while the FDIC insurance does generally prevent runs on banks by ordinary people, it does nothing for businesses. As far as a business with 20 million in the bank was concerned, most of their money is at risk and the situation is not that different as it would have been 100 years ago in the 1920s. And thus, the very painful process of a bank panic happened to silicon valley bank just like it used to happen to old US banks back in the 20s and 30s, before FDR created the FDIC.
So I think the government should seriously consider expanding the FDIC insurance to higher levels, perhaps in exchange for additional fees.
> I think the lesson to learn here is that perhaps the FDIC insurance limits should go up.
100% this. $250k is reasonable enough for most individuals, but it's far too low for businesses. You don't want people worrying about if their paycheck will clear and companies going under because a traditional bank failed.
Yeah, probably the best way to prevent this from happening would be to have the FDIC guarantee up to 40 million for businesses, or something on that level. Going from having >95% of your cash uninsured to even like 30% uninsured (for a huge company) would be a massive change.
FDIC should just offer unlimited insurance for depositors. Bank runs are relatively rare events during normal times, so the current fee structure can support handling those instances. During a systemic crisis, the taxpayers have to backstop the depositors anyways. Feels like a no-brainer to me.
Not really... If the executives make terrible decisions then they'll still drive their institution to receivership which means they'll lose their jobs, and the stockholders will lose everything. Maybe an acceptable compromise would be: if you accept unlimited FDIC insurance at your financial institution you agree to executive compensation clawbacks, and more severe penalties if you mismanage funds (e.g. jail time).
In exchange, unlimited FDIC insurance would prevent runs like we saw at SVB. There would be no reason to rush to withdraw if you know that you'll be made whole at the end of the day.
I think the lesson to learn here is that perhaps he should have known that kind of call for community spirit and non-contractually obligated decency should not be expected from a bunch of silicon valley CEOS. And VCs.
I was trying to find out more about this. The reserve ratio was replaced by an “ample reserves” policy, wherein the Federal Reserve pays an increased interest rate on reserves (a slight discount from the federal funds rate). I wonder how this has played out in reality - do banks have more or less reserves than before this policy change?
No, the problem is not being funded. The problem is suddenly not having any cash left - you can have all the assets in the world, but if you can't turn them into cash and you have cash payments owed then your bank is closed.
_No_ bank has the ability to handle all of their depositors pulling their money out at the same time. I'm not sure how many could handle 25% + however many pulled in the preceding days either.
Bank runs caused banks to default because the banks have run out of cash, plenty of banks have failed despite having sufficient assets to cover their depositors.
An easy way to understand this, imagine a teeny tiny bank:
* 100k cash on hand
* 10 customers with 50k deposits
* 100 customers with 100k mortgages
This bank has 10 million in assets, and 500k in debt, so has 9.5million in net assets
Now 2 customers withdraw 30k each, you still have 9.5 million in net assets but you only have 40k cash. So you sell one of the mortgages at a discount to get some cash on hand. You lose 10k and you report that you did that, and now you have say $130k cash again. But now some of your customers friends hear that some people withdrew a lot of their money, and that you're selling things at a loss so they go oh no, I'm going to with draw all my money. So 2 customers come in to withdraw their money and you say "we don't have enough cash to do that", so you get a super expensive loan and start trying to sell more assets at increasing discounts. People see you doing that and go "oh shit" and now all of your depositors come to get their cash. You have now sold of a bunch of your assets at potentially steep discounts, have some very expensive credit, and still can't give people their deposits back. Congratulations on experience a bank run.
Because of this your bank is now legally insolvent and is seized by the government despite clearly having more assets than debt, you are unable to service that debt.
Alternatively consider someone with a mortgage. They have a property worth $X, and a debt of $(X-Y). Now imagine the bank comes to them and says "you need to pay back your mortgage in 24 hours or we will seize all your property". You can see how that might cause problems no matter how much of their mortgage had been paid off.
In the real world banks have lots of other things set up to reduce risk, but the core principle is the same. No significantly sized bank can handle a full bank run - that's why things like the FDIC were created: it means most people don't have to worry that if they don't immediately pull their money from the bank they'll lose all their money, and so they don't panic withdraw, and so reduce the risk of a run-induced bank failure.
What happened here is that SVB was apparently endeavoring to rebalance its (in fairness terrible) asset mix and was taking a loss on doing so. But that spooked a bunch of billionaire VCs who instructed all the startups they were funding to withdraw from SVB, which caused other VCs to do the same, and pretty soon all these companies with assets far beyond the FDIC limit and/or completely uninsured _they_ did have a reason to fear losing their money if the bank failed. That triggered a run, and because it was actual companies the size of the withdrawals were far more than any well run bank would ever expect to suddenly need so the result was inevitable.
Just to add, I would expect the big US and international banks, and probably most of the slightly smaller and mid sized ones as well, to be able to weather a run from individuals but I don't think any bank in the world could handle all their corporate clients simultaneously demanding all their assets as cash in the space of only a day or so.
[edit: HN ate the formatting on teeny bank so I've added moar newlines]
Is the interbank lending market just not big enough to provide liquidity in situations like this, or is there some other factor keeping that from preventing a bank failure?
If SVB didn't already have sufficient lines of credit (recall that 40+ billion was withdrawn in just one day) arranging a loan or credit for the cash amounts involved takes a large amount of time compared to the obligations a bank is under.
This kind of event is ostensibly prevented by regulations requiring "shock testing" of banks, but the GOP and trump rolled back those regulations for banks like SVB because government regulation is bad, and the CEO of SVB told congress that despite the established history of unregulated banks failing just like this, it would not happen again because magic.
That makes sense. The market is there to make sure banks have enough to meet the reserve requirement. And if that requirement is too low...
I guess that's why we have the FDIC, and why banks pay into the insurance. And why 2008 wasn't as bad as the crash that led to its creation. It looks like the fund has $124 billion as of 2022.
How many banks would make decade long bets that interest rates would stay near zero? In an era which involved printing trillions of dollars in just a couple of years.
If SVB or any bank wasn't underwater on an enormous amount of investments, this wouldn't happen. They could sell or borrow enough to cover the withdrawls.
I'm afraid there's some evidence that there are other very large banks with unrealized losses which might be in similar situations soon.
Withdrawal of $42B in one day. Wow. It does seem like SVB would be uniquely vulnerable to this type of run. (Relatively small # of customers holding large sums of deposit.) Is that incorrect?
A big issue is that the customer base is highly correlated/undiversified, in the sense that they're all funded by a small set of VC's telling them to withdraw their money. SVB was uniquely exposed to the whims of a small set of individuals in this manner.
What's different is how many large accounts SVB had. Most banks have a higher share of funds in smaller accounts. For people with less than $250k at the bank, there's less incentive to withdraw all your funds.
JP Morgan retained a very healthy position throughout the Financial Crisis of 2008-09 largely because they had a large, diffuse base of retail accounts, likely well below insurance limits. I suppose people were happy to keep their cash in.
Since then all major investment banks are salivating over the idea of setting up retail arms for this very reason. Goldman Sachs tried launching "Marcus" for example.
This is hearsay, but as i understand it Goldman had closed the books on their fundraise yesterday... Meaning the fundraise was complete. Some VCs including ycombinator raised the alarm and created the catalyst to get to where we are today. Pretty impressive turn of events but wholly avoidable.
* Bank announced it was selling assets to ensure liquidity
* This caused a run
* The bank became illiquid
* The bank can no longer pay things when they become due
* Therefore the bank is insolvent
* The commission was ordered to take possession of the bank
* The commission has taken possession of the bank
Seems very much like a boilerplate "well that happened" form
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