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naraburns  nihil supernum  1yr ago (text post)   34967 thread views

Culture War Roundup for the week of March 6, 2023

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SVB purportedly services 50% of all startups per their advertising.

Why? Do big banks not want to service startups? Did SVB offer better terms?

It's more a historical thing. 25 years ago, when startups were less of "a thing", a lot of traditional banks didn't approve a startup account because the below looks really weird if you're used to servicing traditional businesses.

  1. Someone with no commercial history or credit

  2. Who wants a credit card

  3. Then who one day deposits millions of dollars

  4. And the next months dollars get sent out and the bank balance goes down

  5. With minimal consistent income

These days it's more that you ask some random person in the startup world, VC, or lawyer, and they go "yeah, a plurality of the people I know use SVB" and that's not where you spend your precious hours as a founder trying to differentiate your company so you just go with the flow.

Though, next week every single founder is going to be taking money out of First Republic, Citizens, Fifth Third, Capital One, BNY Mellon, etc. and wiring it straight to JPM. I suspect there will be a broader bank run.

Though, next week every single founder is going to be taking money out of First Republic, Citizens, Fifth Third, Capital One, BNY Mellon, etc. and wiring it straight to JPM.

Isn't that a bad idea, though? Doing the exact same "all our eggs in one basket" that took down SVB? Being an ordinary idiot, I would have thought the lesson here was "Okay, for the love of God let's keep our payroll in this bank and make sure we have enough to cover six months' wages, then put the running costs money in this other bank" and so on. I realise that makes it a lot of bother to set up and maintain individual accounts, but if you've just had "oops, the bank where we kept all our money just imitated a dead goldfish", wouldn't you try and spread the load around?

It doesn't have to be JP Morgan in particular. Any of the Big 4 (JPM, Bank of America, Citigroup, and Wells Fargo) are both well-diversified and too-big-to-fail. I don't know why anyone with deposits over the FDIC insurance limit of $250,000 would have sensitive money anywhere else.

Apparently the traditional banks were right to be worried.

How so? I’d really like to understand the logic of this position.

I suppose if you're a big bank and startups are only a tiny fraction of your business it would be okay, but its hard to manage risk if you can't predict when customers will deposit and when customers will withdraw.

Cramer cursed JPM, though, so the question becomes- how superstitious are the people making decisions about this?

SVB offered higher deposit rates than most big banks. They were paying 4.5% on money market deposits. Chase is paying 0.01% on everything account short of 48 month CDs which get a generous 1.49%.

This is the key detail I was looking for and it makes me a lot less sympathetic to the depositors now demanding a bail out.

In fairness, it's not good if the safe (because the government can't afford to let them fail) banks use their position to pay peanuts on their deposit rates but attract deposits because no one can bear the risk of banking elsewhere.

I think it's perfectly fine if lower-risk deposits pay substantially lower interest rates

It's one thing if JP Morgan/BoA/Wells were lower risk because of better management but they're lower risk mainly because the US Government can't afford to let them fail so if this happened to them the Fed would have swapped their bonds at par or launched a new round of QE.

I'm not a huge fan of the government picking winners and then those winners taking monopsony rents as a result.

The big banks are regulated in a way which reflects their too-big-to-fail status. As part of this, they are required to prove that they are not doing the specific thing that SVB did - i.e. taking non-mark-to-market interest rate risk by investing floating rate customer deposits in long-dated fixed-rate securities.

Medium-sized banks like SVB were exempted from these rules in 2019 - to quote from the SVB annual report,

In October 2019, the federal banking agencies issued rules that tailor the application of enhanced prudential standards to large bank holding companies and the capital and liquidity rules to large bank holding companies and depository institutions (the “Tailoring Rules”) to implement amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) under the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”). Under the EGRRCPA, the threshold above which the Federal Reserve is required to apply enhanced prudential standards to bank holding companies

increased from $50 billion in average total consolidated assets to $250 billion. The Federal Reserve may also impose enhanced prudential standards on bank

holding companies with between $100 billion and $250 billion in average total consolidated assets.

(SVB had $211 billion in total assets)

SVB CEO Gregg Becker was personally involved in the campaign to relax the rules. He stood up in front of a Congressional Committee and said it was OK for banks like SVB to do this stuff because they were not too big to fail and wouldn't need a bailout.

Among other things, SVB pioneered extending loans to startups as part of their funding rounds.

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