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- Daily Deposit 3.15.2023
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Today in Banking
Biden emphasizes safety of banking system: āYour deposits will be there when you need themā
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Banking 101
Banking goes Boom!
So unless you've been living under a rock, I'm sure you've all heard by now that banking has taken a massive hit since last Thursday. It all started when Silicon Valley Bank (SVB) collapsed into Federal Deposit Insurance Corp. (FDIC) receivership on Friday, March 10th. This was the 2nd largest bank failure in history. Subsequently, Signature Bank, another major bank for crypto collapsed over the weekend, making it the 3rd largest bank failure in history. First Republic Bank and Western Alliance Bancorp were on a trajectory to follow suit, but were saved by a buzzer-beater move from the Fed. The Fed guaranteed to make all depositors whole, wowza.
How the heck did we get here?
Well, we need to go back to 2021 for that. US venture capital-backed companies raised a record $330 billion, doubling that of 2020. And guess who got the biggest piece of that pie? SVB baby! 50% of all US venture-backed tech and life sciences companies bank with SVB. Their deposit base spy-ballooned from $60B to $124B from March 2020 to March 2021, and ultimately reached $175B prior to the FDIC takeover.
What to do with all these juicy deposits? Well, SVB's Treasury folks decided to park billions of those dollars in US Treasuries with an annual yield of 1.79%. Didn't seem like a problem at the time, considering the Fed said it would raise rates unless they saw sustained inflation well above 2%. If you like eggs for breakfast then you probably know that inflation has been aggressively climbing in a way no one expected. Back to SVB's Treasuriesā¦ The 10-year yield last week was 3.9%, and that was no bueno for SVB.
The rising rates of these Treasuries dropped the overall value, forcing SVB to sell those bonds at a loss to the tune of $2B. Now SVB needed to shore up its balance sheet by attempting to raise $2B of capital, which failed. On Thursday, start-ups pushed their founders to pull out money, notably including Peter Thiel's Founder Fund. [Insert panic] Word spread like a fart in the wind and depositors tried to pull $42B out on Thursday.
For comparison, during the largest bank failure in history, Washington Mutual 2008, $16B was pulled out over the span of 10 days.
Needless to say, systems at SVB go down. Stories are surfacing of some customers pulling upwards of $70 million out of their fund and depositing in their personal accounts. But many can't access their deposits. This is when the FDIC steps and shuts her down. As of Friday, SVB becomes a full-service FDIC-operated 'bridge bank'.
Weren't any of these deposits insured? Funny you should ask. FDIC only insures up to $250k per account. In total, 93% of SVB deposits were uninsured. Ouch. We're now seeing a massive shift in what's important to customers in their banking relationships. Great news for companies like IntraFi who offer sweep programs to banks, which provide additional insurance as part of their programs.
What went wrong?
1. SVB's deposit base was highly concentrated in start-ups. This was highly profitable when times were good, hence the tripling of deposits over a 2-year period. This was also a major contributor to their demise. Few industries are as tightly knit as the VC, tech, start-up ecosystem. Once the flag went up, every investor and their brother were on the phone telling founders to pull their funds. High volume deposit withdrawal = bank run.
2. SVB invested customer cash in longer term 10-year US Treasuries and were at the mercy of unexpected rising rates. Loss of value there necessitated an attempt to raise capital, but it was too late. SVB bought bonds when it was cash rich but couldn't hack it as deposit outflow outpaced inflow.
3. SVB's Chief Risk Officer (CRO) left in April 2022 and was never replaced. I'm no genius, but it would've been nice to have someone at SVB to manage risk over the last year. SVB's risk committee more than doubled its meetings after the CRO departure, which in hindsight was an indication of concern with the bank's position.
Now what?
The FDIC stepped in, in a big way, and guaranteed ALL deposits back to SVB customers. What's the point of the insurance if the Fed will guarantee deposits anyway? Well I think the bigger issue was the Fed needed to stop the panic from reaching a contagion. Fear was clearly spreading as we saw Signature go down like Fraizer, and First Republic and Western Alliance next in line. Imagine a scenario where Americans as a whole panic and withdraw all their funds at onceā¦ This is why trust is so important in a fractionalized banking system. If you don't like it, then go talk to the Swiss.
As the dust settles, SVB customers will transfer funds to different banks. I imagine many will open accounts with the Big 4, but this will likely be a let down. Big banks aren't going to give that special attention and white glove treatment you may receive at a smaller or more specialized bank.
Now is the opportunity to advertise sweep programs and better coverage for deposits. This is something no one seemed concerned about before, but is definitely top of mind. The bottom line as always, Don't f@*k with people's money!
LULZ
reply with a Cold Stone bowl scoreā¦ did you:
a) like it
b) love it
c) gotta have it