The Lemon Fool

Thankfully not one I have any exposure to, as far as I can tell. So what went wrong and what lessons can be learned?

To start with, the US regulators were successfully lobied into not implementing Basle III for their "smaller" banks. A useful lesson for those arguing that our banks are overburdened with regulation, forced to be too prudent and that we should allow banks to take on greater risks.

Then there is the deposit base. The US version of our FSCS covers a generous $250k and more normal banks are awash with deposits below this amount. SVB was popular with start ups. A startup up, having raised a million or 2 in funding typically puts that money into a bank. The reason they do this is that they expect to have to burn through that money relatively quickly, a year or 2, before going for another funding round. Any money above $250k gets lumped in with other senior unsecured debt. The important word here is unsecured. Many unsecured creditors getting a whiff about a bank being in trouble will head for the exit and that is what happened here, exacerbated (if not triggered) by a fall in the value of reserves held in bonds.

Hopefully this is a one off case and those with large deposits in other banks will not take flight on Monday. There may well be secondary problems though. Unsecured creditors will have lost a lot of money. Who do those unsecured creditors owe money to? The VCs/PE that put money into start ups will be out of pocket. What will that mean for VC/PE funding? IOW, how far will any contagion spread.

I am sure there are other lessons here. The one that occurs to me is not to be too exposed to the banking sector. Whoops!

hiriskpaul wrote: Many unsecured creditors getting a whiff about a bank being in trouble will head for the exit and that is what happened here, exacerbated (if not triggered) by a fall in the value of reserves held in bonds.

Would they have had an underlying interest mismatch between assets and liabilities? They appear to have invested depositers' cash into bonds. That gives them a rate of return fixed to bond maturity. If they paid floating rates on deposits, they would be vulnerable to a general increase in interest rates. Accounting rules enabled them to disguise this by allowing at least some of their bonds to be held at amortised rather than market value. But that's no help when depositers want their money back.

Lesson #1.

Bank shares are toxic and should never be bought.

Lesson #2.

When another bank inevitably goes pop, everyone suffers anyway.

Alaric wrote:

hiriskpaul wrote: Many unsecured creditors getting a whiff about a bank being in trouble will head for the exit and that is what happened here, exacerbated (if not triggered) by a fall in the value of reserves held in bonds.

Would they have had an underlying interest mismatch between assets and liabilities? They appear to have invested depositers' cash into bonds. That gives them a rate of return fixed to bond maturity. If they paid floating rates on deposits, they would be vulnerable to a general increase in interest rates. Accounting rules enabled them to disguise this by allowing at least some of their bonds to be held at amortised rather than market value. But that's no help when depositers want their money back.

Quite possibly. Some banks, especially US banks, like to hold some of their reserves in mortgage backed securities. These can be incredibly illiquid and long duration, hence amortised rather than priced off a curve or based on a market price. They should really only hold short dated and liquid bonds, but US regulators alow them to get away with this.

Interesting comment in the Diaceutics RNS (#DXRX) saying it’s a condition of their RCF that the cash is deposited with SVB. Makes sense I guess from the bank’s point of view but boy does it compound the exposure between the corporate and the bank.

I guess other RCF’s are like that. If today you’ve got cash with some less reputable bank, you’ll be looking to move it maybe. But perhaps more tricky if there’s also a loan arrangement too.

I should think it is a bit early to start drawing too many lessons from this situation, but from what i have read so far, very light touch regulation seems to have been part of the problem and so risk management by SVB seems largely to have been missing

It would be interesting to know what is meant by Diaceutics RNS (DXRX) (sounds like a pharma). What is their 'RCF' ?

Dod

Dod101 wrote:I should think it is a bit early to start drawing too many lessons from this situation, but from what i have read so far, very light touch regulation seems to have been part of the problem and so risk management by SVB seems largely to have been missing

It would be interesting to know what is meant by Diaceutics RNS (DXRX) (sounds like a pharma). What is their 'RCF' ?

Dod

I'm assuming RCF is Revolving Credit Facility. I see it mentioned in accounts of some of the companies I own.

daveh wrote:

Dod101 wrote:I should think it is a bit early to start drawing too many lessons from this situation, but from what i have read so far, very light touch regulation seems to have been part of the problem and so risk management by SVB seems largely to have been missing

It would be interesting to know what is meant by Diaceutics RNS (DXRX) (sounds like a pharma). What is their 'RCF' ?

Dod

I'm assuming RCF is Revolving Credit Facility. I see it mentioned in accounts of some of the companies I own.

Thanks. I had not thought of that!

Dod

BullDog wrote:Lesson #1.

Bank shares are toxic and should never be bought.

Lesson #2.

When another bank inevitably goes pop, everyone suffers anyway.

It's a good job someone buys them otherwise the system would collapse.

Everyone with shares is sufferring today - especially financials. M and G being the worst at present, down over 4%.

I'm sure there will be bargain hunters out and about.

Dod101 wrote:

daveh wrote:

Dod101 wrote:I should think it is a bit early to start drawing too many lessons from this situation, but from what i have read so far, very light touch regulation seems to have been part of the problem and so risk management by SVB seems largely to have been missing

It would be interesting to know what is meant by Diaceutics RNS (DXRX) (sounds like a pharma). What is their 'RCF' ?

Dod

I'm assuming RCF is Revolving Credit Facility. I see it mentioned in accounts of some of the companies I own.

Thanks. I had not thought of that!

Dod

I thought I'd read that a condition of being a SVB customer was that you had to bank wholly with them 'monoBANKmy'?

Review by PensionCraft.


https://www.youtube.com/live/NwyOTDNaKCA?feature=share

About 20mins in, he presents data from Morningstar.... Worth a watch imho.

monabri wrote:I thought I'd read that a condition of being a SVB customer was that you had to bank wholly with them 'monoBANKmy'?

Perhaps in the US?

An interview on Times Radio this morning at about 0840h, a tech customer of the UK bank, spoke well of them as a a lender attuned to the needs of tech startups. The interviewee mentioned that he had cash deposits at ten UK banks.
He seemed slightly unsure whether HSBC will be as well tuned in on the lending side.

Arborbridge wrote:I'm sure there will be bargain hunters out and about.

I am, but so far the falls are insufficient, although I do have a limit order on LGEN.

V8

Actually it almost seems obvious when you think of it.

Anyway the subject is not Gilts and Bonds but that is up to the Mods.

The lessons so far seem to be the age old ones. Do not put all your eggs in one basket and great prudence is needed to run a bank (which is why HSBC can buy SVBUK) Presumably the UK bit of SVB is under the BoE rules.

Incidentally a long time ago in HK, HSBC made a lot of money by rescuing small local Chinese banks (or at least rescuing deposits) when they over extended themselves. Nothing changes.

Dod

PS I am sure that HSBC will be much more cautious but tough!

monabri wrote:Review by PensionCraft.


https://www.youtube.com/live/NwyOTDNaKCA?feature=share

About 20mins in, he presents data from Morningstar.... Worth a watch imho.

I posted on the news regarding "First Republic " bank and where they featured in the Morningstar tables ( 20 minutes in to the Pension Craft video). There are US banks that are in a worse situation than First Republic.

Arborbridge wrote:

BullDog wrote:Lesson #1.

Bank shares are toxic and should never be bought.

Lesson #2.

When another bank inevitably goes pop, everyone suffers anyway.

It's a good job someone buys them otherwise the system would collapse.

Everyone with shares is sufferring today - especially financials. M and G being the worst at present, down over 4%.

I'm sure there will be bargain hunters out and about.

Not only just in banks, but in general. For instance the way I look at it is if the FT250 prior high of 24.2K level is assumed to have had a high probability of covering a 3.33% 30 year SWR (more inclined to be a PWR), then at a recent 18.9K FT250 price level that increases to 3.33 / ( 18.9/24.2 ) = 3.33 / 0.78 = 4.26% 30 year SWR being pretty safe, and as such is a longer term buy opportunity.

1nvest wrote:Not only just in banks, but in general. For instance the way I look at it is if the FT250 prior high of 24.2K level is assumed to have had a high probability of covering a 3.33% 30 year SWR (more inclined to be a PWR), then at a recent 18.9K FT250 price level that increases to 3.33 / ( 18.9/24.2 ) = 3.33 / 0.78 = 4.26% 30 year SWR being pretty safe, and as such is a longer term buy opportunity.

So as I read that 1nvest, retirees could lump all of their Uk shares prtfolio into a FTSE 250 tracker, re-invest all dividend payments and withdraw 4.3% or so each year to live off, with a fair degree of confidence of not running out in 30 years or so?

I have been looking through the accounts ending 31/12/22. It does read more like a hedge fund with a banking arm rather than a normal bank that generates returns from lending and other banking services. $120B in securities (mostly high credit quality bonds) and only $74B in loans, but only $26B of the bonds were in the available for sale portfolio, which gets properly marked to market. On the other side there were $173B of deposits.

There are about $3.3B in issued senior bonds with maturities between 2025 and 2033. I have not read anything about these and expect these have not been included in the depositor bailout. I am not sure how the bank will be resolved, but if the bond portfolio is run down over time the senior bonds may pay out as they become due. If there is a fire sale of assets, then quite probably not. I think I would be a bit miffed if I was a bondholder and they went for the firesale at the same time as bailing out depositors!

This is making me consider the bank bonds, PIBS and prefs I hold. None of which appear to have moved (yet), other than perhaps NWBD and ELLA. Maybe it might be prudent to do a bit of pruning? In particular I am thinking of Metro 5.5%. This might turn out to be a good time to take some banking risk off the table and "rebalance" into equities.

Anyone else minded to do anything?

They were the wokest bank around.

Go woke go broke?

Perhaps ironically, bond yields are in freefall today, which should flatter SVB balance sheet.....

floyd3592 wrote:

1nvest wrote:Not only just in banks, but in general. For instance the way I look at it is if the FT250 prior high of 24.2K level is assumed to have had a high probability of covering a 3.33% 30 year SWR (more inclined to be a PWR), then at a recent 18.9K FT250 price level that increases to 3.33 / ( 18.9/24.2 ) = 3.33 / 0.78 = 4.26% 30 year SWR being pretty safe, and as such is a longer term buy opportunity.

So as I read that 1nvest, retirees could lump all of their UK shares portfolio into a FTSE 250 tracker, re-invest all dividend payments and withdraw 4.3% or so each year to live off, with a fair degree of confidence of not running out in 30 years or so?

The historic guideline SWR figure is 30 years of 4% SWR, which in the worst historic case(s) left nothing remaining at the end of the 30 years. In effect measures historic prior peak to trough case 30 year outcomes. If forward time fits within that historic bounds then a recent decline against a prior peak of -22% as per the FT250 today, then if from that prior peak 4% SWR is a success, then having bought at a 22% discount suggests that a 5.12% SWR (4 / 0.78) might reasonably be supported. I used 3.33% in my prior post as that historically was more of a PWR (perpetual withdrawal rate) i.e. was inclined to leave a decent amount of the inflation adjusted started date portfolio still available at the end of 30 years. More often more (wealth expansion). 3.33% SWR is in effect the return of your inflation adjusted capital via 30 yearly instalments, a 0% real average overall outcome over 30 years is a pretty low end outcome.

No guarantees, just guidelines. Forward time might see outcomes outside of historic extremes/limits, but where that history does include some wild/wacky events, so one hopes that ones own particular 30 year situation doesn't exceed those extremes, at least not to the downside.

I personally just prefer the FTSE250 index character to that of the FTSE100, around half of FTSE250 earnings are sourced from foreign, and it includes a broad range of Investment Trusts that individually diversify widely. It's also less inclined to have high weightings into individual stocks. FTSE100 can at times have 10% weighting into individual stocks, and maybe high weightings into a number of stocks in the same sector. FTSE250 is much less inclined to see that, as its largest stocks are ejected into the FTSE100, so it might be considered more of a equal weighting type index. There's also a HYP type bunch of stocks mixed in, at least one from a perspective of having selected HYP shares from the FTSE250 index set.

So I'd say a 5% forward SWR based on a 30 year horizon (65 year old living to 95), more if fewer years (75 year old might perhaps look to a 20 year horizon and as such could draw more). Whilst holding a diverse range of assets/styles (integral sets of IT's, HYP ...etc.) traded via single clicks (single ETF/fund that serves as a FTSE250 tracker).