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Bank failures, bank runs and other musings
March 10, 2023
6:30 pm
Dean
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.
A few more details from Reuters . . .

.
Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

March 10, 2023
6:41 pm
AltaRed
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The news is that SVB sold all their long term investments such as Treasuries (bonds) at a loss to meet withdrawals over the past 6 months or so. It was their need to raise new capital to close the gap on realized losses on those investments that resulted in the run on the bank.

There is a large loan book (assets) that will fund a fair bit of the uninsured deposits. The mismatch is not immaterial but it is not minimal either.

March 10, 2023
9:30 pm
AdrenalineTrade
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Who's next? PacWest Bancorp? Signature Bank? Western Alliance Bancorporation? My money's on PacWest. If Powell doesn't do something big on Monday, a few more of these banks will be gone by Friday.

March 10, 2023
9:56 pm
Vatox
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skibum said
All interesting reading. One thing I noticed was the FDIC insures up to $250,000 while CDIC has been $100,000 since the 1960's when very few people had that amount of money.  

From 1983 - 2004 was $60,000 coverage and 2005 forward is $100,000
Not sure how you figured 1960’s.

March 11, 2023
12:06 am
Iconoclast
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Canadian banks erase more than $20b in value on SVB contagion

https://www.afr.com/markets/equity-markets/canadian-banks-erase-more-than-20b-in-value-on-svb-contagion-20230311-p5cr8z

See below to read article

March 11, 2023
12:08 am
Iconoclast
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The fallout from Silicon Valley Bank’s collapse has led to a continent-wide selloff in financial stocks erasing $C19.7 billion ($21.6 billion) in value from Canada’s top banks in the last four days.

Some of the nation’s biggest banks, including Bank of Nova Scotia, Bank of Montreal and Toronto-Dominion Bank fell more than 2 per cent in Toronto trading on Friday.

“Liquidity positions across the Canadian banks are strong,” CIBC Capital Markets analyst Paul Holden wrote in a note defending Canada’s financial sector. Bloomberg

With banking equities far and away the largest sector by weighting of the S&P/Toronto Stock Exchange Composite Index, Canada’s main stock benchmark slumped more than the S&P 500 as the biggest US bank failure in more than a decade roils the market.

At 2.50pm on Friday in Toronto, the S&P/TSE Composite Index was 1.2 per cent lower, having pared some of its earlier losses.

Large Canadian banks have acquired regional US banks in recent years, increasing their exposure to the banking fallout from the failure of Silicon Valley Bank, which entered receivership Friday.

SVB Financial Group had opened a Canadian office in 2019 and listed e-commerce darling Shopify as a client. Shopify did not respond to a request for comment and was among the biggest decliners in Toronto on Friday.

“Liquidity positions across the Canadian banks are strong,” CIBC Capital Markets analyst Paul Holden wrote in a note defending Canada’s financial sector.

Deposits in the US fell 2 per cent in the latter half of last year while Canadian deposits rose 4 per cent, according to Holden. “We do not think that deposit trends will force the liquidation of bond holdings, similar to SVB,” he said.

There could be other consequences though. TD is the largest shareholder in Charles Schwab. The Texas-based brokerage is on track for its worst two-day drop in years.

TD is also in the process of acquiring First Horizon, where deposits have fallen by 10 per cent over the past two quarters. The Canadian financial giant may seek to renegotiate terms, Holden said.

“Risk premiums for US regional banks have increased materially,” he said. First Horizon shares fell as much as 6.7 per cent Friday.

March 11, 2023
3:06 am
RetirEd
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SkiBum: you beat me to it, but you are correct. I distinctly remembered both the coverage increases of 1983 to $60K (yeah, I'm old) and the 2005 increase to $100K, followed by separate coverage for distinct categories of deposit. See:

en.wikipedia.org/wiki/Canada_Deposit_Insurance_Corporation

The original amount of insurance per eligible deposit account was $20,000. This was raised to $60,000 in 1983. As of 2005, CDIC covers $100,000 in eligible deposits per insured category at each CDIC member institution in the event of a failure

It was around 2001 that I first was in a position to get concerned about CDIC rules, as ING and Amex Bank were launching with 4% deposit rates and I wanted to grab some of that.

I knew that some Canadian banks and other FIs were creating secondary identities to double their coverage overall, but I was surprised when I learned of the category creations not all that long ago. I can't find any reference to when that happened at the moment. A bit later, the Wiki explains:

Eligible deposits are insured separately in each of seven categories:
in one name
in more than one name
in an RRSP
in an RRIF
in a TFSA
in trust
for paying taxes on mortgaged properties

RetirEd

RetirEd

March 11, 2023
6:06 am
Bill
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I'm not sure one can assume business account losses will have less economic impact than individual retail investors' losses, might be the opposite.

Post #21 was helpful re FDIC coverage issue, a reputable link was provided. When one posts an alleged 97% rate uninsured, or conversely declares it fake news, it would be helpful to have references for those expressed opinions.

March 11, 2023
7:07 am
dougjp
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Information coming out from some Companies regarding the extent of business deposits they hold at SVB;

https://www.cnn.com/2023/03/10/business/roku-svb-cash/index.html

https://www.bloomberg.com/news/articles/2023-03-11/svb-s-stranded-deposits-spread-the-pain-from-tech-to-napa-valley

Cramer (who seldom fails to voice his opinion about anything!) has a most interesting comment about the Fed that I think is right, and if true could indirectly contain their (and our) our deposit rates increasing and the Cdn. $ FX dropping further;

https://www.cnbc.com/2023/03/10/svbs-failure-could-be-the-thing-that-keeps-the-fed-from-wrecking-the-economy-cramer-says.html

" We may never pass this way again " - Seals & Crofts

March 11, 2023
7:39 am
Norman1
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Yesterday, FDIC said it doesn't know yet how much of the deposits are uninsured:

As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits. At the time of closing [Friday, March 10, 2023], the amount of deposits in excess of the insurance limits was undetermined. The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.

March 11, 2023
8:29 am
Wayno
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I have selected relevant portions of a G&M article to highlight SVB's business presence and impact in Canada.

"The bank had US$209-billion in assets,... making SVB the 16th-largest bank in the United States and second-largest to fail in that country’s history."

https://www.theglobeandmail.com/business/article-canada-silicon-valley-bank-impact/

SVB received a license from Canada’s banking regulator in 2019 to lend to companies here.

In total, SVB Canada had US$692-million in assets and US$349-million in outstanding loans as of December, according to filings with the Office of the Superintendent of Financial Institutions.

Canadian banks are broadly diversified and do not have the same concentrated exposure to the struggling tech industry as SVB.

Overall bank deposits in Canada are growing, while they are falling in the U.S.

OSFI also requires Canadian banks to hold extra capital as a cushion against downturns, giving them strong liquidity positions,
... “We do not think that deposit trends will force the liquidation of bond holdings, similar to SVB.”

Still, Canadian banks have exposure to the U.S., including Toronto-Dominion Bank, which is buying Tennessee-based First Horizon Corp., whose deposits decreased 10 per cent in the past two quarters.

March 11, 2023
9:53 am
savemoresaveoften
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Bill said
I'm not sure one can assume business account losses will have less economic impact than individual retail investors' losses, might be the opposite.

The pain is a lot more for an individual to suffer a loss on a bank deposit than a business in my mind. Yes a business may go bankruptct too and affects employees, but those affected can find another job etc. A depositor losing a good chunk of their savings overnite is worse. Just my opinion.

March 11, 2023
10:23 am
kesa
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AltaRed said
The news is that SVB sold all their long term investments such as Treasuries (bonds) at a loss to meet withdrawals over the past 6 months or so. It was their need to raise new capital to close the gap on realized losses on those investments that resulted in the run on the bank.

There is a large loan book (assets) that will fund a fair bit of the uninsured deposits. The mismatch is not immaterial but it is not minimal either.  

marc ruby write up: https://www.netinterest.co/p/the-demise-of-silicon-valley-bank

March 11, 2023
10:48 am
Norman1
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That's quite odd that Silicon Valley Bank would do that: Put lots of money from on-demand deposits, like chequing accounts, into long term bonds! That looks like a substantial mismatch between when those deposits can be withdrawn and when the bonds mature!

The central banks have been signaling for a while that they were going hike rates. Higher rates cause losses on long-term bonds if the bonds cannot not be held to maturity and need to be sold early. It is odd that a bank would not be aware of that basic finance about bond pricing.

March 11, 2023
10:55 am
mordko
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Overnight Central Bank rates do not necessarily impact long term treasuries, at least not in the way you describe. In fact, long term Treasuries are up since October.

March 11, 2023
10:57 am
savemoresaveoften
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Norman1 said
That's quite odd that Silicon Valley Bank would do that: Put lots of money from on-demand deposits, like chequing accounts, into long term bonds! That looks like a substantial mismatch between when those deposits can be withdrawn and when the bonds mature!

The central banks have been signaling for a while that they were going hike rates. Higher rates cause losses on long-term bonds if the bonds cannot not be held to maturity and need to be sold early. It is odd that a bank would not be aware of that basic finance about bond pricing.  

Their treasury management does a pretty $hitty job I guess, complete term mismatch, or just believe bank run will not happen to them…

Also read 2 cryptocurrency (stable coin and something else) also broke the buck, they r supposed to peg at par with support by cash deposits and other near cash instruments.

March 11, 2023
11:14 am
Bill
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Agreed, savemoresaveoften, more pain if individual depositer, it's why I referred to "economic impact" as business losses result in their employees' pain as well as other businesses, such as suppliers and then their employees too, and so on - ripple effect on economy aspect. At least the job market's pretty solid in USA these days.

March 11, 2023
11:32 am
Norman1
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savemoresaveoften said

Also read 2 cryptocurrency (stable coin and something else) also broke the buck, they r supposed to peg at par with support by cash deposits and other near cash instruments.  

There was zero cash backing LUNA and Tera. They were pegged by an arbitrage opportunity that would present itself should the two de-peg against the US$.

Problem with such "algorithmic" pegging is that the cryptocoins are not redeemable for US$. One still needs to find someone willing to buy the profit in cryptocoins afterwards for US$.

If I was up $1,000 in Monopoly money after an evening of Monopoly, I need to find someone willing to buy my 1,000 Monopoly dollars for 1,000 Canadian dollars to spend at a mall.

March 11, 2023
12:52 pm
Loonie
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cryptocoins... or cryptocons?

March 11, 2023
1:08 pm
COIN
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The U.S. Federal Reserve/government will have to do a bailout of some sort.

"When the losses approached $4 billion, the federal government of the United States feared that the imminent collapse of LTCM would precipitate a larger financial crisis and orchestrated a bailout to calm the markets. A $3.65-billion loan fund was created, which enabled LTCM to survive the market volatility and liquidate in an orderly manner in early 2000."
https://www.investopedia.com/terms/l/longtermcapital.asp

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