Fully agree with your comments. This has nothing to do with Hindenburg or any other short seller. It is not that Hinderburg was the Federal Reserve who went after Adani while forgetting to keep clean their own backyard.
The facts we know of SVB are
- They used to fund the startups and hence obviously, startup would keep their account with them.
- Their deposits grew from approx 60 billion to 220 billion as most of the startups would keep their cash with them. This is obvious.
- What would the bank do with all this deposits. Their main line of business was to finance start ups. At that time, interest rate was near zero.
- The bank decided to invest their surplus cash by buying mostly federal agency mortgage-backed securities. These carry minimal credit risk but can have sizable interest-rate risk. This was at that time the sound thing to do to invest in these securities. All of them being long term.
- The investment were in longer-term mortgage securities with more than 10 years to maturity, rather than shorter-maturity Treasuries or mortgage issues maturing in less than five years. This led to an asset/liability mismatch.
- Fed started hiking interest rate which resulted in borrowing costs higher, meaning tech startups had to channel more cash towards repaying debt. At the same time, they were struggling to raise new venture capital funding. This resulted in a startup drawing up on the deposits at the initial stage.
- In order to meet the increased cash demand by companies, they were forced to sell the long dated securities at a discount. This resulted in a loss of 1.8billion.
- When this news came out, everyone panicked and wanted to take their deposits out. This is the typical run on the bank and there was nothing SVB could do but to shut shop. This is exactly what we saw when Adani stocks were falling and lower circuit being hit, there was no way to exit. I have personally experienced the same when Yes Bank was placed under moratorium by RBI. At that time, for the first time, I saw when there was only sell orders and not a single buy order.
When there is a run on any bank in this world, however strong they are, they will have to shut down as no Bank will have so much liquidity to meet all of their customers need. This is the biggest risk a bank as a business takes on. When there was so much news on SVB, a small time SVC Co -Op bank in India which had nothing to do with SVB, had people coming and asking for their deposits back. The Co-Op bank had to put a notice that they had nothing to do with SVB. This is how sensitive banking business is.
This is what happened in SVB. My only quarrel is what was the Federal Reserve doing, when they were selling these bonds, what happened to Fed monitoring these banks. SVB could have approached the Fed and asked for a loan or any such thing instead of selling these bonds and incurring a actual loss. Fed could have allowed them a bridge finance or something. This is something I never understood as to why they did not go to the Fed first.
In India, thanks to RBI monitoring, all banks are constantly monitored. Co-op Bank was out of their scope few years back and now they are under their monitoring mechanism as well. So many bad news were reported but RBI used to come out and quell these bad rumors.
The good news is that the depositors will get their money back. To the best of what I have read there has not been any fraud or investment going bad and hence whosoever buys this bank will be in a better position, I guess.
Although the depositors money were saved, which is their right, the impact will be felt by individuals as 53% of SVB is owned by Mutual Funds and 1.61% individual stakeholders. The remaining are held by FI – (truly do not care much on this category). Among the MFs – Vanguard owns 10% and Blackrock owns 5.18, there are others but the names are not familiar to me. As majority of the retail public invest in funds in USA, there could be a indirect affect on them.
Disclaimer: These are from what I have read in various publications and I could be absolutely wrong.
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Fed has announced this facility now.
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Are your deposits really insured?
“There is more than $22 Trillion in the U.S. banking system. The FDIC has $124.5 Billion on its balance sheet and a $100 Billion line of credit from the U.S. Treasury. FDIC assets cover only 1.26% of deposits. About the size of Silicon Valley Bank. One bank. Let that sink in”
FDIC – It is similar to the one we have in India – DICGC. The respective bank should be insured by FDIC and automatically all depositors are covered. This is what FDIC FAQ states.
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Q: How can I get deposit insurance?
A: Depositors do not need to apply for or purchase FDIC deposit insurance. Coverage is automatic whenever a deposit account is opened at an FDIC-insured bank. If you want your funds insured by the FDIC, simply place your funds in a deposit account at an FDIC-insured bank and make sure that your deposit does not exceed the insurance limit for that ownership category. See “Are My Accounts Insured by the FDIC?” for more information about the types of insurable products that are covered by FDIC insurance and the amount of deposit insurance coverage that may be available under FDIC’s different ownership rights and capacities. each.
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In India, if a bank is covered by DICGC, then all customers automatically gets the standard cover of 5 lacks