"First Republic Bank’s credit rating was downgraded on Wednesday by both Fitch Ratings and S&P Global Ratings on concerns that depositors could pull their cash despite the federal intervention. "
Solvency means you are able to pay your debts. Banks cannot pay their debts, ever. Banks are never solvent, they are always in debt. They make it appear they are solvent, on paper. They are only solvent in the future, not in the present.
This is they myth of banking that people do not understand or appreciate and that always puts the economy at risk. It was the FED raising rates that pushed their solvency further out into the future.
They were stuck with assets earning <2% for 10+ years, meanwhile depositors were demanding higher returns (else they would put their money in other banks, in 6m tbills, 10yr treasuries, etc.. all of which paid a lot more).
And thus, "it's not a solvency issue as long as depositors are stupid and don't realize they can get more $$$ from other banks" ends up being quite misleading
>Well, when people default on their loans and can't refinance them, they'll default and that money will disappear from the economy. That's on the bank underwriters, and that's when their balance sheets deserve to go lopsided. Not because of central planners raising interest rates.
This "banks are victims from Fed rate policy" narrative is not accurate. A bond portfolio consisting entirely of 10-30 year hold-to-maturity securities is absolute, pure greed and insanity. Any bond manager not engaging in degenerate activity will hold a mix of bond maturities.
This is the bank equivalent of putting all your clients' money into a single stock ticker, and people are doing incredible mental gymnastics to claim that SVB was a victim of external forces
> Yes, it would solve one type of problem. But nobody wants your solution because it’s an unreasonable trade off for everyone to solve an extremely rare edge case.
Can you explain why this is bad? People lived with hard-ish money systems for extremely long periods of time.
> The concepts of assets and liabilities are well understood in the business world. Banks aren’t “lying” and fractional reserve banking does not mean that banks are creating fake dollars. Liabilities have always been part of the equation.
I mean, it's really about how you define words.
Most people believe that they have money in the bank. When in reality, they have unsecured debt to the bank. Although to be fair, for most people that debt is backstopped by FDIC/NCUA.
But, of course, that unsecured debt is often referred to as money, so I can't really blame them too much.
> “If you look at First Republic, you can see that they were offering non-government guaranteed mortgages at fixed rates for jumbo amounts – that’s a crazy proposition to the advantage of the bank. It was in plain sight and we all ignored it until it blew up.”
As if they are so different than the 30-year fixed rated mortgages that every other bank was offering. It also is convenient that the bank he "likes", BoA, also happens to be "too big to fail," which is entirely a government construct (and subsidy).
As a long time First Republic customer who went through multiple vigorous loan approvals, it is quite annoying for it to be thrown around how they had all these bad loans. Every bank that wrote mortgages during the 0-interest rate era has tons of underwater loans on their books, it is just that First Republic happened to be, unbeknownst to anybody before it happened, highly susceptible to a bank run.
> I think the understanding issue is that all banks are basically insolvent by design
Banks are not balance sheet insolvent at all.
The problem is that their liabilities are deposits which are very short term and depositors can show up and demand money, while their assets are loan paper which is typically very long term.
They can become cash insolvent fairly quickly during a run, that doesn't mean that they are "insolvent by design" though.
> However, what caused the desire to get out is bad management at the bank and unrealized losses because the bank had a large portfolio of mortgage backed securities they weren't required to mark to market (thanks dumb regulators)
Rather the inverse. If they had been able to hold their securities to maturity then they would have been fine. The problem is that the drawdown in deposits forced them to sell securities and inherently mark them to market, which made them balance sheet insolvent.
If regulators forced them to market to market that would have just created more panic, that isn't really a solution.
What they needed was to stress test their portfolio back in 2021 when they were buying mortgages against a 6% federal funds rate, and avoid buying so much in order to not have so much interest rate exposure. In 2021 that would probably have been considered laughable.
> If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do?
That's not what the FED is doing though. They are protecting the depositors not the business. The equity holders are getting completely wiped out and most of the employees at First Republic Bank are probably going to lose their jobs so the business is definitely getting screwed.
> We know exactly why banks are failing. Federal rate increases pushed they are long-term Holdings underwater and account holders made a run on the bank.
No, they failed because the banks didn’t hedge interest rate risk whatsoever. It isn’t the Fed’s fault for doing it’s job to tame inflation. It is the banks’ fault for not doing basic risk reduction at the expense of some profit. They optimized for profit and not resiliency.
> I'm not sure the occasional bank run by people who get over zealous with their greed and desire for MORE is necessarily a bad thing.
I mostly agree. I think one of the biggest problems with the bank meltdown of 2008 is that no heads rolled, so it's no surprise that there has ultimately been very little behavioral change.
> The problem in my mind is when banks are doing fractional reserve without the explicit understanding and consent of their depositors.
All of them are consenting (FRB is what banks do, they don't make money by simply holding a deposit) but boy is there a lack of understanding on how the modern bank works as a business and it's effect on the money supply.
> If the costs are instead borne by the ... depositors of that bank, yes it will suck for many
You should have finished your post here. Nobody with any exposure to the real world should be suggesting if a bank's highly skilled risk management professionals working full time on assessing the bank's financial position with access to the confidential data can't assess the risk factors of the bank's bond portfolio adequately enough to keep the bank alive to continue paying them massive salaries and nor can any of the bank's wiped-out equity investors, the real problem is that Joe Sixpack just isn't motivated to spot it in the few minutes of his spare time he gets to ponder changing his bank account.
I mean, you're in a minority of people so confident in your knowledge of the banking system you're willing to offer a diagnosis of its "main problem", but I bet you still couldn't tell me what's unusually risky about the composition of SVB's bond portfolio and what implications that has for your own banking arrangements now it's been in the news for a week, never mind last month when people would have needed to know if they wanted to still have a startup.
I mean, I'm not saying people shouldn't learn lessons from bank failures. It's just that the lesson most of us learned is banks failed a lot more when they weren't regulated and insured.
> Nope, wrong. Their balance sheet is strong and they are fully solvent.
The fact that they sold assets for a loss indicates that they are not.
The fact that the FDIC took over the bank indicates that they are not.
The fact that the bank is winding down with no other bank willing to buy them indicates that they are not.
What fact would you put forward to support your assertion that the bank is fully solvent. Because right now you are saying the opposite of the market, the FDIC and the banks competitors.
If they were fully solvent it would be pretty trivial to find a buyer to keep the bank to Silicon Valley startups going.
The fact that no one will take on their liabilities is very damning.
> They had to do something with the deposits. There were so many deposits because of gov and Fed policy. There was no demand for loans because there was free money everywhere.
Easy, buy treasury bills. What? They don't pay interest through the nose? Guess SVB is not getting double digit revenue growth this year, and you're not getting that big bonus. So sad. Anyway.
> SBN isn’t the only bank in this position. I read a NYT article from 2021 describing this situation and like every bank is in this position.
Link? Also I am quite sure most other banks had the good sense to understand that they need to hedge against interest rate risk.
> Interest rates whipsawed from record lows to 20 year highs in 12 months. No one was ready for that. This is all because of gov and fed policy.
Yes, and gov and fed policy was there to address acts of God (aka COVID) and Putin (aka the Russia-Ukraine war). Should we send a list of demands to them?
> FRB was solvent and had plenty of liquidity if the FDIC didn't force kill it
This is totally incorrect. Face value and market value are a material difference when one faces a liquidity crunch. First Republic was in a slow death spiral for months, and everyone across its capital structure knew it for at least a week.
> there was zero reason FRB couldn't have held all its good loans to maturity and been totally fine
You can’t tell depositors you won’t give them their money for ten years.
>banks didn't account for this with lax lending standards
Pretty sure the ratings fraud got fixed. Also pretty sure they didn't just go back to handing loans out to anyone with a pulse. I'm sure there's some crazy intricate financial instruments made up of dogshit still around, but it's probably going to be a smaller percentage of the bank's balance sheet.
> I don't understand why people are blowing this out of proportion.
SVB collapsed and is the largest bank failure since the 2008 financial crisis.
It is unlikely to cause contagion (though some disagree) which means luckily the Fed won't raise interest rates to mitigate that risk (unless they also think there's risk of contagion, like some experts do).
>It is frightening to me people don't seem to understand this. It's absolutely basic money management.
It isn't frightening to me, because the trust people put into banks' reliability is a testament to the fundamental strength of the American financial system. I'd rather have that than the opposite, where everyone is hyper-sensitive about everything and even refuse to use banks at all.
That said, there is no excuse for Roku, for example, to have more than $400 million in uninsured funds at SVB. That is fundamental malpractice on the part of its corporate treasury, CFO, and management.
>World order is still fluctuating all as a result of these betrayals.
It seems a pretty basic assumption that someone at SVB did a WHAT IF analysis to game out different scenarios if interest rates started rising. This is not rocket science.
>You can do a regression of interest rates from whenever to now, draw a line that's never violated until 2022 (even the 2020 lows were in-trend) and the 2022 highs were almost 50% higher than the trend
Well, if your bank is relying on analysis like this, it deserved to fail.
Here's how easy this situation was:
"Historically, would 5% interest rates be seen as crazy? What happens to our balance sheet if we see those rates?"
The problem is banks operate in a state of perpetual insolvency. Their ability to pay off their debts to customers depends on the state of the larger economy. Too many defaults and the whole thing comes crashing down.
> At no point is cash conservation broken.
It never existed to begin with. All that's required for the illusion to disappear is for enough people to attempt to withdraw funds at the same time.
> I know that the bank has plenty of other peoples’ $900 that if I wanted that cash I could take it.
> Many of the recessions in the United States were caused by banking panics.
> The Great Depression contained several banking crises consisting of runs on multiple banks from 1929 to 1933; some of these were specific to regions of the U.S.
> The global financial crisis that began in 2007 was centered around market-liquidity failures that were comparable to a bank run.
No, solvency is exactly what this is about:
https://www.cnn.com/2023/03/15/investing/first-republic-down...
"First Republic Bank’s credit rating was downgraded on Wednesday by both Fitch Ratings and S&P Global Ratings on concerns that depositors could pull their cash despite the federal intervention. "
Solvency means you are able to pay your debts. Banks cannot pay their debts, ever. Banks are never solvent, they are always in debt. They make it appear they are solvent, on paper. They are only solvent in the future, not in the present.
This is they myth of banking that people do not understand or appreciate and that always puts the economy at risk. It was the FED raising rates that pushed their solvency further out into the future.
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