[Bank failure discussion mega-thread]

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Tanelorn
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

Silicon Valley - there’s the takeover, long weekend for the FDIC I’m sure.

https://www.fdic.gov/news/press-release ... 23023.html
The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately $20 billion.
That’ll put a $20B hole in the FDIC fund, and for reference, the total DIF fund is something like $130B, so they just lost 15-20% of it in just this one failure. For the SIVB losses, $17B appears to be the 1/3 discount they gave the buyer to take the assets. I don’t they will do very well on the remaining nearly $100B worth of the old SIVB assets they couldnt get anyone to take and will be eventually liquidated. Sounds like the FDIC is taking 80% of the losses on the assets that are going to the new bank buyer as well, whatever those turn out to be.
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simplesimon
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Re: [Bank failure discussion mega-thread]

Post by simplesimon »

Tanelorn wrote: Mon Mar 27, 2023 1:23 am Silicon Valley - there’s the takeover, long weekend for the FDIC I’m sure.

https://www.fdic.gov/news/press-release ... 23023.html
The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately $20 billion.
That’ll put a $20B hole in the FDIC fund, and for reference, the total DIF fund is something like $130B, so they just lost 15-20% of it in just this one failure. For the SIVB losses, $17B appears to be the 1/3 discount they gave the buyer to take the assets. I don’t they will do very well on the remaining nearly $100B worth of the old SIVB assets they couldnt get anyone to take and will be eventually liquidated. Sounds like the FDIC is taking 80% of the losses on the assets that are going to the new bank buyer as well, whatever those turn out to be.
Do they mean the $20B expected loss to the fund is after all is said and done? Or what they're recording/accounting for right now?
Valuethinker
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

UncleLeo wrote: Sun Mar 26, 2023 5:37 am Just saw that First Republic's stock lost 90% of its value since the beginning of the month and hasn't recovered at all even after SVBs bailout and the treasury secretary's remarks.
Can someone explain what problems FRB is facing? Similar to SVB? Credit Suisse? something else?
1. based in San Francisco

2. lending to the same sorts of people BUT w a big difference in risk (more traditional banking)

3. Commercial Real Estate exposure is a risk for most US regional and small banks. But especially so if they are based in Silicon Valley/ San Francisco

4. "It's irrational to start a bank run. It's rational to participate in one". Every large depositor will be reviewing their risks. FR will be high on the risk register. So pull the money (above $250k). Which means, quite quickly, the liquidity shock exhausts all the liquid assets FR has.

This is how bank runs work. Once there's a sniff that deposits (of any particular size) might not be recovered, then the money runs to the "Too Big to Fail" financial institutions.

Note that SVB shareholders will get zero. SVB bond holders will get very little (there was some talk of 30-40 cents/ dollar?). So the market gets a sniff this may happen to another bank, and holders sell their securities, and there are no natural buyers. Becomes a self-fulfilling prophecy.
moneyflowin
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Re: [Bank failure discussion mega-thread]

Post by moneyflowin »

Tanelorn wrote: Mon Mar 27, 2023 1:23 am Silicon Valley - there’s the takeover, long weekend for the FDIC I’m sure.

https://www.fdic.gov/news/press-release ... 23023.html
The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately $20 billion.
So we can now put the question to rest -- This was a bailout. The depositors didn't buy private insurance but got FDIC insurance after the fact. Wouldn't it be nice if we could leave our house uninsured, have it burn down, then get paid anyway? :oops:

The FDIC just set a dangerous precendent. They will have to do the same for future bank failures, otherwise it would be unfair.

What do the FDIC-defenders say now about this not being a bailout?
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simplesimon
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Re: [Bank failure discussion mega-thread]

Post by simplesimon »

moneyflowin wrote: Mon Mar 27, 2023 6:41 am What do the FDIC-defenders say now about this not being a bailout?
What do you want to hear?
PersonalFinanceJam
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Re: [Bank failure discussion mega-thread]

Post by PersonalFinanceJam »

moneyflowin wrote: Mon Mar 27, 2023 6:41 am ...
The FDIC just set a dangerous precendent. They will have to do the same for future bank failures, otherwise it would be unfair.

What do the FDIC-defenders say now about this not being a bailout?
Honestly, I think this is going to completely depend on what the "next one" really is. I'm under no illusion that the FDIC much like life has to be fair. We also don't know what the FDIC intends to do to make up the shortfall. Others have argued this will negatively impact us because it will make banking more expensive so we will get lower interest rates on savings. I'm sure that could be true in some imperceptible way to me. I'm also certain those same people overlook the value and small imperceptible benefit they receive from not having a bunch of people instantly out of a job due to no fault of their own. I say this as someone not even close to California or startup culture.

I do think this has sparked a good healthy debate (some in this thread) about what FDIC limits should be and the very nature of banking. It was probably long overdue.
Valuethinker
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

moneyflowin wrote: Mon Mar 27, 2023 6:41 am
Tanelorn wrote: Mon Mar 27, 2023 1:23 am Silicon Valley - there’s the takeover, long weekend for the FDIC I’m sure.

https://www.fdic.gov/news/press-release ... 23023.html
The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately $20 billion.
So we can now put the question to rest -- This was a bailout. The depositors didn't buy private insurance but got FDIC insurance after the fact. Wouldn't it be nice if we could leave our house uninsured, have it burn down, then get paid anyway? :oops:

The FDIC just set a dangerous precendent. They will have to do the same for future bank failures, otherwise it would be unfair.

What do the FDIC-defenders say now about this not being a bailout?
Depositors are not shareholders or bondholders.
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JoMoney
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Re: [Bank failure discussion mega-thread]

Post by JoMoney »

moneyflowin wrote: Mon Mar 27, 2023 6:41 am...
So we can now put the question to rest -- This was a bailout. The depositors didn't buy private insurance but got FDIC insurance after the fact. Wouldn't it be nice if we could leave our house uninsured, have it burn down, then get paid anyway? :oops:
That's happened after some disasters, "FEMA Individual Assistance". Sometimes there is insurance, but it doesn't cover the specific situation or the amount of damage caused...
moneyflowin wrote: Mon Mar 27, 2023 6:41 am...
The FDIC just set a dangerous precendent. They will have to do the same for future bank failures, otherwise it would be unfair.
They've clarified that they would not, and it is unfair, and it does seem like an instance of 'unequal protection under the law', and a bunch of unelected bureaucrats making decisions about things with a huge impact. Not the first time that's happened either.
moneyflowin wrote: Mon Mar 27, 2023 6:41 am...
What do the FDIC-defenders say now about this not being a bailout?
Making depositors whole, isn't what "bailout" was referring to in past financial crisis, but I'm not going to argue about definitions on this.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Small Law Survivor
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Re: [Bank failure discussion mega-thread]

Post by Small Law Survivor »

Wow - I"m coming to this thread late! I am a long-time Boglehead (and I mean really long), but I only look at the site once every week or two. I've been on vacation, so I haven't look at it for more than a week.

However, on returning I see what appear to be very attractive CD rates on Vanguard's site.
- Zions Bancorporation 18 months non-callable at 5.4%
- Cadence Bk Tupelo Miss 9 months at 5.350, again non-callable

I have cash in my tIRA and rIRA that I could easily put into these, and I'm very tempted. They are FDIC-insured, of course (I don't think V. brokers any CDs that aren't, at least that I've seen). And, of course I would be well under the $250K FDIC insured ceiling.

However, the based on the names of the banks these are exactly the kind of "small/regional" banks that are being discussed on the news as potentially troubled.

These CD rates fall into the "too good to be true" category for me, and I'm wondering if there's anything I don't know or any reason not to invest in them? And I'm hoping not to have to read this massive BH thread to find out!

Please advise. Thanks in advance.
72 yrs. mostly-retired lawyer. Boglehead since day 1 (and M* Diehard long before that) under various names
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

ScubaHogg wrote: Sun Mar 26, 2023 8:46 pm
alex_686 wrote: Sat Mar 25, 2023 12:00 pm Conclusion, people are cleaver. No matter how you set up the game, people will figure out how to optimize the system. Since the system is dynamic any regulations will always be a step behind.
A solid argument for a system where banks could fail and it wouldn’t matter anymore than if a local restaurant failed. Run-proof if you will

https://papers.ssrn.com/sol3/papers.cfm ... id=2425883
Yes, that 2014 paper describes the "narrow bank" concept, including money funds that invest solely in short-term Treasurys and/or have floating asset values with tradable shares.

It wouldn't even be difficult to do, and would have prevented the current crisis. I wonder why this hasn't been implemented?
Of course the answer is that it's more profitable to run a "wide bank"... until the run.
In theory, theory and practice are identical. In practice, they often differ.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

Small Law Survivor wrote: Mon Mar 27, 2023 9:47 am Wow - I"m coming to this thread late! I am a long-time Boglehead (and I mean really long), but I only look at the site once every week or two. I've been on vacation, so I haven't look at it for more than a week.

However, on returning I see what appear to be very attractive CD rates on Vanguard's site.
- Zions Bancorporation 18 months non-callable at 5.4%
- Cadence Bk Tupelo Miss 9 months at 5.350, again non-callable

I have cash in my tIRA and rIRA that I could easily put into these, and I'm very tempted. They are FDIC-insured, of course (I don't think V. brokers any CDs that aren't, at least that I've seen). And, of course I would be well under the $250K FDIC insured ceiling.

However, the based on the names of the banks these are exactly the kind of "small/regional" banks that are being discussed on the news as potentially troubled.

These CD rates fall into the "too good to be true" category for me, and I'm wondering if there's anything I don't know or any reason not to invest in them? And I'm hoping not to have to read this massive BH thread to find out!

Please advise. Thanks in advance.
I'd just go with a 52-week T-bill, currently yielding 4.4% if held to maturity (or a shorter one if you want the interest to be taxable this year). It's also not state-taxable if that matters to you.
In theory, theory and practice are identical. In practice, they often differ.
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curmudgeon
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Re: [Bank failure discussion mega-thread]

Post by curmudgeon »

Small Law Survivor wrote: Mon Mar 27, 2023 9:47 am
However, on returning I see what appear to be very attractive CD rates on Vanguard's site.
- Zions Bancorporation 18 months non-callable at 5.4%
- Cadence Bk Tupelo Miss 9 months at 5.350, again non-callable

I have cash in my tIRA and rIRA that I could easily put into these, and I'm very tempted. They are FDIC-insured, of course (I don't think V. brokers any CDs that aren't, at least that I've seen). And, of course I would be well under the $250K FDIC insured ceiling.
I don't have any hesitation on CDs of this type while staying under FDIC limits. There's always somebody that's going to have the highest rates, and it's always been a bit of ebb and flow whether tbills or short term CDs have higher rates.
Small Law Survivor
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Re: [Bank failure discussion mega-thread]

Post by Small Law Survivor »

technovelist wrote: Mon Mar 27, 2023 10:28 am
Small Law Survivor wrote: Mon Mar 27, 2023 9:47 am Wow - I"m coming to this thread late! I am a long-time Boglehead (and I mean really long), but I only look at the site once every week or two. I've been on vacation, so I haven't look at it for more than a week.

However, on returning I see what appear to be very attractive CD rates on Vanguard's site.
- Zions Bancorporation 18 months non-callable at 5.4%
- Cadence Bk Tupelo Miss 9 months at 5.350, again non-callable

I have cash in my tIRA and rIRA that I could easily put into these, and I'm very tempted. They are FDIC-insured, of course (I don't think V. brokers any CDs that aren't, at least that I've seen). And, of course I would be well under the $250K FDIC insured ceiling.

However, the based on the names of the banks these are exactly the kind of "small/regional" banks that are being discussed on the news as potentially troubled.

These CD rates fall into the "too good to be true" category for me, and I'm wondering if there's anything I don't know or any reason not to invest in them? And I'm hoping not to have to read this massive BH thread to find out!

Please advise. Thanks in advance.
I'd just go with a 52-week T-bill, currently yielding 4.4% if held to maturity (or a shorter one if you want the interest to be taxable this year). It's also not state-taxable if that matters to you.
I will go for Treasuries in my taxable acct (nice to avoid that 5% Massachusetts tax), but the brokered CDs seem much more attractive (highter rates, bigger supply) in my IRAs ...
72 yrs. mostly-retired lawyer. Boglehead since day 1 (and M* Diehard long before that) under various names
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

Small Law Survivor wrote: Mon Mar 27, 2023 10:47 am
technovelist wrote: Mon Mar 27, 2023 10:28 am
Small Law Survivor wrote: Mon Mar 27, 2023 9:47 am Wow - I"m coming to this thread late! I am a long-time Boglehead (and I mean really long), but I only look at the site once every week or two. I've been on vacation, so I haven't look at it for more than a week.

However, on returning I see what appear to be very attractive CD rates on Vanguard's site.
- Zions Bancorporation 18 months non-callable at 5.4%
- Cadence Bk Tupelo Miss 9 months at 5.350, again non-callable

I have cash in my tIRA and rIRA that I could easily put into these, and I'm very tempted. They are FDIC-insured, of course (I don't think V. brokers any CDs that aren't, at least that I've seen). And, of course I would be well under the $250K FDIC insured ceiling.

However, the based on the names of the banks these are exactly the kind of "small/regional" banks that are being discussed on the news as potentially troubled.

These CD rates fall into the "too good to be true" category for me, and I'm wondering if there's anything I don't know or any reason not to invest in them? And I'm hoping not to have to read this massive BH thread to find out!

Please advise. Thanks in advance.
I'd just go with a 52-week T-bill, currently yielding 4.4% if held to maturity (or a shorter one if you want the interest to be taxable this year). It's also not state-taxable if that matters to you.
I will go for Treasuries in my taxable acct (nice to avoid that 5% Massachusetts tax), but the brokered CDs seem much more attractive (highter rates, bigger supply) in my IRAs ...
Yes, obviously it matters what the tax location is especially in a high-tax state.
But I'd also check on the FDIC coverage of brokered CDs because that has been a topic of discussion here. I didn't pay too much attention to it because I don't have any CDs but I recall there was a thread about how exactly that coverage works.
In theory, theory and practice are identical. In practice, they often differ.
vaylie
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Re: [Bank failure discussion mega-thread]

Post by vaylie »

Small Law Survivor wrote: Mon Mar 27, 2023 9:47 am On returning I see what appear to be very attractive CD rates on Vanguard's site.
- Zions Bancorporation 18 months non-callable at 5.4%
- Cadence Bk Tupelo Miss 9 months at 5.350, again non-callable
Funny, I came here to ask about these Brokered CDs too.

One of the earlier posts by MrJedi in this thread mentioned this:
MrJedi wrote: Fri Mar 10, 2023 6:48 am FDIC insures your principal (including accrued interest).

But FDIC does not ensure the original terms of the CD. So if you were hoping to lock in a CD rate for 10 years or something like that, that would be a problem, since you would need to reinvest your money after you get your insured money back.
However, I'm wondering if this applies to Brokered CDs vs bank CDs? If the bank goes under before we receive any interest payment, is it possible we basically just lose everything except the principal? There was a post by a Fidelity rep on their subreddit about Signature Bank CDs where they said it was up to the FDIC how things are handled for Brokered CDs.

This is the main sticking point that has me hesitating on whether to go in on these Brokered CDs. And google search doesn't seem to give any conclusive answer to my question about what happens to the interest on a brokered CD when a bank fails.
Tanelorn
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

SIVBQ and SBNY stocks are trading over the counter for pennies now, down from $50-100/share.
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ray.james
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Re: [Bank failure discussion mega-thread]

Post by ray.james »

142 billion withdrawals over 2 days against 175million deposits.
https://www.cnbc.com/2023/03/28/svb-cus ... -says.html

That bank runs in digital era can be over before it is known to common folks!!!
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
Fpdesignco
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Re: [Bank failure discussion mega-thread]

Post by Fpdesignco »

ray.james wrote: Tue Mar 28, 2023 1:54 pm
142 billion withdrawals over 2 days against 175million deposits.
https://www.cnbc.com/2023/03/28/svb-cus ... -says.html

That bank runs in digital era can be over before it is known to common folks!!!
I reality, I give them credit for their back-end systems being able to support that and not crashing.
harikaried
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Re: [Bank failure discussion mega-thread]

Post by harikaried »

Valuethinker wrote: Mon Mar 27, 2023 5:04 amCommercial Real Estate exposure is a risk for most US regional and small banks
We have money at a regional bank that we used to buy commercial real estate with an adjustable rate mortgage that balloons. Should we be doing something now?
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nisiprius
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Fpdesignco wrote: Tue Mar 28, 2023 2:09 pm
ray.james wrote: Tue Mar 28, 2023 1:54 pm
142 billion withdrawals over 2 days against 175million deposits.
https://www.cnbc.com/2023/03/28/svb-cus ... -says.html

That bank runs in digital era can be over before it is known to common folks!!!
I reality, I give them credit for their back-end systems being able to support that and not crashing.
Maybe it didn't. The systems apparently didn't crash, but Planet Money had a podcast about the SVB bank run, and two small-business tech entrepreneurs were shocked when they thought they had withdrawn their money in time, only to discover that their withdrawals did not complete in time to beat the FDIC shutdown of SVB.
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Valuethinker
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

harikaried wrote: Tue Mar 28, 2023 2:19 pm
Valuethinker wrote: Mon Mar 27, 2023 5:04 amCommercial Real Estate exposure is a risk for most US regional and small banks
We have money at a regional bank that we used to buy commercial real estate with an adjustable rate mortgage that balloons. Should we be doing something now?
Is it more than $250k?

I hate to spread stories. Your bank may be perfectly safe. It is almost certainly safe. Federal regulators will be crawling over the books of every bank to check that they are not in the SVB position.

Nonetheless the events do underscore the importance of spreading deposits (and CDs) in lump amounts of $250k or less.

By the way this ?First Citizens? bank which just bought SVB is a pretty good risk. They will have stripped clean any bad assets.
Last edited by Valuethinker on Tue Mar 28, 2023 4:18 pm, edited 1 time in total.
Valuethinker
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

nisiprius wrote: Tue Mar 28, 2023 2:45 pm
Fpdesignco wrote: Tue Mar 28, 2023 2:09 pm
ray.james wrote: Tue Mar 28, 2023 1:54 pm
142 billion withdrawals over 2 days against 175million deposits.
https://www.cnbc.com/2023/03/28/svb-cus ... -says.html

That bank runs in digital era can be over before it is known to common folks!!!
I reality, I give them credit for their back-end systems being able to support that and not crashing.
Maybe it didn't. The systems apparently didn't crash, but Planet Money had a podcast about the SVB bank run, and two small-business tech entrepreneurs were shocked when they thought they had withdrawn their money in time, only to discover that their withdrawals did not complete in time to beat the FDIC shutdown of SVB.
I suspect they just slow walked it. Deliberately or due to overload.

I believe all transactions on the Friday (and those not completed on the Thursday) were reversed.
technovelist
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

harikaried wrote: Tue Mar 28, 2023 2:19 pm
Valuethinker wrote: Mon Mar 27, 2023 5:04 amCommercial Real Estate exposure is a risk for most US regional and small banks
We have money at a regional bank that we used to buy commercial real estate with an adjustable rate mortgage that balloons. Should we be doing something now?
Do they owe you money or do you owe them money? I can't tell from your post which it is.
In theory, theory and practice are identical. In practice, they often differ.
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Re: [Bank failure discussion mega-thread]

Post by skierincolorado »

Has anybody seen how SVB bondholders made out? I assume they will be wiped out, but one article said FDIC was looking to dispose of the remaining 90B in assets in a way that minimizes losses to themselves and investors. Hopefully the part about protecting investors was a mistake in the article.

The deal with citizens was quite bad. Citizens stock was up 55%.
Tanelorn
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

skierincolorado wrote: Tue Mar 28, 2023 9:33 pm Has anybody seen how SVB bondholders made out? I assume they will be wiped out, but one article said FDIC was looking to dispose of the remaining 90B in assets in a way that minimizes losses to themselves and investors. Hopefully the part about protecting investors was a mistake in the article.
Well SIVB bond holders are owed money by the bank holding company, not the bank. That entity has several billion in cash, as well as some other VC-related businesses that seem to be valuable (wealth management, etc), and of course also owed the now worthless bank. One small sticking point, over which $10M’s at least in legal fees will be wasted, is the issue that $2B worth and the majority of the HoldCo’s cash is held at... their own bank that was seized by the FDIC.

And guess who isn’t on the list to get fully repaid in the SIVB bailout? That’s right, the FDIC is holding all those billions hostage and I think the lawyers managed to force them to give <10% as an advance to the holding company so they could, amount other things, fund their efforts to try to win the right to the rest in due course in the courts. Bonds were trading at around $0.50 on the dollar, give or take, but this isn’t exactly the same as a bond holder in the bank since the holding company isn’t the bank / seized entity.
The deal with citizens was quite bad. Citizens stock was up 55%.
They were the only bidder, and of course it was a great deal for FCNCA. The FDIC doesn’t want to run a bank themselves, and given all the risks of buying billions in assets that contributed to the last owner blowing up, and buying them during a time of high financial stress, you better have a clearly great deal for the buyer... if only so that they don’t get a run on them due to having bought too much illiquid high risk stuff.
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Re: [Bank failure discussion mega-thread]

Post by skierincolorado »

Tanelorn wrote: Tue Mar 28, 2023 10:29 pm
skierincolorado wrote: Tue Mar 28, 2023 9:33 pm Has anybody seen how SVB bondholders made out? I assume they will be wiped out, but one article said FDIC was looking to dispose of the remaining 90B in assets in a way that minimizes losses to themselves and investors. Hopefully the part about protecting investors was a mistake in the article.
Well SIVB bond holders are owed money by the bank holding company, not the bank. That entity has several billion in cash, as well as some other VC-related businesses that seem to be valuable (wealth management, etc), and of course also owed the now worthless bank. One small sticking point, over which $10M’s at least in legal fees will be wasted, is the issue that $2B worth and the majority of the HoldCo’s cash is held at... their own bank that was seized by the FDIC.

And guess who isn’t on the list to get fully repaid in the SIVB bailout? That’s right, the FDIC is holding all those billions hostage and I think the lawyers managed to force them to give <10% as an advance to the holding company so they could, amount other things, fund their efforts to try to win the right to the rest in due course in the courts. Bonds were trading at around $0.50 on the dollar, give or take, but this isn’t exactly the same as a bond holder in the bank since the holding company isn’t the bank / seized entity.
The deal with citizens was quite bad. Citizens stock was up 55%.
They were the only bidder, and of course it was a great deal for FCNCA. The FDIC doesn’t want to run a bank themselves, and given all the risks of buying billions in assets that contributed to the last owner blowing up, and buying them during a time of high financial stress, you better have a clearly great deal for the buyer... if only so that they don’t get a run on them due to having bought too much illiquid high risk stuff.
So the holding co is not responsible financially for the debts of the bank it owns? Seems like a great way to shield all assets. Start a hold co and funnel the income there and when the bank goes bankrupt you're not liable. That should be illegal. It distorts the incentives of the bondholders and shareholders of the hold co. I must be missing something, that doesn't seem right.

And yeah I see the reasons why the deal was so sweet for citizens, but I am still surprised there wasn't a little more interest. If the deal is so good that citizens valuation is up 5 billion overnight, I would have thought that someone would have been able to make a more competitive offer that would still make shareholders happy. Usually mergers and acquisitions don't result in such huge valuation changes for the acquiring company. Youd think all the execs at other banks who are paid in stock options woule want to see their valuation go up by 5 billion, or even just 2 billion.
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Re: [Bank failure discussion mega-thread]

Post by exodusNH »

skierincolorado wrote: Tue Mar 28, 2023 10:53 pm
Tanelorn wrote: Tue Mar 28, 2023 10:29 pm
skierincolorado wrote: Tue Mar 28, 2023 9:33 pm Has anybody seen how SVB bondholders made out? I assume they will be wiped out, but one article said FDIC was looking to dispose of the remaining 90B in assets in a way that minimizes losses to themselves and investors. Hopefully the part about protecting investors was a mistake in the article.
Well SIVB bond holders are owed money by the bank holding company, not the bank. That entity has several billion in cash, as well as some other VC-related businesses that seem to be valuable (wealth management, etc), and of course also owed the now worthless bank. One small sticking point, over which $10M’s at least in legal fees will be wasted, is the issue that $2B worth and the majority of the HoldCo’s cash is held at... their own bank that was seized by the FDIC.

And guess who isn’t on the list to get fully repaid in the SIVB bailout? That’s right, the FDIC is holding all those billions hostage and I think the lawyers managed to force them to give <10% as an advance to the holding company so they could, amount other things, fund their efforts to try to win the right to the rest in due course in the courts. Bonds were trading at around $0.50 on the dollar, give or take, but this isn’t exactly the same as a bond holder in the bank since the holding company isn’t the bank / seized entity.
The deal with citizens was quite bad. Citizens stock was up 55%.
They were the only bidder, and of course it was a great deal for FCNCA. The FDIC doesn’t want to run a bank themselves, and given all the risks of buying billions in assets that contributed to the last owner blowing up, and buying them during a time of high financial stress, you better have a clearly great deal for the buyer... if only so that they don’t get a run on them due to having bought too much illiquid high risk stuff.
So the holding co is not responsible financially for the debts of the bank it owns? Seems like a great way to shield all assets. Start a hold co and funnel the income there and when the bank goes bankrupt you're not liable. That should be illegal. It distorts the incentives of the bondholders and shareholders of the hold co. I must be missing something, that doesn't seem right.

And yeah I see the reasons why the deal was so sweet for citizens, but I am still surprised there wasn't a little more interest. If the deal is so good that citizens valuation is up 5 billion overnight, I would have thought that someone would have been able to make a more competitive offer that would still make shareholders happy. Usually mergers and acquisitions don't result in such huge valuation changes for the acquiring company. Youd think all the execs at other banks who are paid in stock options woule want to see their valuation go up by 5 billion, or even just 2 billion.
Perhaps it had to do with banks that have over $250B in assets being subject to more stringent tests.
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Re: [Bank failure discussion mega-thread]

Post by skierincolorado »

exodusNH wrote: Wed Mar 29, 2023 1:14 am
skierincolorado wrote: Tue Mar 28, 2023 10:53 pm
Tanelorn wrote: Tue Mar 28, 2023 10:29 pm
skierincolorado wrote: Tue Mar 28, 2023 9:33 pm Has anybody seen how SVB bondholders made out? I assume they will be wiped out, but one article said FDIC was looking to dispose of the remaining 90B in assets in a way that minimizes losses to themselves and investors. Hopefully the part about protecting investors was a mistake in the article.
Well SIVB bond holders are owed money by the bank holding company, not the bank. That entity has several billion in cash, as well as some other VC-related businesses that seem to be valuable (wealth management, etc), and of course also owed the now worthless bank. One small sticking point, over which $10M’s at least in legal fees will be wasted, is the issue that $2B worth and the majority of the HoldCo’s cash is held at... their own bank that was seized by the FDIC.

And guess who isn’t on the list to get fully repaid in the SIVB bailout? That’s right, the FDIC is holding all those billions hostage and I think the lawyers managed to force them to give <10% as an advance to the holding company so they could, amount other things, fund their efforts to try to win the right to the rest in due course in the courts. Bonds were trading at around $0.50 on the dollar, give or take, but this isn’t exactly the same as a bond holder in the bank since the holding company isn’t the bank / seized entity.
The deal with citizens was quite bad. Citizens stock was up 55%.
They were the only bidder, and of course it was a great deal for FCNCA. The FDIC doesn’t want to run a bank themselves, and given all the risks of buying billions in assets that contributed to the last owner blowing up, and buying them during a time of high financial stress, you better have a clearly great deal for the buyer... if only so that they don’t get a run on them due to having bought too much illiquid high risk stuff.
So the holding co is not responsible financially for the debts of the bank it owns? Seems like a great way to shield all assets. Start a hold co and funnel the income there and when the bank goes bankrupt you're not liable. That should be illegal. It distorts the incentives of the bondholders and shareholders of the hold co. I must be missing something, that doesn't seem right.

And yeah I see the reasons why the deal was so sweet for citizens, but I am still surprised there wasn't a little more interest. If the deal is so good that citizens valuation is up 5 billion overnight, I would have thought that someone would have been able to make a more competitive offer that would still make shareholders happy. Usually mergers and acquisitions don't result in such huge valuation changes for the acquiring company. Youd think all the execs at other banks who are paid in stock options woule want to see their valuation go up by 5 billion, or even just 2 billion.
Perhaps it had to do with banks that have over $250B in assets being subject to more stringent tests.
I could see that a bank that is just under 250b doesn't want to go over. Those that are a lot under 250b would be taking a substantial risk and have less free capital. But what about banks already over 250b? Why no interest from them?
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Re: [Bank failure discussion mega-thread]

Post by exodusNH »

skierincolorado wrote: Wed Mar 29, 2023 1:25 am I could see that a bank that is just under 250b doesn't want to go over. Those that are a lot under 250b would be taking a substantial risk and have less free capital. But what about banks already over 250b? Why no interest from them?
The hassle? If you're already at $2T, the $100B of assets is only 5%. Plus you have to pony up the cash for the assets. When you're already making money hand-over-fist, why dither around with another 5%?
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

The Governor of the Bank of England, Andrew Bailey, has been in financial services regulation for over 30 years.

He noted the SVB failure is the fastest seen since Barings went down over a weekend in 1995. Barings was the discovery of a £850m loss on derivatives trades in the Singapore office by a "rogue trader" named Nick Leeson. A tiny loss compared to SVB (which had something like $15bn of equity capital?).

This is the social media & electronic world. A bank with hundreds of billions of deposits can be "run" in 24 hours.

I am wondering, in a world with "artificial intelligence" whether things might take a further gear up. Your AI Treasury Manager decides that a bank is going down, and moves your money before you are even aware of it. Competing against other AI systems that are making decisions on the basis of very similar information & inferences.

A bank might be insolvent (and even rescued) before humans have time to react.

We are really moving into the world envisaged by the writers of "Cyberpunk" - Bruce Sterling, William Gibson etc.

The SF writer Joe Haldeman has imagined what might happen if our nuclear deterrence systems operate on this basis.
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Re: [Bank failure discussion mega-thread]

Post by Valuethinker »

exodusNH wrote: Wed Mar 29, 2023 1:35 am
skierincolorado wrote: Wed Mar 29, 2023 1:25 am I could see that a bank that is just under 250b doesn't want to go over. Those that are a lot under 250b would be taking a substantial risk and have less free capital. But what about banks already over 250b? Why no interest from them?
The hassle? If you're already at $2T, the $100B of assets is only 5%. Plus you have to pony up the cash for the assets. When you're already making money hand-over-fist, why dither around with another 5%?
There's a desire by regulators not to further increase the size of "Too Big to Fail" banks. So originally they were blocked out of the bidding, it appears.

The US is "overbanked" compared to any other developed country. But evidence shows that in terms of local lending to companies and especially to real estate developers, local banks are much more important than the majors.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

Valuethinker wrote: Wed Mar 29, 2023 5:03 am The Governor of the Bank of England, Andrew Bailey, has been in financial services regulation for over 30 years.

He noted the SVB failure is the fastest seen since Barings went down over a weekend in 1995....

This is the social media & electronic world. A bank with hundreds of billions of deposits can be "run" in 24 hours....
It seems obvious that it could and should be slowed down, and I'm surprised that more attention isn't being paid to this. Everything else has overspeed brakes on it. The stock market has circuit breakers, money market mutual funds have liquidity fees and redemption gates, all mutual funds have ten day's leeway to actually pay, Vanguard's funds and I assume everyone's have prospectus language about permission for "potentially disruptive" redemptions, and so on.

I can't spell out the details of how these overspeed brakes should be implemented, either mechanically or in terms of rough fairness, but I don't believe it is an insoluble problem. For example, if some kind of slowdown on redemptions forced a company to delay payroll for several days, that would be unpleasant and inconvenient--but it wouldn't, in itself, cause a sound company to collapse.
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Re: [Bank failure discussion mega-thread]

Post by sid hartha »

moneyflowin wrote: Mon Mar 27, 2023 6:41 am
Tanelorn wrote: Mon Mar 27, 2023 1:23 am Silicon Valley - there’s the takeover, long weekend for the FDIC I’m sure.

https://www.fdic.gov/news/press-release ... 23023.html
The FDIC estimates the cost of the failure of Silicon Valley Bank to its Deposit Insurance Fund (DIF) to be approximately $20 billion.
So we can now put the question to rest -- This was a bailout. The depositors didn't buy private insurance but got FDIC insurance after the fact. Wouldn't it be nice if we could leave our house uninsured, have it burn down, then get paid anyway? :oops:

The FDIC just set a dangerous precendent. They will have to do the same for future bank failures, otherwise it would be unfair.

What do the FDIC-defenders say now about this not being a bailout?
To me an important distinction is that equity holders were not bailed out. I guess if the FDIC has to tap into 20B from the insurance fund to make depositors whole that's going to be paid by other banks in the FDIC system. Maybe those banks then pass along costs to customers in the end. It's not great and no one is probably thrilled by this. But I'm actually ok with it because the alternative could have been so much worse. The whole thing is a little slimy and unfair with VC's getting made whole and probably in the end all banking customers footing the bill with increased fees etc. but in my opinion it was the right move to stabilize the entire banking system. I will say there were lots of people saying that this would not cost a penny and SVB's assets could cover all of it. Well they were wrong I guess. So it goes to show you never really know what's going on with these bank failures and how much it's going to cost.
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Re: [Bank failure discussion mega-thread]

Post by runninginvestor »

Valuethinker wrote: Tue Mar 28, 2023 4:17 pm
nisiprius wrote: Tue Mar 28, 2023 2:45 pm
Fpdesignco wrote: Tue Mar 28, 2023 2:09 pm
ray.james wrote: Tue Mar 28, 2023 1:54 pm
142 billion withdrawals over 2 days against 175million deposits.
https://www.cnbc.com/2023/03/28/svb-cus ... -says.html

That bank runs in digital era can be over before it is known to common folks!!!
I reality, I give them credit for their back-end systems being able to support that and not crashing.
Maybe it didn't. The systems apparently didn't crash, but Planet Money had a podcast about the SVB bank run, and two small-business tech entrepreneurs were shocked when they thought they had withdrawn their money in time, only to discover that their withdrawals did not complete in time to beat the FDIC shutdown of SVB.
I suspect they just slow walked it. Deliberately or due to overload.

I believe all transactions on the Friday (and those not completed on the Thursday) were reversed.
People really want t+0 settlement and transfers. But this kind of friction definitely helps in cases like this.
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Re: [Bank failure discussion mega-thread]

Post by Small Law Survivor »

vaylie wrote: Tue Mar 28, 2023 1:56 am
Small Law Survivor wrote: Mon Mar 27, 2023 9:47 am On returning I see what appear to be very attractive CD rates on Vanguard's site.
- Zions Bancorporation 18 months non-callable at 5.4%
- Cadence Bk Tupelo Miss 9 months at 5.350, again non-callable
Funny, I came here to ask about these Brokered CDs too.

One of the earlier posts by MrJedi in this thread mentioned this:
MrJedi wrote: Fri Mar 10, 2023 6:48 am FDIC insures your principal (including accrued interest).

But FDIC does not ensure the original terms of the CD. So if you were hoping to lock in a CD rate for 10 years or something like that, that would be a problem, since you would need to reinvest your money after you get your insured money back.
However, I'm wondering if this applies to Brokered CDs vs bank CDs? If the bank goes under before we receive any interest payment, is it possible we basically just lose everything except the principal? There was a post by a Fidelity rep on their subreddit about Signature Bank CDs where they said it was up to the FDIC how things are handled for Brokered CDs.

This is the main sticking point that has me hesitating on whether to go in on these Brokered CDs. And google search doesn't seem to give any conclusive answer to my question about what happens to the interest on a brokered CD when a bank fails.
Well, in terms of risk, I would not be too concerned if a bank failure means I lose future interest on the CD. I'd be happy just to get my principal back, and wouldn't sweat the lost interest!
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Re: [Bank failure discussion mega-thread]

Post by homebuyer6426 »

Valuethinker wrote: Wed Mar 29, 2023 5:03 am The Governor of the Bank of England, Andrew Bailey, has been in financial services regulation for over 30 years.

He noted the SVB failure is the fastest seen since Barings went down over a weekend in 1995. Barings was the discovery of a £850m loss on derivatives trades in the Singapore office by a "rogue trader" named Nick Leeson. A tiny loss compared to SVB (which had something like $15bn of equity capital?).

This is the social media & electronic world. A bank with hundreds of billions of deposits can be "run" in 24 hours.

I am wondering, in a world with "artificial intelligence" whether things might take a further gear up. Your AI Treasury Manager decides that a bank is going down, and moves your money before you are even aware of it. Competing against other AI systems that are making decisions on the basis of very similar information & inferences.

A bank might be insolvent (and even rescued) before humans have time to react.

We are really moving into the world envisaged by the writers of "Cyberpunk" - Bruce Sterling, William Gibson etc.

The SF writer Joe Haldeman has imagined what might happen if our nuclear deterrence systems operate on this basis.
Financial institutions have had predictive modeling and analytics running for decades now. A bank will make a decision on what to do with your account through a computer before any human manually reviews it, if they ever do. One danger with automation is that it tends to have predictable patterns that can be exploited by actors "in the know". But this too has been happening for hundreds of years. Think about the rise of bureaucracy and the administrative state, and how many people take advantage of the blind-spots in that overall efficiency-increasing system, to take their cut when nobody is going to be the wiser. With every new landscape, the game changes a little, but remains a "game", of risks and rewards, incentives and disincentives, events and reactions, and people adapt.
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Re: [Bank failure discussion mega-thread]

Post by exodusNH »

sid hartha wrote: Wed Mar 29, 2023 7:35 am To me an important distinction is that equity holders were not bailed out. I guess if the FDIC has to tap into 20B from the insurance fund to make depositors whole that's going to be paid by other banks in the FDIC system. Maybe those banks then pass along costs to customers in the end. It's not great and no one is probably thrilled by this. But I'm actually ok with it because the alternative could have been so much worse. The whole thing is a little slimy and unfair with VC's getting made whole and probably in the end all banking customers footing the bill with increased fees etc. but in my opinion it was the right move to stabilize the entire banking system. I will say there were lots of people saying that this would not cost a penny and SVB's assets could cover all of it. Well they were wrong I guess. So it goes to show you never really know what's going on with these bank failures and how much it's going to cost.
As I've mentioned before, in the middle of a crisis, you don't have the luxury of making perfect decisions. The situation was fluid. Information was incomplete. There seemed to be a real possibility of a real disaster. They made the best decisions they could given the circumstances, and more importantly, with information and constraints that none of us here know about.

They're will be a full report at some point. Politicians will make whatever arguments play to their constituents. Maybe some useful new laws will be passed. Banks will probably face more scrutiny under existing laws. This exact type of crisis probably won't happen again, but we'll get a rhyming problem in the future.
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Re: [Bank failure discussion mega-thread]

Post by exodusNH »

Valuethinker wrote: Wed Mar 29, 2023 5:39 am The US is "overbanked" compared to any other developed country. But evidence shows that in terms of local lending to companies and especially to real estate developers, local banks are much more important than the majors.
Yes, and this will be the real fallout from the crisis. They're too small to matter systemically, but they're vital in the areas they serve.
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Re: [Bank failure discussion mega-thread]

Post by harikaried »

technovelist wrote: Tue Mar 28, 2023 4:40 pm
harikaried wrote: Tue Mar 28, 2023 2:19 pm
Valuethinker wrote: Mon Mar 27, 2023 5:04 amCommercial Real Estate exposure is a risk for most US regional and small banks
We have money at a regional bank that we used to buy commercial real estate with an adjustable rate mortgage that balloons. Should we be doing something now?
Do they owe you money or do you owe them money?
I suppose technically they owe us money as we have deposits there. We paid off our commercial ARM that tracked 5-yr Treasury around the time which it increased 4% from its recent low, so I suppose we might have help improve liquidity for the bank by doing so? But on the flip side, now without a mortgage payment, we've reduced our checking account to be pretty minimal at this regional bank paying 0% interest.

It sounds like the potential Commercial Real Estate exposure risk is that there are many mortgages in this space that basically require refinancing every few years with adjustable rates and/or balloon payments, and with the significantly higher interest rates, people might not be able to make the new payments or qualify for a new mortgage resulting in banks taking the property that are now dropping in value?

We've been thinking of moving away from this regional bank account anyway, but maybe we should do so before we can't get money out?
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Re: [Bank failure discussion mega-thread]

Post by cleopold73 »

harikaried wrote: Wed Mar 29, 2023 12:04 pm
technovelist wrote: Tue Mar 28, 2023 4:40 pm
harikaried wrote: Tue Mar 28, 2023 2:19 pm
Valuethinker wrote: Mon Mar 27, 2023 5:04 amCommercial Real Estate exposure is a risk for most US regional and small banks
We have money at a regional bank that we used to buy commercial real estate with an adjustable rate mortgage that balloons. Should we be doing something now?
Do they owe you money or do you owe them money?
I suppose technically they owe us money as we have deposits there. We paid off our commercial ARM that tracked 5-yr Treasury around the time which it increased 4% from its recent low, so I suppose we might have help improve liquidity for the bank by doing so? But on the flip side, now without a mortgage payment, we've reduced our checking account to be pretty minimal at this regional bank paying 0% interest.

It sounds like the potential Commercial Real Estate exposure risk is that there are many mortgages in this space that basically require refinancing every few years with adjustable rates and/or balloon payments, and with the significantly higher interest rates, people might not be able to make the new payments or qualify for a new mortgage resulting in banks taking the property that are now dropping in value?

We've been thinking of moving away from this regional bank account anyway, but maybe we should do so before we can't get money out?
If most that banks loan looks like that with variable rate lending, and they pay 0% on demand deposits, then they are a lot less likely to run into trouble than SVB did with a lot of fixed rate bonds in their lending portfolio. They are probably less profitable than SVB was right until it all fell down too though....
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Re: [Bank failure discussion mega-thread]

Post by rkhusky »

How much of the FDIC/SVB $20B went to insured depositors versus uninsured? Presumably those with more than the limit would have received their $250K even if the limits were strictly enforced. $20B/$250K = 80k depositors.

Or is there a rule that money from the sale of assets first goes to insured depositors?
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Re: [Bank failure discussion mega-thread]

Post by PersonalFinanceJam »

rkhusky wrote: Wed Mar 29, 2023 5:07 pm How much of the FDIC/SVB $20B went to insured depositors versus uninsured? Presumably those with more than the limit would have received their $250K even if the limits were strictly enforced. $20B/$250K = 80k depositors.

Or is there a rule that money from the sale of assets first goes to insured depositors?
I guess this depends on how you want to slice it. I think you could say all of it went to uninsured deposits. According to reports I've seen, SVB had about 175 billion in deposits with an estimated 75% being uninsured.
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Re: [Bank failure discussion mega-thread]

Post by Tanelorn »

rkhusky wrote: Wed Mar 29, 2023 5:07 pm How much of the FDIC/SVB $20B went to insured depositors versus uninsured? Presumably those with more than the limit would have received their $250K even if the limits were strictly enforced. $20B/$250K = 80k depositors.

Or is there a rule that money from the sale of assets first goes to insured depositors?
The average SIVB account size was something like $4M. This suggests the typical account would be over 90% uninsured by the $250k limit. I would think the vast majority of the bailout losses of $20B estimated will consequently be going to uninsured depositors.
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Re: [Bank failure discussion mega-thread]

Post by nisiprius »

I would speculate that if FDIC rescues ever are less than smooth, a less-than-smooth rescue would be more likely to happen with a borderline-big bank than with a small community bank, and therefore if you are within the insurance limits you might find small banks to be safer from disruption than big banks.

Of course a big bank that doesn't fail is smoother than a small bank that does...
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Re: [Bank failure discussion mega-thread]

Post by technovelist »

harikaried wrote: Wed Mar 29, 2023 12:04 pm
technovelist wrote: Tue Mar 28, 2023 4:40 pm
harikaried wrote: Tue Mar 28, 2023 2:19 pm
Valuethinker wrote: Mon Mar 27, 2023 5:04 amCommercial Real Estate exposure is a risk for most US regional and small banks
We have money at a regional bank that we used to buy commercial real estate with an adjustable rate mortgage that balloons. Should we be doing something now?
Do they owe you money or do you owe them money?
I suppose technically they owe us money as we have deposits there. We paid off our commercial ARM that tracked 5-yr Treasury around the time which it increased 4% from its recent low, so I suppose we might have help improve liquidity for the bank by doing so? But on the flip side, now without a mortgage payment, we've reduced our checking account to be pretty minimal at this regional bank paying 0% interest.

It sounds like the potential Commercial Real Estate exposure risk is that there are many mortgages in this space that basically require refinancing every few years with adjustable rates and/or balloon payments, and with the significantly higher interest rates, people might not be able to make the new payments or qualify for a new mortgage resulting in banks taking the property that are now dropping in value?
Yes, that's exactly the problem. Usually this is much more gradual because interest rates don't double in a few months so the banks take losses over time rather than all at once.
harikaried wrote: Wed Mar 29, 2023 12:04 pm
We've been thinking of moving away from this regional bank account anyway, but maybe we should do so before we can't get money out?
I don't see the upside (for you) of staying but there is plenty of potential downside.
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Has 96% of US banks pre-tightening capitalization gone missing?

Post by taojaxx »

[Thread merged into here --admin LadyGeek]

A recent paper (Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs, March 13 2023) asserts that, after the unexpectedly fast Fed tightening, marked-to-market bank assets have declined by an average of 10% across all the banks so that these losses amount to a stunning 96% of the pre-tightening aggregate bank capitalization.
In total the U.S. banking system’s market value of assets would be $2.2 trillion lower than suggested by their book value of assets as of 2023:Q1. If confirmed, that would imply that out of the 4844 FDIC-insured depository institutions, 2315 would be technically insolvent, meaning that the mark-to-market value of their assets is insufficient to cover all non-equity liabilities.
Losses are unevenly spread with Global Systemically Important Banks ("Money Center Banks") relatively unscathed.
This eerily echoes the 1982 Savings and Loans crisis following the Volcker Fed decisive rate hikes.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by jebmke »

Please provide a link to your reference.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by UpperNwGuy »

What are you asking? I don't understand the point of the post.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by Cheez-It Guy »

Isn't the thread title itself a question? Seems pretty clear.
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Re: Has 96% of US banks pre-tightening capitalization gone missing?

Post by z3r0c00l »

If everyone in the country panics and tries to take their money out of all of the banks at once, many of those banks would fail and there wouldn't be enough money to back up the deposits. This is why everyone shouldn't panic and take their money out of banks.
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