If you’re trapped you’re trapped. Most are not tied in like that. Others, as they grow, need to consider other banking options. Only makes sense.
Tough to fault them for choosing SVB, sure, but not so tough to fault them for going so far over their insurance is it? Could they not simply open a Fidelity account and put it in short term tbills…laddering them to expire weekly, monthly, etc., depending on their cash flow needs? Am I missing something?
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I don’t know any businesses that do that. It’s not sustainable for companies with millions in deposits. Startups most of the time have one accounting person to handle financial aspects and do not have knowledge or time to do treasury work. They have cash pouring in from investors and have millions sitting in bank with SVB being the most popular bank for tech startups
The job of managing those T bill investments can be outsourced by buying into a money market fund… though occasionally money market funds get into trouble.
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Why it not sustainable? It does not seem it would be that hard to do. Sure, not as easy as just sticking it all in one bank but that is obviously quite risky. Perhaps the funds would be at risk in Fidelity?
As @ucbalumnus indicates, a MM that invests in st treasuries could work too.
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The major cause for SVBs demise is a regulatory construct that assumes a “bank run” plays out over time as had been the case previously. SVB would have needed a relatively modest capital infusion to respond to deposit withdrawals. Instead word of “trouble” amongst the techcentric clientele spread in an unprecedented manner and with such speed that it overwhelmed the banks capacity to meet the demand for cash on demand.
This in some ways suggests a potential problem for any and all financial institutions that previously had not contemplated or been regulated and capitalized to protect against.
Contemporary views of a bank run are often drawn from scenes from Its A Wonderful Life and Jimmy Stewart when in todays world they are much more analogous to the Twitter word of mouth experienced around stocks such as GameStop.
Unfortunately this largely “fabricated” failure and systematic stress will result in other institutions being adversely impacted and pain.
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I’ve heard rumors that this is Peter Thiel’s doing? Is that to be believed?
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SVB’s problem is that almost all of its customers were in the tech start up sector. Many other banks diversify their portfolio in order to hedge their bets against bank runs.
I will try and respond with an analogy.
Imagine a crowded movie theater. Someone whispers do you smell smoke. Suddenly there is a murmur amongst people smoke, smoke, smoke.
As people start anxiously moving towards exits the doors get congested and panic erupts. They are climbing over one another and people are hurt.
Once all settles down and the fire dept shows up it is discovered some popcorn had burnt and no one was in real danger from fire.
None the less in the midst of the pandemonium the theater is destroyed and forever will be known as a place that is unsafe.
Was the first person who uttered the word smoke “responsible” or was it deliberate and the end result predictable? I have no idea.
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Banks in general tend to borrow (deposits) short while lending long in order to make money on the interest rate spread.
Rising interest rates devalue their assets (loans and bonds). Since the assets are not marked to the market daily, all looks fine if there is not a net outflow of deposits. If there is, then the bank needs to sell assets, but that requires marking them to the market and consuming the capital cushion. Too much net outflow as in a bank run could leave the bank with negative capital cushion.
A bank could be safer against a bank run by holding short term assets, essentially being like a money market fund. But then it will have less income from interest rate spread, so it will have to charge higher fees and be uncompetitive that way.
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I’m really stupid in this area and so need it explained to me like I’m dumb. This article did just that. Thanks for posting and gifting it!
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SVB’s situation is idiosyncratic in the sense that its business was too concentrated in a particular sector. However, there’s also a systemic issue in its collapse. Banks like SVB aren’t subject to the same level of stress tests that money center banks are subject to post '08. That concentration risk wasn’t properly identified, let alone remedied. In fact, the opposite has happened. Politicians (local and national) have lobbied to weaken those tests for their favorite banks.
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I think you are over simplifying banks ability to manipulate these holdings in what is a heavily regulated and risk controlled process. Hold to maturity portfolios versus available for sale are largely dictated by regulatory authority with the specifics of what can be held and mark to market requirements being prescribed by law.
The specifics minutia isn’t appropriate for this forum but I don’t think it productive to go off on tangents that either.
FYI available for sale portfolios are marked to market and their sizes and holdings are regulated. The assets sale that started these events were in HTM portfolio.
So you would prefer all banks be systematically too big to fail?
Why do you think no federal bailout for SVB?
Of course, this means that those HTM assets had to be marked to the market when sold, realizing the losses due to interest rate increases. It also implies that they had already sold the previously designated AFS stuff.
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No, but I’d like banks like SVB run stress tests that help identify the risks they’re taking on. They may have to set aside more capital or manage their risks better. It would obviously mean lower return for them, but would make the system safer.
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within reason, the US govt has got to stop rescuing bad corporate decisions…
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This.
Right? Or what’s the point of the 250,000 ins. coverage? 
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They do by regulation…
And on a on going periodic basis internally to avoid non compliance or capital shortfalls once the Fed completes their testing. Senior management and risk officers are obligated to report interim shortfalls or changes of substance.
You can’t stress test for panic. No bank can keep all depositor funds on hand.