Matt Levine: $SIVB & $SI ...Startup Bank Had a Startup Bank Run + Robert Armstrong of FT "SVB is not a canary in the banking coal mine"

[Cat9MixCloud]

Programming note: Money Stuff was supposed to be off today, but: bank run!

SVB

The lesson might be that there are some industries that are bad to bank. Imagine that it was 2021, and someone was like “do you want to start the Bank of Crypto? What about the Bank of Venture-Backed Tech Startups?” You’d be tempted, right? Those industries had so much money! They seemed cool. If you were their bank — if you were the specialized bank that exclusively focused on those industries — influencers on Twitter would tweet nice things about you, and you’d get invited to fancy parties. Also, as their bank, you’d probably find a way to get a cut of growing industries with lots of potential. Provide banking services to tech startups, get warrants in those startups, get rich when they go public. Provide banking services to crypto exchanges, start some sort of blockchain-based payment network, get rich through the magic of saying “blockchain” a lot.

But the structure of being the Bank of Crypto or Startups was a bit rickety. Traditionally, the way a bank works is that it takes deposits from people who have money, and makes loans to people who need money. The weird problem with focusing exclusively on crypto or startups in 2021 is that they had too much money. If you were the Bank of Startups, the main service that you provided to startups is that equity investors would give them a truck full of cash and they’d deposit it at your bank. Here is how SVB Financial Group, the holding company of Silicon Valley Bank, describes the vibe of 2021 and 2022 in its Form 10-K two weeks ago:

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> Much of the recent deposit growth was driven by our clients across all segments obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities—which during 2021 and early 2022 were at notably high levels.

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People kept flinging money at SVB’s customers, and they kept depositing it at SVB. Perfectly reasonable banking service.

[Cat9MixCloud]

https://archive.ph/kfnlR

Why won’t most other banks face a similar crisis? First, few other banks have as high a proportion of business deposits as SVB, so their funding costs won’t rise as quickly. At Fifth Third, a typical regional bank, deposit costs only hit 1.05 per cent in the fourth quarter. At gigantic Bank of America, the figure was 0.96 per cent.

Second, few other banks have as much of their assets locked up in fixed-rate securities as SVB, rather than in floating-rate loans. Securities are 56 per cent of SVB’s assets. At Fifth Third, the figure is 25 per cent; at Bank of America, it is 28 per cent. That is still a lot of bonds, held on bank balance sheets at above their market value(opens a new window). The bonds’ low yields will be a drag on profits. This is no surprise and no secret, though, and banks with more balanced businesses than SVB should be able to work through it.

Most banks’ net interest margins (asset yield minus funding cost) will soon start to compress. This is part of a normal cycle: when rates rise, asset yields rise quickly and the deposit costs catch up. Gerard Cassidy, banking analyst at RBC, expects NIMs to peak in the first or second quarter and decline from there. But everyone knew this was coming before SVB hit the rocks. RBC held its annual banking conference this week, at which all the major regional banks spoke. Only one (Key Corp) lowered its guidance for net interest income.