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Bank failures, bank runs and other musings
March 11, 2023
1:13 pm
savemoresaveoften
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Norman1 said

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.  

Norman1 said

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.  

I meant the USDC stablecoin which depeg as a result of the SVB collapse. The USD Coin is backed by cash instrument if I am not mistaken
But yeah Luna and Tera were pegged by arb which works in theory but not in reality.

March 11, 2023
1:29 pm
Norman1
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COIN said
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.…

Not for Silicon Valley Bank.

Silicon Valley Bank doesn't have a margin call on something like $100 billion of government bonds that LTCM did. That much government bonds coming onto the bond market all at once would crash the bond market and spike interest rates. The US government intervened so those margin-called bonds could be sold gradually.

Silicon Valley Bank only has around $10 to $20 billion of government bonds. No forced liquidity now as withdrawals are now gated by FDIC to the insured portion of deposits only.

March 11, 2023
1:38 pm
Norman1
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savemoresaveoften said

I meant the USDC stablecoin which depeg as a result of the SVB collapse. The USD Coin is backed by cash instrument if I am not mistaken …
 

Yes, USDC stablecoin is backed by cash. Unfortunately, USDC had the bad luck of depositing around $3 billion of its $40 billion backing cash with Silicon Valley Bank. sf-surprised So, the stablecoin is now 92% to 100% backed by US$ instead of 100% until it figures out how much of that $3 billion will be recovered.

March 12, 2023
5:38 am
savemoresaveoften
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This is from a bloomberg article on Mar 10. Its a good summary of what happened. Still the speed of its collapse stunt even the professionals.

Morale of the story:
Never trust a bank CEO when they ask its depositors to remain calm. Depositors have basically 2 days to get out in this case.

"WHY DID SVB PROVE SO VULNERABLE?

Several factors came together to cause its distress. Some of those are unique to SVB, while others are the source of broader worries in banking. Behind most of them are the rapid interest-rate increases pushed through over the last year by the U.S. Federal Reserve to tame the highest inflation in decades. One consequence of those hikes that hit SVB especially hard was the sharp downturn in the high-flying tech companies that had been the source of its rapid growth; most banks have broader customer bases. As venture capital dried up, SVB’s clients tapped their deposits to withdraw cash they needed to keep going.

WHAT HAPPENED AFTER THOSE WITHDRAWALS?

To keep up with the wave of withdrawals, SVB had to sell assets — including, crucially, bonds that had lost a substantial portion of their value. That produced $1.8 billion in losses that wouldn’t have hit the bank’s balance sheet had the bonds been held to maturity. Here, too, SVB’s funding structure had made it particularly vulnerable. All US lenders park a chunk of their money in Treasuries and other bonds, and the Fed’s hikes made those existing bonds less valuable because of their low yields. But SVB took it to a different level: Its investment portfolio had swelled to more than half its total assets, far above the norm."

March 12, 2023
10:34 am
Dean
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.
Janet says; "No Bailout" . . .

.
It'll be interesting to see how the markets react on Monday. It could be another 'Bargain Day' for Canadian Bank stocks. sf-smile

    Dean

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

March 12, 2023
10:57 am
savemoresaveoften
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Dean said
.
Janet says; "No Bailout" . . .

.
It'll be interesting to see how the markets react on Monday. It could be another 'Bargain Day' for Canadian Bank stocks. sf-smile

    Dean

  

There should not be, there is very little systematic risk. FDIC already announced the assets will be auctioned off. My pure guess is maybe those over the limit will take up to a 30% haircut, maybe less.
They do have solid assets that will cover all depositors if held to maturity. Just not the liquidity to survive that long.

March 12, 2023
11:50 am
COIN
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Oprah will not be pleased.

"OPRAH STANDS TO LOSE $590 MILLION AFTER COLLAPSE OF SVB March 11, 2023 10:55 am by IWB Harry & Meghan are broke now too. Global Community Weekly (GloCom) is a reader-supported publication."

March 12, 2023
12:01 pm
mordko
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Doubt depositors will lose anything at all. Its relatively cheap for the spendthrift government to make sure depositors are made whole and would help prevent sympathy runs on other banks.

March 12, 2023
4:05 pm
AltaRed
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mordko said
Doubt depositors will lose anything at all. Its relatively cheap for the spendthrift government to make sure depositors are made whole and would help prevent sympathy runs on other banks.  

You got it right as just announced by Yellen. It won't cost FDIC much as they will simply hold on to the bonds until maturity. The bigger question is the loan book in terms of whether it is worth 100 cents on the dollar or something a bit less.

March 13, 2023
5:24 am
savemoresaveoften
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AltaRed said

You got it right as just announced by Yellen. It won't cost FDIC much as they will simply hold on to the bonds until maturity. The bigger question is the loan book in terms of whether it is worth 100 cents on the dollar or something a bit less.  

So depositors will make whole, shareholders get wipe out, bond holders will most likely get something back but won’t know how much and when for a while.
Not a bad ending, and Yellen’s claim it’s not a bail out still stands too.

March 13, 2023
5:25 am
mechone
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2 banks now SVB and Signature Bank, nice to see in US deposits are insured to 250k which is what Canada should be doing 100k since 2005 is now with inflation and house prices is nothing

March 13, 2023
5:42 am
mordko
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Wonder if this might lead to higher GIC and lower HISA rates as certain stress test scenarios suddenly take central stage in Canadian backrooms. Conversely fixed rate mortgage rates might move back to premium over variable.

March 13, 2023
6:32 am
MyUsername
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mordko said
Wonder if this might lead to higher GIC and lower HISA rates as certain stress test scenarios suddenly take central stage in Canadian backrooms. Conversely fixed rate mortgage rates might move back to premium over variable.  

Probably it will, though some of the smaller players have done this for a while to encourage term deposits that are not cashable until maturity: EQ Bank, Oaken, Tangerine (except their time-limited interest promos).

March 13, 2023
7:14 am
savemoresaveoften
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Smaller players may feel the need to bump rates higher just to attract more deposits, in case they need it and while its still "cheap"

Also it will be interesting to find out how much of each Cad bank's deposits are uninsured, personal vs business accounts too.

March 13, 2023
9:45 am
Dean
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.
Just incase it hasn't been mentioned, SVB's Canadian Branch in Toronto is also involved . . .

.
Dean

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

March 13, 2023
9:49 am
AltaRed
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Every entity of SVB would be involved by definition. They are subsidiaries/divisions of SVB and have to be taken over by the regulators of each country to avoid confiscation of assets by the FDIC et al. HSBC just bought the UK assets of SVB for 1 pound.

March 13, 2023
3:15 pm
butterflycharm
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This trend sounds like higher banking fees and higher taxes to come.

- Isn't there a business account insurance program that CFO's purchase as part of their job's basic duties? or they don't exist and FDIC $250k is it?

- What Canadian banks/unions are shown to be exposed to this so far?

March 13, 2023
3:50 pm
AltaRed
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Why would Canadian banks be exposed to SVB and/or SVB Canada? OR do you mean some other Schedule 2 (foreign owned subsidiaries) banks like SVB Canada might be at risk due to insolvency of their parent?

March 13, 2023
4:59 pm
butterflycharm
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AltaRed said
Why would Canadian banks be exposed to SVB and/or SVB Canada? OR do you mean some other Schedule 2 (foreign owned subsidiaries) banks like SVB Canada might be at risk due to insolvency of their parent?  

It is an intertwined economy. And that was a question.

March 13, 2023
5:03 pm
COIN
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A couple of points.
1) SVB Canada shut down by OSFI
2) Assets of SVB U.K. purchased for $1 by HSBC.

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