[Finance] SVB - New banking crisis looming?

[pb21]

Things not looking great for Deutsche Bank at the moment.

Seems to be following a similar path to Credit Suisse recently (poor reputation, CDS up, share price down), although I am sure there are differences.

 

[Change at Barnham]

Things not looking great for Deutsche Bank at the moment.

Seems to be following a similar path to Credit Suisse recently (poor reputation, CDS up, share price down), although I am sure there are differences.

What is CDS?

 

[Stat Brother]

What is CDS?

Tell someone you've never seen The Big Short - without telling them.


Credit Default Swaps - dogshit - and at that point I'm out!

 

[pb21]

What is CDS?

Credit Default Swap.

Effectively a sort of insurance against the bank failing, don't really understand, but its not a good sign.

Deutsche Bank shares plunge, default insurance hits four-year high

Deutsche Bank shares tumbled on Friday after the bank's credit default swaps that insure against default shot to a four-year high, highlighting concerns among investors about the overall stability of Europe's banks.

www.reuters.com

What Is a Credit Default Swap (CDS), and How Does It Work?

A credit default swap (CDS) is a particular type of swap designed to transfer the credit exposure of fixed income products to another party.

www.investopedia.com

 

[rogersix]

Yep ..I said a well known capitalist country

so then, what was your original point?

 

[KZNSeagull]

Tell someone you've never seen The Big Short - without telling them.


Credit Default Swaps - dogshit - and at that point I'm out!

It wasn't the CDS that were dogshit. It was the mortgage bonds that were dogshit and the Collaterised Debt Obligations that were dogshit covered in catshit.

 

[Bozza]

Things not looking great for Deutsche Bank at the moment.

Seems to be following a similar path to Credit Suisse recently (poor reputation, CDS up, share price down), although I am sure there are differences.

A theory I've been loosely following is that the whole banking system is on a precipice.

In short, I think the theory is this: With interest rates so low, many banks put lots of their cash into long-term (ie 10 year) bonds paying low rates of interest, as short-term bonds were essentially paying no interest.

Unfortunately with the interest rate rises we've seen, these bonds have lost a fair bit of money should they need to be sold on now.

Banks will only need to sell them on now if depositors want a lot of cash back at the same time, ie a bank run. If they do, they'll get less back than they put into the bonds - also less than they'll get back if they are allowed to mature for the full term.

This is what triggered the SVB collapse and, apparently, many other banks are susceptible to the same.

Lots more on Balaji's twitter account - https://twitter.com/balajis - his pinned tweet is a good place to start

 

[sparkie]

I'm getting a bit fed up with the weekly bank-of-the-week banking crisis.

It always seem to be the bitcoin fans who are bigging it up though ?

 

[Jackthelad]

They need some crisis so that they can push us into digital money trap, which they're heavily invested in.

 

[Machiavelli]

A theory I've been loosely following is that the whole banking system is on a precipice.

In short, I think the theory is this: With interest rates so low, many banks put lots of their cash into long-term (ie 10 year) bonds paying low rates of interest, as short-term bonds were essentially paying no interest.

Unfortunately with the interest rate rises we've seen, these bonds have lost a fair bit of money should they need to be sold on now.

Banks will only need to sell them on now if depositors want a lot of cash back at the same time, ie a bank run. If they do, they'll get less back than they put into the bonds - also less than they'll get back if they are allowed to mature for the full term.

This is what triggered the SVB collapse and, apparently, many other banks are susceptible to the same.

Lots more on Balaji's twitter account - https://twitter.com/balajis - his pinned tweet is a good place to start

The current banking system emerged in the 70s with the floating of interest rates, and was aided by computerisation, providing assistance for the Big Bang. It's grown enormously since then, and exceeded national boundaries, becoming global players. It's based upon a series of mathematical models that claim to match or track 'the real world (economy)'. It's produced a series of those models and layered them on top of one another, all with the intention of spreading risk within itself and 'the real world (economy)'. That has transpired to have the opposite effect, for the simple reason that there is a disparity between the model/s and 'the real world (economy)'. They -- and (some of) us -- cottoned onto that in 2007/08. There is much talk of reform, security, dissipation of risk from the financial sector, such that we don't need to worry about banking, just leave it to them, and carry on and keep calm. They have continued to coin it in since 2008, and largely claim that that is because they work better/smarter/harder than the rest of us. They coin it, because the control the coins.
I'm not predicting the collapse of the financial system a la 2008. But I'm also treating the comments of certain bigwigs with deep scepticism.
There is a different way to do banking, which was done prior to the 1970s, etc. I suspect that would be a much better way of operating between the financial and 'the real world (economy)'. But we are where we are. For now, at least.

 

[Machiavelli]

PS, you could read Galbraith on The Great Crash or, for 2008, Whoops! by John Lanchester explains what it all entails as clearly as is possible. In fact, I'd advise looking out for anything that Lanchester writes on the current banking situation.

 

[chickens]

@Bozza Absolutely correct. In theory, there’s nothing wrong with the banking system providing lots of people don’t pile in asking for their money back at the same time (the very definition of a bank run) - unfortunately there’s money to be made in causing mischief, by shorting a potentially vulnerable institution and then proclaiming loudly “Oh dear, bank X’s underlying figures don’t look very healthy.”

Banks with sensible leadership will be currently trying to shore up their balance sheet without alerting/alarming the markets. While the underlying cause is different (subprime mortgages vs long-dated bonds) it suggests we haven’t learnt enough from 2008, and that we haven’t separated retail banking (the glue that holds the real economy together) from the risk-taking investment side.

Retail banking should be a low-profit but incredibly stable business. Investment banking needs to be able to take risk. They’re two separate types of business that mix like oil and water.

If this does hit the fan, I fully expect strong regulation to be announced, which will then somehow be incredibly watered down before it actually becomes law. Private profit, socialised (taxpayer) losses. Again.

Where I’m not with your man on Twitter, is that Bitcoin is the answer. Not scaleable to the real world economy, and technological barriers to entry for those who don’t use tech.

(a surprisingly large and persistent percentage of the population)

 

[Bozza]

@Bozza Absolutely correct. In theory, there’s nothing wrong with the banking system providing lots of people don’t pile in asking for their money back at the same time (the very definition of a bank run) - unfortunately there’s money to be made in causing mischief, by shorting a potentially vulnerable institution and then proclaiming loudly “Oh dear, bank X’s underlying figures don’t look very healthy.”

Banks with sensible leadership will be currently trying to shore up their balance sheet without alerting/alarming the markets. While the underlying cause is different (subprime mortgages vs long-dated bonds) it suggests we haven’t learnt enough from 2008, and that we haven’t separated retail banking (the glue that holds the real economy together) from the risk-taking investment side.

Retail banking should be a low-profit but incredibly stable business. Investment banking needs to be able to take risk. They’re two separate types of business that mix like oil and water.

If this does hit the fan, I fully expect strong regulation to be announced, which will then somehow be incredibly watered down before it actually becomes law. Private profit, socialised (taxpayer) losses. Again.

Where I’m not with your man on Twitter, is that Bitcoin is the answer. Not scaleable to the real world economy, and technological barriers to entry for those who don’t use tech.

(a surprisingly large and persistent percentage of the population)

This is way out of my area of expertise and understanding, but aren't low-yield long-term bonds a low-risk activity?

Until, such time, anyway, as...

- Interest rates surge, and
- People get spooked and want their cash back

And, presumably, technological advancements have increased the risk on this because people don't need to wait for the bank to open in the morning and join a big queue as large amounts can be withdrawn any time by anyone with a phone in their hand. Again, this is what I understand happened with SVB.

And, whilst some may be advocating that bitcoin is the answer to life, the universe and everything, I think that others are currently advocating it as a store of value to protect against the risk of widespread financial institution failure and hyper-inflation of the US dollar.

 

[chickens]

This is way out of my area of expertise and understanding, but aren't low-yield long-term bonds a low-risk activity?

Until, such time, anyway, as...

- Interest rates surge, and
- People get spooked and want their cash back

And, presumably, technological advancements have increased the risk on this because people don't need to wait for the bank to open in the morning and join a big queue as large amounts can be withdrawn any time by anyone with a phone in their hand. Again, this is what I understand happened with SVB.

And, whilst some may be advocating that bitcoin is the answer to life, the universe and everything, I think that others are currently advocating it as a store of value to protect against the risk of widespread financial institution failure and hyper-inflation of the US dollar.

SVB was always going to be the very first bank to be hit. All of the Silicon Valley guys share WhatsApp groups, and most of them share the same pool of investors. Once a rumour started, it was round all of Silicon Valley in seconds. When your clients are all tech bro’s plugged in permanently talking to each other, that’s herd mentality at a speed never previously seen.

Likewise with banking apps, as you say, there can be nobody in your physical branches, and yet you’re still seeing deposits flying out of accounts. In the past banks could bring the physical shutters down and buy themselves some time. Now they have to pull the plug on their servers too. Not a market calming move.

Correct with the bonds, too, the Fed had historically signalled it would move gently with rate increases, banks believed it and bought in, but inflation forced the Fed’s hand. Now everybody’s looking very carefully at where they keep their money and are prepared to pull it at the first whiff of something going wrong.

Bitcoin wants to replace gold, the new “safe store of value” in difficult economic times. I remain to be convinced by any of the digital currencies, even the ones that scale better than Bitcoin. Just a quick read of the “web3 is going great” site suggests that putting your money into these unregulated exchanges is likely to enrich someone, but probably not you.

 

[beorhthelm]

@BozzaBanks with sensible leadership will be currently trying to shore up their balance sheet without alerting/alarming the markets. While the underlying cause is different (subprime mortgages vs long-dated bonds) it suggests we haven’t learnt enough from 2008, and that we haven’t separated retail banking (the glue that holds the real economy together) from the risk-taking investment side.

Retail banking should be a low-profit but incredibly stable business. Investment banking needs to be able to take risk. They’re two separate types of business that mix like oil and water.

long dated bonds is not risk taking though. in fact it's part of the regulations in some cases, they have to hold more bonds than other investments to keep their balance sheet more stable (and create more demand for gov bonds...).
the particular case of SVB and to some extent CS show you cant seperate retail and investment banking. there are depositors larger than the guranteed and there are investments that need depositing. for example a new business, they have got 5m in funding for a couple of years, need to meet payroll. they deposit in SVB, who compete with over banks and need to offer them a returns on savings. it all went wrong simply because its in the interest of the depositor to move money from the savings at 1% to gov bonds at 3%. CS is taking high value individuals and putting their money in to business investments. the lines seperating JP Morgan and Halifax aren't so clear in the middle.

 

[pb21]

Bitcoin wants to replace gold, the new “safe store of value” in difficult economic times. I remain to be convinced by any of the digital currencies, even the ones that scale better than Bitcoin. Just a quick read of the “web3 is going great” site suggests that putting your money into these unregulated exchanges is likely to enrich someone, but probably not you.

Don't want to turn this into a Bitcoin thread, but bitcoin is really not the same as other digital currencies, and certainly not web3 ones; a different kettle of fish entirely. Also, Bitcoin doesn't want to do anything, its just a code/protocol.

 

[chickens]

long dated bonds is not risk taking though. in fact it's part of the regulations in some cases, they have to hold more bonds than other investments to keep their balance sheet more stable (and create more demand for gov bonds...).
the particular case of SVB and to some extent CS show you cant seperate retail and investment banking. there are depositors larger than the guranteed and there are investments that need depositing. for example a new business, they have got 5m in funding for a couple of years, need to meet payroll. they deposit in SVB, who compete with over banks and need to offer them a returns on savings. it all went wrong simply because its in the interest of the depositor to move money from the savings at 1% to gov bonds at 3%. CS is taking high value individuals and putting their money in to business investments. the lines seperating JP Morgan and Halifax aren't so clear in the middle.

Agree, that traditionally government bonds are seen as safe, and are not risk-taking. As Bozza pointed out, it’s only been the ramping up of interest rates that has caused them to become problematic for those holding them and needing to cash them in before maturity. However, it’s up to banks to decide what combination of assets to hold, and surely holding enough of a mix to cover withdrawals is part of competent management. Equally rates were only ever going to rise from their low rates, so for supposedly professional investment managers to be surprised by that seems bizarre, even if the rise has been slightly faster than expected. You’d hope post-2008 banking would have its house in order.

Would retail banking customers pay for their bank accounts? Most businesses do. Many consumers have previously taken accounts that charge a monthly fee and provide a package of benefits.

There’s no reason why banks couldn’t provide retail only services and be profitable. It could be a working business model, but not a hugely profitable business model. (I can’t speak for globally, I know regulations differ from market to market)

My preference would be for the lines to be clearly marked, let deposits be deposits and investments be investments.

The failure of a bank’s investments should never impact retail banking customers, or taxpayers for that matter.

 

[chickens]

Don't want to turn this into a Bitcoin thread, but bitcoin is really not the same as other digital currencies, and certainly not web3 ones; a different kettle of fish entirely. Also, Bitcoin doesn't want to do anything, its just a code/protocol.

Fair points, should have stated “Bitcoin is being marketed as a safe store of value by those who would profit from it being perceived as such.”

Also agree that Bitcoin predates web3, but appears to me (as someone who has tried digging through multiple layers of hype only to find more hype) that it is the blueprint for many of web3’s most dubious projects. SVB wasn’t a crypto bank, but Silvergate and Signature were. A digital currency that only an ever-shrinking pool of institutions will convert back into one you can actually use, seems of limited use to me.

 

[pb21]

Fair points, should have stated “Bitcoin is being marketed as a safe store of value by those who would profit from it being perceived as such.”

Also agree that Bitcoin predates web3, but appears to me (as someone who has tried digging through multiple layers of hype only to find more hype) that it is the blueprint for many of web3’s most dubious projects. SVB wasn’t a crypto bank, but Silvergate and Signature were. A digital currency that only an ever-shrinking pool of institutions will convert back into one you can actually use, seems of limited use to me.

Well, either Bitcoin will be perceived to be a safe store of value (or similar) or it wont be. But really there is no perception required, well at least not more than anything else. Certainly some are 'marketing' and shilling it, always some scammers about.

Which ties into your second point, re. web3. I guess Bitcoin can be considered a a blueprint (blockchain/cryptography existed before) to these web3 things, but then these also, supposedly, facilitate for something new, or extra on top, i.e. web3, of which many/most are dubious at best. Bitcoin is just bitcoin, it a code/protocol and nothing more, that's why I say they are a different kettle of fish.

The banks you mention, as I understand it, where poorly run and greedy, and didn't fail as a result of Bitcoin per se, more a collapsing house of cards built based on the dubious projects. On you final point, it does seem as though traditional financial institutions are trying to limit access and converting back and/to, who knows how that will pan out...